Good News In The First Department For Owners of Real Property Subject to Mechanic’s Liens Discharged By Bond

• Posted on: Mar 23 2018

A mechanic’s lien is an encumbrance on the title to the real property. Contractors and subcontractors, among others (collectively, “Contractors”), whose work improves real property, are entitled to place a mechanic’s lien on the real property so improved to secure the payment of the amounts due to them.  Oftentimes, mechanic’s liens are problematic for real property owners.  For example, the filing of such a lien could be an event of default under a mortgage or a lease.

Under New York’s Lien Law, there are numerous ways to discharge a mechanic’s lien for a private improvement.  For example, an action must be commenced to foreclose a lien, or the lienor must obtain an order to continuing the lien, within one year of its filing or the lien will be discharged.  (See Lien Law §§17 and 19(2).)  Before or after a lien foreclosure action is commenced, but after a lien is filed, a lien can also be discharged by procuring and filing with the clerk of the county in which the lien is filed, a bond or undertaking in an amount equal to 110% of the amount of the lien.  (See Lien Law §19(4).)

A mechanic’s lien for a private improvement can also be discharged by paying money into court.  (See Lien Law §20.)  If the payment is made before an action to foreclose the lien is commenced, the deposit must equal the amount of the lien plus interest to the time of the deposit.  (See Lien Law §20.)  If the payment is made after the commencement of a foreclosure action, the lien will be discharged upon payment into court “of such sum of money, as, in the judgment of the court or a judge or justice thereof, after at least five days’ notice to all the parties to the action, will be sufficient to pay any judgment which may be recovered in such action.”  (See Lien Law §20.)

Section 37 of the Lien Law permits an owner or contractor to obtain a bond either before or after the commencement of the improvement in an amount as directed by the court “which shall not be less than the amount then unpaid under such contract, conditioned for the payment of any judgment or judgments which may be recovered in any action brought for the enforcement of any and all claims, notices of which may be filed as in this section provided, arising by virtue of labor performed or materials furnished in or about the performance of any such contract.”  (See Lien Law §37.)  Once a Section 37 bond is approved by the court and filed with the county clerk an order shall be made by such court, judge or justice discharging such property from the lien of each and every Contractor, who, thereafter, “shall have a claim, which shall attach against and be secured by such bond, for the principal and interest of the value, or the agreed price, of such labor and materials”.  (See Lien Law §37(4) and (5).)

The Lien Law sets forth the necessary parties defendant to a mechanic’s lien foreclosure action.  (See Lien Law §44.)  Among others, lien law §44(3) requires that “[a]ll persons appearing by the records in the office of the county clerk or register to be owners of such real property or any part thereof” be named as a defendant.

In the event that a bond or cash deposit is made to discharge a lien, does the owner of the real property remain a necessary party to a mechanic’s lien foreclosure action?  There is presently a split among the Departments on this issue.  The law in the Second Department is that the owner need not be named as a party defendant.  In Bryant Equipment Corp. v. A-1 Moore Contr. Corp., 51 A.D.2d 792 (1973), the Bryant  Court held that the subject bond “replace[s] the real property as the security to be attached and attacked” and, therefore, Lien Law Section 37(7) controls and “sets forth the classes of persons who shall be joined as parties defendant, namely the principals and surety on the bond, the contractor, and all claimants who have filed notices of claim prior to the date of the filing of such summons and complaint.”  (Internal quotation marks omitted.)

The Third Department shares this view and held that “[w]here the lien no longer attaches to real property due to the filing of a bond under the Lien Law…the owners of the real property are no longer necessary parties to the action.”  (M. Gold & Son, Inc. v. A.J. Eckert, Inc., 246 A.D.2d 746 (1998).)

The First Department, however, does not share the view of the Second and Third Departments.  In Harlem Plumbing Supply Co., Inc. v. Handelsman, 44 A.D.2d 768 (1972), a tenant was building out space leased from the landlord owner of the property.  A materials supplier filed a lien, which, before the commencement of a foreclosure action, was discharged by deposit into court made by the tenant pursuant to Lien Law §20.  The property owner, who was named as a defendant in the action, moved to dismiss.  The Court recognized that the “effect of the deposit was to discharge the lien upon the real estate and shift it to the fund.”  Nonetheless, relying on Lien Law §44(3), the Harlem Court in holding that the owner was a necessary party to a mechanic’s lien foreclosure action stated:

The fact that this lien was discharged by a deposit (Lien Law s 20) rather than by an undertaking (id. s 19(4)) is of no consequence. Where, as here, the lienor has elected to proceed in equity to enforce its lien, both sections envision the establishment of the validity of such lien before further rights accrue. Under such circumstances, the owner of the property is a necessary party defendant, although the prior owners are not.

The Supreme Court, New York County, in Doma Inc. v. 885 Park Avenue Corp. (March 13, 2018), was faced with the very issue decided by the Harlem Court, but adopted the reasoning of the Second and Third Departments after recognizing that “[t]he law on this question is not settled.”  The plaintiff in Doma was a contractor that performed renovation work for defendant Gilman, a tenant/shareholder in a cooperative apartment in a building owned by defendant 885 Park Avenue Corp.  Owner defaulted in answering the complaint.  In response to plaintiff’s motion for a default judgment, Owner cross-moved to dismiss the complaint “on the ground that a bond discharging the lien has been filed ensuring full payment of the lien amount.”

The Doma court, accepted the cross-motion as timely made in lieu of an answer and addressed the merits of Owner’s position.  The Doma court characterized the reasoning of the Harlem Court as being “very technical” and recognized that some motion courts in New York County have followed Harlem.  Relying on the authority set forth above, the Doma court stated that the First Department “appears to stand alone in the view that the owner is a necessary party following the posting of a bond discharging the lien.”  Accordingly, the Doma court, in refusing to follow the First Department in Harlem, stated:

Since the owner of the building ceases to have a stake in an action by a contractor against a tenant following the posting of a bond, wherein any subsequent action deals with the surety and not the real property, from a public policy perspective, there is no purpose in keeping the owner in the caption.  Indeed, to keep the owner of the building in the action would only serve to needlessly increase the costs associated with the ownership and management of real property in this State….Given, however, that two other departments of the Appellate Division have disagreed with [the First Department’s] technical reasoning, relying on Lien Law §37(7); that other motion courts in New York County have followed the Second and Third Departments and avoided the technical problem; inasmuch as this Court can discern no public policy reason to keep the owner in the action under these circumstances; and noting that the First Department has not had occasion to revisit this proposition in many years; this Court follows the rule that, upon the filing of a bond discharging a mechanic’s lien, Lien Law §37(7) supplants Lien Law §44(3) in prescribing the necessary parties to the action, and causes the owner to no longer be a necessary party.

Notice of entry of the Doma order was filed on March 16, 2018, and no notice of appeal has been filed as of yet. 

Tagged with: Commercial Litigation, Construction Litigation, Lien Bonding, Lien Discharge, Lien Law, Mechanic’s Liens