In a recent post, we discussed how New York courts will rarely (although sometimes do) summarily dismiss exaggerated mechanics liens. However, in a recent case, Neptune Estate v. Big Poll & Son Construction, L.L.C., a New York Supreme Court took the issue of an exaggerated lien one step further in answering the question: If a general contractor or subcontractor files a fictitious mechanics lien, can a property owner not only have the lien declared void but also sue the contractor for damages?
What is a Fictitious Mechanics Lien?
The New York Supreme Court in Neptune reasoned that the following factors indicate a fictitious mechanics lien:
- The lienor is claiming it is owed money for work that the property owner can show the lien or never performed.
- Similarly, the lienor makes no distinction between work for which it was already paid and work for which it is claiming unpaid invoices.
- The lienor is claiming money over which it, not the property owner, had control. For example, in Neptune, the property owner was able to show that IVM, the party filing the lien, controlled the bank account for the entire project and that any disbursement were made by IVM, not the property owner.
- The party against whom the lien was filed can show that the lienor knew it was filing its lien against the wrong property (i.e., a party who was released from the construction project eight months before the lien was filed) yet filed the lien against that party anyway.
- The lienor “intentionally incorporated inflated claims and false work completion dates.”
Intentionally incorporating inflated claims and false work completion dates in a lien indicates a fictitious mechanics lien
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How a Fictitious Mechanics Lien Can “Injure Property”
If you’ve ever considered filing a mechanics lien with levelset, you may have checked out our page which describes 17 great ways a mechanics lien helps get you paid. On that list, Number 11 (Mechanics Lien Will Effectively Freeze Money Flow on the Project) and Number 15 (Mechanics Lien Claims May Affect A Contractor’s Bonding Ability) are particularly relevant in this case.
In Neptune, both the flow of money was frozen and the contractor’s bonding ability was hindered. First, Neptune’s lender, Brooklyn Federal Savings Bank, refused to release any more money from its loan to Neptune for seven months while Neptune fought the initial lien claim. Second, Neptune had to find a second surety (which charged Neptune much higher interest rates) because its first surety refused to pay any claims on the property. In total, Neptune claimed more than $325,000 in damages as a result of the fictitious lien filed against its project.
Under New York law, injury to property is “an actionable act, whereby the estate of another is lessened …” In this case, Neptune argued in a somewhat novel fashion that by filing a fictitious lien against its property, IVM injured the value of its estate because work was stopped for seven months and Neptune had to expend several hundreds of thousands of dollars to continue on its project. Although there are some cases that demonstrate a fictitious lien can injure property, other cases seemed to indicate the exact opposite.
Is Wrongfully Filing a Fictitious Mechanics Lien Actionable Under New York Law?
Under Neptune, the short answer is “yes.” Since the property owner was able to a variety of factors – including the fact that IVM inflated its claims, made up completion dates, claimed money on work it never performed, and knowingly filed the lien against the wrong party – the court held that Neptune could recover any damages resulting from IVM’s wrongfully filed fictitious lien.
Like most arenas of law, however, a better answer would be “maybe.” As we know from cases such as On the Level Enterprises v. 49 East Houston, even demonstrating that a lien is exaggerated is a tall order for property owners.
The burden is even greater for property owners who are seeking damages from fictitious liens because the owner must show that the lienor wrongfully filed the lien intentionally. Property owners who are seeking damages from fictitious liens must show that the lienor wrongfully the lien intentionally. Demonstrating intent is one of the hardest elements to prove because the opposing party – in this case, a general contractor or subcontractor – can always claim that it did not intend to file a fictitious lien.
Still, in Neptune, the evidence so overwhelmingly showed that IVM wrongfully filed a fictitious lien against Neptune that the court held that IVM did so intentionally. While on one hand the result in Neptune opens the door for counterclaims property owners may have against subcontractors who wrongfully file mechanics liens, it is not clear exactly what evidence owners will have to present in order to have an actionable fictitious lien claim.