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Craft v. Stevenson Lumber

179 N.J. 56, 843 A.2d 1076 (2004)

CONSTRUCTION LIENS—A material supplier has a duty to determine which of a contractor’s projects is the source of its payments and to allocate those payments properly; otherwise, it can’t impose a construction lien on an owner’s property for unpaid bills.

A property owner hired a contractor to build a home. The contractor, in turn, bought construction supplies from a lumber company. The owner paid the contractor for labor and materials when payments were due. When the contractor paid the lumber company, including for supplies used for the construction of the owner’s house, it never specified for which of its multiple projects its payments were intended. As a result, the lumber company applied the payments to the contractor’s oldest outstanding invoices. The contractor stopped working on the owner’s home after having been paid a substantial amount. The contractor’s principal then filed for bankruptcy, and the contractor quickly became insolvent. The lumber company then filed a Construction Lien Claim against the owner’s property. In response, the owner filed a complaint demanding dismissal of the lien claim. The parties filed cross-motions for summary judgment and a lower court ruled in favor of the lumber company.

The owner appealed, challenging the legitimacy of the lien claim and denying the existence of a lien fund. The Appellate Division affirmed the grant of summary judgment, and held that the innocent owner was obligated to bear the financial burden caused by a defaulting contractor, even though the owner had paid its contractor in full, and even though the owner didn’t know that its contractor had outstanding accounts with its supplier.

On further appeal, the New Jersey Supreme Court reversed, holding in favor of the owner. According to the Court, a supplier has a duty to determine which of a contractor’s projects is the source of its payment and to allocate the payment accordingly. Since the lumber yard had failed to do so, and since it was unable to verify the existence of a debt as required under the Construction Lien Law, no lien claim against the owner’s property could be filed. As to the existence of a lien fund, the amount available to satisfy a lien is determined by subtracting an owner’s payments made from the “total contract price.” When a contractor walks off a job and has been paid to date, there is no lien fund because no money is owed by the owner to its contractor.

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