T wo recent cases shed light on the effect of will then determine - PDF document

G Construction Alert July 2004 New Reasons Why Potential Lien Claimants May Want to File A Notice of Unpaid Balance By Adrienne L. Isacoff, Esq. T wo recent cases shed light on the effect of will then determine whether the NUB met the filing a Notice of Unpaid Balance technical statutory requirements and, if so, the (“NUB”), a tool that is rarely used by amount for which a lien may be filed. claimants filing liens under the Construction Lien By contrast, with respect to commercial projects Law i (“CLL”). The holdings in Schoonover Electric the CLL makes the filing of a NUB optional and, Co., Inc. v. Enron Corp and Garden State Paper even if filed, service on the owner and/or Company, LLC , (“ Schoonover Electric ”) ii , and contractor is not mandatory. As a result of this Sovereign Bank v. Silverline Holdings Corp. , flexibility in the statute, few potential lien (“ Sovereign Bank ”) iii may provide added incentive claimants on commercial projects avail themselves for potential lien claimants to take this extra step of this option. The recent case law on this issue to insure additional protection under the CLL. may cause potential claimaints to file NUBs even before payment problems emerge. The Requirements to File a NUB under the CLL The Schoonover Electric case turned on whether Under the predecessor to the CLL, the a construction lien on the property of a debtor in Mechanic’s Lien Law, lien claimants on all projects bankruptcy is enforceable against a bona fide were required to first file a Notice of Intention. purchaser of the property subject to the lien. Enron The CLL has a similar, but not identical provision - had filed a voluntary petition for bankruptcy on the NUB. The information contained in the NUB December 2, 2001 and Garden State had filed a is essentially the same that is included in a lien petition on December 17, 2001. Schoonover filed claim, and it may be amended as more work is three liens under the CLL on December 18, 2001 performed or if partial payment is made. Under the against Garden State’s assets. The issue before the CLL, in the case of residential projects, a NUB Bankruptcy Court was whether the CLL would must be filed with the clerk of the county where permit Schoonover to perfect its liens when the work has been performed prior to filing a lien. iv another entity had acquired an interest in Garden The NUB is served on the owner and contractor State’s property prior to the date the liens were and, simultaneously, the potential lien claimant filed, under certain exceptions provided by the must file a demand for arbitration with the Bankruptcy Code. v In analyzing the case, the American Arbitration Association. The arbitrator Bankruptcy Court emphasized that under Section This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G 10 of the CLL a lien claimant does not obtain an The effect of this ruling may lead contractors interest in the property until he or she has actually and suppliers to file NUBs in order to preserve their filed a lien, nor does the lien attach to an interest lien rights, especially if they have any concern that first recorded by a bona fide purchaser. The sole the owner of the property may file for bankruptcy. exception to the priorities established by Section 10 Only by filing the NUB will the potential lien is found within Section 20 of the CLL. That claimant preserve its priority over subsequent Section provides that: purchasers of the property. A lien claim validly filed under this act The holding in Sovereign Bank gives further shall have priority over any prior support for the proposition that potential lien creation, conveyance, lease or mortgage claimants on commercial projects may want to of an estate or interest in real property, exercise their option to file a NUB. Defendant only if the claimant has filed with the Silverline, a developer, entered into a mortgage and county clerk prior to that creation, construction loan agreement with Sovereign. The conveyance, lease or mortgage, a Notice mortgage was recorded on February 4, 2000. A of Unpaid Balance and Right to File construction lien filed by a contractor against the Lien. property was recorded on October 26, 2001. Upon default of the loans from Sovereign by Silverline, The Bankruptcy Court reiterated that Section the lender commenced a foreclosure action against 20(a) specifies that, in the event a NUB is filed, a Silverline, naming the contractor as a defendant as subsequently filed lien claim will relate back to the the result of its lien. It then moved for a filing of the NUB such that the lien claimant determination that its mortgage had priority over obtains priority over intervening bona fide the construction lien claim. purchasers. If the NUB is not filed, there is no relation back and the lien will not be effective The lien claimant took the position that, even if against bona fide purchasers who acquire an the mortgage was first recorded, Sovereign still had interest in property prior to the filing of the lien to demonstrate that the funds secured by the claim. vi The Bankruptcy Court rejected mortgage had been utilized for a statutorily Schoonover’s argument that its liens should relate specified purpose in order for it to maintain its back to date of commencement of its work, stating priority position. The contractor argued that if the “[t]he mechanism for the filing of a NUB is funds were misused, then the construction lienor required precisely because liens do not relate back assumed priority. The statutory provision upon to the commencement of the service period, but which the lien claimant relied for this proposition is rather attach at the time of filing.” vii Section 22 of the CLL which provides, in relevant part, that “[e]very mortgage shall have priority … over any lien which may be established by virtue of

G this act to the extent that the mortgage secures The Court further noted that if a NUB is funds which have been applied to” various recorded prior to a mortgage, then, under Section enumerated purposes, including the payment of: 22, “[i]t is only when the construction loan proceeds are misused that the holder of a NUB or a a. the payments of amounts due to any holder of a first-filed construction lien would retain claimants who have filed a NUB; its priority.” viii b. the payment or the securing of payment The bottom line is that filing a NUB will not of all or part of the purchase price of the automatically give a lien claimant priority over a land covered thereby; later-filed mortgage. However, it may provide such c. the payment of any valid lien or priority if the construction loan proceeds were encumbrance which is, or can be misused. Without the NUB, the lien claimant established as, prior to a lien provided completely loses its chance to take priority. for by this act; d. the payment of any tax, assessment or other State or municipal lien or charge Conclusion due or payable at the time of such The Schoonover Electric and Sovereign Bank payment; cases make it clear that there are advantages to and several other applications. filing a NUB that are often overlooked by contractors. Too often, contractors and subs skip The lien claimant argued, in essence, that the step of filing a NUB, wait until the owner or Section 22 should be interpreted to mean that contractor has fallen behind in payment, and then every mortgage shall have priority over any lien scramble to file a lien before the 90-day period from which may be established by virtue of this act only the last work performed has expired. It is better to the extent that the mortgage secures funds practice to file a NUB early in the job. The NUB which have been applied to the specified purposes. need not be served on the owner or contractor. The Court noted that Section 10 and Section 22 Simply by recording it, the NUB will provide of the CLL must be read together. As discussed priority against bona fide purchasers in the event of above, Section 10 provides priority to all first-filed the owner’s bankruptcy and, possibly, against mortgages over subsequently filed construction subsequently filed mortgages. That simple step may liens unless a NUB has been filed pursuant to make all the difference in successfully collecting on Section 20. Since the lien claimant had recorded a valid claim. its lien after Sovereign had recorded its mortgage and had not filed a NUB, Sovereign’s mortgage had automatic priority and Section 22 never came into play.

G If you have any questions regarding this or any other i N.J.S.A. 2A:44A-1 et seq . construction law issue, please call Steven E. Brawer, ii In re Enron Corp., et al. , No. 01- Chair of the Construction Law Practice Group, at 16034,consolidated with Schoonover 973-597-2412 or sbrawer@lowenstein.com, or Electric Co., Inc. v. Enron Corp. and Adrienne L. Isacoff, Counsel to the Construction Law Garden State Paper Company, LLC , No. Practice Group, at 973.597.2596 or 02-02140 (Bankr. S.D.N.Y. 2003). aisacoff@lowenstein.com. iii Sovereign Bank v. Silverline Holdings Corp. , Superior Court of N.J., Appellate Division, A-3117-02T5 (decided March 23, 2004) iv N.J.S.A. 2A:44A-20. v 11 U.S.C. Section 546(b). vi Schoonover at 13-14. vii Schoonover at 14. viii Sovereign Bank at 12.