Willful Exaggeration under Lien Law 39-aPrint Article
- Posted on: Jul 22 2022
Laborers and material suppliers (collectively, “Providers”) that add value to construction projects should be paid for their work by the owner, general contractor or whoever else brought them to the project in the first instance. If Providers do not receive payment despite their own performance, several remedies are available. For example, a simple claim for breach of contract may be brought by an unpaid Provider. Such remedies, however, may be insufficient to insure payment. Accordingly, Article 2 of New York’s Lien Law provides additional rights and remedies to Providers by establishing the right to file mechanics’ liens against the improved property.
Thus, “Lien Law § 3 provides that a contractor 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.’” NGU, Inc. v. City of New York, 189 A.D.3d 850 (2nd Dep’t 2020) (hyperlink added). “It is well established that the purpose of the mechanics’ lien statute is to provide an added degree of protection to persons who provide labor or material for construction projects by providing independently enforceable security interest upon the construction property.” Strober Brothers, Inc. v. Kitano Arms Corp., 224 A.D.2d 351, 352 (1st Dep’t 1996) (citations omitted).
So important are the rights afforded by the Lien Law, Section 34 of the Lien Law provides that “[n]otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable….” In describing the background of the adoption of Section 34, the Court of Appeals stated:
Senator James H. Donovan, a sponsor of the bill which the Legislature ultimately enacted as Lien Law § 34, described the impetus behind this legislation:
“Since the year 1897 the Legislature has recognized the need to afford protection to those who furnish work, labor and services or provide materials for the improvement of real property. Throughout the succeeding years changes in the law have been enacted to clarify, enlarge and perfect the right of those who improve real property to be paid. The Lien Law has been the sole vehicle through which such interests may gain a measure of protection. … The surrender of such protective rights as a prerequisite to obtaining a contract or subcontract is repugnant, against public policy and should be void”
It is evident from the foregoing that New York’s Lien Law is remedial in nature and intended to protect those who have directly expended labor and materials to improve real property at the direction of the owner or a general contractor.
West-Fair Elec. Contractors v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148 (1995) (quoting Mem of Senator Donovan, L.1975, ch. 74, 1975 N.Y.Legis Ann., at 341) (ellipses omitted).
While the Lien Law provides a valuable tool for Providers to secure payment, the rights afforded by the lien law can also be abused in order to, among other things, pressure an owner or general contractor into paying a Provider when, perhaps, there is a legitimate dispute as to a Provider’s entitlement to be paid. The filing of a mechanics’ lien, for example, may be a default under a mortgage, a construction loan or the contract between an owner and its general contractor. Accordingly, the Lien Law affords an owner or general contractor the opportunity to discharge a lien under certain circumstances. For example, Lien Law § 19 provides that liens for private improvements can be discharged by, inter alia, failing to commence an action to foreclose the lien within one year of filing (§19(2)), neglecting to prosecute an action to foreclose a lien (§19(3)), or by executing a bond or undertaking under specified conditions “in an amount equal to one hundred ten percent of such lien conditioned for the payment of any judgment which may be rendered against the property for the enforcement of the lien” (§ 19(4)). Lien Law §§ 20 (discharge of lien after notice of lien filed by payment of money into court), 21 (discharge of lien for public improvement) and 21-a (vacating a lien for a public improvement, by court order) also permit the vacatur or discharge of mechanics’ liens under appropriate circumstances.
Another check on the ability to abuse the right to file a mechanics’ lien is that a lienor is not permitted to file a lien in which the amount of the lien is willfully exaggerated. Thus, Lien Law § 39 provides:
In any action or proceeding to enforce a mechanic’s lien upon a private or public improvement or in which the validity of the lien is an issue, if the court shall find that a lienor has wilfully exaggerated the amount for which he claims a lien as stated in his notice of lien, his lien shall be declared to be void and no recovery shall be had thereon. No such lienor shall have a right to file any other or further lien for the same claim. A second or subsequent lien filed in contravention of this section may be vacated upon application to the court on two days’ notice.
Section 39-a of the Lien Law sets forth the penalty for willfully exaggerating a lien and 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.
Sections 39 and 39-a of the lien law “must be read in tandem, and damages may not be awarded under § 39-a unless the lien has been discharged for willful exaggeration.” Guzman v. Estate of Fluker, 226 A.D.2d 676, 678 (2nd Dep’t 1996) (citations omitted). Further, because Lien Law § 39-a is penal in nature, “it must be strictly construed in favor of the person upon whom the penalty is sought to be imposed.” Id. Lien Law § 39-a’s remedies and damages are “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.” Matrix Staten Island Dev., LLC v. BKS-NY, LLC, 204 A.D.3d 1004, 1006 (2nd Dep’t 2022) (citation and internal quotation marks omitted). In circumstances where a lien is discharged “for reasons unrelated to its supposed exaggeration, there remains no lien to be declared void by the court.” Wellbilt Equip. Corp. v. Fireman, 719 N.Y.S.2d 213, 216 (1st Dep’t 2000) (citations omitted).
The Appellate Division, Second Department, determined issues regarding willful exaggeration in Adria Infrastructure, LLC v. Henick-Lane, Inc., decided on July 20, 2022. In Adria, Adria and Henick entered into a subcontract to perform work on a construction project. Adria liened the project in 2013 and 2015 and commenced an action to foreclose those liens in 2015. Henick’s answer contained a wilful exaggeration counterclaim. After discharging the liens, Adria moved for leave to file an amended complaint eliminating the lien foreclosure claim. Henick moved “to reinstate the 2015 lien but at a value of $0.” Supreme Court, among other things, denied [Adria’s] motion to the extent that it sought to remove the cause of action to foreclose the mechanic’s lien dated March 31, 2015, … and granted that branch of Henick’s motion which was to reinstate the mechanic’s lien dated March 31, 2015, at a value of $0.” The Second Department affirmed on Adria’s appeal.
The Second Department articulated the issue to be decided as concerning “the effect of the plaintiff’s discharge of the 2015 lien and whether the lien can be reinstated to preserve Henick’s wilful exaggeration counterclaim.” In reaching its conclusion, the Court noted that 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 and internal quotation marks omitted.) Accordingly, the Court held that:
The Supreme Court correctly determined that the plaintiff’s 2015 lien should be reinstated in order to allow Henick to pursue its wilful exaggeration counterclaim. Pursuant to the Lien Law, the lien filed by [Adria] was required to be in existence at the time of trial in order to allow for the pursuit of a wilful exaggeration counterclaim by Henick. Thus, as determined by the Supreme Court, the reinstatement of the 2015 lien was necessary in order to permit Henick’s counterclaim to continue. [Citation 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.