Brilliant Strategy Preserves Willful Exaggeration Claim
When a party is found to have filed a willfully exaggerated mechanic’s lien, it can be liable for damages which include the amount by which the lien was exaggerated. While liens are not frequently found to be “willfully” exaggerated (an innocent, good faith overstating of a lien amount is not actionable) the fear of having to pay in damages the full amount of the deliberately overstated amount (plus bonding premiums and attorney’s fees) can be a very severe penalty.
But those damages can only be recovered where a court determines that the lien is willfully exaggerated. If the lienor decides to discharge its lien, or discontinue its cause of action for lien foreclosure, even at the eleventh hour, the court loses the power to find the lien to have been exaggerated and the other party loses its chance to recover any damages resulting therefrom. This has always been a win-win game for a lienor. It can push the envelope by increasing the lien amount, and if it ever comes close to being hit with damages for willful exaggeration, it can withdraw its lien at the last minute with impunity. Until now.
In a recent case in the Supreme Court on Staten Island, a subcontractor filed a series of liens totaling over $4 million and commenced a foreclosure action to enforce them. The contractor bonded the liens (at a cost of tens of thousands of dollars in premiums) and asserted counterclaims for willful exaggeration, seeking recovery of the full amount of the lien overcharge, as well as attorney’s fees and bonding costs. At the last minute, the subcontractor filed Releases of Lien and dropped its foreclosure cause of action (continuing on with the non-lien-related claims).
In a clever move, the contractor asked the court to leave the subcontractor’s liens in place—i.e., to void the filing of the Releases of Lien—but to reduce them from over $4 million to $0. The contractor also opposed the subcontractor’s efforts to discontinue its lien foreclosure action. For good measure, the contractor sought to join the president of the subcontractor, individually, as a party in the action, so he could be held personally liable for the willful exaggeration damages. The court granted the contractor’s motions.
In essence, the contractor was put in the odd position of advocating the lien it challenged and maintaining the lien foreclosure action against it, just so it could preserve its counterclaim for willful exaggeration. It was a gutsy move, but the risks were mitigated by having the court reduce the amount of the liens to $0.
It was a smart strategy that turned the tables on the subcontractor—converting what it may have thought was a “win-win” into a potential “lose-lose.”
Further information on mechanic's liens can be found on our blog:
Liening for Unbilled Work and Unsigned Change Orders
Willful Exaggeration of a Mechanic's Lien - Only Established at Trial