A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
MECHANICS' LIENS: MATERIAL SUPPLIER IS ALSO CONSTRUCTION LENDER - WHAT NEXT?
An Important Case Goes Unpublished
When ASH sold the houses to individual defendant consumers, the closing attorney involved represented ASH and the individual defendants. The closing attorney would contact Mr. Casey of CBC's "Construction Loan Financing Department" requesting a construction loan payoff for the particular house. The closing attorney did not inquire into whether or not additional amounts were owed by ASH to CBC even though the closing attorney knew of the open account arrangement. The closing attorney relied upon lien affidavits signed by ASH falsely stating that ASH had paid all laborers and material men. It was alleged that Mr. Casey had no direct knowledge of or responsibility for the amounts owed to CBC for labor and materials supplied on the open account to ASH.
At each closing, ASH paid the amount secured, by CBC's construction loan but not the amounts owed to CBC for labor and materials or amounts owed to other creditors. The defendant homeowners purchased individual lots, the defendant lender made loans secured by deeds of trust on those lots and the defendant Investors Title issued owners' and loan policies. When CBC filed its claims of lien against the lots, the date of first furnishing on each lot predated the date of recordation of the deed of trust on that lot.
The defendants relied upon the doctrine of
"equitable estoppel," discussed in the opinion as follows:
The court found that the first element was missing because Mr. Casey, for CBC, responded to all closing attorney inquiries about the payoff figure for the CBC construction loans with ASH "and that the closing attorney never asked [CBC] about open account balances owed to [CBC] by defendant ASH." (Emphasis Added.) Instead, he relied upon lien affidavits. Further, the closing attorney's knowledge of CBC's open account was imputed to the defendant owners and so, certain of the parties asserting estoppel could not be found to be without knowledge of the open account. (The opinion does not clearly discuss the issue of the closing attorneys representation of the defendant lenders.) In addition, citing authority, the court stated that since CBC perfected its lien in accordance with Chapter 44A, the equitable estoppel claim was properly denied.
In addition, the court held that CBC, the
plaintiff-material supplier, was a third party beneficiary of the
Investors Title owners' policies because the policies stated that such
liens were within the policy coverage.
It should be noted that, in certain cases involving a construction lender who is also a material supplier, the purchase price of the completed improvements and lot might not be enough to payoff all outstanding liens. This can present a situation where certain indebtedness information will not be volunteered by the construction lender/supplier, or sort of a "don't ask, don't tell" policy.
2. Underwriting Practices
WHERE ANY BUILDING SUPPLY COMPANY OR ANY PERSON OR
ENTITY THAT APPEARS TO BE A PERSON OR ENTITY THAT FURNISHES LABOR,
MATERIAL, SERVICES OR EQUIPMENT PURSUANT TO CHAPTER 44A OF THE GENERAL
STATUTES, HOLDS A MORTGAGE OR DEED OF TRUST UPON LAND TO BE INSURED, THE
CLOSING ATTORNEY MUST OBTAIN WAIVER OF ALL LIEN RIGHTS PURSUANT TO LAW
FROM THAT HOLDER IN ADDITION TO CONSTRUCTION LOAN OR OTHER LOANPAYOFF
INFORMATION AND DEED OF OR MORTGAGE CANCELLATION.
A title insurance commitment requirement in accord with the above will be inserted when we believe the title opinion warrants it.
approved attorney and title insurer will have to be more vigilant than
ever to guard against the above construction industry practice taking
place under the "relation back" rule of priority in G.S. 44A-10.
MOBILE HOMES, MANUFACTURED HOUSING UNITS AND MODULAR HOMES
I. Restrictive covenant considerations in
preparing the title insurance opinion
In Starr, the court held that a factory-built modular home constituted a mobile home within the prohibition of restrictive covenants prohibiting mobile homes. This was in spite of the fact that the axles, wheels and tongues were removed after the home was placed on the land. Isenhour distinguished Starr on the basis that in Isenhour, the covenants permitted modular homes while prohibiting mobile houses. In Young, the structure was found to be a prohibited mobile home because it was designed for transport, notwithstanding that it was subsequently rendered immobile and placed on piers. In Angel, the unit was not a mobile home since it was placed on a foundation and could only be moved in the manner in which a house built on-site could be moved.
In Briggs, the covenants provided that "No structure of a temporary character, trailer...or any other outbuilding shall be inhabited, located or used upon any building...lot at any time as a residence, either temporarily or permanently."
The Court of Appeals noted that even though the owner chose an optional steel framed structure, this did not change the character of the unit even though this did determine available methods of delivering the unit to the lot. The owners could choose to have the units lifted onto a dolly or to have a tongue and axles attached to save expenses. The latter method was chosen. The unit was attached to a permanent foundation, a deck and covered porch were attached and a three-car garage was built upon a permanent foundation and connected to the unit by a breezeway. A building permit was obtained prior to installation. Periodic inspections were conducted during the installation and construction. The unit's placement on the land complied with the North Carolina State Building Code. The Court observed that since the unit was attached to a permanent foundation, it could only be moved in the same way as a site-built home. Title was transferred by a bill of sale and no certificate of origin was ever issued.
Therefore, the court found that the restrictions were not violated.
The Court of Appeals listed several factors
differentiating "modular homes" from "trailers" or
the unit is moved to the lot;
(2) Whether the unit must comply with the N.C.
Manufactured / Mobile Homes or with the applicable building code;
the unit is attached to a permanent foundation;
the completed unit can be easily moved, or
has to be moved like a site-built home; and
the title to the unit is registered with the N.C. Department of Motor
Vehicles or title is conveyed by deed.
Apparently, no single factor is determinative.
Obviously, factor (1) is not as important as the other factors. This area
of the law should be clarified by legislation.
II. Insurability of title
The Title Company's view on the applicability of restrictive covenants and the insurability of the unit as part of the land is as follows.
A. Restrictive covenants
Regarding restrictions, a case within the facts of Briggs presents no problems. Other situations will be considered on a case-by-case basis.
B. Issues other than application of restrictive
unit must be permanently affixed (within the Briggs guidelines) to a permanent foundation constructed on the
land with all wheels, tongues, axles and other items for transportation of
the unit removed.
outstanding certificate of origin must be destroyed and any outstanding
certificate of title must be cancelled, with any lien thereon being noted
as being satisfied on the certificate. The owner should then send the
certificate of title, along with a short cover letter, to: Registration
Section, Division of Motor Vehicles, 1100 new Bern Avenue, Raleigh, North
Carolina 27697, Phone (919) 733.3025. Where the certificate of title is
lost, the DMV requires that a replacement certificate of title be issued
to the owner, and then cancelled for treatment of the unit as real
soon as possible (usually after closing), the unit and land as a parcel of
real property must be listed for taxes as real property. See G.S.
105-273(13). Outstanding personal property taxes must be paid since those
can constitute a lien on real property. G.S. 105-355; G.S. 105-356.
is helpful, but not required, for there to be a recital in the deed and
deed of trust in the transaction to be insured that the land and unit
constitute one parcel of real property. An affidavit of intent for the
unit to constitute part of the land in accord with the above is helpful.
the unit is affixed to the land so as to constitute real property in North
Carolina, the unit will be covered as part of the "land" insured
by a title insurance policy. See paragraph 1(d) of the Conditions and Stipulations of the ALTA policies, defining the term
Issuance of the ALTA Endorsement Form 7 can confirm that the unit is
insured as part of the insured land, since the endorsement states that:
"The term 'land' as defined in this policy includes the manufactured
housing unit located on the land at Date of Policy."
sure to check closing instructions to see if the lender wants the unit to
be considered as part of the land or if the lender wants the unit to
remain and be considered personal property. If the latter is true, we will
except to the title to the writ and any lien against the unit. If there is
any ambiguity in the lender's instructions, the lender should be consulted
in advance of closing.