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 (4th 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).
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