By: Jennifer M. Horn and Daniel E. Fierstein
A recent case before the Appellate Division of the Superior Court of New Jersey (Morris County Improvement Authority and Somerset County Improvement Authority v. Power Partners Mastec, LLC) involving solar construction has shed light (pun intended) on the complications associated with projects that are publicly and privately owned and financed, especially with regard to municipal mechanics’ liens and private construction liens. As the parties in MasTec learned the hard way, the intersection of public and private lien rights can wreak havoc on contractor and subcontractor lien rights. All bidders are wise to consider the ramifications prior to submitting a bid.
New Jersey Lien Law: A Tale of Two Statutes
Before we get into the particulars of the MasTec case, recall that New Jersey has two lien statutes: (1) the Municipal Mechanics’ Lien Law (MMLL) and (2) the Construction Lien Law (CLL). The MMLL applies to public projects and allows subcontractors and suppliers (not contractors) to have a lien placed upon the project funds for the unpaid amount of work it performs. The CLL, on the other hand, permits contractors, subcontractors, and suppliers to place a lien against the relevant privately owned property interests for the unpaid amount of work it performs.
The MasTec Project P3 Financing Structure
In the MasTec case, the Morris County and Somerset County Improvement Authorities (the Authorities) hired SunLight General Capital, LLC (SunLight) to design and construct about seventy solar energy generating systems (SGF’s) on properties owned or occupied by government entities in Morris, Somerset, and Sussex Counties. Seventy percent of the Project was to be funded by taxable municipal bonds, and the remaining thirty percent was to be financed privately through SunLight; a classic public-private partnership arrangement.
Under this public-private partnership, the Authorities would own the SGF’s and lease them to SunLight for a minimum of fifteen years (after which SunLight would have the option to purchase the SGF’s for a nominal price). Meanwhile, SunLight contracted with MasTec to build the SGFs, and MasTec was to be paid with funds generated from the municipal bonds. Confused? You should be, because it’s confusing.
When Payment Was Withheld, MasTec Filed Two Types of Liens
Project delays ensued, and MasTec, concerned it would not be paid monies owed for its work, filed approximately $50 Million of liens under both of the New Jersey Lien Statutes. First, MasTec filed one set of liens under the MMLL against $50 Million of the public funds generated from the municipal bonds. A trial court, however, ruled that the liens were invalid because MasTec was not a “subcontractor” as the term is defined in the MMLL. Next, MasTec filed a second set of liens under the CLL against SunLight’s leasehold interest in the SGF’s, including SunLight’s rights to draw down the project funds from the municipal bonds.
Unfortunately for MasTec, the Appellate Division ruled against it with respect to both sets of liens. With regard to MasTec’s municipal mechanics’ liens, though the Court agreed with MasTec that it is a “subcontractor” under the MMLW, it also concluded that another statute, the County Improvement Authorities Law, protects County Improvement Authorities like the Morris County and Somerset Improvement Authorities from municipal mechanics’ liens.
As for MasTec’s construction liens, the Court held that such liens could attach to SunLight’s leasehold interest on the properties but not on the municipal bond funds. In so holding, the Court reasoned that bond funds are not “real property” under the CLL. This ruling undermines the force and effect of MasTec’s construction liens because the liens will have no effect on the disbursement of the municipal bond funds.
Proceed with Caution: In This Developing Area of the Law, Liens May Not Have the Expected Effect
This intersection of public and private interests is a relatively new and untapped area of the law that, as demonstrated in MasTec, can wreak havoc on contractor and subcontractor lien rights and must be carefully considered prior to bidding. The MasTec case teaches that when public and private interests intersect, the application and effect of lien law is impacted.
This case is particularly interesting because of the complicated array of public and private contractual relationships. On the one hand, the Improvement Authorities, which own the SGF’s, publicly bid the project with seventy percent of the funds to come from the public. On the other hand, the Improvement Authorities leased the SGF’s to the private developer and thirty percent financier in SunLight.
We will continue to monitor this case, as MasTec could petition the New Jersey Supreme Court to consider an appeal of these issues. It is also interesting and worth noting that MasTec and SunLight are currently embroiled in arbitration to determine which party is responsible for the delays and cost overruns that took place during construction.
In the meantime, all parties involved in similar P3 financed projects should reassess the force and effect of New Jersey’s lien statutes as avenues for recovering payment.
Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate. Wendy R. Bennett is an Associate in the Construction Group.
Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.