The Unpaid Contractor

In Northeast Restoration Corp. v. K&J Construction Co. L.P., a contractor who improved a building being erected as a condominium but failed to file a lien in a timely fashion found that it had no right to recover for the work.

The novel issue raised in this case by the motions for summary judgment by Hudson Street Associates, LLC (the sponsor) and the board of managers of the 195 Hudson Street condominium was whether a subcontractor who performed work on the common elements in connection with the conversion of the building at 195 Hudson Street to condominium residential ownership can recover the alleged unpaid balance from the board and the sponsor, according to the trust fund provisions of Real Property Law Section 339-1(2), for their failure to pay such balance from common charges collected from unit-owners.

In 1998, the sponsor, as owner of the building, entered into a contract with K & J Construction Co., L.P. for the conversion of the building, then used as a warehouse, to residential use. In August of that year, K & J entered into three separate subcontracts with the condominium to perform roofing, parapet, and exterior masonry work on the building. In April 1999, during the course of construction, the sponsor recorded a declaration, under Real Property Law Article 9-B, establishing a plan of condominium ownership. Between May 1999 and May 2000, 27 of the 28 condominium units created were sold by the sponsor, who controlled the board until March 2000 when unit-owners were elected and assumed control.

Northeast Restoration performed work as dictated by its contracts with K & J from November 1998 until March 2000, and claimed that it was owed roughly $168,000. The sponsor had asserted that no money was owing because of defective work. The original action to foreclose its mechanic’s lien based on such claim was dismissed for failure to file liens against the tax lots created upon the recording of the declaration, as required by paragraph 7 of Lien Law Section 9. Thereafter, Northeast began a new action against the sponsor and the board to recover the claimed balance owed, based on asserted violations of the trust fund provision of paragraph 2 of Real Property Law Section 339-1, which provides:

“Labor performed on or materials furnished to a unit shall not be the basis for the filing of a lien pursuant to article two of the lien law against the unit of any unit owner not expressly consenting to or requesting the same, except in the case of emergency repairs. No labor performed on or materials furnished to the common elements shall be the basis for a lien thereon, but all common charges received and to be received by the board of managers, and the right to receive such funds, shall constitute trust funds for the purpose of paying the cost of such labor or materials performed or furnished at the express request or with the consent of the manager, managing agent or board of managers, and the same shall be expended first for such purpose before expending any part of the same for any other purpose.”

Northeast contended that, although the sponsor controlled the board from the time of the recording of the declaration in April 1999 until March 2000 (by which time the work was completed), the board was now liable for the amount owing as it was required to employ the common charges it received for the payment of the balance owing for the renovation work. Northeast argued that such result was equitable since a substantial portion of its work was performed after the unit-owners began moving into the building in June 1999. As for the sponsor, Northeast maintained that as a “manager” of the condominium, it was equally liable.

On the other hand, the board and the sponsor both asserted that it would be grossly unfair to require the board to have to collect charges from the unit-owners to pay Northeast the claimed balance as the owners paid the sponsor for their units under an offering plan which indicated that the sponsor was obligated to complete the renovation of the building.

Clearly, the construction undertaken in converting the property to residential use was not at the “express request” of the board. The contract with K & J for such work was executed in August 1998 and never modified, whereas the board did not come into existence until the declaration was recorded in April 1999. However, upon such recording, a board of managers was established the members of which, until unit-owners were elected in March 2000, were nominees of the sponsor. It was noted that the work performed by Northeast was completed in March 2000, which is just prior to the time the unit-owners assumed control.

While it cannot be said that the construction performed by Northeast was at the “express request” of the board, the court said that it could reasonably be argued that the “labor or materials performed or furnished [were] ... with the consent of the” board, although its members were nominees of the sponsor. There was nothing in the statute that required that the “consent” be in any particular form. In the court’s view, the permission by a board of managers to allow work to be performed in premises controlled by it may be deemed the necessary statutory “consent.”

Section 2.2 of the bylaws of the condominium provided that the board (unless it incorporated, which it had not done) had “the status conferred upon unincorporated associations” under the General Associations Law. There was nothing in such law whereby a change in membership of an unincorporated association would affect its liability for prior actions. Hence, any liability created by acts of the board when controlled by the sponsor would normally remain the board’s liability when control was assumed by the unit-owners.

The court said that the consequence of such conclusion was that a literal reading of Section 339-1 would result in the imposition of liability upon the board for its failure to collect common charges to pay for the improvements made by Northeast. To state the result of such an interpretation was to demonstrate its inequity as the effect would be to require unit-owners, who paid the sponsor for a completely renovated unit, to also have to pay a second time for a portion of the cost of renovation through increased common charges. The court held that such a result would not be in accord with the intent and purpose of the statute. In discussing a court’s duty to avoid a seemingly unintended result from a literal reading of a statute, the court cited a prior case which noted:

“While it is true that, whenever the language of a statute is clear and unambiguous, we are required under ordinary rules of construction to give effect to its plain meaning ..., the literal language of the statute, where it does not express the statute’s manifest intent and purpose, need not be adhered to .... Rather, to effect the intention of the Legislature the words of a single provision may be enlarged or restrained in their meaning and operation, and language general in expression may be subjected to exceptions through implication.”

The evident purpose of the trust fund provision was to provide a contractor who performs work with a means to secure payment since, unless the unanimous consent of the unit-holders is obtained, no lien can be filed against the property. Thus, the court concluded that, without contrary provisions in the offering plan, a proper application of the trust fund provision of the statute should generally be to limit the liability of a board of managers to situations where the “express request” or “consent” referred to is provided by a board selected by the unit-holders. If they were to pay for improvements to the common elements, it should be the acts of their elected representatives which create the liability. Thus, under the facts of this case, the court found that no liability on the part of the board was based on the alleged statutory violation.

The further contention of Northeast that the board assumed the liability of the sponsor according to paragraph 24 of the declaration was of no aid to plaintiff since the sponsor had no contractual relationship with Northeast, and such assumption only applied to obligations “set forth herein,” and the declaration itself did not contain any specific construction obligations on the part of the sponsor.

The claim against the sponsor was devoid of merit because it was not in a position to collect common charges from unit-owners and thus could not be liable for failing to turn over such charges to Northeast. In fact, it paid common charges to the board applicable to its unsold units. Its control of the board before March 2000 did not result in liability since its nominees on the board, as held herein, had no authority to collect common charges from unit-holders to pay for the improvements required to be performed by the sponsor.

Accordingly, the motions of the board and the sponsor were both granted and judgment was entered dismissing the complaint as against them.

Comment: In this case, the contractor was engaged by a developer for roofing work in the construction of a condominium development. Because of a dispute with the developer, the contractor was not paid. It failed to file a mechanics lien before the property was converted to condominium ownership. When the contractor filed under the Condominium Act to recover from the common charges paid to the association by unit-owners, the court disallowed the lien on the ground that the unit-owners bought their units expecting that the developer had already paid for the improvements. The contractor was stuck.