Entries in lien law (20)


Lien Law Update: Lien Agent Statutes up for Proposed Revision

Thanks to Connie Wilson for the heads-up...

Senate Bill 602 was filed today.  The bill proposes to make the first significant revisions to the lien agent statutes since they were implemented five years ago.  The stated goal of the bill is to provide for the cancellation of notices to lien agent.

The proposal is positive in the sense that it is entirely permissive.  All of the amendments dealing with cancellation of a notice to lien agent provide that the potential lien claimant "may" deliver a cancellation, and there is no requirement that a potential lien claimant "must" do so.  (As a practitioner's note, the bill uses the term "file" inaccurately, since notices are not filed with the court, but rather are delivered to a title insurer / lien agent.)

However, the fact that the cancellation provisions are permissive does not mean the bill is perfect.  There is language in proposed section 44A-11.2(s) discussing the effect of a cancellation in the event a contractor delivers a subsequent notice.  Under the bill, the new notice "would not relate back to or renew the cancelled filing."  As it is, notices to lien agent automatically "relate back" to the beginning of a project provided there has not been a sale or refinancing of the property.  The same should be true for a new notice -- either the notice is timely with respect to a given sale or refinancing, or it is not.  So subsection (s) needs to clarify that it is in relation to such an event, rather than implying that the effect of a notice is somehow limited in time.

New proposed subsection (t) also suffers from loose language.  The new subsection would automatically cancel a notice after five years "if not cancelled or renewed pursuant to the procedures described in this section."  However, there is no provision for renewal of a notice under current law.  This would need to be cleaned up, or else a new provision for renewing notices will need to be added.

Finally, the bill provides for amending the permitted fee for a designation of lien agent from $25 to $30 for a residential (one- or two-family dwelling) project, and from $50 to $58 for any other project.  Given that the bill's stated intention is to allow for cancellation of notices to lien agent, the cost increase -- which will likely be passed along to the general public -- should be justified at a minimum. 

Watch this space for further developments regarding this bill.



Notice of Payment doesn't require amount of payment

A client called me today and said he was going to ask me the easiest question I had heard today.  Interestingly, it wasn't as easy as he expected.

The question was whether a notice of payment had to indicate the amount of the payment.  He said that he got a call from a subcontractor who didn't want suppliers and other subs who had sent in notices of subcontract to know how much he was being paid, because they would then expect to be fully paid for the project when it was only a progress payment.  And the client wanted to know if this was a valid request.

Setting aside the fact that when a first-tier subcontractor is afraid of his subs and suppliers knowing how much he is being paid, it may be a red flag about the financial viability of the sub, I took a look at the statute and found that in fact there is no obligation to identify the payment amount.

The notice of payment requirement is a detail of Section 44A-23 of the North Carolina General Statutes, which deals with subrogated lien rights for subcontractors.  After the Swain case, which made clear that a general contractor could face double-payment liability for lien claims, the General Assembly created the notice of contract procedure.  A GC can file and post a notice of contract on a project not later than 30 days following the issuance of a permit or a contract award, whichever is later.  (44A-23(b)(1)(a))  After that step, all second- and third-tier subs and suppliers who fail to serve a notice of subcontract to the contractor are barred from filing a subrogated claim of lien on the real property.  (Id.)  For those subs and suppliers who have served the notice of subcontract, the contractor can still cut off the lien rights on the real property by serving a notice of payment within five days following each payment.  (44A-23(b)(1)(b))

And here is where the interesting language pops up:  the contractor must serve "the written notice of payment setting forth the date of payment and the period for which payment is made as requested in the notice of subcontract form set forth herein."  (44A-23(b)(1)(b))  This language tracks the format for the notice of subcontract, which also requests notice of "the date payment was made and the period for which payment is made."  (44A-23(b)(3))

So there you go.  By statute, a notice of payment doesn't require the contractor to say how much is being paid to a given sub.  And I got to learn something new about our lien laws today.


Lien Law Update: Revisions Bills Move Forward

House Bill 1101 (the Pete Wall fix) and House Bill 1102 (technical corrections to lien agent requirements) were favorably reported from the House Judiciary C subcommittee this morning.  There was no controversy as to either reported bill, nor with an amendment offered to HB 1101 to clarify that the payment bond requirements would apply even for buildings not intended to be used or ultimately owned by the public entity.


4th Circuit affirms subcontractor lien rights after bankruptcy filing

The Fourth Circuit Court of Appeals issued its opinion in In re Construction Supervision Services, Inc. this morning, affirming the district court and holding that subcontractors could rightly perfect their claims of lien on real property and upon funds after an intervening party filed for bankruptcy protection.  The opinion is available here.

For decades, it was understood that delivery of a notice of claim of lien upon funds, which was a requirement for subs to perfect their subrogated lien right on real property, was permitted even after the filing of a petition for bankruptcy protection by a party higher up in the contractual chain.  However, in the Shearin, Mammoth Grading, and Harrelson Utilities cases, the bankruptcy court for the Eastern District of North Carolina held that delivery of the notice of claim of lien upon funds without leave from the bankruptcy court violated the automatic stay.  These rulings set off a chain of appeals, changes of behavior by subcontractors and their attorneys, and also spurred efforts by the Construction Law Section of the NC Bar Association to amend the lien statutes to clarify that the lien on funds, like the lien on real property, existed at the time of furnishing of labor, materials, or services.  (More on this last point later.)

The Fourth Circuit held in CSSI that Section 44A-18, the lien on funds statute at issue, "makes plain that it secures an interest that already exists."  The court also recognized that "a subcontractor's entitlement to a lien on funds arises upon delivery of the materials and equipment."  As such, the exception to the automatic stay for perfecting a pre-existing interest would apply for subcontractor lien rights.

The section of the opinion that was most heartening to subcontractor and supplier attorneys comes on pages 14-16 of the slip opinion.  There, the panel discussed the lien law revisions in 2012 which amended 44A-18 to clarify that the lien on funds "arises, attaches, and is effective immediately upon the first furnishing."  Regarding this amendment, the Fourth Circuit wrote:

This amendment, effective as of January 2013, does not control here.  But because the North Carolina legislature deemed it a clarifying amendment, we nevertheless find it instructive.  With the amendment, the North Carolina legislature sought to "[c]larify when certain subconractor lien claims arise to prevent loss of subcontractor lien rights under bankrputcy court interpretation of [the] current statutory language." (citations omitted)

.... With its clarifying amendment, the North Carolina legislature expressly sought to correct what it clearly viewed to be misinterpretations of state law.

There is no telling whether the Fourth Circuit would have reached the same result in the absence of the lien law revisions.  However, there is no questioning that those revisions, and the efforts by the General Assembly and all the stakeholders to "correct" the "misinterpretations" from the bankruptcy court, were significant to the court.  And now there is no doubt under federal bankruptcy law that subcontractors may file and notice their liens post-petition.


NC Business Court enjoins national lien filing firm for UPL

Many thanks to Matt Bouchard for bringing this to my attention, and for writing up his own blog entry on the topic...

The North Carolina State Bar obtained judgment on the pleadings against Lienguard, Inc., which operates a nationwide website advertised as a "commercial lien filing service," based on allegations that the company engaged in the unauthorized practice of law ("UPL").  According to the opinion, Lienguard admitted that its former president is not a duly licensed attorney and is not authorized to practice law in North Carolina.

On April 4, Judge James Gale of the NC Business Court entered an order indicating that the State Bar was entitled to a permanent injunction against Lienguard prohibiting the company from preparing claims of lien for others without being licensed to do so, from providing legal advice in connection with the preparation of claims of lien, and from holding itself out that the company is competent and entitled to prepare claims of lien.  The injunction is expected to be submitted to Judge Gale not later than April 24.

In reaching its conclusion, the court held that a claim of lien is a "legal document" under the intended reach of Chapter 84 of the North Carolina General Statutes.  The opinion also held that Lienguard's services went beyond that of a mere scrivener, and therefore did not fall into that exception to the UPL laws.  Judge Gale further found that Lienguard held itself out as having specialized knowledge and experience, including a statement that it had a staff "fully experienced in the construction industry which offers the highest quality of service" to its clients.  

Lienguard's defenses included a contention that the UPL statutes were unconstitutionally vague, and that they somehow formed an unlawful monopoly for the preparation of legal documents.  The court rejected those claims, as well as a claim that the action violated Lienguard's equal protection rights.

The upshot of this ruling is that other out-of-state firms who prepare lien documents -- and perhaps other types of documents that were not at issue in this case -- may come under scrutiny from the State Bar.  At a minimum, out-of-state contractors and suppliers may be more likely to seek the assistance of a licensed North Carolina attorney with respect to preparing lien and bond claim documents, if for no other reason than that the national form preparation companies may feel compelled to avoid the risk of similar enforcement actions.

As an interesting comparison, I would recommend also reading the Business Court's opinion in the LegalZoom.com, inc. v. North Carolina State Bar case, which was entered in March of this year.  In that opinion, Judge Gale ruled against LegalZoom as to several of its defenses and counterclaims, but did not enter an injunction based on the motions for judgment on the pleadings.  More discovery is yet to come in that enforcement action.