New Jersey Construction Lien Filings After Bankruptcy Permitted?

THIRD CIRCUIT COURT OF APPEALS ADDRESSES WHETHER CONSTRUCTION LIENS UNDER NEW JERSEY LAW VIOLATE THE BANKRUPTCY STAY

The Third Circuit Court of Appeals on March 30, 2017 issued an opinion that two New Jersey construction suppliers who had filed liens violated the bankruptcy automatic stay. The construction liens, in typical fashion, had been filed by the material suppliers against the owners of the two developments where the prime contractor had installed the materials. The owners had not fully paid the prime contractor for the work on the projects and the contractor, in turn, did not pay the suppliers for their materials. Several weeks after the prime contractor filed for Chapter 11 Bankruptcy, the two suppliers of construction materials filed liens on the properties owned by the developers. The prime contractor filed a motion in bankruptcy court to discharge the liens.

The bankrupt entity (the prime contractor) argued that the bankruptcy’s automatic stay prevented the material suppliers from filing their liens. The court accepted the prime contractor’s argument that the liens were, in fact and in part, filed against the prime contractor’s property inasmuch as the liens could assist them in collecting against the prime contractor’s accounts receivable that was arguably due from the developers. In so holding, the court rejected the supplier’s argument that a filed lien is solely attached to the property interest of the developers/owners.

Rather, the court accepted the argument that the lien could be satisfied by payment of an asset of the bankrupt’s estate to the lien holder (i.e. paying off the lien and deducting the monies due the prime contractor) and, therefore, the lien is essentially against the property of the bankruptcy estate.

The uniqueness of this case (Linear Electric Co., Inc. v. Cooper Supply Co. and Samson Electric Supply, Third Circuit Court of Appeals, March 30, 2017) appears to be related to New Jersey’s Construction Lien Law. Specifically, the court focused upon New Jersey’s “Lien Fund,” which in general, states that an owner discharges a lien by paying into a lien fund from which claimants recover what they are owed. No lien fund can exist if at the time of service of a copy of the lien, the owner has fully paid the prime contractor for the work performed or services, materials, or equipment provided. Further, a claimant’s claim is limited to the “unpaid portion of the contract price of claimant’s contract for the work, services, materials or equipment provided.”

Applying the debtor’s logic, under New Jersey Law, if the lienors were fully paid, the amount that the prime contractor would be owed from the owners would be reduced accordingly. The Third Circuit concluded that this fact directly impacted the prime contractor’s “accounts receivable” which is clearly an “asset” of the debtor under the Federal Bankruptcy Laws.

In the end, the court, following numerous cases involving bankruptcy and lien filings, concluded that if the lienors, under these facts and under New Jersey Law, were allowed to receive full payment by virtue of the liens, the prime contractor would conceivably receive less as a result. In that situation, there would be less money for the bankrupt entity to put into a plan of repayment and, therefore, other creditors of the bankrupt entity would suffer. Thus, the lien filings improperly circumvented the federal bankruptcy laws.

In practical terms, it is interesting to note that the Third Circuit Court of Appeals did not address the well-accepted exception to the bankruptcy code’s automatic stay (Section 362(b)(3)), that permits an exception for mechanic’s liens. Further, the decision will significantly impact the construction industry in New Jersey inasmuch as many suppliers and lower-tier trade contractors rely upon the filing of a lien to protect their entitlement to get paid especially in the event of a bankruptcy filing by upper-tier general prime contractors. Without lien protection, often regarded under bankruptcy law as having some priority, the suppliers of construction materials would become unsecured creditors, forcing them to accept less money on their claim as is common with unsecured creditors.

Construction Lien Foreclosure and Attorneys Awarded by Montana Supreme Court

Construction Lien Foreclosures Permitted When Work is Substantially Complete

In new Montana Construction Lien caselaw, the Montana Supreme Court provided clarity on when a construction lien can be foreclosed upon, and when a contractor is entitled to attorneys fees under Montana’s Construction Lien Law.

One of the questions before the court was whether a contractor was entitled to an award of attorney’s fees and the right to foreclose upon its construction lien under § 71-3-521, et seq., MCA.

The case involved a dispute between a homeowner and a contractor.  The homeowner, an attorney, borrowed funds from a bank to construct a million-dollar home in Ravalli Couty, Montana. The first contractor hired by the homeowner quit after a dispute relating to the construction costs and the filing of a construction lien. The homeowner thereafter hired a second contractor, who also later filed a construction lien after a dispute over contractor’s fees and the quality of work by the stone subcontractor.


At the trial level, the court found that the homeowner “had failed to meet the burden of proof relating to their counterclaims…” for defective work. The District Court also found that the construction lien was valid, and properly filed. Despite this, the District Court found that the contractor was not entitled to foreclose on the construction lien because the homeowner found the stone work to be unsatisfactory. As a result, the contractor could not foreclose on the construction lien, and was not entitled to the statutory attorneys fees.

The contractor appealed, arguing that the District Court erred because under § 71-3-535(4), MCA, the standard is not whether a homeowner is “satisfied” with the work, but whether the work was completed or substantially completed. The Montana Supreme Court reviewed the case and the Construction lien Law. In Montana, construction liens are meant to protect those who increase the value of a property through their labor or materials. Montana, somewhat different from other states, requires that in order to file a lien the lien claimant must “substantially furnish services or materials pursuant to a real estate improvement contract prior to filing the lien notice. Section 71-3-535(4), MCA. Lienable materials are those that are supplied “with the intent that they be used in the course of construction of or incorporated into the improvement[;]” and that are actually “incorporated in the improvement or consumed as normal wastage in construction operations[.]” Section 71-3-524, MCA. Montana’s lien statutes do not authorize liens for the total amount of a construction contract, but rather for the amount of contractual services and materials left unpaid, subject to § 71-3-524, MCA.

As for attorneys fees, under § 71-3-124(1), MCA, a district court “shall allow as costs the money paid and attorney fees incurred for filing and recording the lien and reasonable attorney fees in the district and supreme courts. The costs and attorney fees must be allowed to each claimant whose lien is established[.]”  According to the Supreme Court, “A district court is not empowered with discretion to determine whether a party with an established lien is entitled to attorney’s fees—the language of the statute is mandatory. A district court errs if it fails to award attorney’s fees to a party with an established lien,” and Section 71-3-124, MCA does not require the award of attorney’s fees to be reduced if the judgment is for an amount less than what was claimed in the lien.

The Supreme Court, after reviewing the statutes and prior case law, found that the District Court erred in its ruling. In so finding, the Supreme Court found “…the equitable principles underlying the lien statutes would be undermined if owners could avoid foreclosure of a construction lien by simply expressing their dissatisfaction with a contractor’s work performed. The rule instead…is that work completed or substantially completed, in addition to lienable materials, establishes the lien.” With that, the court ruled that the contractor was entitled not only to foreclosure of its lien, but also to the entirety of the attorneys fees claimed:

“A district court “shall allow as costs the money paid and attorney fees incurred for filing and recording the lien and reasonable attorney fees in the district and supreme courts. The costs and attorney fees must be allowed to each claimant whose lien is established[.]” Lewistown Miller Constr. Co. v. Martin, 2011 MT 325, ¶ 30, 363 Mont. 208, 271 P.3d 48 (quoting § 71-3-124(1), MCA). A district court is not empowered with discretion to determine whether a party with an established lien is entitled to attorney’s fees—the language of the statute is mandatory. A district court errs if it fails to award attorney’s fees to a party with an established lienLewistown Miller, ¶ 30Section 71-3-124, MCA, does not require the award of attorney’s fees to be reduced if the judgment is for an amount less than what was claimed in the lien.

 

The entire case can be found at Vintage Constr., Inc. v. Feighner, 2017 MT 109.

Nevada Proposes to Amend Mechanics’ and Materialmen’s Lien Law

NV Attempts to Strengthen Mechanic’s Lien Laws

Several changes are pending with the Nevada Materialman’s and Mechanic’s Lien Law. The changes appear to be headed for confirmation by the end of the legislative session. The proposed amendments to the current lien law are outlined below. The changes severely increase the liability of contractors, while removing or watering down notice provisions of those seeking to impose the liability. Contractors also are subjected to longer periods of uncertainty in that the statute of limitations in some cases is being doubled from 1 year to 2 years.

These changes, while they bring Nevada in line with the laws of many other states, follow a trend of placing enormous liability on contractors for acts of their subcontractors.  The changes, at the same time they increase contractor liability, eliminate or water down the notice requirements previously imposed to ensure the contractor knows of potential liability. As always, look for these changes increasing a contractor’s liability to result in higher construction costs and higher insurance premiums.

Attempt to Resolve Conflict of Laws: 

In 2015, the Nevada State Legislature passed Senate Bill No. 223, which deal with issues relating to the imposition of vicarious liability on general contractors, foreclosure of construction liens and collecting debt on unpaid workers’ wages or benefits. However, The United States District Court for the District of Nevada in Board of Trustees of the Glazing Health and Welfare Trust v. Chambers, 168 F.Supp.3d 1320 (D. Nev. 2016), found that the bill was preempted by the Employee Retirement Income Security Act of 1974 (ERISA) The new bill attempts to resolve this conflict.

Double Statute of Limitations on Suits Against Prime Contractors

Currently, employees of prime contractors have one (1) year from the date they should have received pay or benefits to sue or start a legal action for the outstanding pay. The proposed law extends this time period to 2 years, and changes the terminology from “prime contractor” to “original contractor”.

Lien Claimant Terms Clarified

The law as it is currently phrased states that a “laborer” is included in the definition of “lien claimant” and this would include an express trust fund for the payment of unpaid wages and benefits, with specific exceptions limiting what are not considered fringe benefits. (NRS 108.2214) The bill under consideration deletes these provisions, and states that any potential claimant under the new bill is a lien claimant.

Revised Notification Requirements

Notification requirements are found throughout the Nevada lien law. As it relates to health and welfare funds, these notifications are being removed and replaced with a new notification requirement, and sets forth new penalties for potential claimants.

Increases Liability for Contractors

While the current law imposes liability on contractors for unpaid labor by its subcontractors, this liability has limits (i.e. contractors are not liable for unpaid health or welfare or other benefit plans). (NRS 608.150) The proposed revisions would eliminate the exceptions, and make the contractor generally liable for the indebtedness for labor that is incurred by a subcontractor or other contractor.

Taft-Hartley Notice

Administrators of a Taft-Hartley trust currently must provide notice of a delinquency when a benefit payment that is owed to the trust is not received. (NRS 338.700) Section 8 of this bill fully repeals this provision of law.

NYC Courts Make Light of Partial and Final Lien Waivers

Sworn Partial and Final Lien Waivers Do Not Change Causes of Action

A new decision issued by the Supreme Court of New York County casts new doubt on the efficacy of obtaining sworn partial and final lien waivers. Lien waivers have become a staple of the construction industry. Most contracts now require that, in order to receive payment, a subcontractor, supplier or contractor must submit a lien waiver that, in most cases, certifies everyone working for them has been paid, and will be paid from the amounts being received in exchange for the lien waiver.

The purpose of the lien waivers is to ensure that no liens will be filed on a construction project by either the contractor providing the lien waiver, or any of its subcontractors or suppliers. Lien waivers originally simply provided this information, and if it was not accurate, would result in a breach of contract action if mechanic’s liens were later filed by subcontractors or suppliers.  The American Institute of Architects provides a form lien waiver, AIA Document G706. The G706 is not a sworn statement, but merely provides the owner with the information requested regarding payments to subcontractors and suppliers.

However, after some time (and many frustrated owners who saw liens being filed on their properties by subcontractors and suppliers who were not getting paid, despite the lien waivers being submitted by contractors), sworn statements accompanying the lien waiver became popular. The AIA even provides form Document G706A, which is the Contractor’s Affidavit of Release of Liens, supporting the G706 by providing a sworn statement stating that all releases and lien waivers have been received from subcontractors and suppliers.

The hope with duly sworn lien waivers was that contractors would be more circumspect in submitting incorrect requests for payment if they believed these incorrect statements could result in a fraud claim against them. Fraud claims often carry with them personal liability, or significantly increased damages, so there is incentive in avoiding them. 


But fraud claims are also difficult to assert, and even more difficult to prove. Courts tend to try to find other ways of dealing with fraud claims, rather than the fraud route. Instead, courts across the country have taken fraud claims and found other, more straightforward, ways of dealing with them.

Recently, the New York City Courts were presented with a case of an incorrect series of lien waivers submitted by a contractor, and the question of whether the sworn statements subjected the contractor to fraud claims.  In theory, sworn statements are obtained with the main goal of subjecting a person to fraud claims in the event the statements are not true. But, in keeping with recent trends in New York law, the court declined to allow private contractual obligations to impose fraud implications.

The case, Solar Elec. Sys., Inc. v. Skanska USA Bldg., Inc., 2017 NY Slip Op 30962(U) (Sup. Ct.), dealt with the issue of whether Defendant Skanska USA Bldg., Inc. could assert a claim against Plaintiff, Solar Elec. Sys., Inc., and its President, for fraud and misrepresentation. The underlying project at issue was for the renovation of a school building at Beacon High School, located in New York, New York. The New York City School Construction Authority was the owner of the Beacon High School Project. 

The basis of Skanska’s fraud claim concerned certified lien waivers.  Skanska alleged that, in exchange for payment from Skanska, Solar submitted sworn statements representing that Solar had paid its subcontractors and suppliers. However, two of Solar’s subcontractors and suppliers later filed liens on the project. The fact that liens had been filed by those working for Solar brought Skanska to believe that the sworn statements in the lien waivers were untrue, and amounted to a fraudulent misrepresentation. Further aggravating the situation was that Solar refused to take steps to have the liens removed, or indemnify Skanska.

Solar responded to the accusations by filing a motion to dismiss the fraud claims, asserting there was no cause of action for fraud because the lien waivers arose out of contractual obligations. Solar further alleged that Skanska owed it significant amounts of money for work performed. Importantly, Solar argued that the lien waiver statements and the refusal to indemnify Skanska against the liens were all purely contractual obligations, and that Skanska’s sole remedy was to assert a breach of contract claim.

The court agreed, stating: “Here, it is without question that the underlying substance of both the breach of contract claim and the fraud claim is entirely of the same origination. Defendants allege in their Third Counterclaim that due to Solar’s breaches of the subcontract, Skanska overpaid and was subject to project liens which were not indemnified by Solar. These obligations of Solar arise from the agreement between the parties. Borducci had no separate or independent duty to the defendants, and the alleged false statements are tied directly to the harm caused by the breach of contract. Additionally, defendants claim the exact same compensatory damages in both of the counterclaims, arising out of Solar failing to pay its subcontractors and suppliers. There is no alleged independent basis outside of the contract between the parties that would give rise to a cognizable fraud claim as the alleged justifiable reliance and inducement springs directly from the contract itself….Plaintiff’s purported fraud damages are actually contract damages. Plaintiff seeks to be placed in the same position that it would have been in had…” Solar performed under the contract.

The case is not unusual in New York courts, and puts, front and center, the question of why owners and other construction project participants insist on having sworn or certified statements when it comes to lien waivers, payroll, or other documents. It may be that they simply want to make the contractor or subcontractor complete the lien waivers more carefully, or think twice before submitting an incorrect lien waiver. Financing requirements may also have something to do with this phenomenon. Or it could be that owners simply feel better when they receive a certified document. The courts, however, at least in New York, have found no difference between certified and un-certified lien waivers.  

Nuclear Disaster Results in Huge Mechanic’s Liens

Fallout of Westinghouse Bankruptcy 

Court records showed that on Friday, May 12, 2017, two more mechanics liens were filed in South Carolina and Georgia on Westinghouse owned nuclear facilities. One lien, in the amount of $6,676,498.47, was filed by Vigor Works, LLC, who performed work and provided materials for reactors.  This lien was filed with relation to the V.C. Summer facility in Fairfield County, South Carolina.

The other lien, also filed by Vigor Works in the amount of $8,909,031.64, was filed on Project Vogtle in Burke County, Georgia. Westinghouse Electric Company, a well known and historic company, now owned by Toshiba, was the general contractor on both project, but filed for bankruptcy on March 29, 2017 after several apparent missteps that resulted in a dramatic increase in the budgets for the proposed nuclear facilities.

While Westinghouse was attempting to continue the construction of the nuclear plants, on Monday, May 15, 2017, it was announced that Southern Co. would take over the continued construction of the Vogtle project. The V.C. Summer Facility is still operated by South Carolina Electric & Gas Co., via an agreement with Westinghouse, but SCE&G is apparently still looking for a contractor to take over the project.Nevertheless, the liens filed by Vigor Works only add to the projects’ woes: on May 2, 2017, Aecon Industrial filed a mechanic’s lien in the amount of $10.7 million, and Fluor Enterprises filed a $60 million lien in March, 2017.

CT Pay-When-Paid Tax Reporting Requirements – Connecticut Department of Revenue Services

Pay-When-Paid Method for Materialmen

Over the course of the last 15 to 20 years, the Connecticut Department of Revenue Services (“DRS”, i.e. the Taxman) has grappled with how to deal with when and how use and sales taxes are to be reported when a subcontractor or supplier has a “pay-when-paid” clause in their contract. The issue seems simple – taxes should only be paid when the subcontractor or supplier is paid – but from the DRS’s point of view, the materials were provided, they have a value, and taxes should be paid. The question is whether the taxes are paid at the time of shipment, transfer, or when money exchanges hands.  In the end, the DRS agrees that money needs to exchange hands before sales or use tax is assessed, with some reporting and record keeping requirements.

Essentially, the DRS’s new guidelines, issued and effective as of April of 2017, permit as follows:

1. The pay-when-paid provision allows sellers of building materials and services an exception to the rule that tax is payable when the transaction takes place
2. It applies to materialmen on a construction project, which includes suppliers and subcontractors, among others. (To be considered a “materialman”, you must be entitled to file a Connecticut Mechanics Lien on a construction project).
3. The person or entity claiming the exemption must file an application with DRS by July 1 of every year showing that they or their company was, in fact, a qualified materialman for the last 2 of 4 years.
4. If the materialman then receives permission in writing from DRS, they will be permitted to collect and remit tax on sales of building materials and taxable services related to the materials to contractors “at the time and to the extent that the materialman receives payment.”

5. For tax purposes, any payments received on account from a contractor must be applied in the regular accounting method used by the materialman, so that the tax is paid when the accounting method is fulfilled. For an example, refer to the DRS Pay When Paid Guidelines, IP 2017(21).

6. Record keeping requirements under this guideline include keeping most of the receipts and other records relating to the transaction for six years.
Note that if the receivable on a pay-when-paid transaction is factored (i.e. if the receivable is sold), the sales tax on 100% of the original sales price must be paid in the year the factoring is performed.

These new guidelines provide some clarity on how the pay-when-paid provisions work with the Connecticut tax code, and how subcontractors and suppliers should deal with non-payment issues when they are filing their tax returns.

Liens v Bankruptcy: Who Wins? Getting Paid When Bankruptcy is Filed

We all dread the word. Whether it is uttered to you or about you, it raises the hair on your neck and is synonymous with not getting paid for your hard work. BANKRUPCTY!

Whether you are a material supplier, a subcontractor or even a general contractor, when anyone in the construction chain above you declares bankruptcy, the natural reaction is to assume that you are getting pennies on the dollar, if anything. However, what most contractors, subcontractors and material suppliers do not realize is that this is not always the case and sometimes, if you have filed a mechanics lien or construction lien, you can get PAID IN FULL.

getting paid when bankruptcy is filedWhen a company files a Chapter 7 bankruptcy, a trustee is appointed by the court and his job is to gather all the money that is owed to the bankrupt company to distribute among everyone who is owed money. This collection of money is called the bankruptcy estate. Obviously, if there was enough money owed or owned by the bankrupt party to pay everyone, they would not be filing for bankruptcy protection, so how can a lien help?

If there is money owed to the bankrupt party for the project that you worked on and a lien has been filed, your lawyer can argue that the money owed never should become part of the bankruptcy estate. The money is only passing through the contractor and, while the contractor may hold a legal interest in the funds it is you who hold the equitable interest in those funds. The court will examine State law in the State where the property exists to determine what property rights exist. If the funds do not become part of the bankruptcy estate, you may be the one getting paid in full.

File your construction lien. The sooner the better. Hire a lawyer to assert your rights and get paid.

Filing A North Dakota’s Mechanic Lien

Liens filed on private property or on funds relating to a public project are known as North Dakota Mechanic’s Liens. When a North Dakota lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property. When a  North Dakota lien is filed with regard to work performed on a publicly or government owned property, it attaches to the fund of money which the public agency has allocated for a project. The reason for this is that you cannot force the sale of publicly owned land (public agencies mean any county, city, town, township, public commission, public board or other municipality authorized by law to make contracts for the making of any public improvement in any city, town, township or other municipality).
Contractors, as well as subcontractors, sub-subcontractors and suppliers who have a contract with a general contractor or a subcontractor can file a North Dakota mechanics lien.

Yes. North Dakota has preliminary notice requirements. No claimant is entitled to a North Dakota mechanics lien unless it first serves written notice upon the owner, informing him that if payment is not made on the lien claimant’s account within 15 days of mailing, a North Dakota mechanics lien will be perfected. The notice must be recorded.
North Dakota mechanics’ liens on private property must be filed within 90 days of the last date the lienor provided materials or services to the Project. However, North Dakota lien rights are not lost if the time frame is not met except against bona fide purchasers for value.

For more info about North Dakota Mechanics Liens, please visit LienItNow.

Filing a Florida Mechanic’s Lien

In Florida, liens filed on private property or on funds relating to a public project are known as Mechanic’s Liens. When a Florida Mechanics Lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.

Contractors, as well as subcontractors, laborers, certain design professionals, sub-subcontractors and material suppliers can file a Florida mechanics lien. If a company supplies material to a material supplier, they are not eligible to file a Florida construction lien claim. Only those who have a direct contract with the owner can file a Florida mechanics lien if the total price for the improvement is $2,500.00 or less.
Depending on the claimant’s status, a Florida pre-lien notice may be required.  Subcontractors and sub-subcontractors, including materialmen and suppliers who do not have a contract with the owner, are required to provide a Notice to Owner within the earliest of the following periods: within 45 days of commencing work or providing services for the Project or before the date of the owner’s final payment to the contractor who furnished an affidavit stating that all potential lien claimants have been paid.

A Florida claim of lien must be filed within 90 days of the last work performed on the project.

To learn more information about filing a Florida Mechanics Lien, please visit LienItNow.

New Jersey Lien guidlines

In the state of New Jersey, liens filed on private property are known as mechanics’ liens . When a New Jersey mechanics lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property. When a New Jersey mechanics lien is filed on a public project, the lien attaches to and secures the funds in the public owner’s hands, prohibiting the owner from releasing that money until the mechanics lien is satisfied.
Contractors, subcontractors, sub-subcontractors, architects, engineers, and suppliers all have lien rights under New Jersey’s Construction Lien Law.

Pre-lien notice requirements exist for some lien claimants. Anyone that does not have a direct contract with the owner should file a Notice of Delivery of Materials and Services with the Owner and Prime Contractor within 20 days of starting work on the Project
New Jersey has different rules for different types of projects.

Construction Liens filed on commercial projects must be filed within 90 days after last day the claimant provided materials or labor to the Project. The filing of a Residential Lien Claim is a two step process. BOTH STEPS MUST BE COMPLETED WITHIN 120 DAYS. Within 60 days of the last furnishing of labor or materials, a lien claimant must file a Notice of Unpaid Balance along with a demand for arbitration. This arbitration has nothing to do with the litigation or resolution of the lien claimant’s underlying claim. It is solely for the purpose of determining whether the lien claimant has the right to file a lien claim. At the conclusion of the arbitration, the lien claimant may file a Construction Lien Claim for the sum of money determined by the arbitrator. Liens on public projects, also known as municipal mechanics’ liens , must be filed within 60 days of when the entire project is completed and accepted by resolution of the public agency. This differs from commercial and residential liens, which have time requirements starting when the work of the claimant, not the project, is completed.

For more information about New Jersey Liens, please visit LienItNow.