Subcontractor Agreements Are “Residential Construction Contracts” Under New Jersey Construction Lien Law

In re Kara Homes, Inc., 374 B.R. 542 (Bankr. D.N.J. 2007)

On an issue never before addressed in a published opinion, a U.S. Bankruptcy Court decided an issue critical to the New Jersey Lien Law.  A major New Jersey based residential home building group (the “Debtors”), owning several large single-family home development projects, entered numerous agreements with various subcontractors who provided goods and services on the projects.  When the Debtors failed to pay, the subcontractors took steps to protect their rights under the New Jersey Construction Lien Law.  However, most of the Debtors initiated Chapter 11 bankruptcy proceedings before the subcontractors could fully complete all of the Lien Law’s requirements.  The Debtors then filed adversary proceedings to determine the extent, validity, and priority of any liens.

The principal issues, and one apparently of first impression in a reported case, was whether the subcontractor agreements were "residential construction contracts" (RCC’s) as defined in the Lien Law, or commercial in nature.  Where goods or services are provided to a non-residential construction contract, the lien attaches when filed; however, when goods or services are provided pursuant to a residential construction contract, separate provisions of the Lien Law apply, and require completion of the process outlined therein before a lien can be perfected.

The Debtors argue that their contracts were “residential” in nature and therefore the statutory lien process had to be followed or the liens were invalid.  The subcontractors argued that the RCC provisions of the Lien Law applied only to the provision of goods or services for a single dwelling, and not the multitude of housing units the Debtors build as part of a project.  The court reviewed four Superior Court cases which have addressed the issue, finding them informative, but not instructional, as the law was unsettled and the analyses flawed.  After consideration of the statutory text and legislative findings, the court determined that the subcontractor agreements were "residential construction contracts" and, as such, the provisions of the Lien Law applied.  

Thus, to be valid, a subcontractor’s lien must be filed and perfected prior to an entity’s Chapter 11 filing.