FISH TALES AND MECHANIC’S LIENS – WILLFUL EXAGERATION UNDER SECTIONS 39 AND 39-a OF NEW YORK’S LIEN LAW

• Posted on: Dec 13 2019

This Blog, in “The New York Court of Appeals Addresses the Issue of When a Mechanic’s Lien Can Be Placed on a Landlord’s Property By A Contractor Performing Work For A Tenant,” quoting John P. Kane Co. v. Kinney, 12 Bedell 69 (1903), explained the purpose of a mechanic’s lien as follows:

The object and purpose of [New York’s] mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest.

Section 3 of New York’s Lien Law provides, in pertinent part:

A contractor, subcontractor, laborer, materialman [among others], who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor … or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien as prescribed in this chapter.

Thus, a mechanic’s lien is a powerful tool as it becomes an incumbrance on the real property that was purportedly improved by the work of the lienor.  This Blog has also addressed mechanisms to discharge a mechanic’s lien, which may present a problem for an owner (here).

Due to the leverage that a mechanic’s lien provides to a lienor, the Lien law permits a lienor to be “punished” if the filed lien is “willfully exaggerated”.  Howdy Jones Const. Co., Inc. v. Parklaw Realty, Inc., 76 A.D.2d 1018 (3^rd Dep’t 1980), affirmed, 53 N.Y.2d 718 (1981).  Lien Law § 39 declares that willfully exaggerated liens are void.  Lien Law § 39-a, which sets forth the penalties that can be assessed against a lienor when a lien is found to be “willfully exaggerated,” provides:

Where in any action or proceeding to enforce a mechanic’s lien upon a private or public improvement the court shall have declared said lien to be void on account of wilful exaggeration the person filing such notice of lien shall be liable in damages to the owner or contractor.   The damages which said owner or contractor shall be entitled to recover, shall include the amount of any premium for a bond given to obtain the discharge of the lien or the interest on any money deposited for the purpose of discharging the lien, reasonable attorney’s fees for services in securing the discharge of the lien, and an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceeded the amount actually due or to become due thereon.

Numerous courts have noted that the “wilful exaggeration” provisions of the lien law were “intended to punish wilful exaggeration and not honest differences in contract interpretation.  Howdy Jones, 76 A.D.2d at 1018 (citations omitted).  If the amount of a lien is both inflated due to a wilful exaggeration and an honest mistake, “the damages are limited to the amount by which the lien is wilfully exaggerated.”  Goodman v. Del-Sa-Co Foods, Inc., 15 N.Y.2d 191 (1965) (citations and internal quotation marks omitted).  The Goodman Court noted that:

As has been true more than once of statutory language — even of opinions of courts — the language may not perfectly fit the thought, but the intention of the Legislature is plain. The draftsman of the statute was thinking of the simple situation where the entire amount of the exaggeration is willful. The purpose was manifestly to allow the recovery of a civil penalty by the owner, to recompense him for the extra trouble and expense to which he has been put by the filing against his property of a deliberately exaggerated mechanic’s lien, in the amount by which the lien was thus exaggerated. There is no suggestion of an idea that the owner is entitled to recover anything on account of an honest mistake.

Goodman, 15 N.Y.2d at 195 – 96.

In Goodman, it was clear that the lien was exaggerated by a combination of honest mistakes and willfulness, but the lower court failed to make findings as to the extent of each.  Therefore, the Court remanded the case to make the necessary findings on which the penalties of Lien law 39-a could be based.  Goodman, 15 N.Y.2d at 199.

“In interpreting the Lien Law, our courts have held that damages under section 39-a may not be awarded unless the lien has been declared void for wilful exaggeration after a trial in an action to foreclose the lien.”  Wellbilt Equipment Corp. v. Fireman, 275 A.D.2d 162, 166 (citations omitted).  Accordingly, if the mechanic’s lien is discharged prior to trial and, therefore, the “action is … merely one in contract” and is “no longer one seeking to enforce a mechanic’s lien,” there “remains no lien to be declared void by the court” and a “wilful exaggeration claim is precluded.”  Wellbilt, 275 A.D.2d at 166 – 67 (citations omitted).

On December 11, 2019, the Appellate Division, Second Department, decided Degraw Const. Group, Inc. v. McGowen Builders, Inc.  In Degraw, the plaintiff subcontracted with the defendant general contractor on several projects.  The subcontracts were terminated pursuant to a settlement agreement pursuant to which “the parties would release each other from all potential claims arising from the projects except, inter alia, for claims arising from latent defects in workmanship.”  The agreement also provided that “if either party breached the agreement, the other party’s sole remedy would be to seek enforcement of the terms of the agreement.”   The general contractor made $100,000 of the $150,000 in installment payments that were due to the subcontractor under the settlement agreement, but stopped “because latent defects had been discovered in the plaintiff’s work.”

Notwithstanding the terms of the settlement agreement, however, the plaintiff subcontractor filed mechanic’s liens against the subject properties and commenced action to foreclose same.  The defendant general contractor and its surety that posted bonds to discharge the liens served “answers interposing counterclaims alleging, inter alia, that the mechanic’s liens were barred by the settlement agreement and therefore were willfully exaggerated.”  On the motion for summary judgment of the general contractor and its surety, the motion court awarded the general contractor “damages in the sum of $25,645, representing the sum [the general contractor] paid [the surety] in premiums for the bonds given to obtain discharge of the liens.  On appeal, the general contractor and its surety argued that “they were entitled to additional damages and attorney’s fees under Lien Law § 39-a based on the plaintiff’s alleged willful exaggeration of the mechanic’s liens.”

In affirming the motion court “insofar as appealed from,” the Second Department determined that remedies under Lien Law § 39-a were unavailable to the general contractor and its surety.  In so doing, the Degraw Court stated:

However, the Legislature intended the remedy in Lien Law § 39-a to be available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action. Moreover, the remedy in Lien Law § 39-a requires a finding that the lienor deliberately and intentionally exaggerated the lien amount, and is available only where the lien is otherwise valid.  (Citations, internal quotation marks and brackets omitted.)

Because the general contractor and its surety “contended in their motion for summary judgment, and the Supreme Court determined, that both of the plaintiff’s mechanic’s liens were invalid in their entirety because the plaintiff was precluded by the settlement agreement from asserting them, and was instead relegated to seeking enforcement of the agreement as its sole remedy for [the general contractor]’s alleged breach of the agreement’s terms” “damages under Lien Law § 39-a for willful exaggeration of the liens were unavailable, as the liens were not otherwise valid.

Tagged with: Commercial Litigation, Construction Law, Construction Litigation, Mechanic’s Liens, New York Lien Law § 39, New York Lien Law § 39-A, Surety Bonds, Wilful Exaggeration, Willful Exaggeration