Tuesday, 10 April 2012

Lien law revision committee final report is mixed bag for subcontractors and suppliers

Guest editorial by James P. Laurie III, The Law Office of James P. Laurie III, PLLC, Raleigh. Reprinted from the April 2012 issue of Carolina Subcontractor, published by the American Subcontractors Association of the Carolinas. 

The Revisions to the North Carolina Mechanics Lien statute submitted by the  Lien Review Committee to the General Assembly are a mixed bag for subcontractors and suppliers. The Revisions fix many problems, but ultimately create new forfeiture points and greater expense and impractical compliance obligations on subcontractors and suppliers earlier in projects than exist in the current statute.

Last year, the North Carolina Bar Association submitted a draft Bill for introduction to the North Carolina General Assembly to make extensive modifications to Chapter 44A, the existing Mechanics Lien statutes in North Carolina. The Bill was sent to Committee for evaluation and charged with the goal of addressing the “problem” that the Carolinas Associated General Contractors and the North Carolina Land Title Association refer to as “hidden liens,” which are all of the lien rights granted to second and third tier subcontractors and suppliers under the current statute.

For the past several months, the Lien Review Committee, which is a subgroup of the Senate Judiciary Committee of the North Carolina Legislature held public hearings and heard presentations and has revised the Bill Draft. The initial Bill sent by the NCBA had extensive revisions which proposed converting the statute to a format similar toFlorida. The Committee has revised the Bill Draft, but has taken a much less ambitious revision in its final Report.

Tweaks
The Revision made several clarifying tweaks to the routine language of the statute; many of the language corrections are small, but intended to make common usage terms more clear or better defined where the 1970′s language failed to make clear the tiers of the parties in the various provisions.

Correct Lien Waivers Case
The Revision corrects the problems caused by a ruling from the Superior Construction case in the North Carolina Business Court, which interpreted progress payment lien waivers to be final lien waivers and interpreted lien waivers as affecting the date of last furnishing by a contractor, which would change the priority of liens with other creditors; this view of the effect of lien waivers is not shared or practiced in the market place.

Standardized Partial and Final Lien Waivers
The Revision does provide standardized lien waiver forms for partial and final lien waivers expressly written into the statute as defaults which are intended to avoid inadvertent waiver of claims and retention and the practical problem that no standard lien waiver is currently used in the commercial market place.

PreLien Procedures
The Committee abandoned the PreLien draft terms from NCBA which were intended to address the “hidden liens problem” due to the controversy and lack of consensus between stake holders regarding the terms. These revisions were the most drastic part of the NCBA proposal in seeking to adopt PreLien procedures which were a hybrid of theFloridascheme. Although the Committee abandoned this effort for Liens, it did include revisions to create a notice procedure for payment bonds on public projects as noted below.

Altering when Lien Perfection Occurs
The Revisions cause perfection of liens to occur earlier under the terms of Chapter 44A to counteract the effect of a series of cases in the Eastern District Bankruptcy Court, commonly referred to as Harrelson/Mammoth. The ruling from this line of cases prohibited potential Lien Claimants from filing their lien after a Bankruptcy petition was filed by the Contractor, and since no lien could be filed, the potential lien claimants were treated as unsecured creditors, instead of secured creditors as a result of their inability to file their liens, despite otherwise having enforceable lien rights under the State statute. The Revisions cause “perfection” to occur earlier, which would circumvent the Bankruptcy ruling. Ironically, on the day the committee heard presentations on why this needed to be fixed, the Bankruptcy Court issued a decision in the appeal of these cases, which wiped out the effect of the cases, making the revisions unnecessary for the moment.

Revisions Fail to Correct Pete Wall Case
This case was a ruling by the North Carolina Court of Appeals, where the Contractor, through no fault of its own, and as a result of operation of contract terms between the Owner and a Lease arrangement for the property, the statutory Lien Rights of the Contractor were wiped out without any recourse, because the work was furnished pursuant to a Lease. Floridarecently amended its statute to allow Lien Claims to reach the fee owner of the property, and not just the Lessee’s interest, and ASAC proposed making a similar change to the North Carolinastatute. The issue affects contractors and subcontractors negatively. The Committee indicated that it desired to correct the effect of the Pete Wall case, and invited proposals from the industry stake holders to include in the Committee’s revisions. Only ASAC submitted a proposed statutory change to correct the effect of the Pete Wall case, but, unfortunately, the Committee took no action on the proposal from ASAC due to lack of time, and recommended “further study” of the issue
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Create Civil Action for False Lien Waivers
The Revisions provide a civil cause of action allowing a party to sue for recovery of treble damages and attorneys fees as an unfair and deceptive trade practice under Chapter 75 when a false lien waiver was furnished; although the statute already made providing a false lien waver a misdemeanor crime, it was considered toothless, where District Attorneys were unwilling to prosecute such matters.

Notice of Public Subcontract Procedure for Payment Bonds
The Revisions create an entirely new lower tier subcontractor Notice of Public Subcontract procedure, which if not complied with, limits the subcontractor=s right of recovery under the bond to work furnished only within 60 days of the bond claim suit. The subcontractor will be required to research and furnish substantially more information for the Notice of Public Subcontract prior to the existence of any claim, in order to avoid a limitation on its payment bond claim later. Intended to cut off late filing claimants, the additional payment bond claim procedure will create new forfeitures of the right to recover for work furnished by subcontractors and suppliers and accepted by contractors and owners, to address the issue of possible double payment. Under the revisions, contractors have a duty to furnish contractual information to subcontractors for their use in preparing notices, but if the they fail to provide the information, they suffer no penalty under the proposed draft revision for failure to do so, only losing the benefit of the curtailed subcontractor claim.

The Revisions recommended by the Lien Review Committee will be taken up in the short session of the General Assembly. See the Committee on Mechanic’s Lien on Real Property Final Report here.

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