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Thomas Group, Inc. v. Wharton Senior Citizen Housing

May 4, 2000


On certification to the Superior Court, Appellate Division. Judgment of Appellate Division reversed and matter remanded to Law Division for further proceedings consistent with this opinion.

Chief Justice Poritz and Justices O'hern, Stein, Coleman, Long, and Verniero join in Justice LaVECCHIA's opinion.

The opinion of the court was delivered by: LaVECCHIA, J.

Argued February 28, 2000

For the first time since its enactment in 1994, the provisions of the Construction Lien Law, N.J.S.A., 2A:44A-1 to -38, are before us for consideration. The Construction Lien Law replaced the longstanding Mechanic's Lien Law in New Jersey, making it easier for contractors, subcontractors and suppliers to place construction liens on property in the amount of the work, services or material they have provided, and for which they have not been paid. The new statute protects a contractor's right to file a lien claim for the value of work it has performed.

This appeal presents the specific issue of whether a contractor is entitled to file a lien claim for unpaid contractual amounts if the contractor has not fully performed contractual conditions precedent to payment. In discharging, as prematurely filed, the lien claim filed by plaintiff, the Thomas Group, Inc. ("Thomas Group"), the trial court held that N.J.S.A. 2A:44A-3 did not entitle the Thomas Group to a construction lien on the property of the owner, Wharton Senior Citizen Housing, Inc. ("Wharton"), because it had not performed the work fully "in accordance with the contract." That ruling was affirmed by the Appellate Division. Both the trial court and the Appellate Division found that because Thomas Group had failed to turn over important documents -- namely Affidavits of Indebtedness, a Consent of Surety, a Certificate of Insurance, and a Release of Liens from Subcontractors, as required by the retainage provisions of the contract -- and had not completed certain Punch List items, Thomas Group had not performed the work entitling it to the retainage under the contract. Therefore, Thomas Group was held not to be entitled to establish a lien on the property in an amount approximately equal to the retainage or ten percent of the total contract price.

We hold that by dismissing Thomas Group's lien claim as "prematurely filed" the courts below improperly denied Thomas Group the right to a lien establishing its security interest in the property in the amount of the value of the actual work it had performed on the project.


Thomas Group entered into a contract with Affordable Housing Developers, Inc. ("AHD"), a Designer/Builder, on July 28, 1995, to serve as the general contractor on a construction project for Wharton. On September 3, 1997, Thomas Group sent AHD an application for final payment in the amount of $754,949.00 for work provided under the $5,110,492.10 contract. On the same day, Thomas Group filed a construction lien claim for $658,290.10, pursuant to the Construction Lien Law, on the property owned by Wharton.

In October 1997, Thomas Group filed a complaint in Superior Court to foreclose on its construction lien claim, naming the owner, Wharton, as defendant. AHD moved to intervene in the action brought against Wharton because it was contractually obligated to indemnify Wharton in connection with lien claims brought against it. AHD simultaneously moved for summary judgment. The trial court granted both AHD's motion to intervene and its motion for summary judgment. As a result, Thomas Group's lis pendens and construction lien claim were discharged and Thomas Group was barred from filing any subsequent lien claim to the extent of the face amount claimed in the discharged lien claim.

The trial court held that Thomas Group's lien claim was filed prematurely because Thomas Group had not performed the work represented by the value of the lien "in accordance with the contract" as required by N.J.S.A. 2A:44A-3. Specifically, the court found that a substantial amount of the lien claim filed by Thomas Group represented retainage amounts withheld by AHD throughout the progress of the work pursuant to the parties' written agreement. The court noted that the contract between AHD and Thomas Group required that AHD withhold ten percent of the total contract price as retainage until final completion of the project.

The court observed that Thomas Group's entitlement to the retainage was governed by the terms of the contract between Thomas Group and AHD, but that Thomas Group had not complied with all the requirements of the contract that constituted prerequisites to release of the retainage. Specifically, paragraph 13.2 stated, in pertinent part: "Retainage shall be paid to the contractor at a time fixed for final payment as described in paragraph 5.4 of the contract." The time for final payment of amounts retained was described in paragraph 5.4.1, which stated: Neither final payment nor amounts retained, if any, shall become due until [Thomas Group] submits to [AHD] (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which [AHD's] or [Wharton's] property might be liable have been paid or otherwise satisfied, (2) consent of surety, if any, to final payment, (3) a certificate that insurance required by the Contract Documents is in force following completion of the Work, and (4) if required by [AHD], other data establishing payment or satisfaction of obligations, such as receipts, releases and waivers of liens arising out of Part 2, to the extent and in such form as may be designated by [AHD]. Paragraph 5.4.2 provided: Final payment constituting the entire unpaid balance due shall be paid by [AHD] to [Thomas Group] upon [AHD's] receipt of [Thomas Group's] final application for payment when the work has been completed and the Contract fully performed.

As noted, in September 1997, Thomas Group sent AHD an application for final payment in accordance with paragraph 5.4.2 of the contract. But by its own admission, Thomas Group had not submitted an Affidavit of Indebtedness, Consent of Surety, Certificate of Insurance or Release of Liens from Subcontractors. Additionally, the Certificate of Substantial Completion submitted by Thomas Group on August 11, 1997, contained a 55-page Punch List describing numerous corrections and repairs to be made to the project. Moreover, as of September 3, 1997, the date Thomas Group filed the lien claim, there were construction liens on the property filed by subcontractors and sub-subcontractors totaling approximately $449,409.35.

The trial court found that "although it [sic] undisputed that [Thomas Group] has performed the majority of work necessary to recover the amount stated in the lien claim," and it had not "willfully overstated" the amount of the lien claim, Thomas Group had not provided work or services, nor furnished material or equipment "in accordance with the contract" as required by Section 3 of the Lien Law. The court noted that the Lien Law did not contemplate a lien claim being used as a tool by a contractor or subcontractor to circumvent its contractual obligations. . . . The purpose of the retainage clause would be completely undermined, and the basis of the bargain between [Thomas Group], AHD and Wharton, would be severely disrupted, if Thomas Group was able to enforce its lien claim against the retainage without meeting the express conditions of the contract. Therefore, the lien claim is without basis. Thus, the court concluded that because the lien claim was prematurely filed, and filed in an improper manner, Thomas Group should be penalized pursuant to Section 15 of the Lien Law for filing the lien claim. Section 15 provides that if a lien claim is without basis, the amount of the claim is willfully overstated, or the claim is not filed in substantially the form or in the manner or at a time required by the provisions of the Lien Law, the claimant forfeits all claimed lien rights and all rights to file subsequent lien claims to the extent of the face amount in the lien claim. N.J.S.A. 2A:44A-15(a).

The Appellate Division affirmed, noting that "the ability to file a construction lien is directly related to the terms of the contract." Measured by that standard, the Appellate Division ...

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