• Construction Liens: The Duty of a Supplier to Allocate Payments Is Clarified... Or Not?
  • July 25, 2013 | Author: Thomas A. Clark
  • Law Firm: Capehart & Scatchard, P.A. - Mount Laurel Office
  • The Appellate Division of the New Jersey Superior Court, in a recent published opinion, has addressed the lengths to which a supplier must go in determining how to allocate payments received from its customer, so as to preserve its right to maintain a valid Construction Lien. In the case, L&W Supply Corp. v. DaSilva, A-2960-10T2 (Dec. 19, 2012), the Court held that a supplier must inquire about the source of a payment it receives, and that a failure to do so may leave the supplier liable for what it could have learned concerning the source of the payment, had it inquired. If the supplier receives explicit instructions from its customer as to how a payment should be applied, it is generally required to follow those instructions. Confusingly, however, the Court's opinion also provides that "...if a supplier has reason to suspect that something is amiss in the material purchaser's allocation of payment to different accounts.", then it is obliged to "...take further action to apply the payments correctly...". Short of asking the customer if they are sure about their proposed allocation, it is not clear what a supplier can do, as a practical matter.

    This case interprets the New Jersey Supreme Court's holding in Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56, which held that a lien claimant has a statutory duty to allocate payments to the accounts from which they were derived. The L&W Court attempted to determine the procedures by which that duty is discharged, and the lengths to which a supplier must go in determining how to allocate payments it receives. The case is based on an all-too-common fact pattern involving (1) a defaulting customer (in bankruptcy); (2) a supplier who provided materials that appeared to have been used on multiple projects, and (3) an owner/general contractor/bonding company responsible for the purchases for only one of the projects. Even though the supplier was able to provide certifications from its bookkeeper and the customer, concerning the allocation of the payments, the Court nevertheless found that there was an issue of fact concerning the proper allocation of payments received. While summary judgment (which is an adjudication without a trial) requires a high standard of certainty, the Court's opinion does not identify what uncertainty existed as to the allocation of payments. The Court's opinion suggests that the owner may have been able to defeat summary judgment simply by claiming that payments had been improperly applied.

    The key parts of the Court's holding are that
    (1) a supplier must inquire concerning the source of payments it receives, and cannot allocate payments as it wishes, in the absence of instructions from its customer. If the supplier fails to do so, it can be liable for what it fails to learn by failing to make inquiry. Having made the inquiry, the Court seemed to appreciate that a supplier typically will have no basis to challenge the information provided by its customer, and the Court holds that (2) a supplier "should not generally (be required to) challenge a materials purchaser without reason to suspect improper allocation of funds." Had the Court's opinion ended at this point, the ruling would have been helpful and clearly understandable. Unfortunately, the Court went on to state that
    (3) "if the supplier has reason to suspect that something is amiss in the material purchaser's allocation of payments to different accounts," then the supplier must "inquire further and verify the source of the payment funds." This statement, while seemingly innocuous, appears to potentially place a supplier in an untenable position.

    The Court's opinion fails to appreciate the practical difficulties that are faced by creditors in attempting to deal with and obtain information from defaulting customers. That is born out by the fact that, although the supplier was able to obtain a sworn statement from its customer to the effect that all payments had been properly allocated (which is itself often difficult if not impossible to obtain), the Court nevertheless held that there was an issue of fact because it "....did not provide calculations or other details to show how they arrived at their conclusions." Unfortunately for suppliers, the take away from this case is that they may need to have a virtual set of account payable records from their customer, in order to protect their right to maintain a construction lien. In this case, let the Seller beware!