Subcontractor Lien Claims “Salvaged” in New Jersey

Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner $250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.