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AEG Holdings, L.L.C. v. Tri-Gem’s Builders, Inc.

347 N.J. Super. 511, 790 A.2d 954 (App. Div. 2002)

CONSTRUCTION LIENS; PRIORITY — The amount remaining unpaid by an owner to a general contractor is the lien fund that a subcontractor may look toward and an owner may not reduce that fund by the amount it needs to pay a replacement contractor to finish the work.

An owner entered into an agreement with a general contractor to construct an addition to its property. The general contractor, in turn, hired a subcontractor for certain work. The owner paid a substantial amount to its contractor. Without paying anything to its subcontractor, the contractor filed for bankruptcy. The subcontractor filed a construction lien for the substantial amount which was undisputably owed to it for the work it had performed. Under the Construction Lien Act, subcontractors are entitled to liens for the value of the work or services performed “in accordance with the contract and based upon the contract price.” Such liens are subject to two further provisions of the Act. One limits the amount of the lien claim to “the contract price, or any unpaid portion thereof, whichever is less, of the claimant’s contract for the work, services, material or equipment provided.” The other provides, in part, that a lien claim “shall attach to the interest of the owner from and after the time of filing of the lien claim.” Together, those two provisions limit the property owner’s liability to a subcontractor “to the rest of what remains unpaid on the prime contract or on the subcontract, prior to receipt of the lien claim.” The lower court calculated the difference between the amount that the owner had contracted to pay the general contractor and the amount it had actually paid the general contractor and awarded the entire difference to the subcontractor. Even though this amount did not fully pay the subcontractor, it represented the entire “lien fund.” The owner argued that its general contractor “left the job without significant work being completed and, therefore, [it would] have to pay additional sums to others to have the job finished.” Under that argument, if the owner were required to pay the entire difference between what it had already paid its general contractor and the contract price, it would end up paying more than the original total contract price. In essence, the owner argued that it should be first permitted to have its project finished and then, if money were left over, it could be used to satisfy the subcontractor’s claim. The Court rejected that argument. It thought that such an interpretation would run “counter to the legislative policy reflected [in the construction lien law].” Specifically, it held that the owner’s “interpretation of the law protects property owners, but it does not protect lien holding subcontractors.” If the owner’s argument were correct, and if there were multiple subcontractors on a job, it could be possible that the property owner would owe nothing to any of them “so long as the property owner had paid the contractor more than the amount owed to any one of the individual subcontractors.” As to the owner’s argument that it was being forced to “pay twice,” the Court said that when earlier courts had held that property owners should not be made to pay twice, it meant only that a property owner was “never subject to liens in an amount greater than the amount unpaid by the owner to its prime contractor at the time the lien claim is filed by one claiming a lien through that prime contractor.” The Court considered that what the property owner had done was to allow its payments to the general contractor get ahead of the work actually performed. Consequently, when the general contractor abandoned the job, the owner “had to pay someone else to do the work [that its original contractor] should have done in the first place. ... That may not be fair to [the owner] but leaving an innocent subcontractor without any payment is too high a price for correcting the inequity placed upon the property owner.” In essence, the Court felt the law never “intended to permit a property owner to defeat a supplier’s [or subcontractor’s] potential lien claim by either knowingly or negligently advancing payments to its prime contractor that were not yet due under its contract.”

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