Mechanic's Lien in NY may not be attached to property after transfer of deed

In V.A.L. Floors v. Marson Contracting Co., the First Department of the Appellate Division reviewed a situation where a parcel of property (a condominium) had been sold and then a mechanic's lien was filed by a contractor hired by the prior owner.  The Court found that:

"since the deed contains the statutorily required trust fund language (see Lien Law § 13[5]), and the conveyance occurred prior to the filing of plaintiff's lien, the "lien is not valid against the deed" 

 The Court further noted that the contractor's mechanic's lien was not filed because:

"Lien Law § 4 provides that a mechanic's lien "shall extend to the owner's right, title or interest in the real property and improvements, existing at the time of filing the notice of lien." Since ownership of the condominium unit passed to the Buyers at the time of delivery of the deed (seeReal Property Law § 244), and since the Buyers did not consent to the work performed outside of the unit which constituted the basis of the overwhelming majority of the Lien (see Real Property Law § 339-l[2]), the Lien was also "invalid under Lien Law § 4(1)"

Most deeds in New York do now contain the statutory trust fund language of Lien Law Section 13 so it would be uncommon to be able to attach a mechanic's lien to property after a valid transfer.  However, the potential lienor is not without recourse.  Lien Law Section 13 makes it clear that the funds received by the owner are trust funds and, if those funds are not used to satisfy claims of contractors and suppliers, the owner (and its principals) may have liability for trust fund diversions.

The lesson for contractors and suppliers here:  don't wait to file your New York mechanic's lien!  There are a number of defenses that can pop up in the window while you wait.  Even though you have time to file (depending on the type of project this may vary in duration), the property could still be transferred hence defeating your mechanic's lien.  Also, during this time the contractor could be paid in full by the owner hence defeating claims of lower tier subcontractors and suppliers.  Granted, filing a mechanic's lien immediately may not always be the proper recourse, but there is a delicate and thin line between waiting too long and filing too soon.  When in doubt, speak to your construction lawyer.

Vincent T. Pallaci is the managing partner of the New York law firm of Kushnick | Pallaci, PLLC where his practice concentrates mainly on the area of construction law including prosecuting and defending mechanic's lien claims.  With offices in the New York City metropolitan area and in Buffalo, New York, KP serves the construction industry across the State of New York.

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.

Appellate Division Rules Owners are Beneficiaries of Trust Funds

The Appellate Division, Second Department, recently ruled, for the first time, that owners of construction projects are beneficiaries of the trust created under Article 3A of the Lien Law and, therefore, have standing to bring claims against contractors, and their corporate principals, for diversions of trust funds. While the author of this blog has been bringing trust fund claims on behalf of owners against contractors and their corporate principals for many years, the decision in Ippolito v. TJC Dev. is the first reported decision in the Second Department to provide a definitive "yes" to the question of whether owners have standing to bring trust violation claims against the contractor and its corporate principals.

In Ippolito the owners argued that they were beneficiaries of the trust funds created under Section 70 (Article 3A) of the Lien Law. The trial court held that the owners lacked standing to bring trust diversion claims. However, the Appellate Division reversed and held that owners do, in fact, have standing as they are intended beneficiaries of the Lien Law trusts. The Court noted that "the primary purpose of article 3-A and its predecessors[is] to ensure that those who have directly expended labor and materials to protect real property [or a public improvement] at the direction of an owner or a general contractor receive payment for work actually performed. The Court went on to say that the trust commences "when any asset thereof comes into existence and continues until all trust claims have been paid or discharged, or all assets have been applied for trust purposes." In finding that the owners do have standing as beneficiaries of the trust fund to bring a claim for trust diversions the Court found that the funds paid by the owners to the general contractor "remained the property of the owners...until the proper payment of such funds by the contractor to the purposes of the home improvement contract, breach by the owners relieving the contractor of its obligation to perform or substantial performance of the contract." The Court goes on to note that the 1987 amendments to the Lien Law make it clear that article 3-A was intended to protect home owners as well as others.

The Ippolito decision was a landmark victory for owners of construction projects and will pave the way for owners to bring trust diversion claims against their contractor, and their contractor's corporate principals, when the contractor fails to use the money it receives towards completing the construction project. While Ippolito involved a home owner, the analysis by the Court clearly establishes that all owners, including commercial and public project owners, will have standing to bring trust diversion claims against contractors.

Under Ippolito the owner will have standing to bring the trust claim until: 1) until the proper payment of the funds paid to the contractor to the purpose of the home improvement contract; 2) until breach by the owner relieving the contractor of its obligations to perform; or 3) until substantial performance of the contract by the contractor. Of course this means that the contractor now knows of three defenses that it can assert to the trust diversion claim: 1) all funds were properly paid for purpose of the home improvement contract thus divesting the owner of standing to bring the claim; 2) the owner breached the contract and therefore relieved the contractor of its obligation to perform; and 3) the contract has been substantially performed. It would seem that these three defenses should be asserted as affirmative defenses to any trust diversion claim brought against the contractor.

It will be interesting to see how attorneys begin to use Ippolito to help owners recover against unscrupulous contractors. The owner now has a very powerful tool in that it can bring the trust diversion claim no only against the contractor but against the contractor's corporate principals. Since trust diversion liability is not dischargeable in bankruptcy, contractors face a significant threat when they chose to use trust funds received from the owner for non-trust purposes.

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

Was the General Contractor Really Paid?

I often get phone calls from subcontractors and suppliers explaining that they have a mechanic's lien on a project or are planning on putting a mechanic's lien on a project but that they have been told by the owner that the general contractor was paid.  The logical question is how does the subcontractor verify that the general contractor was actually paid as alleged? 

The subcontractor has two options.  The first is the demand pursuant to Lien Law Section 76.  The subcontractor, as a beneficiary of the trust funds, has the statutory right to request that the general contractor provide it with a verified statement of the trust funds.  If the general contractor responds as it is required to do, it will show the subcontractor exactly how much has been received in the trust.  The second option is to serve a demand pursuant to Lien Law Section 8.  The Section 8 demand allows the subcontractor to demand that the owner of the project provide it with a statement of the total amount left due under the contract with the general contractor.  Because this is a formal statutory response, it is very unlikely that the owner would state in the Section 8 response that the general contractor has been paid unless the general contractor was actually paid. 

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

Responding to the Demand for a Verified Statement

Pursuant to Lien Law Section 76, a beneficiary of the lien trust funds (Article 3A of the Lien Law) on a construction project may demand that the trustee provide a verified statement, in writing, setting forth the items contained in the books and records of the trust.  The Section 76 demand is a dangerous and powerful tool that, if used properly, can significantly increase the strength of a beneficiary's claim and, if not properly responded to, can doom a trustee. 

In general, the response to the Lien Law Section 76 demand should contain all of the information required to be kept by the trustee pursuant to Lien Law Section 75.  A Section Lien Law Section 76 verified statement should contain, at a minimum:  1) the dates and amounts of funds received by the trustee; 2) the dates and amounts of disbursements made by the trustee; 3) the names of the payees receiving funds from the trust (including, if applicable, the address of the payee and a short description of what the payee did on the project); 4) the total amount of the trust funds still being held in escrow by the trustee; and 5) the name(s) of the person(s) that authorized the payment to of trust funds to the payee.  The statement should then be verified by the trustee and served upon the beneficiary.  Needless to say, it is highly advisable to consult with a construction attorney before responding to a demand for a verified statement under Lien Law Section 76.  A verified statement is a sworn statement and can later be used against the trustee in a trust diversion lawsuit.  An attorney likely will not need to spend much time helping you with the Section 76 statement but it is well worth the small added costs to make sure that the statement is proper and accurate. Keep in mind that trust diversions are crimes, if there is a problem with your records, speak to an attorney immediately before providing the Section 76 response.

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 including preparing Lien Law Section 38 itemized statements.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com