New Jersey Court Requires Materials Suppliers to Ascertain Source of Payments Made By Insolvent Subcontractors Under New Jersey Lien Law

L&W Supply Corp. v. DeSilva, 429 N.J. Super. 179 (N.J. Super. Ct. App. Div. 2012)

In this case, a New Jersey appellate panel expands and clarifies a material supplier’s obligations to determine the source of payments made by purchasers of materials and allocate the payments properly under the New Jersey Construction Lien Law, N.J.S.A. 2A:44A-1, et. seq. (the “Lien Law”).

Pursuant to the Lien Law, a contractor or supplier who is owed payment for work or materials is permitted to file a lien against the real property on which the improvements were constructed. L&W Supply, 2012 WL 6599966 at *1.  The purpose of the Lien Law is two-fold. First, it ensures that suppliers are paid for materials supplied during construction.  Second, it protects owners from paying more than once for the same work or materials.  In order to facilitate the second purpose of the Lien Law, the value of a materials supplier’s lien fund is limited to the unpaid portion of the contract price for the contract for which the unpaid materials were utilized.

Here, L&W Supply Corporation (“L&W”) sold building materials to Detail Contractors, Inc. (“Detail”) for use at a construction project for Meridian Health (“Meridian”).  Detail is one of several entities owned by Joe DeSilva.  L&W opened an account to enable DeSilva to order supplies for projects that DeSilva’s various entities were working on, including over $230,000 worth of supplies for the Meridian project. L&W received a $207,000 payment from Detail and an additional $10,000 payment from another DeSilva entity.  L&W credited nearly $104,000 to supplies purchased for the Meridian project and allocated the remaining $113,000 to materials purchased for other projects DeSilva entities were working on.  L&W then filed a lien for the balance of $127,834.89 against the Meridian project.  The lien fund for the work performed by Detail at the Meridian project was substantially higher than the outstanding balance owed to L&W.  The trial court granted summary judgment against Meridian and the general contractor, Patock Construction Co., Inc. (“Patock”), for the full amount of L&W’s lien claim.

Patock and Meridian appealed the trial court decision, arguing that L&W had an obligation to apply a larger portion of the payment made by Detail to the sums due for materials connected to the Meridian project.  Patock and Meridian argued that the actual value of the lien should have been limited to $12,143.05.  Although L&W submitted affidavits from several people, including its regional credit manager, its supply yard manager, and Joe DeSilva, stating that L&W properly applied the payments to the amounts due for each project, the affidavits did not explain how payments were allocated between various DeSilva projects.  The appellate court held that the conclusory statements in the affidavits submitted by L&W, without affirmative proof of the allocation method, were insufficient to warrant summary judgment.  Under the New Jersey Supreme Court’s holding in Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56 (2004), a supplier is obligated to allocate payments to the proper projects if the supplier “knows or should know” the source of the payment.  Here, the court held that the standard established in Craft “imposes an affirmative duty upon the supplier to allocate payments correctly,” and, as a result, requires the supplier to “inquire about the source of the payments it receives.”  Id. at *5.  Failure to do so may result in a finding that the supplier should have known the source of the payment for the purposes of Craft.  If a supplier has reason to believe that a purchaser is improperly allocating funds to pay off old debts, the supplier has a further obligation to verify the source of the payments.  In order to fulfill its obligations under Craft, the appellate court held that a material supplier cannot “turn a blind eye to improper allocation of payments.” Id. at *6.  In this case, the court reversed the trial court’s grant of summary judgment, holding that L&W did not fulfill its obligation to determine the source of payments made and properly allocate those payments to the sums due from various DeSilva entities.