A subcontractor has liened the property even though the owner has paid in full for its work. The general contractor has disappeared. What should an owner do next? And will its attorneys’ fees be recoverable?

In New York, a mechanic’s lien, although filed in the county clerk’s office on the project owner’s land record, secures only to funds:

  • owed to the party directly above the lienor: each tier of subcontractors, materialmen, and laborers has its own “lien fund,” and pursuit of that is its only recourse; and
  • that have been approved for payment: if the owner did not by contract or change order consent to the payment sought, that dollar amount is not included in the “lien fund.”

Thus, if at the time the subcontractor filed the notice of mechanic’s lien, the owner did not owe the general contractor money for work performed, there is no fund to which the subcontractor’s lien can attach, and the lien is void. In such a case, the owner has several options under the Lien Law.  It should determine whether the lien is “facially valid,” i.e., without knowing any facts, the lien, on its face, complies with the statutory requirements. If so, the owner may serve the lienor with a “Demand for Verified Statement,” which seeks detailed information about the items of labor and materials furnished and the terms of the subcontract under which they were furnished. If the lienor fails to provide a responsive statement within five days, the statute sets up a path by which the owner can seek cancellation of the lien in a summary proceeding. If the lienor does timely respond, then with the information provided by the subcontractor, an owner can verify the lienor’s claim.
Continue Reading An Unfounded Lien: What’s an Owner to Do? And Can it Recover its Attorneys’ Fees?

In a recent decision by the Third Circuit Court of Appeals, the Court held that a mechanic’s lien filed by an unpaid supplier against a construction project, after the contractor through whom the materials were furnished filed for bankruptcy, was voidable. In re Linear Electric Co., No. 16-1477 (3rd Cir. March 30, 2017).  Specifically, the Court held that once the contractor filed for bankruptcy, the automatic stay barred the filing of a mechanic’s lien. While the supplier argued that the lien only encumbered property of the owner of the construction project, rather than property of the contract, the Court rejected that argument. The Court held that because the lien permitted recovery of money owed by the owner to the contractor, the lien acted to seize a portion of the contractor’s accounts receivable, which was now an asset of the bankruptcy estate.

Interestingly, the Court noted that the result might have been different if another state’s law governed. The Court acknowledged that in another case, In re Yobe Electric, Inc., 728 F.2d 207 (3rd Cir. 1984), the filing of a mechanic’s lien by a subcontractor did not violate the automatic stay provision because, under Pennsylvania law, the date of filing the mechanic’s lien related back to “the date of visible commencement upon the ground of the work of erecting or constructing the improvement.” In In re Linear, the Court applied New Jersey law, which contained no such relate back provision and, therefore, the mechanic’s lien was effective only as of the date of filing. 
Continue Reading The Enforceability of Mechanic’s Liens in Bankruptcy is Dependent on State Law

Industry leaders agree that the economy has turned the corner and private construction projects are on the uptick.  Banks have eased lending requirements and there is more private equity money on the streets.  Inexperienced developers are entering the arena and experienced developers are less guarded and taking on more risk.  On the flip side, small