What's an Unpaid Subcontractor or Supplier to Do?

In March 2017, the United States Court of Appeals for the Third Circuit held in In re: Linear Electric Company, 852 F.3d 313 (3rd Cir. 2017), that an unpaid supplier of a bankrupt general contractor is barred by the automatic stay from filing a construction lien claim under New Jersey law against the real property of the owner of a construction project into which the supplier’s materials were incorporated. This article will consider the Linear decision, its impact in New Jersey, and potential remedies available to similarly situated suppliers and subcontractors when their general contractor has filed a bankruptcy petition, including, among other things, the submission of payment bond claims when available.

The ‘Linear’ Opinion

As set forth in Linear, in general, under New Jersey law, if a supplier sells materials on credit to a construction contractor and the contractor incorporates those materials into the improvement of real property without paying the supplier, the supplier may file a lien against that real property. See N.J. Stat. Ann. §2A:44A-1 et seq. Essentially, the supplier attempts to step into the shoes of the contractor to collect a debt owed to the contractor from the property owner so that it may try to recoup what the contractor owes that supplier down the contracting chain. Claimants entitled to file a lien are split into different tiers. A first-tier claimant is the contractor in privity with the owner. A second-tier claimant is, in relation to that contractor: (1) its subcontractor; or (2) its supplier. A second-tier claimant’s lien attaches to the interest of the owner of the improved real property, but is limited to the amount that the owner agreed in writing to pay its contractor, less payments made by or on behalf of the owner in good faith prior to the filing and service of the lien. To the extent the second-tier claimants are collectively owed more on their contracts with the first-tier contractor, than the first-tier contractor is owed on its contract with the owner, then the second-tier claimants’ lien claims will be limited in amount to their pro rata portion of that lesser “lien fund” amount.