First Department Issues New Interpretation of Lien Law Section 5

Skanska USA Building Inc. v. Atlantic Yards B2 Owner, LLC decided on October 20, 2016 by the Appellate Division, First Department, is an excellent discussion of various issues, including Lien Law Section 5, and is a good read for anyone practicing in this area.

Lien Law Section 5 provides, in part

"where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of monies due to the contractor..."  

In an excellent discussion of Section 5 and the legislative history the First Department noted that prior to 2004 the statute left a "gap" in that "contractors working on projects being built by private developers, with private funds, but on public land, could not file liens against the public land or the private entity's leadhold interest."  But in 2004 the above cited language was added to Lien Law Section 5 to give those working on such projects (private projects on public land) some level of protection.

The plaintiff in Skanska apparently took the position that the guarantee provided did not comply with Lien Law Section 5 because it was not equivalent to a bond or "other form of undertaking" required by the law.  The Court noted that New York Courts are to give meaning to each word in a statute and looked at various definitions of the word "undertaking."  Ultimately, the court appears to define an undertaking for Lien Law Section 5 purposes as "simply a formal promise or guarantee."  The Court goes on to note that the legislature intended the term "undertaking" as used in Lien Law Section 5 to mean "guarantee" and points to the fact that the Governor vetoed an earlier version of the law that would have required a bond be posted in every instance disallowing "other forms of security designed to guarantee payment."  The sponsor of the amendment to Lien Law Section 5 clarified that the phrase "or some other form of undertaking" was added to satisfy the Governor's concerns.

Accordingly, the First Department determined that the Lien Law Section 5 obligations were met by  Forest City Enterprise, Inc. (a party to the case) issuing a formal "guaranty" that the owner would "fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the work including, but not limited to, the costs of constructing...the work."  The decision notes that the language of the guarantee follows the letter of the statute and that the public owner was satisfied the by language of the guarantee.  The court notably indicated that it was irrelevant that there were better guarantees available (such as a letter of credit).

While an excellent discussion of Lien Law Section 5, and some guidance as to what Lien Law Section 5 really requires, I'm not entirely sure that this decision is great for contractors and really satisfies the intent purportedly behind giving contractors on these projects some protection.  That may just mean that the legislature needs to go back to work on Lien Law Section 5.  It will be interesteing to see if this one makes it up to the Court of Appeals for the final say.

Vincent T. Pallaci is the managing member of Kusnick Pallaci PLLC and his practice focuses on construction law.   For more information visit Kushnick Pallaci PLLC's website at www.nyconstructionlaw.com.  For more information about Kushnick Pallaci PLLC's lien services visit their mechanic's lien services page here.