NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A4182
SPONSOR: Hunter TITLE OF BILL:
An act to amend the lien law, in relation to requiring a surety bond for
contractors and subcontractors where no public fund has been established
for the financing of a public improvement
PURPOSE OR GENERAL IDEA OF BILL:
This bill would extend payment protection to contractors and subcontrac-
tors involved in certain "hybrid" construction projects in New York
State.
SUMMARY OF PROVISIONS:
Section 1 of the bill amends Section 5 of the lien law, as amended by
chapter 155 of the laws of 2004, to establish that where no public fund
has been established for the financing of a public improvement with an
estimated cost in excess of two hundred fifty thousand dollars, the
chief financial officer of the public owner shall require the private
entity for whom the public improvement is being made to post, or cause
to be posted, a surety bond issued by a surety duly licensed in the
state of New York or an irrevocable letter of credit, in an amount equal
to the cost of the construction work guaranteeing prompt payment of
moneys due to the contractor, .his or her subcontractors and to all
persons furnishing labor or materials to the contractor or his or her
subcontractors in the prosecution of the work on the public improvement.
This bill replaces the term "other form. of undertaking" in current law
with the more specific requirement of "an irrevocable letter of credit"
and requires that both the surety bond and the letter of credit be in an
amount equal to the cost of the construction work.
Section 2 establishes an immediate effective date and applies prospec-
tively.
DIFFERENCE BETWEEN ORIGINAL AND AMENDED VERSION (IF APPLICABLE):
JUSTIFICATION:
Up until 2004, subcontractors working on private projects could file
mechanic's liens in the event they were not paid for the work completed
on the project.
In the case of public projects, unpaid subcontractors could file a
public improvement lien, tied to the public fund allocated to pay for
the project. However, the inability of subcontractors working on
"hybrid" projects, namely those constructed by private developers using
private funds but on public lands, to file liens against the public land
or leasehold interest presents a significant "gap" in the Lien Law
regarding payment protection.
In 2003, legislation amending Section 5 of the Lien Law was introduced
to provide payment security to contractors and subcontractors on such
hybrid projects.
Nevertheless, in 2018 the NYS Court of Appeals affirmed an Appellate
Division, First Department decision which established that a "completion
guarantee" granted to the public entity provides no payment security
whatsoever to the contractors and subcontractors performing work on the
project,thus making the 2004 amendment to the Lien Law meaningless. It
merely ensures to the public entity that the project will be completed.
Judge Judith Gische, who partially dissented in the First Department
decision, wrote that a completion guarantee is not a form of undertaking
that satisfies the Lien Law. In her dissent she states in part:
"In order to achieve the objective of the Lien Law, and consistent with
the legislative history of the amendment, any alternative undertaking
must provide substantially equivalent protection to that provided by a
bond. The alternative undertaking should be a financial arrangement that
would afford an unpaid contractor, subcontractor, laborer or provider of
materials, a fund of money, or an asset, available for predictable and
prompt payment...The completion guarantee is not the functional equiv-
alent of a bond or other form of undertaking..."
The Legislature never intended to leave contractors, subcontractors,
materialmen and workers without payment protection simply because a
private developer enters into a ground lease agreement with a public
entity. This legislation would require that a payment bond, letter of
credit or other equivalent form of payment security be posted by the
private developer on projects costing more than $250,000, which would
provide all parties supplying labor and/or materials to the project some
measure of protection against nonpayment for work performed and/or mate-
rial delivered.
PRIOR LEGISLATIVE HISTORY:
2022: A5767 (Cusick)
2019-2020: A.5471 -A/S.5229 -A Referred to Judiciary (Cusick)
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
None to the state.
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to contracts
entered on or after such effective date.
