You have to love the law of the land. . . .

Thelen Reid Brown Raysman & Steiner LLP

Drawing attention to inequities in the New York Lien Law and calling for legislative reform, a New York Supreme Court recently considered itself bound by existing law to deny enforcement of a bonded mechanic's lien for materials supplied to a for-profit theatre project because the underlying land was owned by 42nd Street Development, a public benefit corporation, which is a subsidiary of New York State's Urban Development Corporation. Jersey Electrical Supply Co., Inc. v. MJR Electrical Contracting Corporation, Supreme Court, New York County, Judge York, November 2000.

Jersey Electrical furnished materials to a theater complex project being built by Loews, a major motion picture theatre developer, on 42nd Street in Manhattan but was not paid. The supplier filed a mechanic's lien for nearly $200,000. The mechanic's lien was discharged by a surety discharge bond posted by Loews. Jersey Electrical sought payment on the bond.

Loews had subleased the land from Dream Team Associates, LLC, a private entity, which in turn had leased it from 42nd Street Development and from the City of New York as fee owners.

The defendants moved to dismiss the mechanic's lien claims. Jersey Electrical argued that all transactions concerning the project were entered into solely by private parties and that ownership of the underlying land by a public entity under such circumstances should not prevent recovery on the bond.

The court acknowledged that Jersey Electrical's arguments were compelling but stated that the "law has not yet caught up to common sense." Citing New York Lien Law §2 (7), the court found that when land is owned by a public corporation, no mechanic's lien may be filed regarding it, even when the role of the public corporation is only "nominal." The only exception is when the public corporation is an "industrial development agency." Because 42nd Street Development was not an "industrial development agency," the limited exception was not applicable, and the mechanic's lien could not be enforced. Because the New York Legislature explicitly used the phrase "industrial development agency" in the exception and because a public benefit corporation and an industrial development agency generally are not interchangeable and were not interchangeable in this case, the Lien Law had to be interpreted as barring enforcement of the mechanic's lien.

The court also dismissed Jersey Electrical's claim for payment on the surety bond. The court noted that the order discharging the mechanic's lien from the real estate when the bond was filed required, as is normal in New York, that Jersey Electrical obtain a judgment nominally enforcing the lien against the real estate in order to recover on the bond. Also, §19 (4) of the Lien Law provides that a condition of the discharge bond is "the payment of any judgment which may be rendered against the property for the enforcement of the lien." Accordingly, the court ruled that because Jersey Electrical was legally barred from foreclosure on the real estate, it could not recover on the bond.

Jersey Electrical failed to name the City of New York as a defendant. Therefore, the court did not address the applicability of the Lien Law to a municipality and instead focused on 42nd street Development's status as a public benefit corporation.

This ruling should be of concern to materialmen, suppliers, subcontractors and contractors doing business in the State of New York with public development corporations, even when the particular project appears to be entirely private as here. Legal advice should be sought in such situations about ways to obtain or secure recovery in the event of nonpayment before signing contracts, subcontracts or material supply agreements.

Basically just another way for the State of New York it give it to you right in the ASS!