Two Issues Under the Construction Lien Law

L&W Supply Corp. v. DeSilva, 429 N.J. Super. 179 (App. Div. 2012).  In Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56 (2004), the Supreme Court ruled that a supplier of materials who seeks to file a construction lien must apply payments correctly against several open accounts of a materials purchaser, such as a subcontractor, if the supplier has reason to know that the payment funds came from a particular building project.  Quoting Craft, an analysis of which took up most of Judge Ashrafi’s opinion for the panel in this case, this decision addressed the obligation of the materials supplier “to ascertain the source of … payments and to apply them accordingly.” 

Plaintiff, a subcontractor who had sought to file a lien, won summary judgment in the Law Division.  The Appellate Division reversed that ruling and remanded for trial as to two of the defendants, finding disputed issues of material fact that could not be resolved on summary judgment.  As to a third defendant, the panel reversed outright for a different reason, as discussed below.

Judge Ashrafi summarized the panel’s ruling as to the two defendants who were entitled to go trial as saying that “when the purchaser of materials has not provided specific, reliable instructions as to the allocation of its payment, or when the circumstances are such that a reasonable supplier should suspect the purchaser has not used an owner’s funds to pay for materials supplied for that owner, then the supplier must make further inquiry and attempt to ascertain the source of the payment funds so that it can allocate them to the correct accounts.  A supplier that fails to fulfill this duty sacrifices its rights under the Construction Lien Law.  This reading of Craft is consistent with the Court’s holding that a supplier ‘has a duty to determine which of a contractor’s projects is the source of its payment and to allocate the payment accordingly,'” quoting Craft.  

Judge Ashrafi noted that some courts elsewhere have rejected such a “duty of inquiry.”  But he concluded that that position was inconsistent with “the affirmative language in Craft” quoted above.  On the facts here, the non-owner defendants were entitled to a trial to determine whether plaintiff had failed to satisfy its duty under Craft.    

The owner defendant won an outright reversal, and summary judgment in its favor, for a different reason.  The owner had posted a surety bond for 110% of the lien claim.  The surety was also named as a defendant in the case.  Under the Construction Lien Law, N.J.S.A. 2A:44A-33d, when an owner posts such a surety bond and the surety is named as a defendant, the court “shall … order that the owner … no longer be a party to an action to enforce the lien claim.”  Thus, the owner was entitled to summary judgment dismissing it from the case.      

Separately, the panel applied two settled principles of appellate practice in rejecting one particular argument made by defendants.  First, that argument was raised for the first time in a reply brief, which is always improper.  Second, defendants had conceded that very point at oral argument in the Law Division.  They would not be permitted to “change their position on appeal.”