Although a timely-filed claim under the beneficiary provisions of Article 3-A of the Lien Law or a mechanic's lien has always been two of a subcontractor's best friends, a recent decision out of the Appellate Division has reaffirmed just how powerful a friend the Lien Law can be to subcontractors who wind up in disputes with general contractors and/or owners on projects. In NY Prof. Drywall of OC v. Rivergate Development, 514437, NYLJ 1202577410360 at *1 (App. Div., 3rd, Decided November 1, 2012), pursuant to Lien Law Article 3-A, simply because money is deposited with a County Clerk sufficient to bond or discharge a mechanic's lien, a subcontractor does not lose its rights to have its beneficiary's interest in the funds at the same time. In other words, subcontractors can simultaneously maintain an action to foreclose its mechanic's liens and an action under Article 3-A of the Lien Law.
In reviewing the Court's discussion of the background of the case, you will see that the circumstances surrounding this case are similar to the circumstances surrounding many disputes faced by subcontractors on a routine basis. As the Court discussed, Plaintiff, a subcontractor, entered into a subcontract with Defendant Rivergate Development, LLC, a general contractor, to complete certain construction work on a large senior housing project on property owned by another Defendant. After the project began, disagreements arose between the subcontractor and Rivergate. (Sound familiar?) Ultimately, the subcontractor filed a mechanic's lien on the property for nonpayment of material and labor in the amount of $137,531,39. Rivergate deposited $142,787.75 with the County Clerk of Ulster County to discharge the lien. The subcontractor then commenced an action alleging, among other things, breach of contract, quantum meruit and relief pursuant to Lien Law Articles 2, 3 and 3-A, including, as pertinent here, foreclosure of its mechanic's lien and an order compelling Rivergate, the owner and other related entities and individuals (hereinafter collectively referred to as Defendants) to produce an accounting of all trust assets and to repay to the subcontractor funds allegedly diverted from the trust. The general contractor, Rivergate, as Defendant, cross-moved for, among other things, summary judgment dismissing plaintiff's Lien Law Article 3-A claims on the grounds that the deposit of funds with the County Clerk discharged the lien and the subcontractor was only left with a claim on the deposited funds - not a beneficiary's claim under the Lien Law.
The lower court granted the Defendants' cross motion dismissing the Lien Law Article 3-A causes of action. Upon review, the Appellate Division reversed and upheld the powerful provisions of Article 3-A as it relates to subcontractor's claims. As subcontractors should know, Lien Law Article 3-A creates trust funds out of certain construction payments or funds to assure payment of subcontractors who perform work on real property for owners and general contractors. As the Court points out, the trust commences "when any asset thereof comes into existence whether or not there shall be at the time any beneficiary of the trust and continues with respect to every asset of the trust until every trust claim arising at any time prior to the completion of the subcontract has been paid or discharged." As an owner or general contractor will sometimes do in order to avoid the provisions of Article 3-A, the general contractor deposited funds sufficient to discharge the mechanic's lien filed by the subcontractors on this project who had not yet been paid in full. The general contractor then argued that by depositing the funds with the County Clerk, the lien was therefore discharged and that Lien Law Article 3-A no longer applied so the subcontractor could not argue that it was a beneficiary of the trust.
The Appellate Division disagreed with the lower court and reasoned as follows: "To construe the Lien Law, as defendants urge us to do, as automatically resulting in the termination of a beneficiary's interest in a Lien Law Article 3-A trust upon the perfection and/or discharge of a mechanic's lien - or, indeed, a termination of the entire trust upon the perfection and/or discharge of the mechanics' liens of all unpaid subcontractors - before the claims of such subcontractors are actually determined on the merits and satisfied would be contrary to both the explicit language of the statute and the legislative purpose behind its enactment."
In fact, in a strongly worded warning to general contractors and owners, the Appellate Division held: "Nor are we persuaded that the discharge of Lien Law Article 2 lien by the deposit of money with the County Clerk is equivalent to a payment or discharge of the Lien Law Article 3-A trust claim (see Lien Law §70 [3]). Further, while defendants' deposit of trust funds with the County Clerk in order to discharge plaintiff's mechanic's lien is not considered a diversion of trust assets (see Lien Law §79), defendants' assertions that no diversion has occurred do not entitle them to dismissal of plaintiff's Article 3-A causes of action, particularly since there are numerous accounting requirements in Article 3-A that are not reflected in the documents supplied by defendants. In our view, defendants must fulfill their fiduciary duties with regard to the Article 3-A trust until such time as the merits of the subcontractors' claims are judicially or otherwise determined and any amounts determined to be owed are actually paid." The ability of a subcontractor to simultaneously maintain an action to foreclose its mechanic's lien and an action under Article 3-A of the Lien Law is another powerful tool in a subcontractor's arsenal for collecting funds owed to them which should be strategically applied as part of collection efforts. We would urge all subcontractors facing similar circumstances to discuss these strategies with their representatives.
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