lien law – Duane Morris Construction Law

December 20, 2024December 20, 2024 by Jose A. Aquino

Mechanic’s Liens and Licensing Laws: Court Ruling Highlights Strict Enforcement

The recent decision by the Supreme Court, Appellate Division, Second Department, New York, in the case of Mikoma Electric, LLC, et al. v. Otek Builders, LLC, et al., emphasizes the importance of adhering to licensing requirements within the construction industry. The case revolves around a dispute where plaintiffs, Mikoma Electric, LLC (Mikoma Electric), and Mikoma Technology of Power and Lights Wiring and Control Limited Liability Partnership (Mikoma Tech), sought to recover damages for breach of contract from Otek Builders, LLC, the general contractor for various WeWork properties.

Mikoma Tech, which was not licensed to perform electrical work in New York City, subcontracted with Otek Builders to carry out electrical work on several properties. Although Mikoma Electric, a licensed entity, obtained the necessary permits and allegedly supervised the work, the court found that this arrangement did not satisfy the licensing requirements stipulated by the Administrative Code of the City of New York § 27–3017(a), This section mandates that electrical work must be performed by a licensed master electrician or under their direct supervision.

The defendants moved to dismiss the complaint and discharge the mechanic’s liens filed by Mikoma Tech, arguing that Mikoma Tech’s lack of a proper license barred its recovery. The Supreme Court initially denied this motion, but upon appeal, the Appellate Division reversed the decision. The appellate court held that the documentary evidence provided by the defendants, which included printouts from the New York City Department of Buildings’ webpage, did not meet the criteria for documentary evidence under CPLR 3211(a)(1). However, the court agreed that Mikoma Tech’s failure to obtain the required license precluded it from recovering under breach of contract or quantum meruit theories and from foreclosing on its mechanic’s liens. Consequently, the Appellate Court dismissed the complaint as to Mikoma Tech and discharged the mechanic’s liens filed by Mikoma Tech.

This decision underscores the strict interpretation of licensing statutes aimed at protecting public health and welfare. The court emphasized that employing or subcontracting work to a licensed entity does not fulfill the statutory requirements if the primary contractor is unlicensed. Consequently, Mikoma Tech’s argument that it should recover because Mikoma Electric, a licensed subcontractor, performed the work was deemed insufficient.

The ruling serves as a critical reminder for contractors and subcontractors in New York City to ensure compliance with licensing regulations to avoid forfeiting their lien rights and the right to recover payments for their work. It also highlights the importance of understanding and adhering to legal requirements in contractual agreements within the construction industry.

Jose A. Aquino (@JoseAquinoEsq on X) is a special counsel in the New York office of Duane Morris LLP, where he is a member of the Construction Group and of the Cuba Business Group. Mr. Aquino focuses his practice on construction law, lien law and government procurement law. This blog is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this blog are those of the author and do not necessarily reflect the views of the author’s law firm or its individual attorneys.

December 14, 2024 by Jose A. Aquino

Appellate Court Ruling Clarifies Legal Boundaries of Surety Roles in Mechanic’s Liens

The Supreme Court, Appellate Division, First Department, New York, recently issued a decision in Thorobird Grand LLC et al. v. M. Melnick & Co., Inc., et al., affirming the lower court’s ruling that granted the plaintiffs’ motion for summary judgment on their cause of action alleging willful exaggeration of mechanic’s liens by the defendant Surety.^{^[1]} The court invalidated and discharged the Surety’s liens but denied the plaintiffs’ claim for damages under Lien Law § 39-a.

The court determined that the plaintiffs had demonstrated the Surety did not meet the statutory definition of a contractor under Lien Law § 2, thereby invalidating its liens. The plaintiffs had engaged M. Melnick & Co., Inc. as their general contractor for certain projects. In accordance with their agreement, Melnick, along with the Surety acting as Melnick’s guarantor, executed payment and performance bonds. Upon Melnick’s termination, which triggered the Surety’s obligations under the performance bond, the Surety elected to retain Melnick to complete the project.

Subsequently, the plaintiffs initiated an action asserting breach of contract claims against both Melnick and the Surety. In response, the Surety filed three mechanic’s liens for unpaid work, while Melnick filed its own liens. The Surety also counterclaimed against the plaintiffs and additional counterclaim defendants, asserting causes of action for breach of contract, quantum meruit, unjust enrichment, declaratory relief, and lien foreclosures. The plaintiffs then filed an amended complaint that included, among other claims, a cause of action for willful exaggeration of liens.

The plaintiffs moved for partial summary judgment on the willful exaggeration claim, contending that the Surety’s liens were invalid as a matter of law because sureties lack the right to file mechanic’s liens. In opposition, the Surety argued that it qualified as a contractor with standing to file liens and had not waived its lien rights by contract.

The court concluded that the takeover agreement between the parties was clear and unambiguous, establishing that the Surety remained in its capacity as a surety and did not assume the role of a contractor. As a result, the court found the Surety lacked standing to file mechanic’s liens. However, it declined to award damages to the plaintiffs under Lien Law § 39-a, noting that such damages are unavailable when a lien is discharged for reasons other than willful exaggeration.

This decision underscores the importance of precise contractual language and the legal distinction between a surety and a contractor in disputes involving mechanic’s liens.

[1] 2024 WL 5080524 (1st Dep’t December 12, 2024)

October 14, 2024October 14, 2024 by Jose A. Aquino

KEY TAKEAWAYS UNDER ARTICLE 3-A OF THE LIEN LAW FROM A RECENT NY APPELLATE COURT DECISION

The New York Appellate Division, First Department, recently revisited several legal principles of Article 3-A of the New York Lien Law in the case of Flintlock Construction Services, LLC v. HPH Services, Inc., 230 A.D.3d 446 (1st Dept. 2024). The court’s ruling provides important clarifications on personal liability, standing in trust asset diversion claims, and the conditions under which punitive damages may be awarded.

A key aspect of this case is the court’s affirmation of the contractor’s standing to assert a claim for the diversion of trust assets under Article 3-A of the New York Lien Law. Article 3-A establishes a trust fund for monies received in connection with improvements to real property and designates the recipient of such funds—whether an owner, contractor, or subcontractor—as the trustee of those funds. The trustee is obligated to hold the funds in trust until the claims of all trust fund beneficiaries are either paid or discharged.

Trust beneficiaries, where the subcontractor is a trustee, include sub-subcontractors, architects, engineers, surveyors, laborers, and suppliers who provided labor or materials for the improvement. Section 77 of the Lien Law provides that the “holder of any trust claim, including any person subrogated to the right of a beneficiary of the trust holding a trust claim,” may maintain a cause of action for the enforcement of the trust.

In Flintlock, the court found that the contractor had standing to enforce a trust claim against its subcontractor. This standing was based on the contractor’s status as a subrogee of the subcontractor’s suppliers, a status formed by the contractor’s involuntary payments to the subcontractor’s unpaid vendors. Under the doctrine of subrogation, one party gains the right to enforce another party’s claim by paying the other party’s debt under compulsion or to protect some interest. By making these “involuntary” payments, the contractor acquired the right to assert claims initially held by the subcontractor’s suppliers.

Although the appellate opinion leaves some ambiguity regarding what constitutes an involuntary payment, an earlier decision by the trial court provides clarification. It explains that a payment can be deemed involuntary either due to a contractual obligation or the necessity to protect the payer’s legal or economic interests. The trial court emphasized that when relying on the latter, the party must prove that the action is not just beneficial but essential to safeguard its interests.

For instance, a contractor who makes payments to trust beneficiaries can enforce an Article 3-A trust if they have already paid the subcontractor and are subsequently required to pay the subcontractor’s suppliers or sub-subcontractors due to the subcontractor’s failure to do so. Among other situations, this requirement can arise from either a contractual obligation or a payment bond obligation.

The First Department’s opinion in Flintlock aligns with the Appellate Division, Second Department’s ruling in J. Petrocelli Constr., Inc. v. Realm Elec. Contrs., Inc., 15 A.D.3d 444 (2d Dept. 2005). In Petrocelli, the court similarly found that a contractor who involuntarily paid a subcontractor’s unpaid vendors could maintain a cause of action under Article 3-A, recognizing the contractor as a subrogee with standing to enforce trust claims. The court emphasized that involuntary payments to cover a subcontractor’s obligations can establish standing to enforce trust fund claims.

It is also noteworthy that the appellate court in Flintlock found the principal of the subcontractor personally liable for the diversion of trust assets. The evidence presented showed that the principal knowingly participated in the diversion, including a substantial payment that was funneled through various accounts before ending up with one of his companies.

While punitive damages can be awarded for violations of Lien Law Article 3–A involving the diversion of trust assets, the court in this case declined to adopt a fixed rule that would make such damages recoverable in every instance. The plaintiff’s failure to demonstrate that punitive damages were warranted under the specific circumstances of this case serves as a reminder that such awards are not automatic and must be justified by the particular facts presented.

The decision in Flintlock Construction Services, LLC v. HPH Services, Inc., highlights the potential personal liability for those who divert trust assets. It also clarifies that while punitive damages can be a remedy for diversion of trust assets, they are not automatically awarded and must be justified by the specific circumstances of each case. Furthermore, the ruling provides valuable insight into the conditions under which a contractor can establish standing as a subrogee to enforce trust fund claims, emphasizing the necessity of demonstrating involuntary payments made to protect their economic interests.

July 30, 2024July 31, 2024 by Jose A. Aquino

Revisiting The Intricacies Of New York Lien Law § 38

In the realm of construction law, disputes over the enforcement and validity of mechanic’s liens are fairly common. The recent case of 176 Washington Park LLC v. Empire Core Group LLC, 2024 N.Y. Slip Op. 50906(U) (Sup. Ct., NY Co., June 21, 2024), serves as a classic illustration of the complexities involved.

New York Lien Law § 38 is clear in its mandate: a lienor must provide a detailed statement of the labor and materials that constitute the claimed lien amount. This includes a comprehensive breakdown of materials used, their quantities, costs, and the specifics of labor, including the nature of the work, hours spent, and the rates charged.

In 176 Washington Park LLC v. Empire Core Group LLC, the defendant’s submission fell short of these requirements. The court found the provided classifications of costs, such as “Porta Potty,” “Construction Site Signs,” “Waste Removal,” “DOB Drawings,” and “DOT Permits,” to be too general. They lacked the necessary detail regarding the nature of the labor and the hours and wages expended. Furthermore, payments to subcontractors were listed without adequate information about the services rendered or the basis for the charges.

The materials section was similarly lacking, with no specifics on the quantity or costs of materials used, despite listing the suppliers and amounts disbursed. This lack of detail ultimately led to the court’s decision to grant the plaintiff’s motion in part, requiring the defendant to provide a proper verified itemized statement within 30 days. Failure to comply would result in the discharge of the mechanic’s lien.

This case underscores the importance of record-keeping and transparency in construction projects. It emphasizes the need of contractors and subcontractors to adhere to the requirements of Lien Law § 38 to ensure the enforceability of their liens.

February 18, 2014July 29, 2014 by Jose A. Aquino

Itemization of Mechanic’s Lien Not Necessary Where Construction Contract Apprised Owner of Lienor’s Claim

New York Lien Law § 38 states that the holder of a mechanic’s 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 [or she] claims a lien, and which shall also set forth the terms of the contract under which such items were furnished.” In Associated Building Services Inc. v Pentecostal Faith Church, 112 A.D.3d 1130, 976 N.Y.S.2d 699 (3rd Dept. 2013), the Court held that a lienor is not always required to provide an itemization of labor and materials furnished to substantiate its mechanic’s lien.

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