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Kvaerner Process, Inc. v. Barham-McBride Joint Venture

368 N.J. Super. 190, 845 a.2d 692 (App. Div. 2004)

CONSTRUCTION LIENS—A construction lien claimant has the burden of establishing its claim, but a discovery right to aid it in doing so.

Subcontractors filed a construction lien pursuant to the Construction Lien Law (Act). The general contractor on the project alleged that the lien was defective and sought an order both discharging the lien claim and barring the subcontractors from filing any further liens arising out of the same work. Specifically, it argued that the lien claim was “defective, willfully overstated, and in substantial violation of N.J.S.A. 44A-2, and that the amount greatly exceeded the agreed upon contract price, which was misstated in the construction lien claim.” The general contractor denied that there was a substantial balance owed as alleged in the lien claim. Furthermore, the general contractor claimed that the subcontractors had previously filed another lien claim and that it had been dismissed. Based upon the earlier dismissal, it argued that the current lien claim demonstrated the subcontractors’ willful violation of the Act.

The lower court held a plenary hearing limited to the issue of whether the subcontractors could support the amount of the lien. When it concluded that the lien lacked a reasonable basis, the lower court discharged it, noting that it was not possible to determine the exact amount owed to the subcontractors. The lower court felt that the question would be answered in a parallel action pending in federal court where the subcontractors were seeking damages on a breach of contract claim. Although the lower court found that the transactions between the parties qualified for a construction lien, it also ruled that the subcontractors had not proved either the amount claimed in the lien or that the general contractor owed any additional funds. Essentially, it felt that the invoices offered by the subcontractors were insufficient and that the lien was overstated by at least $200,000, $22,000 of which was legal fees which the subcontractors included even though they knew that their contract did not provide for attorneys’ fees. Accordingly, the lower court held this to be evidence of bad faith. That is why it held the lien was willfully overstated and without basis. The Court also awarded the general contract or counsel fees pursuant to N.J.S.A. 2A:44A-15.

On appeal, the subcontractors argued that the lower court improperly placed the burden of proof on them and wrongly denied their discovery request. The Appellate Division pointed out that N.J.S.A. 2A:44A-15a provides the forfeiture of lien rights if a lien claim is without basis, or if its amount is willfully overstated, or if it had not been properly filed. It also makes the claimant liable for all court costs and attorneys’ fees incurred by a defending contractor or owner.

The subcontractors contended, however, that the remedy sought by the general contractor was not one of the remedies in the Act available to a contractor. The Court, disagreed, holding that nothing in the Act indicated that its remedies were exclusive to a property owner as opposed to a general contractor. Also, the Court held that as a property owner’s representative, a general contractor, should have the same opportunity as an owner has to seek relief.

The Court also rejected the subcontractors’ argument that the lower court misallocated the burden of proof. A lien claimant is required to establish its claim. Therefore, it is required to shoulder the burden of proof to justify its claim.

The subcontractors also contended that they were prejudiced by the lower court’s limitation of discovery to evidence that there was a contractual basis for the amount of the lien claim. They argued that they were prejudiced because the general contractor was contending there was no written contract amendment that increased the target price of the contract. According to the subcontractors, they should have been able to discover the existence of other documents that would have supported its claims to the contrary. The lower court felt that discovery should not extend to any evidence of the validity of the contract because that was already the subject of the federal court action. The Appellate Division disagreed, holding that the subcontractors were entitled to as much discovery as was needed to respond to the general contractor’s arguments. Essentially, if the subcontractors were required to establish the lien claim, they were entitled to discovery as to every contention the general contractor was advancing to challenge the lien claim. Therefore, the Court remanded the matter so that discovery could be completed.

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