Lien Law is not for the Benefit of Property Owners

On May 7, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in 514 W. 24th Owner LLC v. Pryor, 2019 NY Slip Op. 31300(U), holding that a property owner cannot base a claim on the Lien Law, explaining:

Article 3-A of the Lien Law establishes a comprehensive series of trusts to ensure that monies an owner or contractor receives for a construction project are used to pay contractors and subcontractors. A statutory trust is created for funds received in connection with improvements to real property and either the owner of property or the general contractor on the project is a fiduciary over this statutory trust. Subcontractors, as beneficiaries of the statutory trust, may make claims against the trust for work performed. If, prior to payment of all claims brought by subcontractors against the trust, funds are used for purposes unrelated to the project, there is a diversion of trust funds and a corresponding breach of fiduciary duty. For example, where subcontractors have not been paid for their work they may assert a cause of action against an owner or general contractor for diversion of Lien Law trust funds.

Thus, Article 3-A of the Lien Law creates trust funds out qf certain construction payments or funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as specified taxes and expenses of construction.. We have repeatedly recognized that the primary purpose of article 3-A and its predecessors is to ensure that those who have expended labor and materials to improve real property or a public improvement at the direction of the owner or a general contractor receive payment for the work actually performed..

As the Lien Law makes clear, the purpose of the Lien Law was to ensure that subcontractors get paid for their work without necessarily having to resort to the filing of a mechanic's lien on the real property. Thus, beneficiaries of the Lien Law are primarily subcontractors who have not been paid by owners or general contractors for work done on real property.

Plaintiffs seek to flip the purpose of the Lien Law on its head by claiming that they, as real property owners, are beneficiaries under the Lien Law. However, Lien Law § 71 identifies those considered trust beneficiaries, and owners of property are not included as beneficiaries under the statute. The only potentially applicable exception to this rule provides that owners who enter into a home improvement contract with a home improvement contractor can be trust beneficiaries. This is clearly not the case where, as here, Plaintiffs are owners of a large, multi-unit condominium development.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.