Friday, October 7, 2011

What is a demand pursuant to Lien Law Section 38?

Once an obscure and relatively unknown tool, the demand pursuant to Lien Law Section 38 is quickly becoming widely known and used in the New York construction industry.  Lien Law Section 38 provides:

A lienor who has filed a notice of lien shall, on demand in writing, deliver to the owner or contractor making such demand a statement in writing which shall set forth the items of labor and/or material and the value thereof which make up the amount for which he claims a lien, and which shall also set forth the terms of the contract under which such items were furnished. The statement shall be verified by the lienor or his agent...


When used correctly, Lien Law Section 38's demand for an itemized statement of lien can be the contractor's sword for challenging a subcontractor or supplier's mechanic's lien that the contractor believes is exaggerated or unfounded in some other way.  Likewise, when the demand for an itemized statement is not properly responded to, the lienor may lose an otherwise valid mechanic's lien simply because it did not know how to respond in accordance with Lien Law Section 38.

A few tips for the contractor or owner serving the Demand for an Itemized Statement pursuant to Lien Law Section 38:

1.  The demand must be in writing;
2.  The demand should be served upon the lienor by certified mail, return receipt requested;
3.  The demand should identify the party seeking the itemized statement (i.e. the contractor or the owner);
4.  The demand should identify the specific mechanic's lien that is to be itemized (preferably by lienor name, lien amount, county where filed and date when filed); and
5.  The demand should specify that a response is due within 5 days

Serving the demand is the easy part.  Follow the statute, incorporate the suggestions above, and your Section 38 demand for an itemized statement should be good to go.  However, responding is not so easy.

Many contractors will receive a demand for an itemized statement and simply think "what is this?"  Unfortunately, many lienors will end their inquiry there without seeking legal counsel to find out just what Lien Law Section 38 is and what has to be done in response to the demand.  This can be a fatal mistake that results in discharge of the mechanic's lien.  This is because Lien Law Section 38 specifically provides that failure to respond to a properly made demand can result in discharge simply for failure to comply.  Of course Section 38 does specify that the first such failure can only result in a motion to compel a proper response but, if that motion is made, and that order is obtained and then ignored, the lien will end up in the trash unless the lienor gets its act together and prepares a proper itemized statement of lien.

Very often I will receive itemized statements which simply state something along these lines:

Base contract: $100,000
Change Orders:  $25,000
Adjusted Contract Price:  $125,000
Payments Received to Date:  $75,000
Amount of Lien:  $50,000

This is grossly inadequate and will not satisfy Lien Law Section 38.

Still other responses will go a bit further along these lines:

Base contract: $100,000 (see attached Exhibit A)
Change Orders 1-7: $25,000 (see itemized list and copies attached as Exhibit B)
Adjusted Contract Price:  $125,000
Payments Received to Date:  $50,000
Amount of Lien:  $50,000


This method is a bit better but technically still deficient and unsatisfactory under Lien Law Section 38.  I will caution you, sometimes responding in this general fashion may be the first best step.  Lien Law Section 38 gives you very little time to respond. Even if you keep very good records and run right over to your attorney's office you may not be able to prepare a proper Section 38 demand in time.  Responding in this fashion may buy you some time and, in some instances, will satisfy the contractor or owner and lead to resolution of the lien.

But if the party demanding the itemized statement of lien insists upon a proper itemized statement in full compliance with Lien Law Section 38, the following must be done:

250 hours of labor X $100/hr. (hang drywall)  =  $25,000
125 hours of labor X $200/hr. (site superintendent) = $25,000
Drywall (1,000 pieces) = $25,000
Tape, Spackle and associated materials = $5,000
Crane rental to hoist materials = $10,000


Total Labor and material provided:  $90,000


Total Payments Received to Date:  $50,000


Amount of Lien:  $40,000


Case law is clear that a proper Lien Law Section 38 itemized statement of mechanic's lien must include the quantity and costs of the materials used, details as to the nature of the labor performed, details as to the time spent, and details of the hourly rates.  While this may not always be a problem, sometimes contractors may not keep adequate records to be able to quickly and properly satisfy Lien Law Section 38.

If you keep proper records and act upon the demand for an itemized statement in time, then rather than being a thorn in your side, the itemized statement could be a chance for you to showcase your claim and show the contractor and the owner exactly what work was performed and maybe convince them to pay.  But even if they don't pay, properly responding to the Section 38 Demand will at least preserve your lien and allow you to continue pursuing your rights and hopefully eventually collect payment.

On the other side of things, the contractor or owner that wants to challenge a mechanic's lien can use Section 38 to beat up a lienor that has haphazardly thrown a mechanic's lien on a project without giving much thought to the consequences of keeping poor records or filing an exaggerated mechanic's lien.  In fact, if a contractor or an owner want to challenge a mechanic's lien as exaggerated under Lien Law Section 39 or Section 39A, then the perfect place to start is Lien Law Section 38.  A bad Itemized Statement of Lien can be Exhibit A in the case against the lienor for willfully exaggerating a mechanic's lien.  The risk of an exaggeration claim is another reason that lienors should seek legal counsel upon receiving a Section 38 demand to make sure that the itemized statement which is provided is adequate and does not expose the lienor to losing its lien or an exaggeration claim.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

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