How do I enforce a mechanic's lien?

A common misconception is that a mechanic's lien simply gets you paid upon filing.  But the filing of the mechanic's lien is step one.  Step two is enforcement and a mechanic's lien is enforced through a lien foreclosure action.

Kushnick Pallaci, PLLC is a full service law firm that represents contractors, subcontractors, suppliers owners and developers in lien foreclosure actions across the State of New York from its Buffalo and Long Island offices.

Lien Law Section 38 and Lien Law Section 76: What contractors in Rochester should know

After a mechanic's lien is filed odds are a demand under Lien Law Section 38 will soon follow.  See the video below for more information.  

One alternative to a mechanic's lien (thought the two are not mutually exclusive) is pursuing a claim for a trust fund diversion.  Watch the video below fore more information.  

The law firm of Kushnick Pallaci, PLLC represents the construction industry across the State of New York from their Buffalo and Long Island offices.  

Rochester Contractors Make Sure You Maintain Proper Lien Law Trust Records

The Lien Law trust laws, contained within Article 3A of the Lien Law, are something that most contractors have heard of, but very few understand.  This is unfortunate since the Lien Law trust laws are one of the few areas of the law that are, arguably, intended to protect contractors, or more particularly, subcontractors, suppliers and vendors (as opposed to owners).  In a nutshell, Article 3A of the Lien Law requires every "trustee" to keep all funds that he receives on a construction project in a "trust account" for the benefit of the trust beneficiaries. Just who is a trustee is not always clear but the following general guidelines may be helpful:  1) if an owner receives a construction loan the owner is a trustee; 2) a general contractor is always a trustee of funds received from the owner; 3) a subcontractor can be a trustee if he, she or it owes money to a sub-subcontractor, materialman, vendor or supplier; or 4) a sub-subcontractor and beyond can be a trustee under the same circumstances as a subcontractor.  A simple rule of thumb is that if you are receiving money on a construction project in the State of New York and you owe money to someone else for labor or materials that they supplied to you on that same project then you most likely are a Lien Law trustee and all monies that you receive are "trust funds."

Lien Law trustees must pay all beneficiaries of the trust before they can use the funds for non-trust purposes.  Most importantly, you cannot use the funds for another project and you cannot use the funds to take your profit until you have satisfied all trust claims.  While the Lien Law does require you to maintain these funds in a trust account, it is generally accepted that you do not need a separate account for each project.  Rather, you must keep separate books and records for each project.  But keeping the funds in one account is not, in and of itself, a trust violation.  Your books and records for the project should show the name of the project, the date and amount of payments received and the date, amount and payee of each payment made from the trust funds.  For example, if the general contractor (GC) receives a $100,000 payment from Owner (O) on Project X and then pays $25,000 to Subcontractor A, $25,000 to subcontractor B and $25,000 to supplier C, each of those transactions must show up on GC's books and records.  Each would be a proper use of the Lien Law trust funds.  The remaining $25,000 from O on Project X, assuming no other beneficiaries have trust claims, can be used by the GC as it sees fit whether that be to take profit, use on another project or something else.

In the above example, GC gets into trouble when Subcontractor D is still owed money but rather than pay Subcontractor D, GC takes $25,000 to order materials for Project Z.  This scenario results in a Lien Law trust violation.  The consequences can be disastrous for the trustee.  First, the court has the ability to order the trust funds repaid if possible.  Second, diversion of trust funds is a crime that you can be prosecuted for.  Third, diversion of trust funds exposes corporate principals to personal liability.  Fourth, diversion of trust funds exposes the trustee to potential punitive damages and attorneys' fees awards.  In summary, diverting trust funds can put you in a whole heap of trouble.  While troublesome for the trustee, everyone below him that was owed money and was not paid is offered the additional leverage of the trust claim in their pursuit of the money they are due on the project.

Lien Law Section 75 requires all trustees to maintain careful and accurate books and records of all of these trust transactions.  Failure to maintain proper books and records creates a legal presumption that the trust laws have been violated.  While not a final determination, overcoming this presumption in litigation can be very difficult and, in many cases, impossible.  As a beneficiary of the trust, you are allowed, under Lien Law Section 76, to demand that the trustee provide you with a verified statement, in writing, showing each of the entries on the books and records of the trust account.  In other words, if a general contractor tells you he hasn't paid you because the owner hasn't paid him you can demand to see his books and records for the project and the general contractor is legally required to disclose them to you.

Another significant reason to be concerned about the Lien Law trust laws is that a contractor, or contractor's principal, that is found to have diverted trust funds, and is found liable for that diversion, cannot discharge the claim in bankruptcy.  That means the debt will follow the contractor for at least 10 years, and more likely 20 years, and there will be no way for the contractor to get away from it.  While that is a long time to wait, it is an added security for the subcontractors that are not paid as they will be able to pursue their claim notwithstanding a bankruptcy.  Especially in the current economy where many general contractors are declaring bankruptcy, being able to pursue a claim despite the bankruptcy is a strong deterrent against general contractors diverting trust funds instead of paying their subcontractors.

One very important caveat:  a Lien Law trust fund claim has a very short statute of limitations.  It must be brought within 1 year from the time that either the project was completed (if you are a general contractor) or 1 year  from the time that the payment was due from the general contractor or the project was completed, whichever is later (if you are a subcontractor).   Therefore, you must stay on top of anyone that owes you money and keep careful track of the money.  Don't be afraid to exercise your rights under Lien Law Section 76 if you have not been paid and you think someone may have diverted money on the project.  When in doubt, contact your attorney to find out what rights you have and to make sure you preserve any potential claims you may have.  A good construction attorney will be able to use tools such as the demand pursuant to Lien Law Section 8 or the demand for a verified statement pursuant to Lien Law Section 76 to help establish and set up a trust diversion claim for you.

Vincent T. Pallaci is a partner in the New York law firm of Kushnick Pallaci, PLLC.  His practice focuses primarily on the area of construction law including prosecuting and defending claims for diversions of New York Lien Law trust laws.

Rochester contractors beware: Exaggerating your Rochester mechanic's lien could cause big trouble

Contractors have become as familiar with using mechanic's liens on their New York construction projects as they are with issuing change orders.  However, while issuing a change order that is exaggerated will simply result in denial of the change order, filing an intentionally exaggerated mechanic's lien can have a number of consequences that go beyond non-payment of the lien.

When a contractor is not paid one of the most common initial reactions is to file a mechanic's lien.  Unfortunately, some of those liens do not accurately reflect the amount currently due and properly lienable.  Of course there are certain contractors that intentionally inflate the lien thinking it will perhaps give them more leverage to negotiate or increase the chances of quick payment.  Some contractors file the intentionally exaggerated mechanic's lien simply to irritate and infuriate the person that owes the money and refuses to pay.  Still there are others that exaggerate the mechanic's lien but do so unintentionally.  The unintentional exaggeration can result from accounting errors, believing that certain items may be liened when, in fact, they may not or liening for the entire contract balance (including work yet to be performed) rather than the value of the labor and materials actually performed and unpaid for at the time of the filing of the lien.  All of these exaggerations can be trouble.

In New York, a mechanic's lien should only be filed for the amount of the labor and materials actually performed and unpaid for at the time that the lien is placed.  You also should not file a lien for items such as delay damages or liquidated damages.  While you can, of course, still sue for those damages under other theories, your mechanic's lien must be limited to the value of the labor and materials incorporated into the improvement of the real property.

An unintentional exaggeration of a lien may simply result in no being able to recover that portion which is not exaggerated. However, person challenging the lien will likely charge that the lien was intentionally exaggerated and you will be forced to defend yourself against this claim.  In addition to dragging out the time and cost of the litigation, it will test the accuracy and adequacy of your book and record keeping practices.  Challenging a lien that is exaggerated is a common defense because if the mechanic's lien proves to have been intentionally exaggerated there are devastating consequences to the lienor.

First and foremost a mechanic's lien that has been found to have been intentionally exaggerated is void.  You therefore lose your entire lien - even the legitimate portion.  Also, the lienor faces liability equal to the amount of the exaggeration.  In other words, if a lienor is properly owed $20,000.00 but intentionally exaggerates the lien to $50,000.00 then not only is that entire lien void, but the lienor can be held liable to the owner for the amount of the exaggeration ($30,000.00).  Some courts will even award treble damages meaning that the $30,000.00 intentional overcharge  becomes a $90,000.00 liability.  Intentionally exaggerating a mechanic's lien can also expose the lienor to attorneys' fees and other consequential damages.  For example, an owner faced with an intentionally exaggerated mechanic's lien may assert a claim for slander of title.  If successful, the slander of title claim could expose the lienor to significant damages - especially if the exaggerated lien prevented the sale of the property.

It is important to keep in mind that proving "intent" in the exaggeration can be very difficult.  An unintentional exaggeration or an arguable charge will not provide the relief available in association with an intentional exaggeration.  If faced with a potentially exaggerated mechanic's lien it is important to consult with competent construction law counsel that can guide you through this difficult area of law.  Construction counsel can help you better understand your situation and your rights and liabilities.

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.

Be careful when assigning your Rochester mechanic's lien

Mechanic's liens are freely assignable.  However, a common mistake is when the assignee of the lien fails to record the assignment in the County Clerk's office.  The assignment must contain the names and addresses of the assignee and assignor, the amount of the lien and the date of filing of the lien.  If the assignment is not filed, a subsequent action to foreclose upon a mortgage or a lien need not include the assignee as a party.  More importantly, if the owner pays the original lienor, and the assignment has not been recorded, then payment to the original lienor will be an absolute defense to the enforceability of the lien.  For more information about the assignment of mechanic's lien read Lien Law Section 14.

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.

Rochester Mechanic's Lien FAQ

This is intended simply as a quick reference guide for common questions that come up regarding mechanic's liens in New York . For specific inquiries please feel free to contact me.

1.  Who Can File A Mechanic's Lien?

In general, anyone performing labor or furnishing materials for the improvement of real property may file a mechanic's lien when the labor or materials were requested by the owner or its agent. It should go without saying that the lien can only be filed if money is owed. Some typical lienors are contractors, subcontractors, suppliers, architects, engineers and in some cases construction managers.

2.  How Long Do I Have To File A Lien?

A lien filed against a residential single family private dwelling must be filed within four months of the last performance of labor or furnishing of materials. A lien filed against any other private property must be filed within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials.  A lien against a public improvement must be filed within 30 days of the time that the public project is completed and accepted by the public entity.  A lien that is solely for retainage may be filed at any time within 90 days of the time that the retainage became due.


3.  How Long Does My Mechanic's Lien Last?

The lien is valid for one year. After that you must take steps to extend the lien. If not extended or foreclosed upon, the lien will expire by operation of law.



4.  How Do I Foreclose on a Mechanic's Lien?

Foreclosing on a mechanic's lien is a fairly complicated process that involves filing a formal lawsuit. There are specific people that must be included in the lawsuit and other specific requirements that justify retaining an attorney to handle the foreclosure.



5.  What Do I Do If I Am Served With A Mechanic's Lien?

You have three options: 1) bond the lien; 2) commence legal proceedings to discharge the lien; or 3) do nothing (not recommend under most circumstances). For bonding the lien or attempting to discharge the lien through the court systems it is strongly recommended that you consult with an attorney.



6.  What Happens If I File A Lien That Is Not Accurate?

This is really a two part problem. First of all, a lien that is defective on its face (meaning in the actual terms set forth in the lien) can be summarily discharged and will not protect you. Second, filing an improper lien can expose you to liability, especially in the case of a "willfully exaggerated lien" where you are subject to treble damages and attorneys fees being awarded against you.

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

Removing the mystery from bonding your Rochester Mechanic's Lien

I often receive phone calls inquiring about the process for bonding a mechanic's lien.  Often the caller has one of the following problems:  1) he or she has not been able to get any information about the process of bonding a mechanic's lien; 2) he or she has received the wrong information about the process for bonding a mechanic's lien; or 3) he or she has received conflicting information about the process for bonding a mechanic's lien and is not sure who is right.

A bond to discharge a mechanic's lien is not as mystifying of a process as it can be made out to be when you are asking someone that doesn't know what they are talking about.  The two most common people that need to obtain a discharge bond are the property owner and the project general contractor (who is usually contractually obliged to discharge any mechanic's liens filed by suppliers or subcontractors).  A source of some of the confusion may be due to the fact that there are a few types of bonds out there that tie in with construction.  For example, in addition to the bond to discharge a mechanic's lien, there are also payment bonds, bid bonds, maintenance bonds and performance bonds (each of which serves an entirely different purpose than the bond to discharge a mechanic's lien).

A bond to discharge a mechanic's lien serves one simple and particular purpose: it removes the mechanic's lien from a parcel of real property and, in essence, the mechanic's lien then attaches to the bond until it is discharged some other way or satisfied.  A discharge  bond is governed by Lien Law Section 19(4).  Pursuant to Lien Law Section 19(4), a mechanic's lien may be discharged by posting a bond equal to 110% of the face value of the mechanic's lien.  This answers one of the most common questions - how much does it cost to bond a mechanic's lien?  The answer is that it always depends on the amount of the lien, but always will require at least 110% of the lien face value.  It does not matter what surety you use to obtain the bond, they all must issue a bond in the amount of 110% of the face value.  The only area where cost can vary is in the premium that the surety charges you to issue the bond.  The premium is, of course, based upon the amount of the lien.  So the cost to bond a mechanic's lien equals 110% of the face value of the lien plus the surety's premium.

But how do you obtain a bond?  The most common way to obtain a mechanic's lien discharge bond is to go to a surety and file a bond application.  While just about any insurance company licensed and authorized to conduct business in New York can issue a mechanic's lien discharge bond, there are certain sureties that specialize in this area and, therefore, will be more familiar with the process and, likely, able to get you through the process more quickly since they understand what they are doing.  You usually will have to file an application and can pay for the bond in one of two ways: 1) you can post cash; or 2) you can post a letter of credit.  Obviously if you post cash the process moves more quickly and you are very unlikely to be denied the bond since there is little risk to the surety as they are literally collecting the entire amount first and then holding it until the mechanic's lien is discharged.  If you chose to go the route of the letter of credit then the process may take a bit longer and the surety may be very selective in who it will accept a letter of credit from.  One thing to keep in mind is that if you do obtain a discharge bond then the surety is almost certainly going to require that you defend and indemnify it in any action that is brought to enforce the lien.  This is because once a mechanic's lien has been bonded the surety becomes a necessary party to the foreclosure action.

Once you obtain the discharge bond you will file it with the county clerk where the mechanic's lien was filed and serve it upon the lienor and then that's it (not that some counties, including New York County, will require you to purchase and Index Number and submit an affirmation from an attorney requesting the discharge of the mechanic's lien).  The bond now takes the place of the property and the mechanic's lien is no longer a concern for the property owner.

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.