Lost Profits and the Exaggerated Lien
Updated: May 18, 2020
Last month, the State Supreme Court sitting in New York County issued a decision reminding contractors not to include items other than labor and material in mechanic's liens. GPK 31-19 LLC v L&L Constr. Dev. Inc., 2020 N.Y. Misc. LEXIS 1620 (NY County April 23, 2020). In the decision, which dealt with a developer suing its general contractor for trust fund diversion, much was discussed, but central to this post was the discussion on exaggerated liens. Apparently, the general contractor had filed a lien stating, in addition to labor and material provided, a calculation of its lost profits. After motions and cross motions were filed on the subject, the decision [edited by this writer] reads as follows:
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"In most cases, claims for willful exaggeration must be resolved at trial. However, where the lienor has 'included in its lien amount items that are not for labor or materials, as its own itemization makes plain' and does not offer a good faith explanation for their inclusion, a grant of summary judgment on a cause of action of willful exaggeration is appropriate (LMF-RS Contr., Inc. v Kaljic, 126 A.D.3d 436, 437, 2 N.Y.S.3d 351 [1st Dept 2015]).
Defendants not only fail to present evidence that Contractor's lien is not willfully exaggerated but instead admit facts which require denial of their motion to dismiss the willful exaggeration claim. In paragraph 7 of his affidavit, Xiangbo declares that the largest portion of Contractor's $315,039.14 mechanic's lien represents what Contractor projected to be 'its lost profit from the Project, 10% of the [C]ontract price, approximately $220,000.' Lost profits cannot be recovered through a mechanic's lien (Goldberger-Raabin, Inc. v 74 Second Ave. Corp., 252 N.Y. 336, 340, 169 N.E. 405 ; see also Aaron v Great Bay Contr., Inc., 290 AD2d 326, 326, 736 N.Y.S.2d 359 [1st Dept 2002] ['validity of lien plainly turns on a dispute as to whether respondent has completed the work required by the contract'] and Matter of Atlantic Cement Co. v St. Lawrence Cement Co., 22 AD2d 228, 230-31, 254 N.Y.S.2d 676 [3d Dept 1964] ['anticipated profits under uncompleted contracts or damages for prevention of performance are not lienable, the lien being available only for past performance'])."
So far so good. But then the Court went on:
"This is not a case of 'mere inaccuracy' or 'honest mistake in setting the amount of the lien' (Strongback Corp. v N.E.D. Cambridge Ave. Dev. Corp., 25 AD3d 392, 393-94, 808 N.Y.S.2d 654 [1st Dept 2006], citing Goodman, 15 NY2d at 196). ... The court is compelled to grant the motion of Owner and Westchester for an order voiding the lien, pursuant to Lien Law§ 39, and directing that the lien discharge bond be released."
Wait, what? Granting the motion to void the lien? Did the Court just conclude as a matter of law that the inclusion of lost profits was not a mere inaccuracy or honest mistake? It shouldn't have, at least not without more evidence about the general contractor's mindset, which we found none of in the filed papers (we checked on ECF). Exaggerated lien claims are not meant for bad judgment -- e.g., can we or can't we include this amount? We see there's a subtle trend going that way. But we want to remind everyone, that's not what the exaggerated lien provision was meant for. It's meant only for times when a lienor is attempting to defraud a party. To lower the standard to something less than fraud would make the filing of a lien impractical for most contractors, especially those who file liens on their own. This in turn would make the lien law, which was made for their benefit, something they won't turn to out of fear of getting things wrong.
Now this contractor has to deal with the Court's superfluous statement and the accompanying res judicata effects.
-Mat Paulose Jr., Esq.
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