Contractors, subcontractors and material suppliers are granted by New York statute the right to file a mechanic's lien against the realty being improved to the extent of the work and labor performed and materials furnished. A mechanic's lien operates much like attachment and garnishment, to make sure that a subcontractor, for example, who supplies labor or materials for a construction project and does not have a contractual relationship with the owner of the property will receive the amount due to himself or herself. The mechanic's lien secures the amount due to the subcontractor by a lien on the real property improved. However, the rights of a subcontractor are derivative of the rights of the general contractor, and a subcontractor's lien must be satisfied out of any monies due and owing from the owner to the general contractor at the time the lien is filed. The subcontractor cannot enforce his lien if full payment has been made by the owner to the general contractor. One way in which an owner can pay a general contractor in full is to take credits against the amount owed to the contractor based on incomplete or defective work, commonly known as back charges.
In the recent case of IMP Plumbing and Heating Corp. v 317 East 34th Street, LLC et. al., a subcontractor sought to enforce a mechanic's lien where the owner claims that there are no monies due to the general contractor because of back charges against the general contract.
In 2008, IMP entered into a plumbing subcontract with a general contractor to perform work for the project owner, New York University, for the fixed sum of $77,520. Shortly after IMP completed its work, NYU terminated the general contractor's contract, claiming that the contractor defaulted by failing to complete the work in accordance with the project's schedule. It was undisputed that at the time NYU defaulted the general contractor, it had only paid the contractor $358,110 of the $495,108 amount of the prime contract.
In the trial court, IMP moved for summary judgment foreclosing its subcontractor's lien. In doing so, IMP contended that it had established that it had completed its work, and that there was money remaining due to the general contractor on the prime contract. In opposition, NYU contended that as the result of back charges against the general contractor, there was no money left owing to the general contractor.
The trial court accepted IMP's arguments and granted its motion for summary judgment against the owner. On appeal, the trial court's determination was revered. In doing so, the appellate court found that the trial court improperly failed to consider the merits of NYU's claim that the general contractor had breached the contract. This breach, if established at trial, could form a defense to NYU's payment of the amount outstanding on the prime contract. A subcontractor cannot enforce its lien against an owner where there are no monies due from the owner to the general contractor at the time the subcontractor's lien is filed.
One way in which an owner may "pay" a general contractor is to deduct credits based upon back charges against the prime contract. Where an owner pays the general contractor in full (either by payment, by back charge credit, or through a combination of the two), an owner is generally not liable to a subcontractor. The theory is that the services performed by the subcontractor are for the benefit of the general contractor who is responsible for the completion of the improvement, not for the benefit of the owner. A mechanic's lien filed without delay increases the likelihood that the lien will attach to monies due and owing from the owner to the general contractor. Accordingly, the prudent subcontractor or material supplier should promptly file a mechanic's lien once it becomes clear that there is a problem with payment on the project.