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Foulke v. Staval, Inc.

A-3010-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

CONSTRUCTIONS LIENS — Even if a construction lien turns out to be unenforceable, if the parties, without committing fraud, had previously agreed to a settlement involving payment of the lien, that settlement agreement will be upheld.

Buyers contracted with a developer to purchase property and a home being constructed by the developer. The developer hired a contractor to install kitchen cabinets, vanities and countertops, and the contractor filed a construction lien when it completed the work. Unbeknownst to the contractor, there was a technical error in the lien’s filing that precluded its enforcement.

After the buyers contracted to buy the property from the developer, the developer defaulted on its building loan. As a consequence, the property was encumbered with liens and mortgages, including the construction liens filed by the contractor and others. Before closing, a title insurance company advised the buyers that it appeared that the liens on the property likely exceeded the price they had agreed to pay. The buyers sued the developer, but received no relief. They then hired an attorney to negotiate payments that would satisfy the creditors and allow them time to decide whether to proceed with the closing.

The attorney, unaware of the invalidity of the lien, wrote to the contractor’s attorney with an offer in exchange for release of the lean. The contractor accepted on the condition that the debt be treated equal to the other creditors. After this, but before closing, the buyers obtained an updated title search and discovered that the lien was invalid for failure to file a notice of unpaid balance in accordance with New Jersey law. Because the buyers proceeded to closing without obtaining a release, the amount due on the lien was held in escrow. A week later, the buyers wrote to the contractor requesting a discharge and advising of the buyers’ intention to commence litigation to discharge it. The contractor replied that the two had formed a binding and enforceable agreement.

At trial, the lower court invalidated the lien but still enforced the settlement agreement. On appeal, the buyers objected to the lower court’s conclusions on the adequacy of consideration, the apparent authority of their attorney, and a bar against enforcement of the contract attributable to the construction lien law. The Appellate Division found these arguments to be without sufficient merit to warrant comment. The Court observed that the contractor’s response was an acceptance of the material terms offered by the buyers and essentially reiterated the condition precedent proposed by the buyers – successful negotiations of reduced payments with other creditors. The buyers’ claim of mutual mistake over the validity of the lien was also rejected because they were not adversely impacted by the mistake because they could not have expected to receive more than the difference between the lien amount and the settlement amount unless they actually knew about the invalidity.

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