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Howrey LLP
Drawing
attention to inequities in the New York Lien Law and calling
for legislative reform, a New York Supreme Court recently
considered itself bound by existing law to deny enforcement
of a bonded mechanic's lien for materials supplied to a
for-profit theatre project because the underlying land was
owned by 42nd Street Development, a public benefit corporation,
which is a subsidiary of New York State's Urban Development
Corporation. Jersey Electrical Supply Co., Inc. v. MJR
Electrical Contracting Corporation, Supreme Court, New
York County, Judge York, November 2000.
Jersey
Electrical furnished materials to a theater complex project
being built by Loews, a major motion picture theatre developer,
on 42nd Street in Manhattan but was not paid. The supplier
filed a mechanic's lien for nearly $200,000. The mechanic's
lien was discharged by a surety discharge bond posted by
Loews. Jersey Electrical sought payment on the bond.
Loews
had subleased the land from Dream Team Associates, LLC,
a private entity, which in turn had leased it from 42nd
Street Development and from the City of New York as fee
owners.
The
defendants moved to dismiss the mechanic's lien claims.
Jersey Electrical argued that all transactions concerning
the project were entered into solely by private parties
and that ownership of the underlying land by a public entity
under such circumstances should not prevent recovery on
the bond.
The
court acknowledged that Jersey Electrical's arguments were
compelling but stated that the "law has not yet caught
up to common sense." Citing New York Lien Law §2
(7), the court found that when land is owned by a public
corporation, no mechanic's lien may be filed regarding it,
even when the role of the public corporation is only "nominal."
The only exception is when the public corporation is an
"industrial development agency." Because 42nd
Street Development was not an "industrial development
agency," the limited exception was not applicable,
and the mechanic's lien could not be enforced. Because the
New York Legislature explicitly used the phrase "industrial
development agency" in the exception and because a
public benefit corporation and an industrial development
agency generally are not interchangeable and were not interchangeable
in this case, the Lien Law had to be interpreted as barring
enforcement of the mechanic's lien.
The
court also dismissed Jersey Electrical's claim for payment
on the surety bond. The court noted that the order discharging
the mechanic's lien from the real estate when the bond was
filed required, as is normal in New York, that Jersey Electrical
obtain a judgment nominally enforcing the lien against the
real estate in order to recover on the bond. Also, §19
(4) of the Lien Law provides that a condition of the discharge
bond is "the payment of any judgment which may be rendered
against the property for the enforcement of the lien."
Accordingly, the court ruled that because Jersey Electrical
was legally barred from foreclosure on the real estate,
it could not recover on the bond.
Jersey
Electrical failed to name the City of New York as a defendant.
Therefore, the court did not address the applicability of
the Lien Law to a municipality and instead focused on 42nd
street Development's status as a public benefit corporation.
This
ruling should be of concern to materialmen, suppliers, subcontractors
and contractors doing business in the State of New York
with public development corporations, even when the particular
project appears to be entirely private as here. Legal advice
should be sought in such situations about ways to obtain
or secure recovery in the event of nonpayment before signing
contracts, subcontracts or material supply agreements.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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