A mechanics lien is an incredibly powerful tool to ensure payment on a construction project. Given how effective they are, they must be kept in check to avoid any frivolous claims. One way the state of New York has tried to keep these claims from getting out of hand is by providing owners with the ability to request an itemized list of labor and materials provided known as a Section 38 or itemized statement demand. Lien claimants who receive such a demand should be prepared to respond to these requests. Failing to do so can result in losing the entire lien claim!
NY Lien Law Section 38: The itemized statement demand
New York mechanics lien laws provide an interesting mechanism for property owners to verify a lien filed on their property. When confronted with a lien filed on their property, NY owners can request additional documentation to prove the validity of the claim. This right can be found under NY Lien Law §38, entitled “Itemized Statement May be Required of Lienor.”
Requesting an itemized statement
The pertinent part of this statute states:
A lienor who has filed a lien shall, on demand in writing, deliver to the owner or contractor making such demand a statement in writing which shall set forth the items of labor and/or material and the value thereof which make up the amount for which he claims a lien, and shall also set forth the terms of the contract under which such items were furnished.
Let’s break this down into simpler terms. This section says that, when a property owner or contractor is facing a lien, they have the right to demand proof. If proof is demanded, the contractor or supplier who filed the lien must provide an itemized list of the labor and materials the lien amount is based on, along with the value of each one.
This is essentially a way for a property owner or GC to challenge an exaggerated NY lien claim. Those who are faced with such a demand should be sure to respond to the request, or lose their lien rights.
Failure to provide an adequate itemized statement
The statute further states the penalties for non-compliance with the demand. It states that:
Failure to comply within 5 days, or if delivers an insufficient statement, the requesting party may petition the court… for an order directing the lienor within a specified time to deliver the statement.
Once this court order has been made, and the lienor still fails to comply or provides an inadequate statement, the court can make an order canceling the lien. Clearly, a violation of this order can lead to some incredible financial hardship, and that’s exactly what happened in a recent dispute.
Section 38 demand cost a contractor $1.2M
Smith, Gambrell, and Russell wrote about the case New York Red Hook 160, LLC v. 2M Mechanical, LLC, dealt with such a demand and showed how severe the consequences could be for failing to comply.
Red Hook 160, LLC (Red Hook), had a mechanics lien filed on their property by 2M, LLC (2M) in the amount of $1,200,000. In response to this, Red Hook sent a Section 38 demand for an itemized list of the labor and materials forming the basis of the claim. Which makes sense, given the amount. 2M initially refused to provide this list, so Red Hook petitioned the court to order 2M to comply.
In response to this request, 2M provided a one-page document simply listing the submitted pay applications, which totaled the amount claimed in the mechanics lien. Red Hook argued that the list wasn’t sufficiently itemized to meet the requirements under §38, and the court agreed.
The result? 2M’s mechanics lien was canceled by the court.
Fun extra fact: Apparently, 2 days after the lien was vacated, 2M attempted to file a lien for the same amount against Red Hook. This 2nd lien claim, as you may have guessed, was also dismissed!
Takeaways for NY contractors and suppliers
The lessons learned here can be useful for both property owners and subcontractors filing mechanics liens against a New York work of improvement. Property owners can employ this incredibly useful (and rarely used) tactic when faced with a mechanics lien. Not only to evaluate the amount claimed but to potentially dismiss the claim if the contractor doesn’t comply.
Prepare for the Section 38 defense
This wasn’t the first time that Red Hook 160, LLC used Section 38 of New York Lien Law to defend themselves against a lien. (And after winning a battle over $1.2 million, it probably won’t be the last.)
Just two months before, another subcontractor – Borough Construction Group, LLC – filed a $2.5 million mechanics lien against Red Hook. In that case as well, Red Hook filed an itemized statement demand.
A JDSUPRA article details what Red Hook did next:
BCG supplemented its statement with “voluminous records,” yet Red Hook asserted that the itemization provided remained deficient and requested that the Supreme Court of New York either require further itemization of the lien or discharge the lien.
It was an understandable gamble on Red Hook’s part. If their request succeeded, they could potentially get out of a $2.5 million payment.
But in that case, the court sided with BCG, saying that they provided sufficient itemization. The court denied Red Hook’s request for additional itemization or a discharge of the lien.
Respond quickly and accurately to an itemized statement demand
From the contractor/supplier perspective, this is a hard lesson learned in statutory compliance. Lien claimants in New York should be aware that filing a mechanics lien also comes with certain obligations. One of the obligations is to justify the amount they are claiming. Anytime a Section 38 demand is received, the lien claimant should take prompt action.
This list must be submitted in a timely fashion. Not only that, but it also must contain enough detail to justify the amount set forth in the claim.
The NY courts require that the itemized statement include:
- A description, the quantity, and the costs of all materials used,
- a detailed accounting of the labor performed, and
- the rate at which the laborers are being paid.
Failing to provide at least this degree of detail could expose you to huge financial risk.
Keep better records and pay applications
This stresses the importance of keeping detailed records and preparing a detailed schedule of values. There’s no reason a lien claimant shouldn’t be able to justify a claim – especially on a claim of this magnitude.
Furthermore, this also emphasizes the importance of submitting as much additional documentation as possible along with a payment application. In the construction industry, sometimes what is documented is more important than what actually happened. The more documentation and communication on a project, the more likely payment disputes, and challenges won’t pop up on a project.
Don’t give the property owner any reason to challenge your mechanics lien. However, if they do, be sure you have an accurate accounting of all costs to defend your claim. Or you may find yourself high and dry.