Senate Bill S4840

                                 
BILL NUMBER: S4840

SPONSOR: FAHY
 
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 legislation would provide contractors and subcontractors with
payment protection on certain "hybrid" construction projects built in
New York State.

 
SUMMARY OF PROVISIONS:

Amends Section 5 of the lien law, as amended by chapter 155 of the laws
of 2004, to provide 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 bond or a
letter of credit other form of collateral financial security approved by
a federal or state financial regulator 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 legislation replaces the term "other form of undertaking" in
current law with the more specific requirement of "a letter of credit or
other form of collateral financial security approved by a federal or
state financial regulator."

 
JUSTIFICATION:

Prior to 2004, subcontractors performing work on private projects could
file mechanic's liens if they were not paid for the work performed on
the project. On public projects, unpaid subcontractors could file a
public improvement lien, which attached to the public fund set up to pay
for the project. However, the Lien Law had a "gap" in payment
protection, in that subcontractors performing work on "hybrid" projects
being built by private developers with private funds, but on public
land, could not file liens against the public land or the private enti-
ty's leasehold interest.

In 2003, legislation amending Section 5 of the Lien Law was introduced
to provide payment security to contractors and subcontractors on such
hybrid projects. However, in '2018 the NYS Court of Appeals affirmed an
Appellate Division, First Department decision which effectively made the
2004 amendment to the Lien Law meaningless because a "completion guaran-
tee" provided to the public entity provides no payment security whatso-
ever to the contractors and subcontractors performing work on the
project. It merely provides a guarantee 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 for contractors, subcontractors, materi-
almen and workers to be left 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 non-payment for work performed and/or
material delivered.

 
PRIOR LEGISLATIVE HISTORY:

2019/2020: S5229A

2021/2022: S5483

2023/2024: S3551/ A4182

 
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 into on or after such effective date.