In a prior post, we explained how a Municipal Mechanic’s Lien would not secure a lien claimant’s right to recovery from a municipality if the lien is filed after all earned project funds have been paid out and retainage or excess funds are needed to complete a project. This outcome might seem unfair to lien claimants who have performed work or supplied materials but remain unpaid. However, as experienced construction lawyers know, the outcome is consistent with statutory and common law trust fund principles.
In National Surety Corp. v. Barth, 20 N.J. Super. 100 (Ch. Div. 1952), the court concluded that “Clearly the [Trust Fund] statute does not impress a trust upon the funds still in possession of the State and not yet paid to the contractor.” Id. Furthermore, “New Jersey courts have consistently read Barth to impose an equitable trust only over funds that, because of their origins and because of the way in which they had been dedicated or earmarked, could only be disbursed for the designated purpose for which they were obtained.” Universal Bonding Insurance Co. v. Gittens and Sprinkle Enterprises, Inc., 960 F.2d 366, 370 (3rd Cir. 1992)(emphasis added). Under trust fund principles, therefore, a contractor only has potential recourse to funds for a public project that have either already been paid by the public entity to a contractor or that remain in the possession of the public entity but have been specifically designated for the particular public project.
On the bright side, under the New Jersey Trust Fund Act mentioned in Barth, money paid by a public entity, including the State of New Jersey, pursuant to a contract for a public improvement, constitutes a trust fund in the hands of the person receiving payment until all claims for labor and materials in connection with the contract have been paid. N.J.S.A. 2A:44-148. Thus, although an unpaid Municipal Mechanic’s lien claimant has no recourse against the municipality where the municipality no longer possesses project specific funds, he or she may have a claim against a prime contractor who has received payment from the municipality but has failed to pay his subcontractors or suppliers.
Whether pursuing a claim based upon the New Jersey Trust Fund statute, common law trust fund principles or a Municipal Mechanic’s Lien, a contractor or supplier has no recourse against a municipal or other public entity if all of the money specifically designated for a project has been paid out. In the case of a Municipal Mechanic’s Lien filed where all project specific funds have already been paid out, but a project remains incomplete due to abandonment or other issues, additional funds utilized by the municipality to complete the project are likely not project specific and thus not subject to recovery vis a vis a Municipal Mechanic’s Lien.
The interplay between the New Jersey Municipal Mechanic’s Lien Law and the Trust Fund Act once again weigh in favor of prompt action by a contractor or supplier to assert and preserve their rights to project funds.
The construction lawyers of the Law Office of Bart J. Klein devote a significant amount of their practice to New Jersey construction law and litigation, including construction liens and municipal mechanic's liens. We welcome you to contact us for further information and any questions relating to your rights under New Jersey's construction laws.
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