Second Department Evaluates Alternative Undertakings Used at Atlantic Yards

At the lower court, Owner moved in part to dismiss the Lien Law § 5 cause of action, and the motion court granted this branch of the motion, finding that Owner had no express contractual requirement to comply with Lien Law § 5.

Skanska appealed on this issue, as well as several others. At the outset and directly counter to the motion court on this point, both the majority and dissent implicitly accepted that the Lien Law applied to the project at issue, because the project was built upon publicly owned land by a private developer, and the parties' agreements required compliance with New York law, which indisputably includes the Lien Law.

The Lien Law

The Lien Law encompasses three different scenarios in which it creates rights to security for the protection of those workmen and materialmen expending labor and materials to improve real property: 1) private mechanics' liens pursuant to Lien Law § 10, which attach to the real property upon which the improvement is constructed; 2) public improvement liens for projects that are owned by the state or a public corporation, which attach to the project's public funding; and 3) as required by Lien Law § 5, payment bonds or other undertakings for certain projects whose costs are over $250,000.

The Lien Law § 5 remedy is the security provided by the Lien Law for hybrid improvements, namely private work on publicly owned property, which has neither realty nor public funds to attach to. The lack of a remedy in this situation is the result of two rules: 1) a private lien cannot be filed against a privately held leasehold interest if the underlying property is publicly owned; and 2) a public improvement lien, which does not attach to the improvements or work performed by a contractor, but only to the funds held by a public entity for the project, cannot be filed if there are no such funds.

Lien Law § 5 was amended in 2004 to bridge the gap for just such hybrid projects. It requires that the public entity for whom the improvement is being made must “post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of the moneys due to the contractor, his or her subcontractors and to all persons furnishing labor and materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.”

'Completion Guaranty'

The bone of contention between the majority and the dissent was whether the “Completion Guaranty” was a form of undertaking that satisfied Lien Law § 5. Lien Law § 5 does not mandate the posting of a bond as the sole acceptable form of security, but permits the alternative posting of an “undertaking.”

The majority did not view the definition of “undertaking” in CPLR Article 25, describing either a deposit of funds or U.S. bonds or “[a]ny obligation, whether or not the principal is a party thereto, which contains a covenant by a surety to pay the required amount, as specified therein, if any required condition, … section 2502, is not fulfilled” to be delimiters on the term, but opted for more expansive definition. If the CPLR 2501 definition is applied, it is clear that the Completion Guaranty does not satisfy the Lien Law § 5 “required condition,” which is that the undertaking must guarantee “prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.”

Rather, the majority deemed that Forest City satisfied its Lien Law obligations when an affiliate issued a guarantee that another affiliate that did not truly own the public property upon which B2 Tower was built, would cause “substantial completion” of the development — and mandated Owner to apply monies from its lender to the work. The Completion Guaranty also required that the “work would be kept free of liens,” a requirement that the dissent pointed out was, in this particular hybrid public/private project, meaningless, given private and public improvement lien limitations.

The dissent zeroed in on the Lien Law's remedial statutory objectives aimed at providing statutory security for contractors, subcontractors and suppliers, other provisions of the Lien Law referencing deposited funds as a bond alternative, and the 2004 amendment's legislative history, which specifically discussed letters of credit. Its conclusion: “an “alternative undertaking should be a financial arrangement that would afford an unpaid contractor, subcontractor, laborer, or provider of materials, a fund of money, or an asset, available for predicable and prompt payment.”

Applying this standard, the Completion Guaranty fell short in that not only was it “no more than [Forest City's] contractual promise to complete the project and pay its account, which, if not honored, requires a lawsuit to secure a judgment and a collection process to obtain satisfaction,” but recovery was unacceptably “dependent upon a guarantor's particular financial circumstances at the time a protected party is in need of the remedies that the Lien Law provides.”

Conclusion

In sum, the Completion Guaranty that the majority found to be acceptable actually placed “contractors and subcontractors on hybrid construction projects … in a worse position in terms of a remedy than their private and public improvement counterparts, eviscerating the underlying purposes of the 2004 amendment.”

***** Jennifer Kavney Harvey is a partner at Couch White LLP, resident in the firm's Albany, NY, office. Reach her at 518-320-3418. Email: [email protected].