A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
The TCNC website, announced in the December 2002
newsletter, found at www.oldrepublictitle.com/nc, contains all of our
newsletters and a cumulative index which is updated monthly. The website
also contains all of the American Land Title Association forms, including
endorsement forms. We hope that you will find the website useful and we
urge you to let us know what additional topics you would like to see
discussed in future newsletters.
TCNC’s 20th YEAR
In February 1983, Safeco Title Insurance Company
signed an exclusive issuing agency agreement with Safeco Title of North
Carolina, Inc., presently The Title Company of North Carolina, Inc. (TCNC).
In 1991, the agency was purchased by Old Republic National Title Insurance
Company. Old Republic is one of the largest—and according to many rating
agencies, the financially strongest—of title insurers. TCNC is also a
policy issuing agent for Lawyers Title Insurance Corporation and First
American Title Insurance Company.
We appreciate the friendships and customer loyalty the TCNC staff has attained throughout the last 20 years.
The attorneys managing the TCNC offices have
extensive private practice and title insurance experience in commercial
transactions. The company has handled large transactions involving
difficult underwriting situations and endorsement coverage. For those
firms needing assistance in obtaining title examination work, either
because the firm chooses not to do its own title work or because the firm
needs title work performed in other counties, TCNC has the experience and
contacts to obtain the title examination work, including obtaining title
documents. When it is desired or required, TCNC can handle escrow aspects
of commercial transactions as well. This
includes tax deferred exchanges.
MECHANICS’ LIENS—SUBCONTRACTORS’ LIENS—A NEW CASE
The case of Martin
Architectural Products, Inc. v. Meridian Construction Company, et al, __N.C.App.__,
__S.E.2d.__ (2002), is noteworthy.
DUFCU was the leasehold-owner, Meridian was the general contractor
and the plaintiff Martin was a subcontractor of Meridian to provide
materials. Meridian assigned its general contract to Incotech on March 9,
1999. Plaintiff subcontractor first furnished materials on March 16, 1999.
DUFCU gave Incotech notice of termination of the general contract on
September 8, 1999. On September 24, 1999, pursuant to the general
contract, DUFCU’s architect certified DUFCU’s cause to terminate.
DUFCU’s affidavit stated that a contract balance of $54,752.47 remained
due as of July 7, 1999. DUFCU made no further payments. A suit by Incotech
against DUFCU was resolved by a finding that Incotech’s contractor’s
license was limited to $250,000 and Incotech had already been paid for
work in excess of that limit, so Incotech could recover nothing.
(It should be noted that in Zickgraf
Enterprises, Inc. v. Yonce, 63 N.C. App. 166, 303 S.E.2d 852 (1983),
it was held that when a contractor failed to be properly licensed, this
did not affect a subcontractor’s right to a claim of lien.)
DUFCU entered into a new general contract with
Mitchell to complete the improvements. Plaintiff subcontractor provided
materials to Mitchell for a total amount due of $14,895.04. Plaintiff
subcontractor filed a claim of lien against DUFCU’s interest in the land
and a notice of claim of lien on funds for $14,895.04 and served a copy of
each on DUFCU.
The plaintiff subcontractor filed an action against
Mitchell and DUFCU on May 12, 2000 trying to collect $14,895.04, plus
interest. Plaintiff alleged that DUFCU was holding sums due to Meridian
and/or Incotech. (The plaintiff had initially contracted with Meridian,
but first furnished materials to Incotech and later furnished materials to
Mitchell.) The plaintiff also contended it was entitled to enforce the
perfected lien rights of Meridian and Incotech. For some reason, the
plaintiff canceled its claim of lien on the land on October 26, 2000, but
its claim of lien on funds was still pending. The court held that since
the plaintiff canceled its claim
of lien against the land it could not maintain a right of subrogation to
the claim of lien against the land held by Meridian and Incotech, even
though it never dismissed its sixth claim for relief seeking subrogation.
When DUFCU received the plaintiff’s notice of liens on funds, DUFCU still owed $14,895.04 under the terms of the construction contract. Ordinarily, DUFCU would have a duty to retain that amount under G.S. 44A-20. DUFCU claimed that after Incotech’s breach, DUFCU had to spend an additional $25,846.07 to complete the contract. This $25,846.07 set off against the $54,752.47 balance owed Incotech at the time of the termination of its contract reduced the balance due on the contract to $28,906.40, which was enough to support the plaintiff’s lien on funds. (It should be remembered that the plaintiff’s subrogation claim of lien on the land pursuant to G.S. 44A-23 was invalidated as noted above.)
DUFCU also sought to use $46,046.37 in attorneys’
fees incurred as an offset. If permitted, this offset would mean that
there would be no funds owed by DUFCU against which a lien on
funds would be asserted.
In North Carolina, recovery of attorneys’ fees can
only occur when authorized by a statute. DUFCU never cited a statute and
the Court of Appeals reviewed the North Carolina General Statutes, but
could not find one that allowed recovery of attorneys’ fees due to the
Incotech breach of contract. The Court of Appeals continued,
“Considering the strong public policy in favor of protecting laborers
and materialmen who supply labor and materials to building projects, as
evidenced in the materialman’s lien statutes, compared with the
prohibition against awarding attorney’s fees in the absence of a
statutory provision, we hold that, assuming there was a breach of contract
by Incotech, DUFCU could not setoff its attorney’s fees from the amount
owed on the contract and thereby defeat plaintiff’s lien.”
MECHANICS’ LIENS—SUBCONTRACTORS’ LIEN RIGHTS—AN OVERVIEW
OF LIEN ENTITLEMENT
The rights of a subcontractor are governed by the
confusing provisions of G.S. 44A-17, et seq. and, to the extent not
inconsistent with those statutes, G.S. 44A-7 through G.S. 44A-16 also
apply. The usual case
involves a first tier subcontractor (“FTS”). A FTS is entitled to a
lien upon funds owed to the contractor (“C”) by the owner (“O”)
for amounts earned, pursuant to G.S. 44A-18(5). G.S. 44A-18(1). The lien
upon funds is perfected by FTS giving notice of claim of lien upon funds
to O under G.S. 44A-19 and is effective when O receives the notice.
G.S.44A-18(6). G.S. 44A-19(a)
sets out the contents of the notice. G.S. 44A-19(b) sets out the form of
notice of claim of lien upon funds. There is no requirement to file or docket this form alone in the clerk’s office. However, it often is filed,
either prior to the filing of a claim of lien on real property or with a claim of lien on real property pursuant
to G.S. 44A-23’s subrogation provisions. When a claim of lien against
the owner’s real property is filed pursuant to G.S. 44A-20(d), a copy of
the notice of claim of lien upon funds is required to be attached as an
exhibit. G.S. 44A-23 and G.S.
44A-20(d) are discussed below.
When O receives the notice given under G.S. 44A-18(6)
and G.S. 44A-19, O is under a duty to retain any funds owed to C up
to the amount of FTS’s lien upon funds. G.S. 44A-20(a). If O does
not do so, and O makes payments to C, the lien upon funds continues upon
the funds in the hands of C, and O becomes personally liable to FTS up to
the amount of the wrongful payment to C. G.S. 44A-20(b).
For example, suppose O owes C $10,000 and C owes FTS
$5,000. FTS can perfect a claim of lien upon funds for $5,000 by the
statutory notice to O. But if O owes C $10,000 and C owes FTS $20,000, FTS
can perfect a lien upon funds for only $10,000. That is because O only
owes C $10,000 against which FTS can perfect a claim of lien upon funds.
G.S. 44A-18(1) and (5).
Also, if O owes C $10,000 and C owes FTS-1 $8,000 and C owes FTS-2 $4,000 and O receives FTS-1’s claim of lien upon finds for $8,000 on January 5 and O receives FTS-2’s claim of lien upon funds for $4,000 on January 6, the two liens are prorated by G.S. 44A-21. The noticed claims of lien upon funds are reduced to actual liens upon funds as follows, without regard to which notice was received by O first and without regard to who first furnished performance.
Once the amount of the lien upon funds is determined,
O must retain funds owed to C sufficient to cover the lien or liens in
accord with the above rules. If O owes C $10,000 and receives a notice of
claim of lien upon finds from FTS for $5,000, and O receives no other
claims of lien upon funds before O makes payment to C, O can pay C $5,000
and retain $5,000 which retainage will be subject to FTS’s lien upon
funds. Suppose, for example, that instead, O pays C $7,500. FTS retains
his lien upon the $2,500 which O still holds and retains his lien upon
$2,500 of the $7,500 which C has received. G.S. 44A-20(b). Also, since O
was supposed to retain (and not pay to C) $5,000 instead of retaining
$2,500, O will be deemed to have made a wrongful payment to C to the
extent of $2,500 and will have personal liability to FTS for $2,500
(which, in a civil action, can be reduced to a judgment against O). G.S.
44A-20(b). To the extent of that personal liability for $2,500, O can
obtain reimbursement from C. G.S. 44A-20(c).
How a lien upon funds in favor of FTS can turn into a
lien upon O’s real property is an interesting development to analyze.
(The analysis is ever more complex in the case of a second tier
subcontractor, “STS”, due to the case of Electric
Supply Co. v. Swain Elec. Co., 328 N.C. 651, 403 S.E.2d 291 (1991) and
how the case badly misconstrued G.S. 44A-23 prior to its extensive post-Electric
Supply amendment, which amendment has made understanding STS lien
rights more complex. This newsletter article will not discuss STS lien
rights. That discussion will appear in another newsletter.) The analysis
involves two additional statutes, G.S 44A-20(d) and G.S. 44A-23(a).
G.S. 44A-20(d) provides:
If the obligor
is an owner of the property being improved, the lien claimant shall be
entitled to a lien upon the interest of the obligor in the real property
to the extent of the owner’s personal liability under subsection (b),
which lien shall be enforced only in the manner set forth in G.S. 44A-7
through 44A-16 and which lien shall be entitled to the same priorities and
subject to the same filing requirements and periods of limitation
applicable to the contractor. The lien is perfected as of the time set
forth in G.S. 44A-10 upon filing of claim of lien pursuant to G.S. 44A-12.
The claim of lien shall be in the form set out in G.S. 44A-12(c) and shall
contain, in addition, a copy of the notice given pursuant to G.S. 44A-19
as an exhibit together with proof of service thereof by affidavit, and
shall state the grounds the lien claimant has to believe that the obligor
is personally liable for the debt under subsection (b).
G.S. 44A-23(a) states:
A first tier
subcontractor, who gives notice as provided in this Article, may, to the
extent of his claim, enforce the lien of the contractor created by Part 1
of Article 2 of this Chapter. The manner of such enforcement shall be as
provided by G.S. 44A-7 through 44A-16. The lien is perfected as of the
time set forth in G.S. 44A-10 upon filing of claim of lien pursuant to
G.S. 44A-12. Upon the filing of the notice and claim of lien and the
commencement of the action, no action of the contractor shall be effective
to prejudice the rights of the subcontractor without his written consent.
EXAMPLE: O owes C $10,000. C owes FTS $5,000. On
January 20, O receives a G.S. 44A-19 notice of claim of lien upon
funds for $5,000 pursuant to G.S. 44A-18(6). On, for example, January
21, C could waive his lien rights against O’s real property. If he did
so, FTS could not file a claim of lien upon
O’s real property pursuant to FTS’s previously existing right of
subrogation to C’s right to do so
under G.S. 44A-23, by virtue of the clear implication of the last
sentence of G.S. 44A-23(a). At this
point, FTS has no right to file a claim of lien upon O’s real
property pursuant to G.S. 44A-20(d)
because O has not yet made any wrongful payment to C under G.S. 44A-20(b).
At this point, FTS could probably enforce in court his lien upon funds for
$5,000, and could enforce in court C’s personal obligation to pay FTS
$5,000 because of FTS’s contract with O. If, for example, C does not
waive his lien rights on January 21, FTS could file a claim of lien upon
O’s real property pursuant to FTS’s right of subrogation to C’s
right to file such a claim of lien against O’s real property, pursuant
to G.S. 44A-23(a). If after
FTS files such a claim of lien on O’s real property under G.S. 44A-23
and, before FTS commences his
civil action to enforce that claim of lien, C waives his claim of lien
rights, FTS would lose his lien pursuant to FTS’s subrogation rights
under G.S. 44A-23(a), by virtue of the last sentence of G.S. 44A-23(a).
However, if C does not waive his right to a lien upon the owner’s real
property before FTS commences
his civil action of lien enforcement, C’s waiver after
FTS commences his civil action will have no affect on FTS’s lien rights
against O’s real property under G.S. 44A-23(a).
If, after O receives FTS’s notice of claim of lien upon funds for
$5,000, O pays C $7,500, and C does not waive his lien rights prior to
FTS’s commencement of an action of lien enforcement, FTS has the
following rights: (1) a lien upon funds for $5,000 (even though now,
$2,500 of the lienable amount is in C’s hands); (2) the right to sue C
for $5,000 pursuant to C’s contract with FTS; (3) the right to sue O
personally for a $2,500 wrongful payment to C; (4) the right to file a
claim of lien for $2,500 against O’s real property under G.S. 44A-23(a)
because of subrogation to C’s right to do so (this is because O still
owes C $2,500) and (5) the right to file a claim of lien for $2,500
against O’s real property pursuant to G.S. 44A-20(d) because that is the
extent of O’s personal liability for a wrongful payment to C under G.S.
44A-20(b). It is likely that the right to a claim of lien under G.S.
44A-23(a) and the right to a claim of lien under G.S. 44A-20(d) can be
combined into one claim of lien clearly complying with both sections
setting forth the basis for the claim. E. Urban, North
Carolina Real Property Mechanics’ Liens, Future Advances, and Equity
Lines, Including Title Insurance Sec. 31-2 (Harrison Co. 2nd
Ed). However, if before FTS commences his lien enforcement action, C
waives his lien rights against O’s real property, FTS will lose his
rights to a claim of lien for $2,500 under G.S. 44A-23 (even if FTS has
already filed a claim of lien under G.S. 44A-23(a)), but apparently will not
lose his right to a claim of lien under G.S. 44A-20(d). See E. Urban,
supra, at Sec. 25-2 discussing statements in Electric
Supply Co. This is because that, to the extent FTS has lien rights
against O’s real property under G.S. 44A-23, it is because FTS is
subrogated to C’s lien rights against O’s real property. At the point
of C’s waiver, C has no such rights, because (1) C has been paid all but
$2,500 by O and (2) C has waived his lien upon real property rights. By
contrast, C’s waiver cannot affect FTS’s lien rights against O’s
real property under G.S. 44A-20(d) because, to the extent FTS has lien
rights under G.S. 44A-20(d), it is because C has wrongfully been paid by
O, C has no lien rights to the extent C has been so paid and O has thereby
incurred personal liability to FTS under G.S. 44A-20(b) which is the basis
for lien rights under G.S. 44A-20(d). E. Urban, supra, at Sec. 30-2,
citing Mace v. Bryant Construction
Corp., 48 N.C.App. 297, 269 S.E.2d 191 (1980); Con
Co., Inc v. Wilson Acres Apartments, Ltd., 56 N.C.App. 661, 289 S.E.2d
663, cert. den., 306 N.C. 382, 294 S.E.2d 206 (1982).
The above example illustrates an important loophole
in Chapter 44A. C’s waiver or subordination of his lien rights against
O’s real property prior to FTS’s commencement of a lien enforcement
action can have the same affect on FTS’s lien rights against O’s real
property under G.S. 44A-23, but has no such affect upon FTS’s lien
rights under G.S. 44A-20(d).
G.S. 44A-12(f) governs validity of waivers:
An agreement to waive the right to file or claim a lien granted under this Article, which agreement is in anticipation of and in consideration for the awarding of any contract, either expressed or implied, for the making of an improvement upon real property under this Article is against public policy and is unenforceable. This section does not prohibit subordination or release of a lien granted under this Article.
This provision prevents “no lien contracts.”
It does not prevent a waiver after a claimant begins furnishing
performance at the site.
It can be seen that the problems discussed above can
impact what a title insurer will require in the form of a lien affidavit,
waiver and/or subordination and with respect to who must sign what. When
the project is large and there is a separate general contractor and many
subcontractors, it is not unusual for the title insurer to accept the
signature of the owner and the general contractor on the appropriate form,
depending upon the title insurer’s confidence in those signatories. For
a completed house, often the owner-builder’s signature is enough. No
form or collection of signatures is enough to protect the title insurer in
certain situations involving certain parties. TCNC, given the concept of “relation back” codified in G.S.
44A-10 applicable to subcontractors, is here to work with you on these
(In our next issue, we will discuss problems with lien perfection,
enforcement and priority.)
DESCRIPTIONS—BAKER v. MOOREFIELD, 154 N.C.APP.134, 571 S.E.2d 680,
aff'd 357 N.C. 156, 579 S.E.2d 269 (2003)
The case involved a boundary line problem. The case
cited the North Carolina Supreme Court in Cutts
v. Casey, 271 N.C. 165, 155 S.E.2d 519 (1967), where the Supreme Court
held that, when “there is a conflict between course and distance and a
fixed monument, the call for the monument will control.” The legal
description read as follows:
BEGINNING at an
iron stake in the Golden Baker and C.D. Slate line, at a point 54.8 feet,
South 79 degrees 51 minutes East of Golden Baker’s and C.D. Slate’s
corner in C.T. McGee’s line, and
runs thence South 7-1/2 degrees West, said line being parallel to the
brick wall of the store building; 100 feet to a corner in the line of
U.S. Highway 52; thence South 79 degrees 57 minutes East 140 feet to a
point in the line U.S. Highway 52, thence parallel with the first line,
running North 7-1/2 degrees East 150 feet to an iron stake, Golden
Baker’s corner and Mrs. C.D. Slate’s line; thence with her line North
79 degrees 57 minutes West 140 feet to the BEGINNING. (Emphasis is
The court held that the description was ambiguous and so the proper construction of the line being parallel to the Store Building would take precedence over the same line as being South 7 ½ degrees.