Question. Lienor's lien foreclosure action was settled by a stipulation of discontinuance contingent on General Contractor filing a demand for arbitration regarding the dispute as per the arbitration clause contained in the parties' contract. Should the mechanic's lien be vacated and the surety bond given to discharge the mechanic's lien be cancelled?
Answer. YES. Under Lien Law §19(4), the filing of a surety bond discharged the mechanic's lien. Further, as the lien foreclosure action was discontinued, and the parties agreed to go to arbitration, the surety bond was discharged as a surety on a bond given to discharge a mechanic's lien was only obligated to satisfy a judicially established lien. Once Lienor discontinued the lien foreclosure action, defendants' surety could no longer be compelled to pay an arbitral award out of the surety.
In March, Lienor and General Contractor entered into an agreement (the Agreement) whereby Lienor agreed to perform certain work at the premises. The Agreement contained an arbitration clause which required any controversy or claim arising out of the Agreement to be settled by arbitration.
In August, Lienor stopped work over an alleged dispute. In December, Lienor filed a Notice of Mechanic's Lien against Owner; General Contractor was named in the lien as the party by whom Lienor was employed. Lienor then commenced an action to foreclose the Mechanic's Lien the following June.
Subsequently, the lien was bonded.
Before answering in the litigation, the parties agreed to submit their dispute to arbitration, as required by the Agreement. As a result of the parties' agreement to arbitrate, Lienor's lien foreclosure action was settled by a stipulation of discontinuance. The Stipulation provides that the discontinuance was contingent upon General Contractor filing a demand for arbitration with the AAA with respect to the parties' dispute. Subsequently, General Contractor filed the required demand for arbitration which was acknowledged by the AAA in January.
Owner and General Contractor seek to vacate, cancel and discharge the Mechanic's Lien and Surety Bond.
In light of the fact that the lien foreclosure action has been discontinued and the parties have agreed to go to arbitration, the the Mechanic's Lien has already been vacated and the Surety Bond is discharged. That is because a surety on a bond given to discharge a mechanic's lien is only obligated to satisfy a judicially established lien. Hence, once Lienor discontinued its lien foreclosure action, defendants' surety can no longer be compelled to pay an arbitral award out of the Surety Bond.
In order to prevent this unfortunate outcome, the Stipulation should have provided that Owner and General Contractor were to maintain the Surety Bond as a condition to Lienor's staying its lien foreclosure action. The Stipulation the parties actually exchanged provided for a one-for-one exchange between Lienor on the one hand and Owner and General Contractor on the other. Specifically, the Stipulation provides that Lienor will discontinue its action to foreclose its Mechanic's Lien so long as General Contractor files a demand for arbitration.