Lien Rights At Risk When Doing Business With Unlicensed Contractor
The Lien Law provides a remedy to unpaid subcontractors and suppliers by allowing them to file a mechanic's lien directly against an owner's property. However, this remedy is not unlimited and is balanced against the countervailing consideration of preventing the owner from having to pay twice for the same work or materials. Thus, while an unpaid subcontractor or supplier may file a mechanic's lien, the lien is derivative of the general contractor's right to recover from the owner. If the owner has paid the general contractor in full, there is no lien fund from which a subcontractor or supplier lienor may recover.
In Kamco Supply Corp. v JMT Bros. Realty, LLC, which was successfully argued on appeal by this author's associate, the appellate court dealt with the issue of whether a supplier (and, by extension, a subcontractor) can recover when the reason for the lack of a lien fund is attributable to the general contractor's inability to recover, as opposed to the owner's full payment to the general contractor.
J.M.T. Brothers Realty, Inc., a homeowner, retained a general contractor who turned out not to have the home improvement license required by the New York City Administrative Code. There are similar provisions applicable to home improvement contractors doing business in Westchester, Rockland, Putnam, Nassau and Suffolk Counties. Kamco Supply Corp., a supplier, entered into a contract with the unlicensed general contractor to furnish windows to the project. The supplier did not have a contractual relationship with the homeowner. The homeowner eventually terminated the general contractor and claimed various backcharges against the contractor. After the contractor was terminated, the supplier filed a mechanic's lien against the homeowner's property and started a lawsuit to foreclose that lien.
Early in the lawsuit, the homeowner moved to dismiss the lien foreclosure action arguing that because the supplier's lien rights were derivative of the general contractor's rights, the general contractor could not recover from the homeowner because the contractor was not licensed as a home improvement contractor. Therefore, the homeowner argued, there was no lien fund from which the supplier could recover from the homeowner. The trial court agreed and dismissed the supplier's lawsuit. The supplier appealed the decision.
The appellate court affirmed. The court held that the contractor's unlicensed status made its contract with the homeowner unenforceable. Therefore, there could be no funds due or owing from the homeowner to the unlicensed contractor which would support the supplier's mechanic's lien. In the absence of a direct contractual relationship between the homeowners and the supplier, the supplier could not recover on its lien foreclosure action against the homeowner.
A subcontractor's or supplier's lien can only be satisfied out of monies due and owing from the owner to the contractor at the time the lien is filed. In this case, there were no monies due to the contractor because of its unlicensed status. A subcontractor or supplier would be well advised to research the licensing status of a home improvement contractor before they contract because their lien rights may be adversely impacted if the contractor is unlicensed.
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April 19, 2021
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