Your material supplier calls you seeking your counsel. It has received a payment from a company to whom it supplied materials without any direction on which of several project accounts the payment should be applied. What are the material supplier’s obligations regarding allocating this payment among its open accounts? May it apply this payment to a project debt where it does not have enforceable rights to file a construction lien, thereby leaving unpaid the debt on a project where it has an ability to file a construction lien? If it does, what are the consequences for the enforceability of its subsequently filed construction lien?
In Craft v. Stevenson, 179 N.J. 56 (2004), the New Jersey Supreme Court held a supplier had an obligation to apply the payment to the construction project from which it knew, or had reason to know, the payment emanated. Under Craft, if the supplier failed to apply the payment to the project when it knew or had reason to know the payment derived from that project, it forfeited its lien rights on the project. After Craft, questions remained regarding: (1) whether the supplier had an affirmative duty to inquire about the source of the payment if the payment was not accompanied by information tying it to a specific project; and (2) the circumstances under which a supplier could accept direction from the payor on the application of the payment to a specific project or debt. In the absence of answers to these questions, material suppliers faced substantial uncertainty about the enforceability of constructions liens they filed based on their allocation of such payments to other projects.
