Recent NJ Appellate Division Decisions Leave Lien Claimants '0 and 2'

Generations of contractors, subcontractors, and suppliers in the construction industry have looked to liens as an avenue to seek payments owed on construction projects. As such, it is imperative for potential lien claimants—and owners—to stay informed of decisions involving New Jersey’s Construction Lien Law (N.J.S.A. 2A:44A-1 et seq.), which applies to private commercial residential projects, and Municipal Mechanics’ Lien Law (N.J.S.A. 2A:44-125 et seq.), for those projects contracted by New Jersey public agencies. Highlighted in this article are two recent decisions from New Jersey’s Appellate Division interpreting the scope of each of these statutes.

In Ash Maple v. Jeral Constr. Co., No. A-1282-17T1, 2019 WL 2495678 *3 (App. Div. June 17, 2019), the Appellate Division reaffirmed the long-established principle that “subcontractors who are not paid by the general contractor who hired them cannot sue the property owners with whom they lacked privity.” Citing F. Bender v. Jos. L. Muscarelle, 304 N.J. Super. 282, 285-86 (App. Div. 1997); Insulation Contracting & Supply v. Kravco, 209 N.J. Super. 367, 377-79 (App. Div. 1986).

The facts in Ash Maple are straightforward. In 2015, the plaintiffs, Ash Maple and The Fried Group, hired defendant Jeral Construction Company as the general contractor in the construction of a Walgreens drug store. Jeral entered into numerous subcontracts, including with Elite Landscaping, but failed to pay its subcontractors in full. Not surprisingly, the unpaid subcontractors filed construction lien claims, including Elite, which claimed it was owed $87,696.40 under its subcontract with Jeral.

The plaintiffs, Ash Maple and the Fried Group, initiated suit against the lien claimants, which prompted the trial court to enter an order establishing a lien fund pursuant to N.J.S.A. 2A:44A-9. Elite received its pro rata share of the lien fund, which totaled $35,300.94, with the remaining funds distributed to the other lien claimants. But it did not end there for the plaintiffs, as Elite filed quasi-contract claims against them for the balance owed of $52,395.46. Both Elite and the plaintiffs moved for summary judgment, with the trial court granting summary judgment to the plaintiffs.

In its motion for summary judgment before the trial court, Elite argued that it was entitled to recover payment beyond its pro rata share from the lien fund based on the principle espoused in Groesbeck v. Linden, 321 N.J. Super. 349, 353 (App. Div. 1999), that the Construction Lien Law “was not designed or intended to be the exclusive remedy of an unpaid contractor.” Id. at *2. While the trial court agreed with that general principle, it distinguished Groesbeck because the lien claimant in that matter was the general contractor in privity of contract with the homeowner. As the subcontractor on the project, Elite’s contract was with the general contractor Jeral, and it was not in privity of contract with the owner. The Appellate Division therefore found the trial court correctly awarded summary judgment to the plaintiffs, as there was nothing in the record “to even suggest Elite had any dealings with plaintiffs or expected payment from them when it rendered its landscaping services to Jeral.” Id. at *3.

While the Appellate Division’s decision in Ash Maple is instructive for lien claimants on private construction projects, for the most part it reinforced established principles. The decision in the case of MasTec Renewables Construction Company v. Sunlight General Mercer Solar, No. A-1833-15T4, 2020 WL 579008 (App. Div. Feb. 6, 2020), by contrast, may alter the way contractors and suppliers approach projects for county improvement authorities. The parties in the MasTec case had been embroiled in litigation in New Jersey in both the state and federal courts—as well as arbitration—for the better part of six years. And, as it related to liens filed by subcontractors, the court held that New Jersey’s Municipal Mechanics’ Lien Law, N.J.S.A. 2A:44-125 et seq. (MMLL) does not apply to county improvement authorities. Id. at *1.

MasTec involved a dispute over payment for the construction of a solar energy facility located at Mercer County Community College (“Solar Project”). Mercer County Improvement Authority (MCIA) awarded SunLight General Capital the contract to build the Solar Project. SunLight General’s successful proposal identified MasTec as the subcontractor responsible for the construction of the Solar Project. MCIA and SunLight General’s affiliate, SunLight General Mercer Solar (“SunLight”), executed three agreements in connection with the Solar Project, including a Lease Purchase Agreement (the “Lease”). Id. at *3. The Lease contained provisions concerning SunLight’s obligation to construct the Solar Project; MCIA’s responsibility to fund the majority of the Solar Project’s costs; the procedure for MCIA to release payments for project costs; and SunLight’s Lease obligations and rights. The Lease specified that construction costs were to be paid through the use of Local Bonds issued by MCIA and Grant Funds that SunLight expected to receive from the U.S. Department of Treasury. MasTec was not a party to, nor a participant in the negotiation of, any of the three agreements.

MasTec and SunLight executed a subcontract related to the Solar Project, to which MCIA was not a party. MasTec completed the Solar Project, and SunLight accepted the Solar Project as complete; however, there were extensive delays in construction, and MasTec alleged it was owed over $10 million from SunLight. Id. at *4. On Jan. 16, 2014, MasTec filed a Municipal Mechanics’ Lien Notice with MCIA in the amount of $10,250,500 (the “Municipal Lien”). Id. MCIA disputed the validity of MasTec’s lien on the grounds that it was invalid because the County Improvement Authorities Law, N.J.S.A. 40:37A-44 (CIAL) exempts the property of a county improvement authority from judicial process. Id. at *1. MasTec subsequently settled its claims against SunLight, agreed to reduce its lien to $6.9 million, and filed a complaint against MCIA to foreclose on its Municipal Lien. The Law Division granted MCIA’s motion to dismiss MasTec’s foreclosure complaint, agreeing with MCIA’s position that its property was exempt from judicial process.

MasTec filed an appeal to the Appellate Division, arguing that its Municipal Lien was enforceable against the MCIA’s project fund pursuant to the MMLL. Amicus curiae Utility and Transportation Contractors Association of New Jersey (UTCA) intervened, emphasizing the state’s long history of protecting subcontractors, suppliers, and laborers, and arguing that disallowing liens against a county improvement authority would discourage these parties from working on such projects. MasTec and UTCA asked the court to “declare that a subcontractor on a municipal construction project can enforce and foreclose on a municipal mechanics’ lien against the project fund held by a county improvement authority.” Id. at *1.

To reach its decision, the Appellate Division focused on the MMLL, the CIAL, and the interplay between these statutes. Id. at *7-13. “The MMLL gives unpaid subcontractors, materialmen, and laborers having a contractual relationship either with a prime contractor or a subcontractor, a lien ‘for the value of the labor or materials, or both, upon the moneys due or to grow under the contract and in the control of the public agency.’” Id. at *6, citing N.J.S.A. 2A:44-128 (emphasis added). “‘Public agency’ means any county, city, town, township, public commission, public board or other municipality in this state authorized by law to make contracts for the making of any public improvement in any city, town, township or other municipality.” Id., citing N.J.S.A. 2A:44-126. Counties are considered “municipalities” under the MMLL while the state and its agencies are excluded in the MMLL’s definition of “public agency,” which is “limited to counties and conventional municipal corporations.” Id. A county improvement authority is not specifically included in the MMLL’s definition of “public agency.” Id.

The CIAL was enacted in 1960 in part to give counties flexibility in financing projects. Id. at *7. The CIAL makes every county improvement authority “a public body politic and corporate constituting a political subdivision of the State established as an instrumentality exercising public and essential governmental functions to provide for the public convenience, benefit and welfare.” Id., citing N.J.S.A. 40:37A-55 (emphasis added). The Appellate Division then turned to the legislative history of the CIAL to find that the intent was to exempt county improvement authorities from the terms of the MMLL:

This act shall be construed liberally to effectuate the legislative intent and as complete and independent authority for the performance of each and every act and thing herein authorized, and an authority shall not constitute or be deemed to be a county or municipality or agency or component of a municipality for the purposes of any other law.

Id. at *12 (emphasis added). This language, together with the mandate to liberally construe the CIAL, led the Appellate Division to conclude that a county improvement authority such as the MCIA does not qualify as a county or municipality or agent of either for purposes of the MMLL or any other law. Id. As such, the Appellate Division held that MasTec’s Municipal Lien was invalid and affirmed the trial court’s dismissal of MasTec’s lien foreclosure complaint. Id. at *13.

In response to the MasTec decision, will subcontractors and suppliers adjust their pricing on county improvement authority projects? Will they attempt to negotiate for guarantees, shorter payment terms, or broader rights to suspend or terminate—or perhaps even avoid bidding on projects? The extent of MasTec’s impact on these projects remains to be seen, but that it will have some impact seems inevitable.

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Reprinted with permission from the April 27, 2020 issue of the New Jersey Law Journal. © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.