By Henry L. Goldberg, Managing Partner, Goldberg & Connolly & STA Legal Counsel
As reported in ENR last week in an article entitled “ENR Survey: Subcontractor Payment Delays Grow Longer,” it was observed that “Subcontractors say late payments take longer to collect, even as the construction market and the overall economy show strong signs of improvement,” and that “The problem, if anything, has grown worse over the past few years . . . as some owners and prime contractors have standardized less-than-prompt payment as a general business practice.”
ENR further reported that one subcontractor,…“takes full advantage of Texas’ mechanic’s lien law to make sure his company gets paid what it is due. He starts by sending project owners and contractors an initial notice, signaling his intent to file a lien. If that doesn’t shake the payment loose, he follows the notice up in 45 days by filing a mechanic’s lien on the property. ‘I don’t care if it’s my mother, I will file a lien on the project,’” he was quoted as saying.
In this environment, it is surprising we find it necessary to reinforce the importance of using the tools at a subcontractor’s disposal to help assure its “getting paid.” This Legal Log, second in a series, focuses on the most powerful, yet simplest, tool in a subcontractor’s arsenal: the mechanic’s lien under the New York Lien Law.
Review of the Basics
Private mechanic’s liens must be filed within eight months of the performance of the last labor provided or the last materials supplied to a project. The time limit is four months for a “single” family residence (up to four units).
For a public improvement lien, filing must be made no later than thirty days after the project is determined to have been completed and accepted by the public owner. Public owners are notorious for not issuing timely certificates of “acceptance” and final acceptance is often quite delayed. Therefore, mechanic’s lien rights continue to be available until actual formal acceptance of a public works project by the public owner.
Critical Timing Beyond Lien Law Requirements
This could clearly be an extended period of time for the timely filing of a public improvement lien. However, for the public improvement lien to be effective, as opposed to simply timely, a fund of monies must still be available for payment on the public contract at the time of the filing of the lien. Similarly, for a private mechanic’s lien, monies must be due from the private owner to the general contractor. The owner can never be required to pay twice.
Too many subcontractors believe that if the statutory deadlines are met, their claim will be protected. This is not correct. Many times, despite filing a mechanic’s lien on time, the lien turns out to be worthless. In order for the mechanic’s lien to have any value, in addition to being timely filed, there must, as indicated, be a “fund” due and owing. It is certainly not beyond the realm of possibility, especially if the lienor is one of the finishing trades, that when the lienor files his mechanic’s lien, albeit timely, there are little or no funds left due and owing the general contractor. As a result, the timely mechanic’s lien filed by the subcontractor, would not “catch” any funds.
Understandable Reluctance, But . . .
Certainly, there are business reasons not to rush to file a mechanic’s lien. In a competitive marketplace, business relationships are invaluable. But is a general contractor that is not paying you for months on end actually a valued asset? This is clearly a judgment call. We do advise, however, that you maximize the chances that at the time you file your mechanic’s lien there is a fund to which your mechanic’s lien can attach. You should file as early as possible and not wait until the eve of the statutory deadlines discussed above. While recognizing that this is often easier said than done, we would urge you to err on the side of action, not delay. We’ve seen too many avoidable tragedies.
Another impetus for early filing is that as other liens are filed against the contractor, and as more funds due the general contractor are paid by the owner, the odds of having adequate funds to which your mechanic’s lien can attach diminish over time.
Here, again, there is a common misunderstanding. Many subcontractors believe that mechanic’s liens are given a priority based upon the time in which they are filed. This might be called a “first-in-time, first-in-right” rule. Unfortunately, this is not the case. Under New York law all mechanic’s liens which have been timely filed and are otherwise enforceable, are treated on an equal footing, as a class of “creditors.” In the situation where there are less funds to satisfy all the valid liens, the liens share in that fund on a pari passu basis. That simply means proportionately and without preference. Thus, in such a situation, the larger lien gets a greater share of the funds still remaining. Even if you were early with your lien, other later liens can “dilute” your claim. By waiting, there will simply be more liens chasing less funds due the general contractor.
Do Not Be Discouraged By “Bonding Off” Procedures
General contractors will often tell the subcontractor, after a mechanic’s lien has been filed, that nothing was actually accomplished, since “all you did was hold up payments.” Again, this is not completely accurate. As long as there is a fund of monies applicable to the job, filing the lien causes financial pressure to be applied against the general contractor. Also, for a private construction project in which a construction loan has been obtained by the owner, the lender will also apply pressure to the owner to resolve the dispute. In both cases, whether public or private, the party seeking to discharge the lien must post a bond equal to 110% of the value of the mechanic’s lien Bonding off the lien, therefore, actually sets up the best circumstances for the potential mechanic lienor.
By filing a timely lien which “catches” funds, even if the lien is bonded off, you have obtained a very valuable, additional security vehicle, a lien-discharge bond. This provides a surety’s independent obligation to pay valid claims, with the significant balance sheet of a major insurance company behind it. It is a separate and distinct funding source for your claim. This would be available even if the general contractor, or the developer, subsequently becomes insolvent.
What the bond also potentially provides is a faster way of being paid, since major sureties, at least, will promptly investigate and often pay off lien claims, unless there is a bona fide defense available to their principal. Sureties may initially side with their principal, but often the case is clear and the monies are due to be paid and an arrangement can be made. So there is not much being lost by a lien being bonded off.
It is in the subcontractor’s best interest to file a lien, and to do so as soon as possible. This increases the chances that there will still be funds due and owing the contractor to which your mechanic’s lien can attach. Once you have a timely lien that has “caught” funds, you are well on your way to securing your interests. Yes, you may still have to sue to establish or adjudicate your rights, but at the end of the day there will be funds to pay your judgment. However, if you do not move promptly to allow for compliance with the statutory time limitations or, as importantly, you do not move promptly enough to catch funds that are still due the general contractor, you will have effectively waived this valuable right to ultimately secure your payment. Our advice is straight forward: avail yourself of your basic legal rights or have no one else to blame but yourself.