On April 25, 2018, the Appellate Division of the Superior Court of New Jersey issued a rare opinion interpreting New Jersey’s Construction Lien Law. In addition to providing a helpful summary and analysis of New Jersey courts’ developing interpretation of the Construction Lien Law and its predecessor statutes over time, the opinion in NRG REMA, LLC, et al. v. Creative Environmental Solutions Corp., addresses two important issues relating to the Construction Lien Law. The bulk of the opinion determines that the value of salvage material recovered by a demolition contractor enlarges the lien fund available to unpaid subcontractors who file lien claims. The Appellate Division also determines in the opinion that under the Construction Lien Law, the person signing a corporate entity’s lien claim must demonstrate that he or she has been designated a corporate officer consistent with the terms of the corporate entity’s bylaws or board resolution.
While the above issues may seem fairly narrow, in deciding them, the Court provides useful explanations as to how the lien fund is to be calculated under the Construction Lien Law and to what degree “substantial compliance” with the formatting requirements of the Construction Lien Law must be achieved in order to avoid invalidation of a construction lien. These explanations are applicable to a wide variety of situations in which a construction lien is either being contemplated or is already at issue.
There are two goals of the Construction Lien Law. The first is to provide a source of security to those who provide construction services and materials. The second is to protect property owners who have met their payment obligations by relieving them of the potential burden of double payment for work and materials. Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56, 67 (2004).
The Construction Lien Law attempts to protect both owner and supplier and courts must balance the competing interests in the light of the Construction Lien Law’s apparent purposes. The size, sophistication and “innocence” of parties varies. The mere status of the parties as owners versus contractors and suppliers does not matter. However, when an owner and a lien claimant contractor are “equally innocent” when a prime contractor defaults, and they offer “equally plausible” interpretations of the Construction Lien Law, a court may apply a “tie-breaker” in favor of the lien claimant contractor over the owner.
“An amount of a lien on an interest of a person . . .shall be limited to the amount that person agreed in writing to pay, less payments made . . . in good faith prior to the filing of the lien.” N.J.S.A. 2A:44A-3(f). The lien claim “shall not exceed the unpaid portion of the [claimant’s] contract price . . . .” N.J.S.A. 2A:44A-9(a).
For first or second tier lien claimants (a prime or subcontractor to the prime contractor), the lien fund is limited to “the earned amount of the contract between the owner and contractor minus any payments” made before the claimant serves the lien. N.J.S.A. 2A:44-9(b)(1). For third tier lien claimants, a subcontractor or supplier to a subcontractor, the lien fund is limited to the lesser of the lien fund for the first or second tier claimants, or “the earned amount of the contract between the contractor and the subcontractor to the contractor, minus any payments” made before the claimant serves the lien. N.J.S.A. 2A:44A-9(b)(2). “Earned amount of the contract” means the contract price if work has been completed, or if work has not been completed, “the value, as determined in accordance with the contract,” of the partial completion of work. N.J.S.A. 2A:44A-9(e).
If the owner has fully paid the contractor at the time the lien is filed, there is no lien fund. N.J.S.A. 2A:44A-9(d).
The fact pattern in NRG REMA involved a contract for demolition where the contractor paid the owner for the right to demolish a building and salvage the materials. The concept of the lien fund is typically understood as the pool of funds the owner is obligated to pay to a contractor pursuant to a contract. In this case, there was no such fund. Instead, the value of the contract was in the market value of the salvage materials.
The Appellate Division ruled that the amount available from the lien fund was the market value of the salvage materials, transferred to the contractor in return for its demolition work, less the contractor’s cash payment to the owner for the right to demolish and salvage. This determination was consistent with the Appellate Division’s reasoning that “the primary equitable principle underlying the Construction Lien Law is that a property owner should not enjoy the benefits of labor or materials without paying for them.”
Another issue decided by the Appellate Division in NRG REMA relating to the Construction Lien Law was the scope of the requirement as to exactly who can sign a construction lien on behalf of a corporate entity. The Construction Lien Law requires that a person with authorization through corporate by-laws or board resolution sign a construction lien on behalf of a company. The Appellate Division considered that the Construction Lien Law’s procedural requirements were meant to be “stringently applied.”
In NRG REMA, a person describing himself as an “officer/shareholder” of the corporation claiming the lien signed the lien. However, the lien claimant corporation never amended its bylaws, passed a resolution approving the signatory’s appointment as an officer or otherwise formally designated the signer as an officer. There was no written no written evidence that the signatory of the lien was authorized to sign the lien nor was there any evidence presented that such evidence was provided to the notary who notarized the lien that the signatory had authority. As a result, the Appellate Division determined that the signature on the lien did not meet the requirements of the Construction Lien Law, and thus that the lien was invalid.
The overarching theme of the NRG REMA decision is that, with respect to the Construction Lien Law, New Jersey courts will continue to look back to the principles underlying the Construction Lien Law. Specifically, maintaining the delicate balance of protecting contractors right to payment while also protecting owners’ right to avoid double payment. While this balancing act makes it difficult to anticipate how a court will apply the Construction Lien Law to an unusual set of facts, the Appellate Division’s analysis of the signatory requirement reinforces the notion that the best practice is strict adherence to even the most minute and ministerial of the Construction Lien Law’s requirements.
Our firm devotes a significant amount of its practice to New Jersey construction law and litigation, including construction liens. As part of this practice, we file construction liens and prosecute/defend lawsuits in which lien claims are asserted. We welcome you to contact us for further information.
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