June 18, 2019
by Bob Incollingo
In the abstract, it’s hard to imagine anything less compelling than a disagreement over construction. Forgive the pun, but in concrete terms that view would be mistaken. Outrage over feeling ripped off is dyed in the bone of construction disputes. Owners and contractors anchor to outcomes, personally vested beyond proportion to the dollars involved.
Lien cases seem even more stressful than others, because title to the improved property hangs in the balance. Under the construction lien law for private projects, the foreclosed property can be sold and the proceeds applied to the claimant’s bill.
That is, if the lien is good.
More times than you would expect, the lien is not good. All construction liens, whether commercial or residential, face a strict test under the statute. Generally speaking, “close enough” is not good enough for a lien claim. This is one of those areas in life where “a little knowledge is a dangerous thing,” since you really do need to pay attention to the fine points when you record a construction lien, which must be letter perfect and true in all respects. Someone who records a bad lien is asking for trouble when the lien gets tested in court. Don’t drag your feet giving up a bad lien. You’ll regret it when the judge orders you to pay the other side’s attorney’s fees.
An experienced lawyer will discharge a bad commercial lien at the threat stage with opposing counsel. The residential lien process is riskier, since a potential claimant has to persuade an arbitrator that the lien is good before he even files it. While most bad residential liens will be weeded out in the expedited arbitration, some defenses to a bad lien must await resolution by the court. For example, prior payment of the prime contract price will defeat a subcontractor’s lien, but is rarely apparent to the subcontractor when he records his NUB or his lien. News that the prime contractor has been paid in full will naturally outrage an unpaid subcontractor. For the unpaid lien claimant, the news gets worse.
Among the definitions appearing in the Construction Lien Law you find at section 2A:44A-2:
“Lien fund” means the pool of money from which one or more lien claims may be paid. The amount of the lien fund shall not exceed the maximum amount for which an owner can be liable. The amount of the lien that attaches to the owner’s interest in the real property cannot exceed the lien fund.
Not the most transparent definition, and it begs the question, what is “the maximum amount for which an owner can be liable?” Section 2a:44A-9 of the law supplies the answer: “The amount of a lien claim shall not exceed the unpaid portion of the contract price of the claimant’s contract for the work, services, material or equipment provided.” Section 2a:44A-9 further limits the claim depending on where the claimant stands in the food chain of owner, prime contractor, subcontractor, and sub-subcontractor.
Here we do the math. Subject to one or two exceptions, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim will cap the amount recoverable by a first tier lien claimant (prime contractor) or second tier lien claimant (subcontractor or supplier to the prime). A lien by a third tier lien claimant (sub-subcontractor) will be limited to the lesser of (a) the amount which would be due to a first or second tier contractor or (b) the earned amount of the contract between the contractor and the subcontractor to the contractor, minus any payments made prior to service of a copy of the lien claim. Got that? When you do the numbers, if you do them right, you come up with the amount of the “lien fund,” the amount up to which the lien claim may attach to the interest of the owner, and be paid out from the proceeds of sale of the liened property.
The lien law is based in part on the principle that an owner should not have to pay twice for the same work. Still, an owner and a prime contractor can’t play games with the contract price in hopes of lien-proofing the property, or even reducing the lien fund for recovery. To avoid a lien claim entirely on grounds of payment in full, final payment has to pre-date the notice of unpaid balance, if any, and service of the recorded lien. The statute and case law dictate that attempts by the owner to defeat a lien claim by payment after the record date will not work, nor will any other payments outside the normal obligations of the contract. So, subsection 2a:44A-9(c) provides that a lien fund will not be reduced by payments by the owner that do not discharge the obligations for the work performed or services, material or equipment provided, including, but not limited to:
“(1) payments not in accordance with written contract provisions;
“(2) payments yet to be earned upon lodging for record of the lien claim;
“(3) liquidated damages;
“(4) collusive payments;
“(5) use of retainage to make payments to a successor contractor after the lien claim is lodged for record; or
“(6) setoffs or backcharges, absent written agreement by the claimant, except for any setoffs upheld by judgment that are first determined by: (a) arbitration or alternate dispute resolution in a proceeding conducted in accordance with section 21 of P.L.1993, c.318 (C.2A:44A-21); or (b) any other alternate dispute resolution agreed to by the parties.”
Subject to subsection c. above, no lien fund exists, if, at the time of service of a copy of the lien claim, the owner has fully paid the prime contractor for the work performed or for services, material or equipment provided.
New Jersey construction lawyer Robert J. Incollingo sat in his car on his lunch hour and watched them tear down the old Subaru Headquarters. That’s the kind of thing construction lawyers do. More articles like this appear on RJILAW.com.