 |
 |
 |
CONSTRUCTION
LIEN LAW
IN NEW JERSEY
NEW DEVELOPMENTS AND SPECIAL CONSIDERATIONS
By: James H.
Landgraf
Following the
adoption of the New
Jersey Construction
Lien Law in 1994 to
address liens on
private projects and
for the following
six years, what
little case law
arose created a
pattern of strict
construction.
The Courts in
interpreting cases
arising out of the
Construction Lien
Law followed the
general proposition
that had been
prevalent under the
preceding Mechanics
Lien Law in that
lien rights were a
statutory creation
and parties wishing
to enjoy the
statutory benefits
were required to
strictly comply with
the provisions of
the lien law.
Gallo v. Sphere
Construction Corp.,
293 N.J. Super. 558
(Ch. 1996)
Strictly enforcing
the provisions of
N.J.S.A. 2A:44A-2,
3, 9 and 10 that
lien rights under
the Construction
Lien Law were
conditioned upon the
existence of a
written contract,
the Court rejected a
lien that was filed
based on work
performed while a
contract was being
negotiated, where
the contract never
was formally
executed and the
parties terminated
the relationship.
The Court also
strictly construed
the provisions of
N.J.S.A. 2A:44A-6
which required
execution of the
lien by claimant or,
in the case of a
partnership or
corporation, a
partner or duly
authorized officer
thereof” in
rejecting a lien
that had been
executed by counsel
for the claimant
similar to what was
standard practice
under the Mechanics
Lien Law.
Finally, the Court
strictly construed
the requirements of
N.J.S.A. 2A:44A-3, 9
and 10 by rejecting
in any event the
lien claimant’s
attempt to seek
profit on work that
was not performed
based upon the
language that
allowed a lien to be
filed on the basis
of work that was
performed.
F. Bender v. Joseph
L. Muscarelle, Inc.,
304 N.J. Super. 282
(App. Div. 1997)
In this case, while
the Court did not
directly deal with
the provisions of
the Construction
Lien Law, it did
find that based upon
the provisions of
the Construction
Lien Law, including
the provision that
prohibits a waiver
of lien rights (N.J.S.A.
2A:44A-38) a
subcontractor could
not bypass
contractual privity
requirements to
declare it had
failed to perfect
its lien rights by
raising a quantum
meruit claim against
the owner.
Mansion Supply Co.,
Inc. v. Bapat, 305
N.J. Super. 313
(App. Div. 1997)
cert. denied 153
N.J. 49
In Mansion, the
Court strictly
interpreted the “90
days from the last
day of work”
requirement of
N.J.S.A. 2A:44A-6 in
rejecting an effort
to file a lien claim
after that time
period had passed
and further
determined that a
filing of a Notice
of Unpaid Balance
consistent with
N.J.S.A. 2A:44A-20,
while protecting a
subsequently filed
lien’s priority
pending the filing
of the lien, would
not serve to extend
the 90 day
requirement for the
actual filing of the
lien.
Orefice v. ADR, 315
N.J. Super. 493
(App. Div. 1998)
By 1998, the Courts
were starting to
address issues
pertaining to
nuances and
practical
complications
surrounding the
Construction Lien
Law. One of the
problems that was
arising dealt with
the requirements of
the lien law to file
action for
enforcement in the
Superior Court which
was often contrary
to contractual
arbitration clauses.
The Court in Orefice
acknowledged this
apparent discrepancy
and, citing the
provisions of the
Construction Lien
Law which allow for
separate actions (N.J.S.A.
2A:44A-14d) noted
that a party who
made claims for
relief outside of
enforcement of the
lien would not be
precluded from doing
so in a separate
action and further
that the lien
requirement of
initiating of action
in the Superior
Court would prevail
over arbitration.
This has led to the
practical remedy of
bringing the action
within the Superior
Court and then
staying the same to
allow for
arbitration of the
underlying
contractual
disputes, which
results would
thereafter return to
the Court as part of
the enforcement
action.
Groesbeck v. Linda,
321 N.J. Super. 349
(App. Div. 1999)
Again, interpreting
N.J.S.A. 2A:44A-14d,
the Court determined
that although the
contractor had
failed to property
exercise its lien
rights, it could
still maintain a
contract claim.
By 2000, the Courts
in seeing
Construction Lien
Law cases on a more
frequent basis, as
well as more such
cases winding their
way to and through
the appellate
process, the Courts
began to apply more
practical
considerations
beyond the overall
“strict
construction”
process that had
applied to the
earlier cases.
Issues were now more
frequently arising
with regard to the
amounts of the liens
in question, the
propriety of the
sanction provisions
and the problems
associated with the
“lien fund.”
Thomas Group, Inc.
v. Wharton Senior
Citizen Housing, 163
N.J. 507 (2000)
This case had
started under the
strict construction
processes whereby
the trial court and
Appellate Division
had rejected the
lien. Upon reaching
the Supreme Court,
however, the Court
began to analyze
what was really at
stake and issue. In
this case, the
primary issue dealt
with the amount of
the lien and whether
or not the
contractor had
overstated the
amount of the lien.
The contractor had
filed a lien at a
point when it had
performed a majority
of the physical work
on the project but
had not turned over
all required
closeout documents
that would have
triggered the
release of retainage.
The lien claim
included the
retainage amount.
The Supreme Court
determined that the
provisions under
N.J.S.A. 2A:44A-3
that included
performance of work
“in accordance with
the contract” was
intended to mean
that a party must
perform work under
the contract to be
entitled to a lien,
but did not
necessarily require
that the party must
satisfy all terms
and conditions of
the contract.
Veering from the
“strict
construction”
interpretative rules
that had been
applied up until
this time, the Court
specifically
determined that the
statute needed to be
“construed sensibly
and in furtherance
of the underlying
legislative
purpose.” The Court
went on to find that
in lieu of a full
discharge of the
lien where work
and/or
administrative
requirements
remained, a remedy
could be fashioned
whereby the lien
claimant would be
stayed in enforcing
its lien until it
met the contractual
preconditions for
payment.
Legge Industries v.
Joseph Kushner
Hebrew Academy, 333
N.J. Super. 537
(App. Div. 2000)
This is the first
case dealing with
what has become a
significant
practical
consideration
pertaining to the
“lien fund.” Since
the statute both
provides and intends
that an owner not be
required to pay more
than its underlying
contractual
obligations, the
issue of what is to
happen when the
cumulative liens
exceed the owner’s
contract balance has
become a common
development. The
Court in Legge was
faced with a
situation whereby
the owner was
holding a contract
balance less than
the cumulative
liens. However, it
was also determined
that the owner had
made payments to the
prime contractor
before they were
earned and due. The
Court in determining
what would
thereafter
constitute the lien
fund determined that
such unearned
payments would not
reduce the owner’s
maximum liability.
The lien fund would
also include
contractual
retainage whether or
not it was earned.
The Legge Court was
also asked to make a
determination
regarding the
viability of some of
the liens that had
been filed. On the
one hand, it
reverted to the more
strict reading of
the “written
contract”
requirements
pertaining to
suppliers whereby
delivery tickets
could satisfy the
writing requirement
but that generalized
invoicing would not.
It also become the
first Court to
analyze what was
truly allowed for
under the sanction
provisions of
N.J.S.A. 2A:44-15.
The Court determined
that the requirement
of “willful
overstatement” as
the basis for
requiring forfeiture
of a claim requires
an intent to recover
that to which the
claimant knows he is
not entitled. To the
requirement of
“willful
overstatement” the
Court essentially
included a
requirement that the
claim be made in bad
faith.
Triple R
Enterprises, Inc. v.
Pezotti, 344 N.J.
Super. 31 (App. Div.
2001)
In another “lien
fund” case, the
Court determined
that under the
statutes (N.J.S.A.
2A:44A-10), the
amount of the lien
fund would be
established at the
time a lien claimant
filed its lien
against the owner.
In Triple R, a lien
had been filed by
another
subcontractor prior
to the subject lien
and payments had
been made by the
owner following the
filing of that lien
but before the
subject lien.
However, the initial
lien had been
satisfied and the
additional payments
where made prior to
the subject lien
filing. Since the
prior lien had been
satisfied, it would
no longer count as
the initiating point
for developing the
lien fund to protect
subsequent lien
claimants.
AEG Holdings, LLC v.
TriGems Builders,
Inc., 347 N.J.
Super. 511 (App.
Div. 2001)
In another “lien
fund” case, the
Appellate Division
in determining that
the construction
lien statute was
remedial and
designed to
guarantee security
for those who
furnish labor or
materials and should
be “construed
sensibly,” found
that a property
owner was required
to pay the
subcontract the
difference between
the contract price
and the amount that
it had previously
paid to the general
contractor prior to
the filing of the
lien even if that
resulted in the
owner’s having to
pay more for the
finished job than
the original
contract price.
Again, as in the
case of Legge, the
Court found that the
owner had made
payments to the
general contractor
which had not yet
been earned by the
general contractor
and therefore could
not be deducted from
the “lien fund.”
West Virginia Steel
Corp. v. Sparta
Steel Corp., 356
N.J. Super. 398
(App. Div. 2003)
This case
represented a
“return to form” of
the strict
construction
interpretations that
had been prevalent
during the early
years of
Construction Lien
Law cases. A
manufacturing
supplier had filed
lien claims against
the project owners
and thereafter
commenced action in
a county other than
the county where the
property was
situated. Despite
argument that rules
pertaining to venue
allow for relaxation
of venue in the
interest of judicial
economy, the Court
strictly construed
the provisions of
the Construction
Lien Law (N.J.S.A.
2A:44A-14) which
required the
commencement of an
enforcement action
to be brought in the
Superior Court in
the county in which
the real property is
situated and
rejected the
proposition that
other counts in the
complaint properly
placed venue in the
initial county
and/or the matter
could be
transferred.
The Court further
rejected the
manufacturer’s lien
claim on the basis
that it did not have
“an agreement….” in
writing. While the
lien claimant had a
written contract,
there were no
written contracts
between some of the
interceding parties
which effectively
broke the required
chain of written
contracts.
D.D.B . Interior
Contracting, Inc. v.
Trends Urban Renewal
Association, Ltd.,
176 N.J. 164 (2003)
Returning to the
trend of “sensible
interpretation,” the
Supreme Court again
reversed the
Appellate Division’s
affirmation of a
trial court decision
that followed the
“strict
construction”
interpretative
process. The trial
court and Appellate
Division, following
the thought process
from Gallo v. Sphere
Construction Corp.
with regard to who
may sign a lien
claim under N.J.S.A.
2A:44A-6, rejected a
lien that had been
signed under a
“power of attorney
vesting an
attorney-in-fact
with the authority
of a duly authorized
officer.” The
Supreme Court found
that on the basis of
the properly
executed power of
attorney it
effectively created
a “duly authorized
officer” and
therefore even
though the signatory
on the lien was not
a formal officer of
the company,
execution of the
lien by the
“attorney-in-fact”
was sufficient to
meet the statutory
requirements.
Sovereign Bank v.
Silver Line Holdings
Corp., 368 N.J.
Super. 1 (App. Div.
2004)
In the first
reported case
dealing with
priority of liens,
the Court confirmed
that a first filed
mortgage had
absolute priority
over a second filed
construction lien in
a foreclosure action
brought by the
mortgagee. The Court
did note and
recognize that the
lienor had rights
under the provisions
of pertaining to
Notices of Unpaid
Balances under which
it could have
protected its
priority against a
mortgage that was
filed in the
interceding period
between the NUB and
the lien, but had
failed to do so.
Craft v. Stevenson
Lumberyard, Inc.,
179 N.J. 56 (2004)
In a slight
reversion to strict
construction of the
lien law, the
Supreme Court in
Craft dealt with the
dual issues of the
validity of a lien
claim and
establishing the
lien fund. The Court
repeated its prior
statement from The
Thomas Group in
clearly stating that
the Construction
Lien Law “is not to
be strictly
construed, but
rather is to be read
sensibly and with an
understanding of the
policies underlying
the Construction
Lien Law.” The Court
confirmed that an
individual lien
claim by a
subcontractor or
supplier can never
be greater than the
amount that that
claimant is owed and
that the measure of
the lien fund never
exceed the
difference between
the total contract
price between the
owner and the
contractor and the
amount that the
owner has paid to
the contractor as of
the filing of the
lien claim. The
Court dealt, on a
first impression,
with the provisions
of N.J.S.A.
2A:44A-37 which
allow a property
owner to request
from the prime
contractor, a list
of all parties who
may have lien
rights.
Under somewhat
unique factual
circumstances, the
Court was faced with
a supplier/lien
claimant who had
maintained several
open accounts with
its customer (the
contractor) and when
it had received
funds from the
contractor, had
applied them to
other existing
accounts that it had
with the contractor.
The Court determined
that where the
subcontractor knew
that the payments
were from the
specific project
owner and were
intended to
discharge duties for
that project, the
project owner had
the right to expect
that his payments
would be applied for
those specific
materials. The Court
specifically
determined that the
practice known as
the “payment
application rule”
which allows a
creditor to apply
payments to a
debtor’s account in
any manner that it
chooses unless
otherwise
instructed, is not
absolute in the
context of the
Construction Lien
Law. On this basis,
the Court found that
the lumber
subcontractor was
precluded from
filing a lien claim
under the
Construction Lien
Law where it had
received but had
failed to properly
allocate the
contractor’s
payments. The Court
noted that
consistent with the
provisions of the
lien law, the
subcontractor still
had common law
claims against its
customer, the
contractor.
Finally, the Court
determined that in
this particular
instance, no lien
fund existed where
the project owner
had made progress
payments to the
contractor for work
performed and was
fully current to the
time that the
contractor had left
the project without
paying its
subcontractors. The
Court thereby
determined that
since the owner had
paid all monies
actually owed, no
lien fund existed.
Kvaerner Process,
Inc. v. Barham-McBride
Joint Venture, 368
N.J. Super. 190
(App. Div. 2004)
Following a ruling
by the trial court
in which a
subcontractor’s lien
was discharged and
the general
contractor was
awarded counsel fees
(N.J.S.A.
2A:44A-14), the
Appellate Division
confirmed that the
general contractor
was permitted to
bring an action to
discharge a lien and
that the burden of
proof would be
placed upon the
subcontractor to
justify the claim.
The Court further
determined, however,
that “great care”
needed to be
exercised in
evaluating the
sufficiency and good
faith of the claims
and that the fee and
cost assessment
authority provided
for under the
Construction Lien
Law should be used
conservatively to
discourage premature
challenges. Although
not ultimately
deciding the merits
of the case, the
Appellate Division
reversed and
required that the
subcontractor be
provided with full
discovery in order
to allow it the
opportunity to
shoulder the burden
of proof.
Labov Mechanical,
Inc. v. East Coast
Power, LLC, 377 N.J.
Super. 240 (App.
Div. 2005)
In another
construction lien
fund case, where
several
subcontractors
instituted
construction lien
actions, the Court
determined that the
contract
balance/lien fund
was not subject to
reduction by
liquidated damage
back charges that
the owner contended
existed against the
prime contractor,
where the liquidated
damages were not
established until
after the liens had
been filed.
Riggs Distler & Co.,
Inc. v. Valero
Refining Co., N.J.
2005 WL 2897483 (D.N.J.
2005)
The United States
District Court used
this case as an
opportunity to
revisit the
provisions of
N.J.S.A. 2A:44A-9
and 10 which provide
the formulae for
establishing the
maximum amount of a
lien. The Court
interpreted and
found that where
subcontractors
outstanding balance
while being less
than the balance
remaining due from
the owner to the
prime contractor
[strike that] where
a
sub-subcontractor’s
outstanding
receivable while
being less than the
amount still owed by
the owner to the
prime contractor,
was less than the
amount owed by the
prime contractor to
the subcontractor
(contracting party
with the lien
claimant), the
maximum amount of
the lien would be
limited by the
amount due from the
prime contractor to
the subcontractor
since that was the
lowest in the chain
of contract
balances.
|
|
|
|
|
|
|
|
