New York Commercial and Construction Lawyer Blog

The Challenge of Proving Willful Exaggeration Under The Lien Law

April 27, 2020 | by Steven Cramer

In J. T. Magen & Co., Inc. v. Nissan North America, Inc., 178 A.D.3d 466 (First Dep’t 2019), the court applied some basic principles concerning willful exaggeration under the Lien Law to an unusual set of facts. While the court did not explicitly refer to Lien Law Section 39, it underlies the entire case. Section 39 permits a court to cancel a mechanic’s lien that is found to have been willfully exaggerated.

The unusual facts are these: defendant Nissan sought to dismiss plaintiff contractor J. T. Magen’s (“JTM”) lien foreclosure action where JTM’s lien was filed against the entire building in which both Nissan and a non-party, BICOM, had leasehold interests. To confuse matters, JTM’s construction contract was with non-party BICOM only, but called for JTM to perform construction work on both BICOM’s and Nissan’s spaces.

Nissan argued that the lien was willfully exaggerated because JTM failed to differentiate and apportion its lien based on the work it performed for the two separate tenants, Nissan and BICOM. Nissan also claimed JTM had walked off the job before it ever performed any work on Nissan’s space, so that Nissan did not benefit from the work that was the basis for JTM’s lien.

Validity Of No Damage For Delay Clause In Construction Contracts

April 20, 2020 | by Trista W. McConnell

It is becoming increasingly evident that “no-damage-for-delay” provisions in construction or building contracts will be strictly enforced except in rare instances. This principle was recently reiterated by the First Department in WDF Inc. v. Turner Constr. Co., 177 A.D.3d 513, 112 N.Y.S.3d 133 (1st Dept. 2019), which held that a prime contractor’s internal e-mail assessing potential delay damages was irrelevant to the enforceability of the broad no-damages-for-delay clause in the subcontract. Id., 177 A.D.3d at 514. The Court rejected the argument that the email constituted a party admission of liability, stating that it was apparent from the email that the prime contractor was assessing the costs claimed by the subcontractor, rather than the viability of the subcontractor’s claims under the terms of the subcontract. Id. Based on this reasoning, the Court stated that “[t]he fact that [the prime contractor] evaluated whether [the subcontractor] incurred delay damages is irrelevant to the enforceability of the no-damages-for-delay clause.” Id.

The First Department also noted that the case was “strikingly similar” to a separate action brought by the subcontractor seeking delay damages, wherein the Court concluded that alleged poor administration or planning was insufficient to overcome a no-damages-for-delay clause in a construction contract. WDF, Inc. v. Trustees of Columbia Univ. in the City of N.Y., 170 A.D.3d 518, 96 N.Y.S.3d 42 (1st Dept. 2019). As a result, the Court found that the no-damage-for-delay provision in the contract was still applicable, as a matter of law.

Recent standard construction contracts issued by the City of New York for its public projects have eliminated the no-damages-for-delay clause, although they still have stringent notice provisions. Nonetheless, many construction contracts with private owners contain this provision. Contractors presented with this kind of exculpatory clause should attempt to remove this language or at least limit the terms.

Contractors Cannot Use Contractual Limitations Periods to Wholly Preclude Actions

April 13, 2020 | by Daniel E. Katz

Digesare Mechanical, Inc. v. U.W. Marx, Inc. stands for the principle that while parties are free to contract to to shorten the six-year statute of limitations period for breach of contract they cannot use such a limitation to effectively preclude such a claim in its entirety. 176 A.D.3d 1449, 112 N.Y.S.3d 306 (3d 2019).

The case effectively concerned a dispute between a subcontractor and a contractor in which the subcontractor alleged that the contractor had not fully paid it for work completed on a project. The relevant subcontract contained a limitations period provision stating that the subcontractor was required to bring any claim within six months of its last day of work.

Additionally, the subcontract contained a provision providing that the subcontractor would be paid by the contractor when the contractor was paid by the owner. The court determined that this provision was a permissible pay-when-paid provision rather than an unenforceable pay-if-paid clause. However, it was the combination of the pay-when-paid provision in conjunction with the shortened contractual limitations period that rendered the limitations clause unenforceable.

Second Department Upholds Mechanic’s Lien for Pre-Construction Services

January 2, 2020 | by Daniel E. Katz

The New York Lien Law provides broad categories for the type of work, labor, or services for which a contractor can file a mechanic’s lien if it is not paid. Owner’s typically argue that a contractor, construction manager, or design professional which perform preconstruction services cannot file a mechanic’s lien if it is unpaid. Not surprisingly, contractors, construction managers, and design professionals take the opposing position. Courts have continued to grapple with this issue. The Second Department recently adopted a nuanced opinion, finding that certain preconstruction services were lienable, but others were not. This blog also updates a previous posting of ours (September 27, 2018), where we discussed the lower court opinion which is now the subject of this appeal.

In Old Post Road Associates, LLC v. LRC Construction, LLC, 177 A.D.3d 658 (2d Dept. 2019), a construction manager, LRC Construction, LLC (“LRC”), filed a mechanic’s lien based upon the preconstruction services it had performed. The owner (“Old Post Road”) moved to dismiss the lien pursuant to Lien Law Section 19(6) because it alleged the services in question did not permit a lien, and thus the lien contained a “facial defect.” Lien Law Sections 2(4) and 3 state, in substance, that a lien may only be filed if the work, labor or services were for “demolition, erection, alteration or repair of any structure” which constitutes a “permanent improvement” upon the property in question. Drawings, plans, or specifications prepared by an architect, engineer, or designer can also qualify in certain instances.

Old Post Road argued in support of its application that LRC’s lien included a claim for services such as consulting for construction phasing and the preparation of budgets. Various cases support the conclusion that those services are not lienable. (see, e.g., Goldberger-Raabin, Inc. v 74 Second Ave. Corp., 252 N.Y. 336, 341-342 (1929).

Prompt Payment Act Right to Arbitration Upheld

December 23, 2019 | by Daniel E. Katz

As we previously noted (Blog of June 1, 2018), the Prompt Payment Act (“PPA”) has had less of an impact on payment disputes for construction projects in New York than many originally anticipated. Judge Jed Rakoff of the Southern District of New York recently issued an opinion that may breathe some life to the statutory scheme in certain circumstances.

In Maple Drake Austell Owner LLC v. D.F Pray Inc., 19 CV 5930, S.D.N.Y 7/15/19, the contractor (“Pray”) sought expedited arbitration with the owner of the project (“Maple”) regarding a payment dispute. Because Maple refused to pay the full amount of a payment requisition, Pray issued a Notice of Complaint to Maple pursuant to the PPA and served a demand for expedited arbitration. Maple then filed an application in court seeking a stay of the arbitration. The court granted an interim stay pending further briefing on Maple’s preliminary injunction application.

In support of its application, Maple argued that the PPA mandatory arbitration provisions only applied to the undisputed invoices. Furthermore, because the contract between Maple and Pray only called for arbitration “upon mutual agreement of the parties,” Maple argued that the contract overrode the PPA. Certain New York state court decisions were consistent with Maple’s contention. Turner Construction Co. v. JoA Concrete Corp., 44 Misc. 3d 217, 984 N.Y.S.2d 579 (Sup. Ct. N.Y. Co. 2014); Southgate Owners Corp v KNS Building Restoration Inc., 2013 WL5869618 (Sup. Ct. N.Y. Co 2013). However, the Third Department had issued a more recent and contrary opinion in Matter of Capital Siding & Construction, LLC, 138 A.D.3d 1265, 31 N.Y.S.3d 230 (3d Dept. 2016). The Capital Siding Court held that the PPA applied to disputed invoices and that a contract could not override the PPA. Because the Capital Siding opinion was the only New York State appellate authority on the subject, Judge Rakoff held that he was obligated to follow its interpretation. Even if it were not binding, however, he stated that requiring arbitration of disputed invoices was consistent with the meaning and intent of the PPA. Accordingly, the arbitration was directed to go forward.

RPAPL Section 881 Litigation Continues Apace

August 12, 2019 | by Daniel E. Katz

Due, in part, to increased construction activity, a renewed focus on project safety, and owners becoming more aware of their rights and remedies, Real Property Action and Proceedings Law (“RPAPL”) Section 881 continues to generate litigation and court decisions construing various provisions of the statute. Two recent decisions are of special note.

In Cucs Housing Develop. Fund Corp. IV. V. Aymes, 2019 WL 934935, 2019 N.Y. Slip Op. 30450 (Sup. Ct. N.Y. Co. Feb. 26, 2019), Judge Melissa A. Crane granted a developer the right to underpin its neighbor’s building, even though such access constitutes a permanent encroachment. While many practitioners and developers believe RPAPL Section 881 does not authorize a trespass of this nature, Justice Crane found to the contrary.

The specific facts of the case undoubtedly had something to do with the result. The petitioner-developer was in the early stages of building an affordable housing project to address the homelessness problem in New York City. The plans in question were approved after a two-year review process by the New York City Department of Buildings. The respondent-neighbor owned a vacant and unused building, without active utilities or security. When questioned at a hearing as to why he opposed the underpinning application, the neighbor, appearing pro se, responded, “I don’t have to have a reason… I just don’t want underpinning.” Furthermore, the Court found there was no feasible alternative to the underpinning, and that in cases such as Madison 96 Associated LLC v. 17 East 96th Owners Corp, 121 A.D.3d 605, 608, 995 N.Y.S.2d 553 (1st Dep’t 2014) and Matter of Tory Burch LLC v. Moskowitz, 146 A.D.3d 528, 43 N.Y.S.3d 901 (1st Dept’t 2017) the First Department seemed to recognize that underpinning could be authorized if it was “virtually unavoidable” or if the “reasonableness and necessity of the trespass” was clearly demonstrated. Accordingly, the Cucs Court authorized the underpinning.

RICO Based Construction Claim Dismissed

May 30, 2019 | by Daniel E. Katz

Disputes between owners of construction projects and contractors occasionally include allegations of fraud and intentional wrongdoing. In these instances, it is sometimes tempting to include a claim for civil liability under the Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”). Successful prosecution of a civil RICO violation includes the recovery of treble damages and attorneys’ fees, among other things. However, successful RICO claims in the civil context are relatively rare. The courts have interpreted the RICO statute to make it exceedingly difficult for a construction law dispute to turn into a recoverable RICO violation. The case of Grace International Assembly of God v. Festa, (17-CV-7090)(E.D.N.Y. April 1, 2019) highlights the difficulties in bringing a civil RICO case.

In Grace, the Plaintiff retained defendant Falcon General Construction Services Inc. (“Falcon”) to act as its general contractor for a project involving Grace’s religious sanctuary. Defendant Festa, the president and sole shareholder of Falcon, met with representatives of Grace and allegedly made numerous fraudulent misrepresentations which Grace divided into two different categories. One set of misrepresentations related to the need for advance payment of certain monies, the use of those monies on the project, and the progress of the construction on the project (“The Project Invoices Fraud Scheme”). According to Grace, it relied on the misrepresentations of defendants when it made payments to them. Furthermore, according to Grace, defendants improperly failed to make payments to subcontractors who had fully performed their work while representing to Grace that those payments had been made (the “Subcontractor Nonpayment Fraud Scheme”).

After Grace terminated defendant Falcon from the project, it commenced a legal action in the federal district court for the Eastern District of New York, alleging, in part, the two related schemes referenced above. Plaintiff also relied on the same basic set of facts to allege various state law contract and fraud-based claims.

Mechanic’s Lien Claim Not Limited By Amounts Contained In Requisitions Submitted to Owner

March 7, 2019 | by Daniel E. Katz

Contractor’s mechanic’s liens are based upon work actually performed (and unpaid). Often, contractors rely upon the payment requisitions they submitted to the owner to establish the claimed value of the work. Requisitions that were never submitted to or considered by an owner can also be used by a contractor on occasion to support its lien claim. That circumstance was addressed by the First Department in Ferro Fabricators, Inc. v. 1807-1811 Park Avenue Development Corp. 165 A.D.3d 572, 86 N.Y.S.3d 54 (1 st Dept. 2018).

The defendant in Ferro moved for summary judgment on, among other things, its counterclaim that Plaintiff’s mechanic’s lien was willfully exaggerated and thus subject to dismissal pursuant to Lien Law §39 and 39-a. Defendant pointed to the seventh payment requisition Plaintiffs had submitted, which alleged the work was only 78% complete. In opposition to the motion, however, Plaintiff provided the court with a subsequent (eighth) requisition, which had never been submitted to Defendant, but which alleged that 97% of the work was complete. Under those circumstances, the First Department held that the trial level court had properly denied Defendant’s summary judgment motion because there were disputed issues of material facts regarding the amount of work performed.

By its holding, the Court re-confirmed the long standing rule that a lienor is not strictly bound and limited by the requisitions it submitted during the course of the performance of its work. Any work which was performed after the last requisition was submitted may also form the basis of a lien. Indeed, the First Department specifically rejected Defendant’s argument that the work referenced in the eighth requisition should not be included in the lien claim merely because it was never submitted. In other words, while the timely submission of a requisition can often aid

Joint Venture Status Denied By Court

December 26, 2018 | by Daniel E. Katz

Construction companies, especially those engaged in large public works or private development projects, sometimes form joint ventures to pool their resources and perform work on jobs that might be beyond their individual financial capabilities or technical expertise. Typically, the joint venture is formed for an individual project. As a result, the formation of the joint venture is often not addressed with the same degree of formality and care as when a corporate entity is formed on a more permanent basis. Recently, in Slabakis v. Schik, 164 A.D.3d 454, 84 N.Y.S.3d 45 (1 st Dep’t 2018), the First Department addressed the requirements of forming a joint venture in the context of a dispute as to whether a proper joint venture had been formed.

The plaintiff in Slabakis alleged there was an oral joint venture agreement, and sued the defendant, its purported joint venture partner, for breach of contract, breach of fiduciary duty and related wrongs. Defendant moved to dismiss, alleging that the complaint did not adequately allege the existence of a joint venture agreement. The trial level court denied the motion, holding that there was an issue of fact as to the viability of the complaint.

On appeal, the First Department reversed and dismissed the complaint, holding that the pleading was defective in two material respects. First, the Slabakis complaint failed to contain a mutual promise that profits and losses would be shared to some degree. Instead, it indicated that all of the losses would be solely borne by the defendant. This was “fatal” to plaintiff’s claim that a joint venture was created.

The Court of Appeals Upholds the Fourth Department’s Lien Law Section 3 Consent Decision

November 29, 2018 | by Megan Gardner

On November 20, 2018, in Angelo A. Ferrara v. Peaches Café LLC, et al., 2018 WL 6047993 (N.Y. Nov. 20, 2018), the New York Court of Appeals upheld the Fourth Department’s decision in Ferrera v. Peaches Café LLC, 138 A.D.3d 1391, 30 N.Y.S.3d 765 (4^th Dep’t 2016). As I discussed in my prior posts, “The Divide in Interpretations of Lien Law Section 3’s Consent Requirement Continues” and “Varying Interpretations of Lien Law Section 3’s Consent Requirement,” New York Courts have been at odds in their determinations of the consent requirement contained in Lien Law Section 3. Judge Wilson of the New York Court of Appeals clarified these distinctions in his recent decision.

The key facts in the underlying case are summarized as follows: Defendant Peaches Café LLC (“Tenant”) entered into a lease agreement (the “Lease”) with Defendant-Appellant COR Ridge Road Company, LLC, (“Landlord”), who also owned the subject premises. The Lease affirmatively required the Tenant to undertake the construction of various improvements at the premises. Specifically, the Lease detailed certain requirements for the electrical work. Nonparty Quinlan Ferrara Electric, Inc. (who assigned its claims to Plaintiff-Respondent Angelo A. Ferrara) (“Contractor”) contracted with Tenant to perform a portion of the electrical build-out work at the premises. Despite satisfactorily completing its work, Contractor was never paid the balance for its work performed. Accordingly, Contractor filed a mechanic’s lien against the premises and commenced a lien foreclosure action.

In the lien foreclosure action, the trial court granted Landlord’s motion to dismiss the complaint as against Landlord, because, according to Landlord, “it did not have any direct dealings with [Contractor] and did not explicitly consent to the specific electrical work performed by [Contractor.]” Peaches, 30 N.Y.S.3d at 767. The Fourth Department reversed the trial court, finding that that Landlord/owner’s consent for the electrical work was derived from the terms of the Lease, which obligated Tenant to install electrical upgrades on the premises. Thus, the Landlord/owner was obligated to pay for the reasonable value of Contractor’s services. Id at 768. Landlord appealed.