Carefully Review Settlement Agreements

Carefully Review the Settlement Agreement & Be Prepared to Accept the Terms of the Agreement

In Degraw Const. Group, Inc. v. McGowan Bldrs., Inc., 2017 NY Slip Op 32080 – NY: Supreme Court 2017, parties executed a settlement agreement, which in addition to a payment settlement, required the parties to release one another from further claims. Despite the agreement, the subcontractor filed mechanic’s liens and attempted to proceed with suit. Much to the subcontractor’s dismay, the court upheld the terms of the settlement. The subcontractor’s liens were void and the subcontractor had to pay damages to the general contractor.

Some Background

McGowan Builders, Inc. (McGowan) was the general contractor for two projects: YMCA of Greater New York (YMCA Project) and Nan Shan Development of CPC Queens Senior Center/Day Care Center (Nan Shan Project). For both projects, McGowan hired subcontractor Degraw Construction Group, Inc. (Degraw) to construct concrete foundations, walls and floors.

As with many construction projects, disputes arose. To resolve the disputes, McGowan and Degraw executed a settlement agreement, “Agreement for Termination for Mutual Convenience and Mutual Release.” The settlement agreement dictated that McGowan would pay $150,000 in installments to Degraw, and that both parties agreed to a “mutual release.”

According to the court opinion, the mutual release specified that “[McGowan] and Degraw agree that upon full performance of their obligations hereunder, any and all claims that could have been asserted under the YMCA Subcontractor Purchase Order and the Nan Shan Subcontractor Purchase Order shall forever be released…”

Essentially, the parties agreed the $150,000 would settle debts and the parties agreed they would forfeit further mechanic’s lien actions.

In a Tennis Match of Correspondence

In what can be best described as a tennis match of correspondence, the parties served up letters & responses.

First up, McGowan notified Degraw it would not remit further payment, as McGowan had discovered defects on the YMCA Project. (Until this time, McGowan had paid $100,000 of the $150,000 settlement.) The terms of the settlement agreement had a clause for ‘latent defect claims’:

“[R]elease each other from all potential claims against each other on the YMCA and Nan Shan projects except for claims arising from latent workmanship defects and claims arising from Degraw’s indemnification obligations…”

Unsurprisingly, Degraw then sent a demand for payment & advised it would pursue all remedies, including a mechanic’s lien against the projects, if McGowan did not remit payment.

McGowan served back, reminding Degraw of the terms of the settlement agreement: “The lien claims that you are threatening to file on these projects are contrary to the express terms of the Settlement Agreement. Any sum that may be claimed to be due in a lien filed on either project will be completely arbitrary because the Settlement Agreement does not allocate the principal amount of the settlement and/or the current unpaid balance of $50,000 between the YMCA and the NAN Shan Projects.”

And, of course, McGowan’s correspondence wouldn’t be complete without a subtle jab “As previously advised, if you are foolish enough to file a lien on either the Nan Shan or the YMCA project swift action will be taken to obtain a Court Order for the discharge of such lien(s)…”

Degraw Serves Up Liens, McGowan Counters with Discharge Bonds

Despite the terms of the settlement agreement, Degraw filed two mechanic’s liens. The lien on the YMCA Project was filed for $214,590.46 and the lien on the Nan Shan Project was filed for $87,096.01.

McGowan, in turn, obtained discharge bonds for both liens.

Degraw proceeded with suit to enforce its liens, and McGowan filed a motion to have the liens declared as barred per the settlement agreement, to have the lien amounts declared as willfully exaggerated, to recover damages and to have Degraw’s suit dismissed.

The Court’s Findings

  • Liens Barred Based on Settlement Agreement: The terms of the settlement agreement were clear. When the parties executed the agreement, they waived the right to proceed with further claims. Therefore, Degraw’s liens were unenforceable.
  • Liens Willfully Exaggerated: Simple math confirms the liens were exaggerated. The agreement was for $150,000, of which $50,000 was unpaid. The liens were filed for a total of $301,686.47.
  • McGowan Recovers Damages: Because the liens were in violation of the settlement agreement and willfully exaggerated, McGowan was the prevailing party & was awarded $25,645 in damages.
  • Degraw’s Suit Dismissed: If there was still any question regarding the validity of Degraw’s liens, let the court’s final finding end it – the liens and suit were dismissed.

The Takeaway

Settlement agreements are not uncommon in the construction industry. We often assist with exchanges of release of lien for payment. But, it’s imperative for parties that execute an agreement to understand that the agreement may be enforceable, just as with any other contract. Review the terms of all agreements, and as a best practice, seek legal guidance before signing anything!

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