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The Perils of Filing a Willfully Exaggerated Mechanic's Lien

12/09/2014 | Winter 2014 Newsletter
Construction lawyers are well aware of the consequences which flow from the filing of a“willfully exaggerated” mechanic’s lien. New York Lien Law §§39 and 39-a provide that not only is such a lien held to be void, the lien or can be liable for the difference between the amount of the exaggerated lien and the actual amount due, plus the costs and attorney’s fees incurred in bonding or discharging the lien.

However, cases which actually find a lien to have been willfully exaggerated are so few and far between, that when one comes along, construction practitioners sit up and take notice.

One of the reasons for the scarcity of such cases is the high hurdle to proving “willfulness.” One must prove that the lienor knew, or had reason to know, that its lien was inflated. Mere error or negligence will not suffice to establish this intent. A good faith belief of one’s entitlement is generally sufficient to overcome the defense.

Moreover, it has traditionally been held by the courts that the only way one can enforce the defense is at the trial of a lien foreclosure action commenced by the lienor. In other words, if the lienor simply files the willfully exaggerated lien and lets it sit there (even if it renews it for a couple of years), there is little the owner can do to obtain damages for willful exaggeration so long as the lienor chooses not to start a foreclosure action and proceed to trial.

In a recent case, a contractor filed a mechanic’s lien in the sum of $295,000 against an owner for whom it had constructed a hair salon. The owner contended that the lien was willfully exaggerated, and therefore void, and asserted that defense in the lien foreclosure action commenced by the contractor. After discovery, the owner moved for summary judgment trying for an early determination of the invalidity of the lien, claiming there was no need for a trial on the issue.

The contractor, in an earlier Itemized Statement of its lien, could justify only $243,000, not the full $295,000. As a result, it then sought to amend its lien downward to the lesser amount. The Lien Law has a provision permitting the amendment of one’s lien, but it provides that in such case, “the question of willful exaggeration shall survive such amendment.”

Interestingly, the court did not require the parties to await the full trial. The court held that the lien was willfully exaggerated on the motion for summary judgment. This allowed the owner to obtain the dismissal of the lien significantly faster than if it had been required to await the full trial.

Of course, being able to meet one’s burden of proving that the lien was “inflated maliciously or with fraudulent intent” is a difficult task, especially on a motion for summary judgment. But where, as in the subject case, the lienor could not account for almost 20% of the amount it liened for, and made no effort to amend its lien until long after it started its foreclosure action, the court had no trouble finding the lien to be void.

The second interesting aspect of the decision is that the court essentially shifted the owner’s burden of proof back to the lienor — who alone had the knowledge to explain away the error —observing that the lienor “provide[d] no proof in admissible form to support its conclusion that such exaggeration was an honest mistake or subject to a bona fide good faith dispute regarding work performed.”

There are perhaps three lessons to be learned. First, this case may have opened the door a bit more to the possibility of establishing that inflated liens are willfully exaggerated — with all of the damages which flow from that. Second, it may provide support for seeking a more expedited determination of that issue in a proper case. Lastly, it warns a contractor of the perils of not carefully calculating the amount of its lien.

Consultation with an attorney familiar with the Lien Law can help contractors file valid and enforceable liens which will withstand challenge in court, and assist owners in effectively obtaining the dismissal of “willfully exaggerated” liens.

About the author: Randy Heller is a partner at Gallet Dreyer & Berkey LLP. His practice focuses on construction law and litigation, representing contractors and owners in construction related matters. Mr. Heller has been named a Super Lawyer by the New York Times Magazine as one of the top attorneys in construction law in the New York metropolitan area, and by New York magazine as one of the Best Lawyers of New York. Mr. Heller can be reached at rjh@gdblaw.com.