The filing of a mechanic’s lien can help contractors secure their right to payment. However, it can also cause hardship for owners and higher tiered contractors if the lien claim is unjustified. The New York Lien Law provides a number of mechanisms to discharge a mechanic's lien before or during litigation.
I. Bond to Discharge a Lien
New York Lien Law § 19(4) allows a lien to be discharge by filing a bond securing up to 110% of the amount claimed. A mechanic’s lien discharge bond is executed by the principal, which requests the bond, and the surety, a financial services company which guarantees payment if the lien claim is proved. To provide this service, sureties require the principal to pay a premium of approximately 3% of the lien amount, to post collateral, and to reimburse the surety if it is required to pay a claim. A copy of the bond must be served upon the lienor.
The Court of Appeals in Morton v Tucker, 145 N.Y. 244 (1895) addressed the procedure and effect of a lien discharge bond. When a mechanic's lien is discharged by the filing of a bond, the bond stands in place of the real property or fund against which the lien was filed. An owner, who would be a necessary party in a lien foreclosure action, is not a necessary party once the lien has been bonded. Instead, the lienor may name the surety as a defendant, ensuring there is a solvent party to pay the judgment if the lien claim is proved.
Where a lien has been bonded, the commencement of an action to foreclose is sufficient to continue the lien, as well as the liens of other lienors properly joined as defendants. It is not necessary or proper to file a notice of pendency once a lien has been bonded. Lien Law § 17. If a notice of pendency has been filed, the owner is entitled to an order cancelling it.
Due to their speed and simplicity, lien discharge bonds are perhaps the most common method of discharging a lien. When a lien is filed, but an action is not promptly commenced to foreclose, a bond-and-wait strategy is often optimal. Lienors often fail to foreclose on mechanic’s liens, as it is simple and cheap to file a notice of lien but complicated and costly to prove the lien claim through a lawsuit. If the lienor fails to foreclose on its lien, the lien and bond become nullities, and the principal who procured the bond can get back any collateral paid to the surety.
II. Discharge by Deposit
New York Lien Law § 20 provides that an owner may discharge a mechanic's lien by the payment of money into court. Before a lien foreclosure action is commenced, the discharge is effectuated by depositing with the county clerk a payment equal to the amount claimed in the lien, with interest to the time of the deposit. After an action has been commenced to foreclose the lien, such lien may be discharged by a payment into court of such sum of money as, in the judgment of the court, will be sufficient to pay any judgment which may be recovered. Lien Law § 20.
Whether a deposit is made before the commencement of an action or a payment is made thereafter, the effect is to discharge the lien upon the real estate and shift it to the fund. An action is still necessary to enforce the lien. Moreover, the enforcement provisions that would have been applicable if the lien had remained on the real estate are still applicable. “The nature of the pending action has not changed; the deposit was merely substituted as security for the lien which must still be judicially established”. Harlem Plumbing Supply Co. v Handelsman, 40 A.D.2d 768, 768 (1st Dep’t 1972). In particular, those persons specified in Lien Law § 44 as necessary parties must be named as defendants in the lien foreclosure action.
Deposit of money into court pursuant to Lien Law 20 can be a reasonable alternative to bonding a lien where the party seeking to discharge the lien lacks an established relationship with a surety. However, if a lien discharge bond can be obtained, that is often cheaper and easier than paying money into court and filing a motion seeking return of the payment after the lien expires.
III. Discharge for Failure to Prosecute
A mechanic’s lien may be discharged pursuant to Lien Law § 59 for neglect of the lienor to prosecute the lien. Ordinarily, a lien is valid for one year and may be extended for one additional without the lienor commencing any court proceeding. However, this deadline can be reduced to 30 days pursuant to Lien Law § 59. A notice may be served upon the lienor requiring it to commence a lien foreclosure action within 30 days from the time of service or show cause why the lien should not be discharged. If the lienor fails to foreclose the lien within this period, the court will vacate the lien pursuant to Lien Law 59. This device is particularly useful for smaller or frivolous liens which the lienor does not intend to prosecute.
IV. Summary Discharge of Defective Liens
A lien may be discharged through a special proceeding pursuant to Lien Law § 19(6): (1) where it appears from the face of the notice of lien that the claimant has no valid lien by reason of the character of the labor or materials furnished and for which a lien is claimed, or (2) where for any other reason the notice of lien is invalid by reason of failure to comply with the provisions of § 9, or (3) where it appears from the public records that such notice has not been filed in accordance with the provisions of § 10. The owner or any other party in interest may petition the court in the county where the lien was filed for an order summarily discharging the alleged lien.
However, unless a notice of lien is invalid on its face, it is not subject to discharge in a Lien Law § 19(6) special proceeding and any dispute regarding its validity must be resolved in a lien foreclosure action. Luckyland (N.Y.), LLC v. Core Cont. Const., LLC, 921 N.Y.S.2d 537 (2d Dep’t 2011). It is rare that a lien will contain a defect on its face which would support discharge under this section. For example, if the notice of lien claims it was filed within the required time, but it was not, this cannot be challenged through a Lien Law 19(6) special proceeding. Instead, the timeliness of the lien would have to be challenged through a motion to dismiss or a motion for summary judgment after the commencement of a lien foreclosure action.
V. Invalidation for Willful Exaggeration
A mechanic's lien may be vacated pursuant to Lien Law 39 if a lienor willfully exaggerates the amount due. To establish that a lien is voidable under this provision, the opponent of the lien must show that the amounts set forth in the notice of lien were “intentionally and deliberately exaggerated” Garrison v. All Phase Structure Corp., 821 N.Y.S.2d 898 (2d Dep't 2006). The fact that a lien may contain improper charges does not, in and of itself, establish that the lienor willfully exaggerated the lien. Minelli Const. Co., Inc. v. Arben Corp., 768 N.Y.S.2d 227, 228 (2d Dep't 2003).
A lien found to be willfully exaggerated not only is void, but also subjects the lienor to liability under Lien Law § 39-a. In an action to enforce a mechanic's lien, a defendant may assert a counterclaim seeking damages for a willfully exaggerated lien. Pursuant to Lien Law § 39-a, damages may include any premium paid to obtain a bond to discharge the lien, the interest on any money deposited to discharge the lien, reasonable attorney's fees incurred in discharging the lien or in voiding the lien for willful exaggeration, and the amount of the exaggeration. Typically, the issue of willful exaggeration is determined at trial, not through a summary judgment motion. A court can only impose damages for willful exaggeration where it is proven that the lienor intentionally overstated the amount of the lien and did not overstate the lien due to an honest mistake. Goodman v. Del-Sa-Co Foods, Inc., 257 N.Y.S.2d 142, 145 (1965).
VI. Discharge in Litigation
A lien may be discharged in litigation through a motion to dismiss, a motion for summary judgment, or at trial. Lien Law § 39, discussed above, provides one basis for discharge in litigation. A lien may also be discharged if it is proved that the lienor was not owed any payment. Even if the lienor was owed money by the party it contracted with, it generally will not be able to recover on its lien claim if a party higher in the payment chain was paid in full. In addition, it will not be able to recover if the lien was not filed on time or in accordance with the provisions of the New York Lien Law. However, even if the lien is discharged based on technical defects, the lienor may still be able to recover for breach of contract against the party that it directly contracted with.
Similarly, when a lien is discharged by filing a bond pursuant to Lien Law § 19(4) or paying money into court pursuant to Lien Law § 20, this discharges the lien as against the real property but does not extinguish the lien claim as against the substitute collateral. Unless the lienor allows its lien to expire, the validity of the lien claim will still have to be litigated before the lienor’s claim against the substitute collateral is discharged. If you are seeking to challenge a mechanic’s lien that has been filed against your construction project, please contact Sophie Wang at (917) 932-0999 Ext. 3 for an initial consultation.
About Author
Sophie Wang graduated from the University of California, Berkeley School of Law in 2013, where she served as an editor of the Berkeley Business Law Journal. Read more.
Questions? Contact us today.
Related Articles
