Subcontracting is commonplace in the construction industry. The Owner contracts with a General Contractor (GC) who then contracts with one or more subcontractors (Subs) who, in turn, enter into agreements with suppliers and sub-subcontractors (Sub-Subs). While this multi-tiered approach to construction projects is meant to aid in the successful completion of projects by spreading risk and focusing talent, it also has serious implications in terms of the lien rights of the various contractors and subcontractors, especially to those at the lower tiers.
Unlike other areas of the law, the New York Lien Law and the case law interpreting it favors a policy of never forcing anyone to pay twice for the work it contracted to have performed. In order to enforce this policy, the current law provides that a lienor’s rights are derivative of each contracting tier above the lienor. In practice, this means that a lienor cannot recover on its lien if any single one of the following three conditions exist on the project at the time the lien is filed: (1) The Owner owes no funds to the general contractor, (2) the general contractor owes no funds to the subcontractor with whom the lienor contracted, or, (3) most obviously, no funds are owed to the lienor. The Supreme Court of New York, for Queens County, recently released a decision in the case of Trinity Products, LLC v. Carrickmore P&D, LLC1 reaffirming and elaborating on this principle.
Carrickmore was the GC on a project in Queens for demolition of an existing building and construction of a new two-story building on the same lot for approximately $2.6 Million (the “Project”). Carrickmore, in turn, subcontracted with J.J.’s Construction Corp. (“J.J.’s”) for J.J.’s to perform the earthwork, concrete and steel pipe piles work for the Project. J.J.s then created another tier in the contracting process by using various Sub-Subs on the Project, including the plaintiff in the action, Trinity Products, LLC (“Trinity”). For the early part of the Project, everything seemed to be moving along well. However, in the middle of the Project, J.J.’s began to fall behind in performing its work and paying its subcontractors. Eventually, Carrickmore was forced to terminate J.J.’s due to these, and other failures.
At the time Carrickmore terminated J.J.’s, it had already paid J.J.’s over $2 million (based on J.J.’s requisitions). There was still a balance of approximately $600,000.00 on Carrickmore’s contract with J.J.’s; however, J.J.’s had not earned any part of that balance. In fact, after terminating J.J.’s, Carrickmore quickly became aware that J.J.’s previously requisitioned work—for which it had been paid over $2 Million—was incomplete and/or defective in many respects. As Carrickmore still had to fulfill its obligations to the owner, it completed J.J.’s work on its own, utilizing completion subcontractors and suppliers. Carrickmore was able to complete J.J.’s work, although it cost Carrickmore much more than the $600,000 contract balance remaining on its subcontractor with J.J.’s.
After J.J.’s was terminated (and during Carrickmore’s completion of J.J.’s work), Trinity filed a lien based on payments it alleged were due and owing to it from J.J.’s. Carrickmore did not owe any funds to J.J.’s at the time the lien was filed due to back-charges associated with completing and correcting JJ’s work. Near the time that Carrickmore completed J.J.’s work, Trinity, J.J.’s supplier, brought an action to foreclose on the mechanic’s lien in Supreme Court, Queens County.
Carrickmore moved for summary judgment against Trinity, arguing that Trinity could never recover on its mechanic’s lien since Carrickmore could establish that it owed no funds to J.J.’s at the time Trinity filed is mechanic’s lien (and that nothing thereafter became due from Carrickmore to J.J.’s). The Court granted Carrickmore’s motion, reaffirming the caselaw holding that lower tier subcontractors’ rights are derivative of their upstream contractors’ rights. In essence, even though Trinity, the supplier, was owed money by J.J.’s, the subcontractor, it was unable to recover on a mechanic’s lien because J.J.’s had been fully paid by the General Contractor at the time the lien was filed. Trinity’s claim was doomed from the start based on the time it filed its lien. Had Trinity filed its lien earlier—prior to J.J.’s being fully paid—it is possible that Trinity could have recovered on its lien.
TAKEWAY: In multi-tier contracting, lower tier subcontractors and suppliers are best protected by filing a notice of mechanic’s lien as early as possible. This filing will put the upstream parties on notice of the fact that there are payment issues at one or more tiers of the project. It also potentially protects party filing the lien from a defense based upon full payment (payments made after the lien is filed generally do not constitute a defense to a lien claim, while payments made before the lien is filed do generally constitute such a defense). Lienors should also be aware of potential for recovery under payment bonds, which can provide relief to contractors who, for one reason or another, may not have rights under the Lien Law. If in doubt on whether and/or how to file a lien, contractors should contact their construction attorney.
1Trinity v. Carrickmore et. al., Supreme Court of the State of New York, Queens County, Index 708799/2015, Decision dated December 22, 2017.