Nearly two years ago, The Construction Payment Blog asked the question: “Does the Green Building Industry Have Fewer Mechanics Lien Rights?” This is a complex question, and one with no set answer. In the case examined in the linked article, the question was whether or not a solar panel installation constituted a “permanent improvement” for the purposes of mechanics lien attachment. That New York court determined that it did not, and limited the availability of mechanics liens for that type of project. A recent case in New Jersey has also limited lien rights related to the installation of solar arrays, but in an entirely different manner, and for a different type of project.

Project Type Is The First Hurdle To Recovery

In the recent New Jersey case at issue, the project giving rise to the lien claim involved 71 different solar facilities in 3 counties. Nearly $90 million in municipal bonds were issued for the project, with the developer/operator to cover the balance of the project costs. The receipt of public funds does not necessarily mandate a determination that the project is a public project, especially when there is some sort of public private partnership and/or a question of ownership of the underlying property. Because the real property on which the solar installations were constructed in this case was publicly owned, the project was, at least, for some purposes a public project subject to New Jersey’s “Municipal Mechanics Lien Law”.

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Project-type classification is important because it determines whether the appropriate avenue for recovery is a mechanics lien, or a bond claim (or municipal lien on funds). Even what seems to be a relatively straightforward determination can be problematic, however. In this case, Sunlight (the developer/operator) was defined as the “owner” of the solar projects for federal tax purposes. It would be relatively easy for a potential lien claimant to take this information, coupled with the knowledge that Sunlight was to cover 30% of the project cost, and determine that the project was at least partially commercial. And, to some extent, that claimant would be correct.

Project-type classification is important because it determines whether the appropriate avenue for recovery is a mechanics lien, or a bond claim (or municipal lien on funds). In the recent New Jersey case, the lien claimant determined the project was public, and filed a municipal lien against the project funds not yet paid to the developer/operator. When that claim was denied, a classic mechanics lien (construction lien) was filed against the interests of the developer/operator – which was denied as well.

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Recent New Jersey Case

Municipal Mechanics Lien

As noted above, in the recent New Jersey case, both a municipal mechanics lien (public project lien on finds) and a “classic” mechanics lien were filed, and both were denied. The reasons for the denials were different in the trial court and the appeal court, and also differed according to the claimed lien. The result reached was interesting, and merits a brief discussion.

The municipal mechanics lien was originally denied by the trial court because the trial court determined the lien claimant was not a subcontractor, and therefore not a party protected by the municipal mechanics lien statutes. In order to qualify for that protection, a lien claimant in New Jersey must be a “laborer, mechanic, materialman, merchant, trader, or subcontractor” as defined by NJSA 2A:44-126. That statute defines a subcontractor as a

person having a contract under a contractor for the performance of the same work or any specified part thereof . . .

The trial court determined that the lien claimant (“Mastec”) was a general contractor, and not protected, because the type and manner of the work performed was that of a contractor, not a subcontractor. This was, correctly, overturned by the court of appeals. Because Mastec had a contract with the developer/operator (who was not the owner) Mastec was properly a subcontractor, despite the nature of the work performed. It makes no difference if they were to do the same work that the developer was contracted to do, the only thing that matters is the contractual relationship.

Specifically, the County Improvement Authorities Law holds that the property of a county improvement authority is exempt from judicial process. Since a municipal mechanics lien is only enforceable through judicial process – it is unenforceable as a matter of law. Despite this, however, the court of appeals still held that Mastec’s municipal lien claim was invalid, and the reasoning potentially has significant impact. The court determined that no enforceable protection existed for Mastec under the Municipal Mechanics Lien Law because the County Improvement Authorities Law (NJSA 40:37A-44 et seq.) directly contradicted. Specifically, the County Improvement Authorities Law holds that the property of a county improvement authority is exempt from judicial process. Since a municipal mechanics lien is only enforceable through judicial process – it is unenforceable as a matter of law.

This is an interesting, an potentially disturbing, result. The municipal mechanics lien (lien on project funds) is an instrument specifically tailored to provide security on public projects on which a “classic” mechanics lien cannot attach. This decision seems to completely cut off the ability to file a valid municipal lien on any project on which a county improvement authority is a party. Given the clear purpose of the Municipal Mechanics Lien Law, it seems a more reasonable approach would be strictly defining the “property” of a county improvement authority immune to judicial process as “real property”, rather than any property. Changing the statute to include a precise definition is the legislature’s job, but the court in this case may have had an opportunity to read that definition into the statute as written, and maybe should have.

Given the clear purpose of the Municipal Mechanics Lien Law, it seems a more reasonable approach would be strictly defining the “property” of a county improvement authority immune to judicial process as “real property”, rather than any property. The inclusion of the terminology in the County Improvement Authorities Law that the property of the authority “shall be exempt . . . from levy or sale” could be read to mandate that the property be real property, or at least property that must be sold to provide cash for debt incurred. This interpretation may have more weight given the fact that the statute also specifically considers and endorses the ability of the authority to give a pledge or lien on its “revenues or other moneys”. While the court would need to determine whether a municipal mechanics lien is given by the authority, and whether the lien is specifically on the authority’s money or the general contractor’s money, there is a colorable argument that the County Improvement Authorities Law is not in direct conflict with the Municipal Mechanics Lien Law such that municipal mechanics liens on projects contracted by a county improvement authority are invalid.

“Classic” Mechanics / Construction Lien

After the its municipal lien was invalidated by the trial court, Mastec filed a mechanics lien against the interests of the developer/operator. This lien claim was also denied by the appeals court. In New Jersey, a mechanics lien attaches solely to an interest in real property, which is defined as:

any ownership, possessory security or other enforceable interest, including but not limited to, fee title, easement rights, covenants or restrictions, leases and mortgages.

In this case, Mastec was attempting to lien a “lease” interest of the developer/operator. There was a lease agreement between the counties and the developer/operator, but that “lease”, while providing the ability to draw on project funds, was not anchored in any interest in real property. Apparently, the property on which the solar installations were developed itself was not leased to the developer/operator, but the project funds to construct an implement the project were. Because the funds did not constitute real property, the developer/operator had no interest in real property of the project to which the mechanics liens could attach. And, therefore, the claimed mechanics liens were invalid.