Court Finds General Contractor’s Mechanic’s Lien Exaggerated As A Matter Of Law, All Subcontractors’ Mechanics Liens Fall Like Dominoes

This column has consistenty warned that it is always a bad idea to exaggerate the amount of a mechanic’s lien. While the exaggerating lienor may succeed in getting the owner’s or upstream contractor’s attention, the negative boomerang effects—such as having the lien declared void, being prohibited any recovery on the contract, being forced to pay the costs and attorney’s fees associated with the discharge of the exaggerated lien and, most importantly, being subject to an award of damages against the lienor in the amount of the exaggeration—greatly outweigh the shock value of a big number on the lien. As a court, in the recent case of Borough Construction Group, LLC v Red Hook 160 LLC, demonstrated, another one of these boomerang effects is that the liens of innocent subcontractors can also be swept up and discharged along with the exaggerated lien.

Background
In September of 2016, Borough Construction Group and Red Hook 160 entered into a contract for Borough to construct a mixed-use commercial/retail property with over 70 units on Imlay Street in Brooklyn. The agreement was an AIA A133-2019 form of contract, which provided that the price of the construction was determined on a cost-plus basis, with a guaranteed maximum price. The contract provided that the markup for subcontractor work was limited to 15% of the cost of that subcontractor’s work.

Two years later, Borough alleged that it was owed over $2.5 million by the owner. Accordingly, Borough filed a mechanic’s lien against the property. Several of Borough’s subcontractors, also not being paid, filed their own mechanic’s liens against the property. The subcontractors’ liens, themselves, totaled nearly $1 million. Borough ultimately sued to foreclose its mechanic’s lien, and the lienor-subcontractors filed appropriate counter- and cross-claims to foreclose their own mechanic’s liens. The owner denied that any monies were owing, and asserted a counterclaim alleging that Borough’s mechanic’s lien was willfully exaggerated.

After five years of litigation—including 20 separate motions—the owner moved for summary judgment dismissing Borough’s complaint and mechanic’s lien, discharging the subcontractors’ mechanic’s liens, and for summary judgment on its breach of contract, fraud, and lien exaggeration counterclaims. In support of that motion, the owner provided evidence that the markup on the subcontractors’ invoices was well above the permitted 15%—and by as much as 230%, that after receiving permission to self-perform several scopes of work which were to have been subcontracted, Borough submitted false manpower logs to make it seem like Borough had more workers on site than were actually there (and submitted bills accordingly), and by performing defective work which was to be blamed on a prior contractor, thus enabling Borough to bill for the purported remedial work. Borough opposed, citing to case law which provides that questions relating to the willfulness of the exaggeration of a mechanic’s lien generally must be resolved at trial, and arguing that there were numerous issues of fact which precluded summary judgment.

Decision
The court granted the owner’s motion and dismissed Borough’s complaint in its entirety. In doing so, the Court acknowledged that the general rule is that questions relating to the exaggeration of a mechanic’s lien must await trial, but held that where the evidence of the exaggeration is “conclusive”, it may be determined on a motion for summary judgment. Here, that conclusive evidence consisted of the contracts of one of Borough’s subcontractors, and Borough’s bills showing the invoices on those lump sum contracts were marked up well in excess of the permitted 15% (and, as noted above, by as much as 230%). There was also ample evidence of the submission of falsified manpower logs and exaggerated bills based on those falsified logs, and of the intentional performance of defective work for the purpose of permitting Borough to bill for the repair.

In addition to dismissing Borough’s complaint, the court dismissed Borough’s mechanic’s lien, as well as the subcontractors’ liens. In doing so, the court cited to well settled law that no recovery can be had on an exaggerated mechanic’s lien. As a result, there was no lien fund to which the subcontractors’ liens could attach, and they had to be dismissed as well.

Comment
Mechanic’s liens are a powerful tool because they not only involve the upstream contractor who is not paying, but they also attach to either the title of the property itself, or the public funds held by the municipal owner. Accordingly, in order to prevent abuse of this powerful tool, the state legislature put in a safeguard in the form of an award against an exaggerating lienor of not only the attorney’s fees incurred in discharging the exaggerated lien, together with the interest on monies deposited to discharge the exaggerated lien (or the premium for any lien discharge bond), but an amount of money equal to the amount of the exaggeration itself. Of course, these harsh penalties are in addition to barring recovery on the exaggerated lien or the underlying contract. Unfortunately for innocent subcontractors, the statutory language that “no recovery shall be had thereon” negates the existence of a lien fund, which is necessary because subcontractors’ mechanic’s liens are derivative of any amounts owing to the general contractor. Accordingly, if the general contractor is barred from recovery because it willfully exaggerated a mechanic’s lien, there can be no lien fund, and innocent subcontractors’ mechanic’s liens fall like so many dominoes.

While many exaggerating lienors avail themselves of the shock value of an exaggerated lien while later trying to avoid the ramifications, Borough Construction is a reminder that innocent subcontractors can also get unwittingly caught up in such a scheme. (There were assertions in the motion papers that one of Borough’s subcontractors had been approached in order to participate in a kickback scheme, but nothing addressed one way or the other by the court; accordingly, at least one of the subcontractors may have had knowledge that Borough was up to no good.) If a subcontractor believes that it may be in a position similar to that of Borough’s subcontractors and their upstream contractor’s recovery is somehow endangered, they should consult with experienced construction counsel to determine what remedies may be available to salvage their right to payment. Regardless, contractors must keep in mind that exaggerating a mechanic’s lien is always a bad idea.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100