The First Department Holds That Completing Surety Under Performance Bond Is Not Entitled to File Mechanic’s Lien
Print Article- Posted on: Dec 13 2024
Today’s BLOG article is about Thorobird Grand LLC v. M. Melnick & Co., a case decided by the Appellate Division, First Department, on December 12, 2024, and which involves mechanic’s liens.[1]
The Facts of Thorobird[2]
Plaintiff, as owner, hired defendant M. Melnick & Co., as contractor, on several projects. Pursuant to the parties’ agreement, contractor was required to procure performance[3] and payment[4] bonds from a surety; in this case, defendant Federal Insurance Co. Ultimately, the owner terminated the contractor from the project and notified the surety of that fact. The owner, contractor and surety then entered into a takeover agreement pursuant to which, inter alia, provided that “[a]s a completing surety and not as a contractor to the Owner, [the surety] agrees to arrange for the performance and completion of the Work required of [the contractor] under the contract in accordance with the terms and conditions of the Contract and Performance Bond….” To satisfy its obligations under the performance bond, the surety hired the defendant contractor to complete the work “in spite of [its] termination” from the project by the owner.
The Owner commenced action against the contractor and the surety for breach of contract with respect to the various agreements to which, respectively, they were parties. The surety and the contractor also filed mechanic’s liens. In the surety’s answer, it asserted counterclaims against the owner for, inter alia, breach of contract and the foreclosure of its mechanic’s liens. The owner subsequently amended its complaint to assert claims against the surety under Lien Law § 39, for willful exaggeration of its lien, and under Lien Law § 39-a, for damages related to the willful exaggeration.[5]
Thereafter, the owner moved for partial summary judgment on its willful exaggeration claim in which it sought the discharge of the surety’s liens and monetary damages. The motion court granted the owner’s motion to the extent of discharging the liens because they were “invalid” because “based on the clear and unambiguous terms of the takeover agreement, the parties intended [the surety] to retain its status as a surety and not be considered a contractor.”
The First Department’s Decision
On the surety’s appeal the First Department affirmed and, in so doing, stated:
We agree with Supreme Court that the takeover agreement is clear and unambiguous that the parties intended [the surety] to remain a surety and not be deemed a contractor. It states, in pertinent part, “[a]s completing surety and not as a contractor to the Owner, [the surety] agrees to arrange for the performance and completion of the Work required of [the contractor]” under the terms of the construction contract and performance bond. It further states, “[the surety] has entered into this Agreement in order to discharge obligations to the Owner under the Performance Bond,” so “any Work performed by [the surety] is, therefore, being performed by [the surety] as a completing surety and not as a contractor of the Owner.” Our reasoning is underscored by the fact that [the surety] retained [the contractor] to continue working on the project. [Ellipses omitted.]
The Court also declined to award the owner damages because damages under Lien Law § 39-a “are unavailable where, as here, the lien has been discharged for reasons other than willful exaggeration.” (Citations omitted.)
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
[1] This BLOG has previously addressed issues involving mechanic’s liens. See, e.g., [here], [here], [here], [here], [here], [here] and [here].
[2] Eds. Note: some of the facts recited herein came from the underlying record available on the Court’s NYSCEF system.
[3] Construction contracts frequently require contractors to obtain performance bonds. “The purpose of a performance bond is to insure that a contract will be completed consistent with its terms.” U.W. Marx, Inc. v. Mountbatten Surety Co., Inc., 3 A.D.3d 688, 691 (3rd Dep’t 2004) (citations omitted). Accordingly, in “the event of a contractor’s default, the surety’s obligation is to either complete the work or to pay the obligee the amount necessary for it to have the contract completed.” Id. (citations omitted).
[4] Construction contracts frequently require contractors to obtain payment bonds. The purpose of a payment bond is to make sure that persons furnishing labor and materials to a contractor receive payment for their efforts. Novak & Co, Inc. v. The Travelers Indemnity Co., 85 Misc.2d 957, 959 (Sup. Ct. Kings Co. 1976), aff’d, 56 A.D.2d 418 (2nd Dep’t 1977).
[5] This BLOG has previously addressed issues involving the willful exaggeration of mechanic’s liens. See, e.g., [here], [here] and [here].
