Buffalo contractors beware: Exaggeration your Buffalo mechanic's lien could lead to 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 Buffalo 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.

Buffalo 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 Buffalo 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.

Buffalo Lien Release "Dos" and "Don'ts"

If you are in the construction industry chances are that in some point in time you have either asked for a lien release or been asked to sign a lien release, also known as a lien waiver.  But do you take the time to actually read the lien release to see what it is?  If not, you should - all releases are not created equally.

A lien release usually comes up when it is time to make payment on a construction project.  Whether you are an owner paying a general contractor or a general contractor paying a subcontractor or supplier, lien releases are key to the payment process.  The lien release essentially says that the contractor or supplier has been paid for his, her or its services and waives the right to file a mechanic's lien against the property or project.  Because of the consequences of signing a lien waiver or a lien release, you should make sure that you do it right and that you understand the difference between the types of lien releases.

The first thing you should do is read the release.  Specifically, look for the following:

1.  Does the lien waiver refer to the correct project?
2.  Is the time period referenced in the lien waiver the period for which you are receiving payment and waiving your lien right?
3.  Is the release/waiver a partial lien waiver or a final lien waiver?
4.  Is the amount set forth in the lien waiver the correct amount that you have been paid?
5.  Are the names of the parties in the lien waiver correct?
6.  Is the release/waiver conditional on payment or unconditional?

Final Waivers

A final lien waiver means that you have been paid in full and are forever waiving any right to file a mechanic's lien against the project and property.  The final lien waiver should be signed at the end of the project in connection with your final payment.

Partial Waivers

A partial lien waiver means that you have received a partial payment, or are receiving a partial payment, and that you waive the right to file a mechanic's lien for that particular portion of the labor or materials that you provided as identified in the lien waiver.  Determining whether the lien release you are signing is a final or partial lien waiver can sometimes be difficult.  Often the document will have a title as either "Partial Lien Waiver" or "Final Lien Waiver" but, even if it does, read it.  Regardless of the title, make sure that the document actually says that you are doing what you think you are doing.  If it is final, that is what the release should say.  If it is partial, it should say that.

Helpful Lien Waiver Tips

An important tip, which seems self evident, is to make sure that you actually are paid before you sign the release.  In almost all instances the lien release or the lien waiver says that you are acknowledging receipt of payment and are waiving your right to file a mechanic's lien.  If you have not been paid and the release is not conditional then don't sign it!  Now, of course there are situations where payment will not be released until you sign and provide the lien waiver. A simultaneous exchange is acceptable.  You hand the lien waiver to the person that is paying you and they in turn hand you a check.  Simple enough.

If you are not paid first, or simultaneously with the exchange of the lien waiver, you should try to sign a document known as a "conditional" lien waiver or a "conditional" lien release.  The conditional lien waiver includes language that limits the effectiveness of the waiver to the extent of payment actually received.  If you are offering a conditional lien waiver expect a fight from the general contractor and/or the project owner.  Owners and general contractors don't like conditional releases and waivers.  More importantly, banks don't like them.  So if your project is financed through a construction loan it is possible that the conditional waiver will not be accepted because disbursements under the construction loan will not be made until unconditional lien waivers are received.

One final note, remember that in New York, a pre-lien waiver is void against public policy.  That means that when you start the project nobody can require you to waive your right to file a mechanic's lien before you actually provide the labor and materials.  If they do, the waiver is void and is not enforceable.  That does not mean you should sign the pre-lien waiver anyway.  Explain that the lien waiver is void and that you will not waive your right to file a mechanic's lien until you are paid for your services. Knowing your legal rights is a critical component to the contract negotiation phase.

Even though lien releases and lien waivers are common in the construction industry, they are still important legal documents.  As with any legal documents, I strongly suggest that you consult with legal counsel before signing a mechanic's lien waiver or a mechanic's lien release.  Often it only takes a few minutes for an experienced construction attorney to review the waiver, make any necessary changes and get it back to you.  The small cost for the review can save you a lot of time and money down the line.

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.

What to do with your Buffalo Mechanic's Lien Discharge Bond

So you've obtained a mechanic's lien discharge bond. The next logical question is "what now?"  The primary reason for obtaining a mechanic's lien discharge bond (Lien Law Section 19(4) ) is to remove the lien from the property.  You may do this because you are contractually obligated to keep the property lien free (for example, if you are a general contractor and your subcontractor filed a lien), because you want to sell the property and the mechanic's lien is causing a problem and holding up the closing, because the mechanic's lien is a default under your mortgage, or a variety of other reasons.  But bonding a mechanic's lien does not get rid of the lien.  The name of the bond - a mechanic's lien discharge bond - causes a lot of confusion to those unfamiliar with the intricacies of the Lien Law.  The bond does not discharge the mechanic's lien in the sense of extinguishing it, it discharges the lien in the sense of removing it from the property.  But the lien remains alive and well.

The mechanic's lien, having been removed from the property, is now attached to the discharge bond.  If you posted the bond you have a few options.  Of course one option is to simply wait it out.  The lien will expire by operation of law in the same manner as it would expire against the property.  A mechanic's lien, as a general rule, lasts for a period of 1 year from filing.  If it is not extended or foreclosed upon it expires and is no longer enforceable.  If this happens the surety that issued the bond should then return the collateral to you (either by extinguishing the letter of credit or returning the cash collateral).  However, some sureties will require you to obtain a court order explicitly cancelling and vacating the mechanic's lien before they release the bond collateral back to the principal.  Unfortunately this adds a bit of time and cost to the process but is certainly easier and more cost effective than litigating and defending a full blow lien foreclosure action.  Other sureties will discharge the bond upon receipt of a letter from the attorney for the bond's principal stating that the time to foreclose upon the lien has expired and no lien foreclosure action has been commenced.

There are two things that can happen to the mechanic's lien before it expires:  1) the lienor can foreclose upon it; or 2) you (or anyone with standing) can attempt to have the lien cancelled and vacated by a Court order.  Challenging the lien and attempting to have it cancelled and vacated occurs in the same manner as if the lien were still attached to the property; the mechanic's lien discharge bond does not alter the process.  The person that wants to discharge the mechanic's lien so that the bond collateral can be released must either attack the mechanic's lien on its face (see Lien Law Section 19 and Lien Law Section 21) or challenge the underlying validity of the lien (i.e. argue that the amount is not owed).  A challenge to the face of the lien can be made via petition commencing a special proceeding under Lien Law Section 19 and Lien Law Section 21.  A challenge to the amount of the lien can only be made in a foreclosure action.  You can force a lienor to foreclose upon its mechanic's lien by using the provisions of Lien Law Section 59 for a private lien or Lien Law Section 21-a for a mechanic's lien on account of a public improvement.

A mechanic's lien that has been bonded can be foreclosed upon in generally the same manner as a lien that has not been bonded and is still attached to the real property.  The lienor files a foreclosure complaint and names all of the necessary parties.  Notably, if a mechanic's lien has been bonded the owner of the real property is no longer a necessary party (see Lien Law Section 44-b).  But the surety that issued the bond is now usually named as a party (though arguably not a necessary one) as is the principal under the bond.  Other than the parties to the action, an action to foreclose upon a mechanic's lien that has been bonded will follow generally the same course as a lien that was not bonded and the lienor must still establish that its mechanic's lien was valid before recovery can be achieved.

The New York Lien Law, the bonding process and the foreclosure process can be a mine field for novices.  Small errors can spell doom in certain instances and it is therefore highly recommended that you consult with an experienced and knowledgeable construction attorney to make sure that everything has been done properly along the way.

Vincent T. Pallaci is the managing member of Kushnick Pallaci PLLC.   Kushnick Pallaci PLLC regularly counsels clients on filing and enforcing mechanic's liens.

Demanding Foreclosure of a Buffalo Public Mechanic's Lien

Most of the posts in this blog discuss liens placed upon private improvements.  However, as most in the construction industry know, there is another type of mechanic's lien: a lien upon an account for a public improvement.  I have previously discussed on this blog how to serve and use a Demand Pursuant to Lien Law Section 59.  The Section 59 demand relates to a private improvement mechanic's lien.   There is a similar provision for mechanic's liens on accounts of public improvements.  The relevant section is Lien Law Section 21-a.  Similar to Lien Law Section 59,  Lien Law Section 21-a requires a lienor to foreclose upon a mechanic's lien within thirty days of receipt of a demand.  Failure to foreclose may result in the mechanic's lien being discharged upon a proper application.

Here is a sample Demand Pursuant to Lien Law Section 21-a:

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF QUEENS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
In the Matter of The Application of

ABC CORP.

requiring XYZ LLC, Lienor, to enforce its lien or show cause why the
Notice of Lien should not be vacated and canceled of record as
prescribed by Lien Law §21-a.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

         You are hereby notified, pursuant to Lien Law §21-a of the State of New York, to commence an action on or before the 1st day of November, 1999, to enforce the lien, a copy of which is annexed hereto as Exhibit “A”, filed by XYZ LLC, on the 31st day of August, 1999, with the NYC School Construction Authority against monies due or to become due ABC Corp., by the NYC School Construction Authority as the result of certain work and construction upon a public improvement known as NYC School 123, 456 Ocean Parkway, Brooklyn, New York, County of Kings, as described in the notice of said lien; or in the event of your failure to commence such action that you appear at the Supreme Court House located at 88-11 Sutphin Blvd., Jamaica, New York on the 18th day of December, 1999, at 9:30 a.m. or as soon thereafter as counsel can be heard, and then and there show cause why an order should not be made, vacating, discharging and canceling said notice of lien of record.


Dated: Melville, New York
September October 31, 1999

KUSHNICK PALLACI, PLLC
By: _________________________
Vincent T. Pallaci
Attorneys for ABC Corp.
445 Broad Hollow Road, Suite 124
Melville, New York
(631) 752-7100

Keep in mind that this is just a sample and you should consult with your own attorney to discuss the proper procedure to follow to serve a demand under Lien Law Section 21-a.  For more information on dealing with a Mechanic's Lien for Account of Public Improvement visit us online at http://www.nyconstructionlaw.com/ or contact me via e-mail at vtp@kushnicklaw.com