Tuesday, October 5, 2010

Mechanic's Lien Discharge Bonds: What happens after the bond is obtained?

A few months ago this blog posted an article about the process for obtaining a mechanic's lien discharge bond.  The next logical question is "what now?"  The primary reason for obtaining a mechanic's lien discharge bond (Lien Law Section 19(4) ) is to remove the lien from the property.  You may do this because you are contractually obligated to keep the property lien free (for example, if you are a general contractor and your subcontractor filed a lien), because you want to sell the property and the mechanic's lien is causing a problem and holding up the closing, because the mechanic's lien is a default under your mortgage, or a variety of other reasons.  But bonding a mechanic's lien does not get rid of the lien.  The name of the bond - a mechanic's lien discharge bond - causes a lot of confusion to those unfamiliar with the intricacies of the Lien Law.  The bond does not discharge the mechanic's lien in the sense of extinguishing it, it discharges the lien in the sense of removing it from the property.  But the lien remains alive and well. 

The mechanic's lien, having been removed from the property, is now attached to the discharge bond.  If you posted the bond you have a few options.  Of course one option is to simply wait it out.  The lien will expire by operation of law in the same manner as it would expire against the property.  A mechanic's lien, as a general rule, lasts for a period of 1 year from filing.  If it is not extended or foreclosed upon it expires and is no longer enforceable.  If this happens the surety that issued the bond should then return the collateral to you (either by extinguishing the letter of credit or returning the cash collateral).  However, some sureties will require you to obtain a court order explicitly cancelling and vacating the mechanic's lien before they release the bond collateral back to the principal.  Unfortunately this adds a bit of time and cost to the process but is certainly easier and more cost effective than litigating and defending a full blow lien foreclosure action.  Other sureties will discharge the bond upon receipt of a letter from the attorney for the bond's principal stating that the time to foreclose upon the lien has expired and no lien foreclosure action has been commenced. 

There are two things that can happen to the mechanic's lien before it expires:  1) the lienor can foreclose upon it; or 2) you (or anyone with standing) can attempt to have the lien cancelled and vacated by a Court order.  Challenging the lien and attempting to have it cancelled and vacated occurs in the same manner as if the lien were still attached to the property; the mechanic's lien discharge bond does not alter the process.  The person that wants to discharge the mechanic's lien so that the bond collateral can be released must either attack the mechanic's lien on its face (see Lien Law Section 19 and Lien Law Section 21) or challenge the underlying validity of the lien (i.e. argue that the amount is not owed).  A challenge to the face of the lien can be made via petition commencing a special proceeding under Lien Law Section 19 and Lien Law Section 21.  A challenge to the amount of the lien can only be made in a foreclosure action.  You can force a lienor to foreclose upon its mechanic's lien by using the provisions of Lien Law Section 59 for a private lien or Lien Law Section 21-a for a mechanic's lien on account of a public improvement.

A mechanic's lien that has been bonded can be foreclosed upon in generally the same manner as a lien that has not been bonded and is still attached to the real property.  The lienor files a foreclosure complaint and names all of the necessary parties.  Notably, if a mechanic's lien has been bonded the owner of the real property is no longer a necessary party (see Lien Law Section 44-b).  But the surety that issued the bond is now usually named as a party (though arguably not a necessary one) as is the principal under the bond.  Other than the parties to the action, an action to foreclose upon a mechanic's lien that has been bonded will follow generally the same course as a lien that was not bonded and the lienor must still establish that its mechanic's lien was valid before recovery can be achieved. 

The New York Lien Law, the bonding process and the foreclosure process can be a mine field for novices.  Small errors can spell doom in certain instances and it is therefore highly recommended that you consult with an experienced and knowledgeable construction attorney to make sure that everything has been done properly along the way. 

Vincent T. Pallaci is a partner in the New York law firm of Kushnick Pallaci, PLLC where his practices focuses primarily on the areas of construction law, including obtaining mechanic's lien discharge bonds, foreclosing on mechanic's liens and defending mechanic's lien foreclosure actions.  With offices in the NYC Metro area and in Buffalo, New York, KP serves the construction industry across the State of New York.

6 comments:

  1. what should I look for as mine field issues when vacating a lien. The lienor did not produce paperwork within the five day court ordered request to show all information

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  2. If a Lienor has been ordered to produce a properly verified itemized statement pursuant to Lien Law Section 38, and has not complied with the Court order, a second motion can be made for failure to comply with Section 38 and the lien can be discharged based solely on non-compliance. This motion can ONLY be made after a first court order has been obtained ordering disclosure. As for mine fields with liens, they are a plenty. In regards to the most common errors that I see with mechanic's liens in New York, read this article: http://nymechanicsliens.blogspot.com/2010/10/seven-deadly-sins-of-mechanics-liens.html

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  3. If a mechanic's lien has been properly bonded for an amount of 110% of the lien amount, can the contractor obtain a judgment in excess of the bond amount (i.e. if the contractor is seeking attorney's fees and prejudgment interest)? If so, who is liable for the excess amount? It is my understanding that the bond resulted in the lien being removed from the property and the contractor can no longer force a sale of the property to recover any excess judgment.

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  4. Excellent question. Once the bond is obtained and posted for the proper amount (110% as you indicate) it removes the lien from the property itself. The bond can then be foreclosed upon and in some situations the ultimate judgment does exceed the value of the bond. If the lien discharge bond does not fully satisfy the judgment after foreclosure of the mechanic's lien then: 1) the entire bond will be turned over to the lienor to partially satisfy the judgment; and 2) if the lienor was smart and had a good attorney it asked for a deficiency judgment. A deficiency judgment means that in the event the bond does not fully satisfy the claim, he, she or it wants a judgment for the full amount left over and wants that judgment directly against...(fill in whoever the lienor can attach the judgment to). In almost all instances, the person that the deficiency attaches to is the person who hired the lienor. If the mechanic's lien was removed from the property, then the property cannot be forced into sale to recover the excess judgment UNLESS the deficiency attaches to the owner. This could be, for example, where the owner hired the lienor. If the lienor then obtained a deficiency, and the deficiency was not paid, the lienor could theoretically record the judgment in the County Clerk's office and it would become attached to the property which the lienor could then have sold through a court proceeding (unlikely unless the deficiency judgment justifies the EXPENSIVE sale process).

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  5. Is the lien indefinitely extended once a foreclosure action has been commenced? That is, what about a situation where the lien is bonded, a foreclosure action is timely commenced, but thereafter the action lingers and appears to be abandoned? Keep paying modest (but annual) bond premiums vs. legal fees to dismiss the action?

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  6. Foreclosure upon a mechanic's lien that has been bonded will allow the lien the remain "alive" for the entire foreclosure action. This is because an action to foreclose upon a mechanic's lien that has been bonded is really deemed an action to test the validity of the lien. If the lien as filed is deemed valid and enforceable, the bond is required to pay. This is different than the situation where a lien is filed and foreclosed upon but there is no bond. When there is no bond, the lien remains valid for as long as the Notice of Pendency is valid (3 years but can be renewed).

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