By Henry L. Goldberg, Legal Counsel, Subcontractors Trade Association
Partner, Moritt Hock & Hamroff LLP

A recent New York appellate court decision highlights the danger of subcontractors and suppliers not having a complete understanding of Section 38 of the Lien Law.

For those not familiar with Section 38, it allows the party against whom a mechanic’s lien is filed to compel the lienor to produce a sworn, Itemized Statement as to the items and value of the labor and materials which constitute the alleged value of its lien.  Specifically, Section 38 provides:

A lienor who has filed a notice of lien shall, on demand in writing,
deliver to the owner or contractor making such demand a statement
in writing which shall set forth the items of labor and/or material
and the value thereof which make up the amount for which he claims
a lien, and which shall also set forth the terms of the contract under
which such items were furnished.

Once served with a demand for an Itemized Statement, too many lienors only superficially comply with the demand so as to avoid the possibility of their lien being cancelled. They must respond within five days and they must respond adequately.

Despite the “shall on demand” language of Section 38, a lienor who is served with a demand must first determine whether it is, in fact, required to respond with an Itemized Statement. There are exceptions.

While the language of Section 38 appears to confer an unrestricted right to an Itemized Statement, this is not the case. An Itemized Statement is only required to apprise the Owner or Contractor of the details of the lienor’s claim. If the Owner already knows the details of the lien, an Itemized Statement under Section 38 would be superfluous and, if so, not required. For example, if the lien is premised upon seeking contract balances and retainage under a lump sum contract, an Itemized Statement under Section 38 would serve no useful purpose. In such case, an Itemized Statement would not be required.

However, whether itemization under Section 38 is required is a fact-specific issue which should not be casually decided upon. If in doubt, a lienor is wise to consult with its counsel. Losing its lien is, in many cases, not worth the risk.

If an informed decision is made that the lienor is required to provide a Section 38 Statement, the Lienor must do so completely, or, again, run the risk of its lien being cancelled.

For a lien to be cancelled for the lienor’s failure to comply, or, failure to adequately comply, Section 38 of the Lien Law provides that:

The court or a justice or judge thereof shall hear the parties
and upon being satisfied that the Lienor has failed, neglected
or refused to comply with the requirements of this section
shall have an appropriate order directing such compliance.
In case the Lienor fails to comply with the order so made
Within the time specified, then upon five days’ notice to the
Lienor, served in the manner provided by law for the personal
service of a summons, the court or a justice or judge thereof
may make an order canceling the lien.

In this recent appellate case, the parties entered into a guaranteed maximum price contract and the lienor had, at the time it filed its mechanic’s lien, not completed all of its work under the contract.  In these specific circumstances, the court concluded that an Itemized Statement was required, but, the court further held that the statement furnished by the lienor failed to properly apprise the Owner of the details of the lienor’s claim and, as such, did not comply with Section 38.

In this case, in response to the Section 38 demand, the lienor merely served upon the owner a spreadsheet highlighting the unpaid balances due its subcontractors and vendors which formed the basis of its mechanic’s lien.

This limited information, only provided in chart form, gave little detail as to the specific nature and extent of the labor/materials provided/furnished, when the labor/material was performed/furnished, and the time frame when the work was performed.

The Itemized Statement failed to identify: (a) the labor allegedly performed by the Subcontractors/Vendors; (b) the materials allegedly provided by the Subcontractors/Vendors; (c) the description, quantity and costs of materials allegedly provided; (d) the details as to the nature of labor, time spent and hourly or other rate of labor charges included in the lien; and (e) the contracts and/or terms of the contracts upon which such materials and labor were provided, all of which are required under Section 38 of the Lien Law.

Section 38 specifically provides that, on demand, a lienor must deliver a writing which

“set[s] forth the items of labor and/or materials furnished and the value thereof which make up the amount for which . . . a lien [is claimed] and … set forth the terms of the contract under which such items were furnished.”

Moreover, caselaw has clearly established that Section 38 requires that the Itemized Statement served by a lienor must set forth the description, quantity and costs of various kinds of materials and the details as to the nature of labor, time spent and hourly or other rate of the labor charges.  In fact, nothing short of such detail will satisfy the statutory requirements of Section 38 and will likely expose the lienor to an application in court for the cancellation of its lien.

In this case, the appellate court affirmed the lower court’s cancelling of the mechanic’s lien in question due to the lienor’s failure to provide an “adequate” Itemized Statement under Section 38.

MH&H Commentary

This case should give pause to any subcontractor or suppler which regularly avails itself of the power and authority of the mechanic’s lien sections of the Lien Law. The Lien Law is a powerful tool not to be abused. You have a responsibility to assure that you are not simply “filling out a lien form,” but are providing adequate details, whether you draft your mechanic’s liens in house, by an outside agency, or by your attorney.

The cancellation of a mechanic’s lien is a rare occurrence, and one that should be wholly avoidable. It may be that GCs and CMs are not typically aware of their ability to challenge a lien and put the lienor to its proof. As a sub or supplier, don’t expose yourself to this risk. The viability and enforceability of your mechanic’s lien may make or break your ability to have your company properly paid.

Brian P. Craig, Esq., Of Counsel to Moritt Hock & Hamroff LLP, assisted in the preparation of this article.