Construction Litigation Law Blog

Matera et. al. v. M.G.C.C. Group, Inc. et. al., Docket No. L-1812-04

Judge Louis Locascio of the New Jersey Superior Court recently ruled in the matter of Matera et. al. v. M.G.C.C. Group, Inc. et. al., Docket No. L-1812-04, that a cause of action under New Jersey’s Consumer Fraud Act exists where there is no direct contact between the parties but there is a connection between the defendants’ “alleged violation of the Consumer Fraud Act and plaintiff’s ascertainable loss.”

The Plaintiffs, homeowners who purchased homes in a development called Crystal Creek Estates, argued that the defendant Bank of America (“BOA”) had concealed information and made misrepresentations to its purchaser, Defendant Developer M.G.C.C. Group, Inc., and to the Howell Township Planning Board, in order to gain approval for constructing the final phase of Crystal Creek Estates, known as Section III. The Plaintiffs all bought homes within Section II of Crystal Creek Estates and began experiencing flooding in their basements and back yards after defendant M.G.C.C. Group, Inc. constructed Section III of the development.

BOA, as the successor to the original financier of the project, took title to two undeveloped lots in Section II and all of the undeveloped lots in Section III of the Crystal Creek Estates development. BOA obtained approvals for the construction of Section III of Crystal Creek Estates from the Howell Township Planning Board before selling the land to Developer M.G.C.C. Group, Inc. In obtaining those approvals, BOA failed to disclose to either the Howell Township Planning Board or M.G.C.C. Group, Inc. that BOA knew about serious drainage problems that would occur in Section II of the development if Section III was constructed as planned and approved. BOA also knew but concealed that Section II of the development would have to be re-graded in order to deal with excessive drainage to the section caused by the planned construction of Section III, and that an engineer had provided BOA with an opinion that there were serious drainage issues between the two sections.

Judge Locascio found that BOA’s misrepresentations and omissions were not only made directly to the Howell Township Planning Board, but were also “intended to be conveyed to the buyer” (defendant M.G.C.C.), because obtaining planning board approval “was necessary to complete the real estate transaction with defendant M.G.C.C.” Id. at 5. The Judge concluded, therefore, that BOA’s misrepresentations and omissions were “in connection with the sale of real estate,” a requirement for application of the Consumer Fraud Act.

The Judge then went on to find that a “causal nexus” existed between the Plaintiffs’ damages and BOA’s misrepresentations and omissions to M.G.C.C. Group and the planning board. Noting that the Consumer Fraud Act does not require privity between a defendant and a consumer, Judge Locascio concluded that the Plaintiffs did not need to be directly exposed to BOA’s misrepresentations and omissions because the Consumer Fraud Act states that a violator of the Act “is liable for any misrepresentations whether ‘any person has in fact been misled, deceived, or damaged thereby’ ... [the Act] did not say any party.” Id. at 6 to 8 (emphasis in original). The Judge found, therefore, that because BOA’s misrepresentations to the planning board and to M.G.C.C. Group ultimately damaged the Plaintiffs, there existed “a causal nexus” between BOA’s violation of the Consumer Fraud Act and the Plaintiff’s “ascertainable losses.” The Judge reasoned that if BOA “did not misrepresent facts to the Howell Township Planning Board, the planning board would not have granted the letter of compliance and section III would not have been built, or in the alternative, the drainage problems would have been corrected before the letter of compliance was granted.” Id. at 9. “Under either scenario, plaintiffs’ properties would not have been flooded.” Ibid. Therefore, it is “proper to hold BOA liable for the damages under the Consumer Fraud Act even though BOA had no contact with plaintiffs.” Ibid.

If you are interested in more information on this topic or have any questions, please contact John Randy Sawyer, Esq. at (609) 895-7349, or by email at jsawyer@stark-stark.com.

The New Jersey Appellate Division ruled this month in two companion cases, New Jersey Shore Builders Association v. Township of Jackson, A-5805-06 (June 23, 2008) and Builders’ League of South Jersey v. Egg Harbor Township, A-1563-07 (June 23, 2008), that municipalities cannot require as a condition of approval that builders and developers provide on-site recreation areas or facilities, or common open space, outside the context of planned unit developments. The Court also held that municipalities cannot require payment of monies to built such facilities off-site in lieu of providing them on-site. The Court found that ordinances requiring such conditions of development approvals were not authorized under the Municipal Land Use Law (MLUL). Through this ruling, the Court has ended a longstanding practice of municipalities to exact these types of conditions from developers, and, for developers who have in the past been made to remit payments in lieu of providing on-site recreation areas, facilities, or common open space, the decision may open a floodgate of demands for reimbursement of those payments.

Ordinances in two municipalities, Egg Harbor Township, Atlantic County and Jackson Township, Ocean County, were the subject of the attack. Both ordinances compelled developers seeking approvals to set aside a certain amount of acreage on-site for use as public open space and/or recreational facilities such as tot lots, tennis and basketball courts, and baseball, soccer and football playing fields. Both townships’ ordinances also provided for payments in lieu of providing those facilities on-site for use in constructing such facilities off-site.

The Appellate Division found that both ordinances were not permitted under the MLUL did not permit the recreational open space exactions required by the ordinances. The Court rejected the Townships’ arguments that the MLUL should be read expansively to implicitly authorize the imposition of open space and recreation exactions. The Court held instead that the MLUL contains explicit language specifically limiting municipalities’ powers in that regard. The Appellate Court held that while providing public open space and recreation facilities is an important goal of New Jersey land use law under the MLUL, it is a goal that can only be accomplished within the strict and specific limits of the MLUL. Municipalities cannot require developers to provide common open space and recreation facilities on-site as a condition of development approval, or require payments in lieu thereof, outside the context of planned unit developments.

Donald B. Brenner, Shareholder and Chair of Stark & Stark's Construction Litigation group, authored the article Homeowner's Association Standing To Assert Without Joining the Homeowners for the March 24, 2008 edition of the New Jersey Law Journal.

You can read the full article here.

On March 11, 2008, in the matter of Camelot Condominium Association, Inc v. Dryvit Systems, Inc., pending before the Superior Court of New jersey, Docket No. BER-L-012457-04, a jury entered a verdict in favor of the Plaintiff and against Dryvit Systems, Inc ("Dryvit") for violations of the New Jersey Consumer Fraud Act. Dryvit Systems is the largest manufacturer of Exterior Insulation and Finish Systems for residential and commercial construction in the United States.

With settlements the Plaintiff obtained before and during trial from other defendants, the total irecovery for the Plaintiff following the jury verdict was $5,046,000.

The case involved a joint repair project done in 1998 on what was then a 16 year old high rise building clad with roughly 300 panels coated with Dryvit's EIFS. The jury returned a verdict that charged Dryvit with knowledge that the Dryvit EIFS finish coating on the buildng's exterior panels softened when exposed to substantial water penetration. That softening caused cohesive failures at critical caulk joints, which resulted in openings for water to penetrate inside the building and cause catastrophic damage to the framing and sheathing on the building.

The jury found that Dryvit made knowing omissions and affirmative misrepresentations of material fact in connection with the repair of the Exterior Insulation and Finish System (EIFS) on the building located in Hackensack, New Jersey. This is the first time in New Jersey that an EIFS manufacturer has been subjected to a jury verdict for violations of the New Jersey Consumer Fraud Act. There will be no appeal.

John Randy Sawyer and Donald B. Brenner Shareholders of Stark & Stark’s Construction Litigation group represented the Plaintiff in the case.

After a condominium association president declined a contractor’s request to execute a written change order and directed the contractor to proceed with the additional work, the association was barred from seeking relief under the Consumer Fraud Act (“CFA”) (N.J.S.A. 56:8-1 to -167) provisions requiring that all modifications to contracts for home improvements be in writing. B & H Securities, Inc., v. CKC Condominium Ass’n, Inc., 2008 WL 508082 (App. Div., February 27, 2008).

Defendant Association hired Plaintiff contractor to complete installation of a fire alarm system in its building that had been begun, but not completed, by a prior contractor. After Plaintiff inspected the premises, its engineer, Charles Hamburger, briefly inspected a portion of the building and estimated the time and expense necessary to complete the project. The parties entered into a time-and-materials contract for completion of the fire alarm system , which was necessary for the building to pass a municipal fire inspection.

Upon beginning its work, Plaintiff discovered that the existing installation was the wrong size and violated applicable building and fire protection codes. Accordingly, Hamburger informed the Association’s president, Robert Lyon, of the existing substandard work, informed him that additional time and materials would be necessary to make the system compliant, and suggested that the parties prepare and execute a change order. Defendant’s president declined, protesting insufficient time and the pressure to complete the installation. Plaintiff then completed the work, including making the existing portions code compliant.

Defendant paid only a portion of Plaintiff’s invoices, and Plaintiff sued to collect the balance due. The trial court found Hamburger’s testimony more credible than that of Lyons, and questioned whether a change order was even necessary when the contract clearly contemplated that Plaintiff was to complete the job to allow Defendant’s building to pass municipal inspections, and did not specify a date or time certain for completion nor set the cost. The judge found that Plaintiff had performed the contract by installing a system that satisfied the municipal inspectors and that Defendant had breached by failing to pay the full amount due.

The trial court rejected Defendant’s contention that Plaintiff had violated the CFA by failing to provide a written modification to the contract. He judge concluded that Defendant was equitably estopped from seeking sanctions under the CFA, based on Lyon’s response to Plaintiff’s request for a written change order.

The Appellate Division affirmed, holding that, even if a change order were required, Defendant was equitably estopped from asserting a CFA defense where its conduct led the Plaintiff to change its position to its detriment. In reaching its opinion, the appellate court relied on Joe D’Egidio Landscaping, Inc., v. Apicella, 337 N.J. Super. 252, 256-57 (App. Div. 2001), in which the court held that a homeowner who declined a written contract for driveway paving, based on his personal relationship with the contractor, was equitably estopped from invoking the CFA to render his agreement with the contractor unenforceable. “[O]ne who induces the alleged wrongdoing should not benefit as a result of it.” Id. at 257.

Rejecting the condominium association’s arguments, the appellate judges found no meaningful distinction between B & H Securities and Joe D’Egidio Landscaping.

In an unpublished case, the Appellate Division recently affirmed the trial court’s decision that defendant property owner did not waive the arbitration clause of its AIA construction contract with plaintiff construction company by participating in plaintiff lawsuit for a year before invoking the arbitration clause. Delam Construction Corp. v. 15 Thornton Road, L.L.C., A-0582-06T1 (App. Div., December 10, 2007. After weighing a variety of factors, including plaintiff’s incurring the expenses of litigation, plaintiff’s bringing a lawsuit although it must have known of the arbitration clause, and defendant’s “playing fast and loose” with the court until invoking the arbitration clause on the eve of trial, the court concluded that plaintiff would not be prejudiced by remitting the case to an arbitrator since the discovery accomplished during the pendency of the lawsuit would be useful in the arbitration.

Neither party disputed that $187,368 plus interest remained unpaid to plaintiff following its completion of construction of defendant’s building. The parties had signed an AIA standard construction contract, which required the parties to submit their disputes to arbitration. Nonetheless, plaintiff sued on the contract in May 2005, amending its complaint in October 2005.

In its answer to the amended complaint, filed in December 2005, defendant counterclaimed for damages attributable to construction deficiencies in plaintiff’s work. Nonetheless, in October 2005, in response to plaintiff’s interrogatories, defendant certified that it had retained no experts to offer opinions on the alleged construction deficiencies. The discovery end date was April 24, 2006.

One month later, plaintiff moved for partial summary judgment, citing defendant’s lack of expert testimony regarding the alleged construction difficulties. On June 6, 2006, defendant responded by amending its interrogatory answers to disclose the names of two experts and providing copies of their reports. Plaintiff moved to bar defendant’s experts since they were named after the discovery end date. The motion’s return date was June 28, 2006, the scheduled trial date.

The trial court’s decision emerged from a blur of motion practice. The court heard oral argument on plaintiff’s summary judgment motion on June 23. On June 27, 2006, the court denied the summary judgment motion pending the outcome of the motion to bar defendant’s experts but granted defendant’s motion to set aside plaintiff’s construction lien. Thereafter, defendant withdrew its supplementary interrogatory answers naming its construction experts.

When the parties appeared for trial on June 28, 2006, plaintiff sought to postpone the trial to allow reconsideration of its summary judgment motion in light of defendant’s withdrawal of its experts. The judge adjourned the trial to allow plaintiff to re-file its summary judgment motion and defendant to file whatever new motions it deemed appropriate.

On June 30, plaintiff moved for partial summary judgment. On July 19, defendant retained new counsel. On July 29, defendant cross-moved to, among other things, dismiss plaintiff’s complaint based on the parties’ contractual duty to arbitrate their differences. Defendant certified that it had been unaware that its prior counsel had missed the deadline for naming its expert witnesses.

After hearing oral argument on August 17, the trial judge decided that the matter should be submitted to arbitration even though defendant’s original counsel had pursued the unusual strategy of “neither raising the arbitration clause [nor] presenting any expert reports.” The court order declared that plaintiff’s summary judgment motion was moot, granted defendant’s motion to dismiss plaintiff’s amended complaint, reinstated plaintiff’s construction lien and ordered defendant to file its demand for arbitration by August 31, 2006. Defendant demanded arbitration on August 30, 2006.

Plaintiff appealed, contending that the trial court’s decision caused it undue prejudice. It argued that defendant waived its right to arbitration by participating in the lawsuit, by failing to raise arbitration as an affirmative defense, and by failing to demand arbitration at an earlier date. Defendant responded by citing contractual language requiring the waiver of any right under the contract to be written.

The appellate court acknowledged the trial court’s reliance on Wasserstein v. Guild Contracting Corp., 261 N.J. Super. 277, 290 (App. Div.), certif. denied, 133 N.J. 440 (1993), which recognized a trial judge’s right to refer a case to arbitration at any time before judgment. Nonetheless, the appellate court viewed its task as reconciling two other competing lines of authority. The first line, including cases such as Ohio Casualty Ins. Co. v. Benson, 87 N.J. 191, 199 (1981) and Marchak v. Claridge Commons, Inc., 134 N.J. 275, 281 (1993), favors arbitration as a cheap and speedy alternative to litigation. The other line, including Wein v. Morris, 388 N.J. Super. 640 (App. Div. 2006), certif. granted, 190 N.J. 254 (2007), holds that active and prolonged litigation of disputes will result in the court’s finding that the parties have waived their right to compel arbitration.

The court resolved its dilemma by reference to Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 925 (3d Cir. 1992), which recognized prejudice as the relevant factor in determining whether or not the right to arbitration has been waived. Here, said the appellate court, plaintiff was not greatly prejudiced since the knowledge gained during discovery would be useful in the arbitration proceeding. Further, to the extent that any prejudice does result from remitting the parties to arbitration, plaintiff shared the fault by bring the action in derogation of the contract. Accordingly, the appellate court affirmed

The Appellate Division recently denied a landscaping contractor’s suit to collect amounts due for extra work in addition to that called for in his contract for complete landscaping of the defendants’ home. Online Contracting, Inc. v. Tripucka, No. A-2622-06 (App. Div., December 6, 2007). The defendants counterclaimed for treble damages and attorneys’ fees under the Consumer Fraud Act (N.J.S.A. 56:8-1 to 116). The court concluded that the contractor’s failure to secure a written agreement for extras totaling $32,994 violated N.J.A.C. 13:45A-16.2(a)(12), which requires all home improvement contracts exceeding $500 to be memorialized by a writing signed by the parties, specifying the work to be performed and the materials to be used, and identifying the start and end date.

The contractor argued that the following language, included within the underlying agreement for landscaping purposes, authorized verbal change orders:

Any alteration or deviation from the description of the work listed above will be executed upon a written change order issued by the contractor and signed by the owner. The change order, whether it be verbal or in writing, will become an extra and will be billed to the owner at the daily rate provided in the [attached] equipment and labor price list.

Because the work was performed pursuant to the equipment and materials price list attached to the underlying contract, the contractor maintained that the contract clause did not violate the Consumer Fraud Act. Further, argued the contractor, the defendants should be estopped by their own conduct in verbally requesting the extras (a putting green and associated structures).

The court disagreed. Citing Scibek v. Longette, 339 N.J. Super. 72 (App. Div. 2001), an auto repair case, it pointed out that since the defendants had not induced the contractor to proceed with the extras without a writing, estoppel did not apply. “Defendants’ verbal directions to [plaintiff] to get the extras ‘done’ cannot be fairly characterized as ‘the intentional relinquishment of a known right,’ or a clear unequivocal ‘act from which an intention to relinquish’ a right can be drawn.” Online Contracting, Inc., supra, No. A-2622-06 at 4, citing Scibek, supra, 339 N.J. Super. at 82. In the absence of the required written agreement for the extras, the defendants could not be said to have intentionally relinquished their right to a written contract by a clear, unequivocal and decisive act.

The court added that the contractor could have preserved its right to collect for the extras simply by providing a written estimate and securing the defendants’ written authorizations. Accordingly, it affirmed the trial court’s grant of attorneys’ fees in accordance with the Consumer Fraud Act ( N.J.S.A. 56:8-19).

World famous architect Frank Gehry, and his firm Gehry Partners is a defendant in a recent lawsuit brought by the Massachusetts Institute of Technology alleging design and construction defects in a $300 Million building on the Cambridge, Massachusetts campus. MIT also sued the contractors who built the building, alleging that design and construction defects caused leaking, cracking, and poor drainage, and that MIT will have to pay millions to fix the problems.

Gehry, when interviewed about the lawsuit, said that construction problems in complex buildings are inevitable, and “The chances of it getting done ever without something colliding or some misstep are small.” Gehry, like most architects surely believes that his design is fine, and that the builder made mistakes in execution.

The builder, a the New Jersey arm of a Swedish firm called Skanska AB, when asked for comment, stated “This is not a construction issue, has never been.” So, the builder believes, of course, that the design is faulty, and he did nothing wrong.

As is typical, both the architect and the builder also fault the owner, in this case MIT, for making changes during construction that they say led to problems. Gehry also commented that he thought that “value engineering” was also responsible for some of the problems.

It is disconcerting to see that a superstar architect, a global construction company and a world-class institute of higher learning, with $300 Million to spend cannot seem to create a water-tight building. Mr. Gehry seems to think that construction defects are par for the course. In that context, it comes as no surprise that we find problems with much simpler, mass-produced homes and condominiums.

You can read the New York Times article discussing the case here.

Plaintiff WHP9, the developer of a multi-building residential project in North Bergen, secured a builder’s risk policy from defendant Centennial Insurance and liability insurance from another carrier before beginning construction. WHP 9, Inc. v. Centennial Ins. Company, A-1454-06T1 (App. Div. October 23, 2007). Plaintiff’s application for the builder’s risk coverage stated the development’s value when complete as $6 million, without reporting the municipality’s sewer pipe or its cost in any way.

While driving piles for footings, a subcontractor punctured a 36-inch cast iron sewer line that ran beneath the property. The damage was discovered in 2002, and the municipality issued a stop work order in March 2003. Plaintiff’s liability insurer defended plaintiff in the municipality’s damage suit, ultimately settling with the municipality.

Asa a result of the stoppage, Plaintiff incurred lost rental income and other expenses exceeding $3 million. Defendant denied coverage under the builder’s risk policy, maintaining that the sewer pipe was not covered property within the policy’s terms:

Covered property means your property or the property of others for which you are liable, consisting of

a. Buildings or structures as described in this Coverage Form Declarations while under construction, erection, or fabrication, including the cost of foundations and underground property such as pipes, flues, drains, electrical wires, piers, and pilings; and excavation, grading, and filling; if such costs are included in the completed value of the project.

But this does not include existing buildings or structures to which improvements, alterations, repairs or additions are being made.

Plaintiff contended that the sewer pipe was covered as “property of others for which you are liable.” The trial court disagreed, and the Appellate Division affirmed, noting that the sewer pipe was not declared as property under construction, erection or fabrication and that the policy explicitly excluded coverage for “existing . . . structures to which . . . alterations, repairs or additions are being made . . . . “ Finding the policy language to be clear and unambiguous, and within an insured’s reasonable expectations, the appellate court confirmed the trial court’s denial of coverage.

In an unpublished decision, the Appellate Division recently enforced an insurer’s duty to indemnify and defend a condominium association for damages resulting from an occurrence during the policy period even though they were not discovered until after the policy had expired. Steinbauer v. East Coast Acquisitions, LLC, 2007 WL 2593007 (App. Div. September 11, 2007).

In March 2003, Ramapo Ridge Condominium Association Phase II (“the association”) discovered that a pipe had burst and flooded an abandoned unit. After the municipality declared the unit unsafe, Sirius American Insurance Co. (“Sirius”), which insured the association under a property damage and general liability policy effective from July 2002 through July 2003, undertook to repair and remediate the damaged unit, which was thereafter acquired by East Coast Acquisitions (“East Coast”) at a foreclosure sale. After additional repairs and upgrades, East Coast conveyed the unit to the plaintiff in July 2004. When plaintiff’s plumber entered a common area crawl space to install a dryer vent line, he discovered mold. Ultimately, in November 2004, plaintiff sued East Coast and the association, among others.

The association demanded defense and indemnification from Sirius. All parties agreed that the damages were caused by the 2003 flooding. Nonetheless, Sirius declined coverage, arguing that its indemnification was only triggered if the property damage occurred during the policy term and the third party sued during the policy term. It relied on the following policy language:

COVERAGE E [-] LIABILITY TO OTHERS
A. We pay for the benefit of the insureds, up to the applicable limit(s) of liability (See Part II D) shown in the Declarations, those sums that insureds become legally liable to pay as damages because of bodily injury or property damage insured here.
Such bodily injury or property damage must:
• Occur during the policy term, and
• Be caused by an occurrence that takes place within the applicable coverage territory: See General Conditions 6.

. . .

Occurrence
Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

. . .

Property Damage
Property damage means the following, caused by a covered occurrence:
• Direct physical injury to tangible property, including loss of use of such property (the loss of use is deemed to occur at the time of such direct physical injury).
• Loss of use of tangible property that is not physically injured: all such loss of use is deemed to occur at the time of the occurrence causing the loss.

The court rejected Sirius’s argument. Because the occurrence (the flooding) occurred within the policy period, the court held Sirius liable for all resultant damages, even remediation of the crawl space mold that was not discovered until after the end of the policy period.

Judge Noel L. Hillman of the United States District Court for the District of New Jersey, sitting in Trenton, recently dismissed a case before her on the grounds that the New Jersey court was an inappropriate place to hear the dispute. The case is First Colonial Insurance Co., et. al, v. Custom Flooring, Inc., et. al., 2007 WL 1651155 (D.N.J. June 4, 2007). The claims in the case involved a flooring project in a building in Minnesota. The general contractor on the job was a New Jersey Corporation named Stone Cor. There was a suit filed in Minnesota over defects in the flooring installation against Stone Cor and its subcontractor Custom Flooring, Inc. This suit was eventually settled, with participation from one of Custom Flooring’s insurance companies, First Colonial. Stone Cor was also an additional insured on a policy issued by Farmer’s Insurance Exchange, which denied coverage in the Minnesota case and declined to provide a defense. The New Jersey action was filed by First Colonial and Stone Cor against Farmers, seeking a declaratory judgment on coverage, e.g. that Farmer’s was obligated to provide a defense to Stone Cor in the Minnesota action, and that it owed a share of the settlement. There was also pending litigation in Illinois, which Stone Cor and First Colonial were parties to, which involved many of the same claims.

In examining the case under the doctrine of forum non conveniens, Judge Hillman saw a case about construction in Minnesota, governed by Illinois law, against Farmers, a California corporation, and where the majority of evidence was located outside New Jersey. Farmers argued that the New Jersey case should be dismissed, because the concurrent Illinois action involved the same parties, the subject matter of the claims and the evidence are all outside New Jersey, and it would be easier for all involved to resolve all the issues in a single alternate forum, in Illinois.

Stone Cor argued that the alternate forum was not an adequate forum, since its claims would be subject to a Statute of Limitations defense there. In fact, Stone Cor had filed a claim against Farmers in Illinois, and had voluntarily withdrawn it, rather than face a motion to dismiss on Statute of Limitations grounds. The New Jersey action was begun shortly thereafter. The Judge found that, other than the fact that Stone Cor was located in New Jersey, nothing else about the case had any connection at all with the state. None of the other parties were citizens fof New Jersey, and none of the events underlying the lawsuit took place in New Jersey. The fact that Stone Cor may not be able to recover on its claims in Illinois was insufficient to avoid dismissal. Stone Cor’s withdrawal of its claims in Illinois suggested forum shopping, and the court was not inclined to reward that behavior. The case was dismissed in favor of the still-pending action in Illinois.

As the real estate market contracts, contractors, subcontractors and suppliers with unpaid balances will need to protect their interests by, among other things, taking advantage of applicable lien laws. In construing New Jersey’s lien laws, definitions of “residential” and “commercial” construction have long been considered by many to be a gray area.

The Bankruptcy Court for the District of New Jersey recently addressed the distinction. It held that agreements with general contractors or developers in which contractors, subcontractors, and suppliers agree to provide work, services, material or equipment to large-scale residential developments are residential construction contracts. In re: Kara Homes, ____ F.Supp. _____ (D.N.J. August 29, 2007).This means that such contractors, subcontractors and suppliers must follow the more complex provisions applicable to residential construction contracts when they wish to secure an unpaid balance with a construction lien.

In New Jersey, the Construction Lien Law (“CLL”) (N.J.S.A. 2A:44A-1 et seq.) distinguishes residential construction contracts from construction contracts that are commercial in nature. The CLL defines a residential construction contract as

any written contract for the construction or improvement to a one- or two-family dwelling, or any portion of a dwelling, which shall include any residential unit in a condominium subject to the provisions of P.L.1969, c. 257 (C.46:8B-1 et seq.), any residential unit in a housing cooperative , any residential unit included in a fee simple townhouse development, any residential unit contained in a horizontal property regime as defined in section 2 of P.L.1963, c. 168 (C. 46:8A-2), and any residential unit contained in a planned unit development as defined in section 3.3 of P.L.1975, c.291 (C. 40:55D-6).

N.J.S.A. 2A:44A-2.

No lien shall attach for work, services, material or equipment provided as part of a residential construction contract unless the provider strictly complies with the requirements of N.J.S.A. 2A:44A-20 and 21, which impose additional requirements for liens filed on residential construction. N.J.S.A. 2A:44A-5c. The Legislature premised the additional requirements for perfecting liens on residential construction on the need to preserve and enhance the State’s economy, promote a stable marketplace in which families can purchase homes with expedience and certainty, allow lending institutions to conduct their business in a stable environment. N.J.S.A. 2A:44A-21a.

The defendants in Kara Homes, which were various contractors and subcontractors of Kara Homes and/or one or more of its affiliated entities, contended that contracts relating to construction of numerous homes within Kara’s developments were not residential construction contracts in that Kara’s construction of homes for resale was commercial in nature and in that the scope of Kara’s developments exceeded the “one- or two-family dwelling” that was the target of the additional lien-filing requirements. Kara Homes and its affiliates argued that, because the developments were residential, their contractors and subcontractors needed to have strictly followed the provisions of N.J.S.A. 2A:44A-20 and 21 for a valid lien claim to have been filed and perfected.

After observing of the few available unpublished cases considering the question “that the issue of whether a large scale construction project is residential or commercial in nature is unsettled and the analysis arbitrary,” the Bankruptcy Court concluded that the literal language of the statute was not dispositive of its intended scope. In light of the legislative purpose articulated in N.J.S.A. 2A:44A-21a, said the court, large scale residential projects must be included among residential construction contracts. Accordingly, contractors, subcontractors and supplier should be careful to observe the additional requirements applicable to residential construction contracts when working on large scale developments.