A recent case before the New Jersey Appellate Court held that funds obtained from salvaged materials can be used to pay lien claimants.  The case, NRG REMA LLC v. Creative Environmental Solutions Corp., (2018 WL 1937282) involved the demolition of Werner Generating Station of which the plaintiff was the owner.  NRG sought multiple bids to demolish the power station.  Interested parties were willing to pay NRG for the rights to demolish the property with the expectation that a profit could be made from the resale of salvaged metals and equipment.  NRG selected Werner Deconstruction LLC who agreed to pay NRG $250,000.00 to demolish the station in return for the rights to the salvaged materials.  Subsequently, Werner subcontracted the work to BTU Solutions to perform the work.  

Shortly thereafter, super storm Sandy filled the site with salt water and dislocated asbestos which resulted in increased removal costs and damaged salvageable material.   BTU subcontracted the work with Site Enterprises who agreed to continue with the demolition and with Creative Solutions, for environmental consulting services.  BTU had difficulty paying both subcontractors, and they recorded liens on the property each in excess of $300,000.    

After Site’s lien filing, BTU removed over 8000 tons of material valued at over $2,000,000.  Shortly thereafter, Werner submitted a change order to NRG to remove oil on the property for $52,000. The trial court concluded the lien fund was approximately $2,000,000 or the value of the salvaged materials.  Both BTU and NRG contended the value was significantly less.  Under New Jersey law, the amount of a lien is limited to the contract amount less any payments made.  N.J. Stat. Ann. § 2A:44A-3.  In addition, the lien may not exceed the unpaid portion of the contract price of the claimant’s contract for the work.  N.J. Stat. Ann. § 2A:44A-9.  So, if the owner has paid in full, no lien fund exists.  The only exception being when an owner prepays the contract amount before the work is performed.

The question on appeal was whether to include the value of salvaged materials from a demolition project as part of the lien fund.  NRG’s position was that the NRG-Werner contract defined the lien fund and that non-monetary “payments” (i.e. the value of the salvaged materials), could not be considered part of the contract amount.  NRG argued, until the change order was approved, NRG agreed to pay nothing, making the lien fund zero. BTU argued the lien fund was $52,000, the amount unpaid under the contract.  Site argued that “other consideration to be paid”, as intended by § 2A:44A-9(a), includes non-monetary salvage, increasing the contract price from zero to over $2,000,000.  The appellate court resolved the issue in the subcontractor’s favor holding that the salvage value did make up part of the contract price.  The transfer of title by NRG constituted a prepayment to Werner and was thus excluded from reducing the lien fund.  Instead of transferring title to the salvaged material upfront, the Court reasoned that NRG could have transferred title to Werner incrementally as the project progressed.  The court found the legislative intent was to prevent an owner from enjoying the benefit of labor and materials without paying for them.  The Court held the salvaged materials increased the value of the property and, therefore, they were an essential component of the “payment” under the NRG-Werner contract, even though it was non-monetary consideration.   

Although the outcome of this case involved a unique set of circumstances, all parties involved in a demolition project should use caution when structuring payment terms under a contract to take into account non-monetary consideration that could be construed to be part of the lien fund.