FOR IMMEDIATE RELEASE
October 20, 2022

Authors:
Alison Arden Besunder, 212-695-8100, ext. 289, [email protected]
Christopher Canfield, 212-695-8100, ext. 313, [email protected]

Surviving Spouses Have the Opportunity to Increase Their Estate Tax Exemption

The IRS recently extended the time for an estate to file a tax return to 5 years from the date of death. This means that a surviving spouse of a decedent who died in the last 5 years can file an estate tax return (a “706”) to preserve the Decedent Spouse’s Unused Exemption (the “DSUE”). What’s a DSUE? (We estate planners love our acronyms). The DSUE is the amount of the federal estate tax exemption that was not used by the decedent. In other words, if the decedent died with a gross taxable estate under $12 million (for 2022; roughly $11 million going back to 2017) but did not file a tax return or did not have a taxable estate, the surviving spouse can recapture that unused exemption amount by having the estate file the 706. Why is this helpful? Because the historically high federal estate tax exemption will be reduced to $6 Million in 2025 when the 2017 Tax Act expires. So, for example, if in 2026 the new federal estate tax exemption is $6mm for everyone else, the surviving spouse who has the benefit of the DSUE would have an exemption of ~$ $17-18 million.

BUT (there’s always a but). The extended time only applies if a 706 was not otherwise required and was only being filed to obtain the portable DSUE. This means that if an estate had a gross taxable estate that exceeded the exemption for the year of death, a timely (meaning within 15 months of death with a valid extension) 706 return would have been required and this special 5-year extension would not apply. Keep in mind that the gross estate includes assets in the Decedent’s name plus one-half of any assets held jointly with the spouse.

As with all tax matters, you should consult with an attorney and your accountant to assess whether you are eligible to take advantage of this extension and whether it is right for your particular situation.

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair in the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

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Author

Christopher Canfield

Christopher Canfield has been practicing for 25 years in the fields of trusts and estates and related tax law.

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Here is the scenario: you are a general contractor who has hired numerous subcontractors for a project you’re working on. Those subcontractors have, in turn, hired subcontractors or materialmen (who may also have hired sub-subcontractors or other materialmen).  Somewhere down the line, a sub-subcontractor or materialman is owed money by downstream parties – parties that you are not in privity with, whatsoever. The sub-subcontractor or materialman decides to preserve their rights for payment by filing a mechanic’s lien.

What do you do?  Do you obtain a lien discharge bond to ensure that you can continue to receive payments from a project owner? Or do you worry that obtaining a lien discharge bond might create another source of funds for the lienor to collect from you? Although New York law generally only permits a lienor to collect the funds to the extent that monies are owed to those it is directly in privity with, would the availability of a surety bond create a new “fund” available to the lienor from you or your surety?

Luckily, the answer to that question is an unequivocal “no”. The filing of a lien discharge bond does not expand your liability as a general contractor beyond the monies that you owe to your subcontractor – the party you are directly in privity with. The only lien fund available would be the amount of money owed by the general contractor to its subcontractor at the time the subject liens were filed. The fact that a general contractor obtains a lien discharge bond does not create a new lien fund available to a sub-subcontractor or materialman.

New York law follows the subrogation doctrine for mechanic’s liens filed by downstream parties on a construction contract. Each tier of subcontractors, materialmen, and laborers has its own lien fund and may only look to its own lien fund for recovery.

A lien attaches only to the funds owed to the party directly above the lienor. Thus, if a materialman cannot establish that monies were due or thereafter became due from the contractor to the subcontractor with whom the materialman dealt, no fund exists to which the materialman’s lien can attach.¹

The court held that a materialman’s mechanic’s lien as a sub-subcontractor is based upon the subrogation doctrine and is valid and enforceable only up to the amount, if any, still due and unpaid to the subcontractor with which it is in privity.²

New York Courts, in reviewing similar situations, have found that the lien discharge bond does not revive any “lien fund” and thus, does not make a fund available to lower tier subcontractors.

Peri Formwork Cases

In two cases concerning Peri Formwork³, the Second Department reversed judgment(s) entered in favor of a sub-subcontractor against the lien bond surety. These two cases also re-iterate and re-establish the long-standing principal that “each party is subrogated to the rights of the contractor or subcontractor on the contracting tier above him”, thus a lower-tier subcontractor cannot collect more than is owed to the party to whom it is in privity.

In both cases, the Second Department held that the lien discharge bond did not create a “new” lien fund. The Second Department explicitly held that a materialman/sub-subcontractor’s lien is only as to any amount(s) due and unpaid to the subcontractor (ie: the party whom the sub-subcontractor is in privity with) at the time that the lien was filed.

Therefore, if the lien fund is depleted at the time of the filing of a lien, a discharge bond will not resuscitate the lien fund. A sub-subcontractor will not be able to recover on a surety bond filed by a general contractor/project owner unless it shows that the subcontractor is still owed money by its general contractor at the time of the filing of the lien.

Dean Builders and Montfort Bros Cases

Likewise, this reasoning was followed by the Court in two more cases⁴.  In Dean Builders, which was filed by a materialman, the Court granted summary judgment to a general contractor and its lien discharge bond surety holding that no “lien fund” existed since the general contractor had paid its subcontractor in full at the time that the lien was filed. Since a sub-subcontractor/materialman’s lien is valid only as to any amount still due and unpaid to the subcontractor, and since the lien fund was depleted at the time the lien was filed, the lien did not attach and the filing of a lien discharge bond did not create a new fund for the lien to attach to.

Similarly, In Montfort Bros., Inc., the court dismissed a lien foreclosure claim against a general contractor and its surety since the subcontractor was paid in full at the time that the lien was filed.

Moreover, it is black-letter law that a party must establish the validity of a mechanic’s lien before a surety may be made to pay pursuant to its lien discharge bond.⁵ Therefore, if you, as a general contractor, do not owe any monies directly to your subcontractor, there is no lien fund for the downstream party’s lien to attach to and, therefore, the mechanic’s lien will not be valid.  Even if you post a bond (and do owe some funds to your direct subcontractor), the lien will only be valid and the surety is only liable for the funds that you owe your direct subcontractor.

If you owe no funds to your subcontractor, there is no lien fund and the sub-subcontractor will not have any available lien fund to foreclose its lien. Even if you do owe any monies to your direct subcontractor, the only available lien fund available will be the amount of monies owed to your direct subcontractor. The bond surety cannot be held liable for the full amount of the monies claimed by the lienor.

Conclusion

As a general contractor, you can file a lien discharge bond without any worry that you are expanding a potential available lien fund since a materialman/sub-subcontractor’s lien is only valid to the extent of the available lien fund when the liens were filed. If your sub-contractor refuses to bond the lien (even though it may be required to do so under your subcontract), you can still bond the lien without having to worry about expanding your potential liability to downstream parties that you are not in privity with.

Are you unsure whether the documents and processes you have in place are sufficient to protect you against costly claims? Contact Goetz Fitzpatrick’s construction law experts today. We will review your current practices and recommend strategies to protect you and your company moving forward.

¹ Philan Dept. of Borden Co. v. Foster-Lipkins Corp., 39 A.D.2d 633 (4^th Dep’t 1972)
² Philan, in National Lighting Co., Inc. v. 111 Chelsea Commerce, LP, 2008 WL 3847329 (Sup. Ct. N.Y. Co. 2008)
³ Peri Formwork Sys., Inc. v. Lumbermens Mut. Cas. Co., 112 A.D.3d 171, 177, 975 N.Y.S.2d 422, 426 (2d Dept 2013) and Peri Formwork Sys., Inc. v. Lumbermens Mut. Cas. Co., 65 A.D.3d 533, 535, 884 N.Y.S.2d 129, 130 (2d Dep’t 2009)
⁴ Dean Builders Group, Inc. v. Crew Contracting of NJ Inc., 2017 WL 4517772, at *4 (Sup. Ct. Kings Co.  2017) and Montfort Bros., Inc. v. Northeast Landscape & Masonry Associates, Inc., 2019 WL 8685092(Sup. Ct. Dutchess Co. May 30, 2019)
⁵ G. Rama Const. Enterprises, Inc. v. 80-82 Guernsey St. Assocs., LLC, 43 A.D.3d 863, 865, 841 N.Y.S.2d 669, 672 (2d Dep’t 2007). 

Author

Benjamin Blum

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As a contractor, you might conduct work on both public projects and private projects.  You receive a contract from the utility to conduct work at a site which you believe to be owned by the utility.  Then – what happens?  You proceed to work on the contract.  Ultimately, the utility stops payment. You’re either still working on the project (without being paid) as required by your contract or you finished working on the contract within the last few months.What do you do? Do you attempt to file a breach of contract suit against the utility for non-payment? Or is there another option?

In fact, there is another option – to file a lien against the project. Before you file the lien, you must ascertain who the actual owner of the project is and the nature of the project, i.e., are you a direct contractor for the owner utility or is the utility conducting work on behalf of a public entity?

If you’re conducting work for Con Ed at a Con Ed-owned project, then you’re in luck!  You can file a mechanic’s lien with the County Clerk directly against the real property where the project is located. If Con Ed is the actual owner of the real property, then you would file the mechanic’s lien directly with the County Clerk.

If your underlying contract is a contract for a private improvement, then the project would not qualify as a public improvement under Lien Law 12 since Con Ed neither qualifies as the “state” or a “public corporation” for the purposes of the statute, per the Bergassi holding.¹

In fact, the Bergassi holding is instructive as to the type of lien that could be filed. The filing of a mechanic’s lien for public improvement on a Con Ed project (or other utility project) would only be appropriate if the utility with which you contracted itself contracted with either the state or a public corporation to perform the work in question. In particular, Courts have held that when the property at issue is owned by a private utility such as Con Ed (which may be deemed a “public service corporation” even though it is privately owned), a private mechanic’s lien would be filed, not a public improvement lien.²

However, what if the property where the project is located is owned by a public corporation, i.e, the State or a subdivision thereof, in fee with the plant where the work being performed is either owned by the utility or leased from the State? In that case, if the contract is ultimately a private contract to perform work solely for the private utility, you would file a lien against the leasehold interest. The filing of a public improvement lien would be wholly inappropriate if the utility is the sole party to request the performance of work and owns the premises.

A public improvement lien is only appropriate where the work is ultimately being performed for a public corporation, e.g., if your company, as a contractor, is performing work for Con Ed or National Grid, who in turn, is performing work for New York City or New York State.

Do I need to file a Notice of Claim?

Another question that may be raised is whether you would need to file a Notice of Claim against the utility for work performed.

The answer is no. Although privately-owned utilities such as Con Ed have been referred to at times as a “quasi-public” entity, these entities do not generally qualify as any of the categories requiring the service of a formal statutory notice of claim under the General Municipal Law or otherwise under statute. The statutory notice of claim, which is a strict condition precedent that must be met prior to the filing of a lawsuit against a municipality, would be in addition to any contractual provisions requiring a contractor to submit claims.

There are various categories of public corporations under General Construction Law 66.  However, a privately-owned utility such as Con Ed or PSEG (with shareholders and dividends payable to the private shareholders) does not fit any of these categories under New York law.³ Quite simply, all of these categories for a statutory notice of claim require that a company either be the “state” or a “public corporation”.

Entities which do not qualify as public corporations under General Construction Law 66 are not subject to the statutory notice of claim requirements.⁴ Thus, even corporations which seem like a public corporation may not actually be a one as a matter of law.

Under General Construction Law 66, the following three types of corporations qualify as public corporations:

1. a municipal corporation, defined as a county, city, town, village, and school district.
2. a district corporation, defined as a territorial division of the State which can assess taxes.
3. a public benefit corporation, defined as a corporation organized to construct or operate a public improvement wholly or partly within the state, the profits from which inure to the benefit of this or other states, or to the people thereof.

Clearly, a private utility does not fit within the first two categories. Thus, the only category which could even potentially be applicable to such a utility is the public benefit corporation. However, per these General Construction Law 66 definitions, in order to be a public corporation, its benefits must flow to “this or another state, or the people thereof”.⁵ Where the benefits of a corporation do not flow to the State or to the people of the State, it generally cannot be considered a public benefit corporation. Thus, a corporation which does not qualify as a public benefit corporation is not subject to the statutory notice of claim requirements.

General Municipal Law 50-e requires a notice of claim for all tort claims against a public corporation. However, generally contract-related claims either fall under a local ordinance/regulation, e.g., New York City Administrative Code 7-201 requirement that notice of claim be filed for all claims against New York City, or fall under the provisions of the Town Law, Public Authorities Law, or Education Law requiring that notice of claim be given for contract-related claims and not just tort claims.

Without a specific statute or ordinance mandating the service of a notice of claim for a contract claim against a municipality or other municipal corporation, a notice of claim would not be required for such a contract claim (particularly for a public benefit corporation).

Even a quasi-public corporation (which is defined as a private corporation that owes a duty to the public and may also be known as a “public service corporation”) does not qualify as a public corporation within the meaning of the General Construction Law. Thus, it is not subject to any of the notice of claim requirements under the General Municipal Law or otherwise.

Since privately-owned utilities such as Con Ed and PSEG are private corporations owned by shareholders with benefits that do not flow to the State or to the people of the State, these corporations do not fit within the ambit of a public benefit corporation for purposes of statutory notices of claim.  A “quasi-public” corporation with stockholders who receive the benefits of the corporation does not qualify as a “public benefit corporation” for purposes of New York law and notices of claim.

Therefore, no statutory notice of claim is required for a claim against a privately-owned utility, although a contractual notice of claim may be required pursuant to the terms and conditions of the governing contract, as these contractual notice provisions are read literally and are strongly favored under New York law.

New York courts have repeatedly held that the failure to strictly comply with a construction contract’s notice-of-claim requirements for extra work, disputed work, or delay damages may be deemed a waiver of such claims.⁶

Therefore, even if you have conducted work for a private utility and are not required to file a statutory notice of claim, you must remain mindful of the contractual notice of claim provisions and strictly comply therewith to avoid waiving such claims.

If you are uncertain whether you are able to file a lien or need to file a notice of claim in a construction-related dispute, contact Goetz Fitzpatrick’s construction law experts today.

¹ Bergassi Group LLC v. Consolidated Edison Co. of New York, Inc., 2013 NY Slip Op 30398(U)(Sup. Ct. Westchester Co. 2013)Index No 56860/2012 (Sup. Ct. Westchester Co. 2013
²   BBH Solutions, Inc. v. S. Digiacomo & Son Inc., No. 650131/2013, 2013 WL 6506811, at *1 (N.Y. Sup. Ct. Dec. 10, 2013) (allowing private mechanic’s lien foreclosure action to proceed); Van Name v. Marcus Substructure Corp., 53 A.D.2d 607, 607, 384 N.Y.S.2d 14, 15 (2d Dep’t 1976 )(contractor entitled to recovery on a mechanic’s lien against real property owned by Con Ed).
³ Bergassi Group LLC v. Consolidated Edison Co. of New York, Inc., 2013 NY Slip Op 30398(U)(Sup. Ct. Westchester Co. 2013).
⁴ Laroc v. City of New York, 2014 WL 10296926 (Sup. Ct. Kings Co. 2014)(holding New York City Economic Development Corporation did not qualify as a “public corporation” for purposes of a notice of claim).
⁵ Seneca Nation Housing Authority v. Flynn Battaglia Architects, P.C., 167 Misc.2d 1040 (Sup. Ct. Erie Co. 1996).
⁶ Promo-Pro Ltd. v Lehrer McGovern Bovis, Inc., 306 AD2d 221, 222 (1st Dept 2003); F. Garofalo Elec. Co. v New York Univ., 270 AD2d 76, 80 (1st Dept 2000).

Author

Benjamin Blum

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Goetz Fitzpatrick, LLP recently prevailed on a cross-motion to compel a construction manager (CM) as agent for a disclosed principal to arbitrate the Third-Party claims of a trade contractor client, even though direct privity of contract between the CM and trade contractor was questionable.

Where the CM acts as agent for a disclosed principal (the owner), standard language in the construction management agreement (CMA) usually provides:

Notwithstanding anything to the contrary which may be set forth in this Agreement, it is expressly acknowledged and agreed that the Construction Manager is acting as agent for Owner and all benefits of this Agreement shall run to the Owner as if the Owner were a signatory hereto.

It is also standard form that trade contracts entered into between the CM as agent for owner are signed by the “[the CM] As Agent for Owner.”

The obvious purpose of such language and manner of execution of the CMA is to attempt to shield the CM as agent from any direct claims and/or liability asserted by any of the trade contractors since it is long-established that an agent which signs a contract on behalf of a known principal cannot be held to have made a commitment in its individual capacity. (See e.g., Shoenthal v. Bernstein, 276 A.D. 200, 205, 93 N.Y.S.2d 187 (1st Dept 1949), appeal dismissed 276 A.D. 831, 93 N.Y.S.2d 908). This principle has been consistently applied in the context of arbitration. (See e.g. Matter of Metamorphosis Constr. Corp. v. Glekel, 247 A.D.2d 231, 668 N.Y.S.2d 594 (1st Dept 1998).

However, that consistency is no longer a constant, thanks to the compelling arguments provided to the Commercial Division of the New York County Supreme Court by attorneys from Goetz Fitzpatrick.

In Sciame Construction, LLC v. Accurate Specialty Metal Fabricators, Inc., NY Co. Index No. 655666/2021, Sciame Construction LLC (“Sciame”) commenced an arbitration “on behalf of owner” against Accurate Specialty Metal Fabricators, Inc. (“Accurate”). Accurate, in turn, asserted Third-Party claims against Sciame for breach of the trade contract. Sciame then filed a Petition to stay the Third-Party claims in arbitration based on the premise that Sciame was merely an agent for a disclosed principal and, as such, there was no contract between Sciame and Accurate which would subject Sciame to arbitrate the claims directly with Accurate.

Goetz Fitzpatrick filed a cross-motion to the Sciame Petition and argued, among other things, that Sciame cannot avoid arbitration of Accurate’s Third-Party claims because Sciame obtained direct benefits from both the construction management agreement and the subcontract, both of which contained arbitration clauses. In other words, Sciame was stopped from avoiding arbitration. The Court agreed and specifically ruled that “even if Sciame was not in privity with Accurate due to it having entered into the Subcontract as agent of Owner, Sciame received direct benefits from the CMA and the Subcontract – serving as the Construction Manager and being entitled to a Construction Services Fee based on work performed by Accurate under the CMA – such that it is estopped from disputing that it is subject to the broad arbitration clauses [citations omitted].”

In short, there is now clear case law from the Commercial Division, New York County, that a CM as agent for owner cannot avoid arbitration of direct claims asserted by a trade contractor where the CM has received a benefit from the CMA and/or trade contract.

The attorneys on the case were Donald J. Carbone and Gerard S. Strain.

Author

Goetz Fitzpatrick