Kaufman Dolowich Voluck,
Attorneys at Law
Legal Counsel, STA
Commencing a Lien Foreclosure Action as a Condition Precedent to Suing the Prime Contractor
As we all know, a payment bond is required to be posted by a prime contractor for almost all public improvement projects in the state of New York. The payment bond serves as security for payment for work, labor and services performed by subcontractors and others. In addition to the payment bond, subcontractors have the right to file a mechanic’s lien or public improvement lien against the money to be paid to the prime contractor on public improvements.
Once a lien is filed, what do you do to get paid? The subcontractor has the right to sue on the payment bond and also sue on the lien. First and foremost, the subcontractor should always sue on the payment bond. The subcontractor can also foreclose on the lien in the same lawsuit. But is that a good idea? I don’t think so.
First, with a lien foreclosure action, the subcontractor must name all of the other subcontractors and sub-subcontractors in the foreclosure action. By doing so, the lawsuit will naturally take longer than a payment bond action because the only parties to the payment bond action are the subcontractor, the bonding company and possibly the prime contractor.
The payment bond action only focuses on the claim of the subcontractor. In a lien foreclosure action, the subcontractor will have to engage in discovery regarding the other subcontractors’ claims which delays the case and increases the legal fees to be expended. More importantly, the subcontractor’s recovery in a lien foreclosure action is limited to the amount of money owed to the general contractor by the owner at the time the lien was filed and thereafter. And, that amount has to be shared between the subcontractors which may lead to litigation between the subcontractors trying to disprove each other’s claims.
In the payment bond action, it doesn’t matter how many liens were filed or their amounts. The payment bond provides for an independent right of action by the subcontractor against the surety company. The best thing to do is to bring an action against the payment bond and renew the lien for as long as possible, and then commence a lien foreclosure action if necessary.