Saturday, July 13, 2013

NY Mechanic's Lien Discharge Bond May Have Impact on Other Causes of Action

Lien Law Section 19 provides that a mechanic's lien may be discharged by the filing of a bond in the amount of 110% of the lien.  The most obvious and straight forward impact of the lien discharge bond is that, once bonded, the mechanic's lien no longer attaches to the property.  This, of course, means that in a foreclosure action the property is not being foreclosed upon but, rather, that the lienor is seeking to establish the validity of the lien so that it may recover upon the lien discharge bond.  However, as we learned recently from the Second Department's decision in Holt Construction Corp. v. Grand Palais, the lien discharge bond may impact causes of action that have nothing to do with foreclosing upon the mechanic's lien itself.

In Holt Construction the lienor plaintiff sought to set aside a conveyance of the property that the lien was originally based upon.  The lienor's argument was that a transfer of the property constituted a fraudulent conveyance of the property pursuant to Debtor and Creditor Law Section 273.  While the trial Court agreed, the Appellate Division reversed on this point noting that once the owner
 "obtained a bond to discharge the mechanic's lien, the debt no longer existed for the purposes of Debtor and Creditor Law Section 273."
The trial Court in Holt touched on another interesting, and often contested, issue: does the filing of a mechanic's lien discharge bond remove the debt from the clutches of Lien Law Article 3A?  This issue has increasingly been clarified by the Courts and the 2nd Department follows form here (following the 3rd Department) in reversing the trial court and holding that
"the discharge of a mechanic's lien by the filing of a bond is not equivalent to the payment or discharge of a trust claim pursuant to Lien Law Article 3-A. Therefore, the filing of the bond did not necessitate the dismissal of the...causes of action which were to recover damages for diversion of trust assets pursuant to Article 3-a of the Lien Law."
The lesson from Holt?  The mechanic's lien discharge bond may free up the property and make it freely transferable.  But it does not extinguish the obligations of a trustee under Lien Law Article 3-a and corporate principals may continue to be held liable for trust fund diversions even after the posting of a bond.

Vincent T. Pallaci is the managing partner of the law firm of Kushnick | Pallaci, PLLC where his practice concentrates on construction law including prosecuting and defending lien law trust fund diversion class actions.  With offices in Buffalo and Long Island, KP provides legal counsel to the construction industry across the State of New York.

1 comment:

  1. How very interesting. I have never seen a lien--which then gets bonded off--give rise to a claim for a fraudulent conveyence of real esate. Thanks for raising a law school question!