Thursday, October 25, 2012
What to do with your Albany Mechanic's Lien Discharge Bond
So you've obtained a mechanic's lien discharge bond. The next logical question is "what now?" The primary reason for obtaining a mechanic's lien discharge bond (Lien Law Section 19(4) ) is to remove the lien from the property. You may do this because you are contractually obligated to keep the property lien free (for example, if you are a general contractor and your subcontractor filed a lien), because you want to sell the property and the mechanic's lien is causing a problem and holding up the closing, because the mechanic's lien is a default under your mortgage, or a variety of other reasons. But bonding a mechanic's lien does not get rid of the lien. The name of the bond - a mechanic's lien discharge bond - causes a lot of confusion to those unfamiliar with the intricacies of the Lien Law. The bond does not discharge the mechanic's lien in the sense of extinguishing it, it discharges the lien in the sense of removing it from the property. But the lien remains alive and well.
The mechanic's lien, having been removed from the property, is now attached to the discharge bond. If you posted the bond you have a few options. Of course one option is to simply wait it out. The lien will expire by operation of law in the same manner as it would expire against the property. A mechanic's lien, as a general rule, lasts for a period of 1 year from filing. If it is not extended or foreclosed upon it expires and is no longer enforceable. If this happens the surety that issued the bond should then return the collateral to you (either by extinguishing the letter of credit or returning the cash collateral). However, some sureties will require you to obtain a court order explicitly cancelling and vacating the mechanic's lien before they release the bond collateral back to the principal. Unfortunately this adds a bit of time and cost to the process but is certainly easier and more cost effective than litigating and defending a full blow lien foreclosure action. Other sureties will discharge the bond upon receipt of a letter from the attorney for the bond's principal stating that the time to foreclose upon the lien has expired and no lien foreclosure action has been commenced.
There are two things that can happen to the mechanic's lien before it expires: 1) the lienor can foreclose upon it; or 2) you (or anyone with standing) can attempt to have the lien cancelled and vacated by a Court order. Challenging the lien and attempting to have it cancelled and vacated occurs in the same manner as if the lien were still attached to the property; the mechanic's lien discharge bond does not alter the process. The person that wants to discharge the mechanic's lien so that the bond collateral can be released must either attack the mechanic's lien on its face (see Lien Law Section 19 and Lien Law Section 21) or challenge the underlying validity of the lien (i.e. argue that the amount is not owed). A challenge to the face of the lien can be made via petition commencing a special proceeding under Lien Law Section 19 and Lien Law Section 21. A challenge to the amount of the lien can only be made in a foreclosure action. You can force a lienor to foreclose upon its mechanic's lien by using the provisions of Lien Law Section 59 for a private lien or Lien Law Section 21-a for a mechanic's lien on account of a public improvement.
A mechanic's lien that has been bonded can be foreclosed upon in generally the same manner as a lien that has not been bonded and is still attached to the real property. The lienor files a foreclosure complaint and names all of the necessary parties. Notably, if a mechanic's lien has been bonded the owner of the real property is no longer a necessary party (see Lien Law Section 44-b). But the surety that issued the bond is now usually named as a party (though arguably not a necessary one) as is the principal under the bond. Other than the parties to the action, an action to foreclose upon a mechanic's lien that has been bonded will follow generally the same course as a lien that was not bonded and the lienor must still establish that its mechanic's lien was valid before recovery can be achieved.
The New York Lien Law, the bonding process and the foreclosure process can be a mine field for novices. Small errors can spell doom in certain instances and it is therefore highly recommended that you consult with an experienced and knowledgeable construction attorney to make sure that everything has been done properly along the way.
Vincent T. Pallaci is a partner in the New York law firm of Kushnick Pallaci, PLLC. His practices focuses primarily on the areas of construction law, including obtaining mechanic's lien discharge bonds, foreclosing on mechanic's liens and defending mechanic's lien foreclosure actions.