January 2003

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.

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.

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.”

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.

Claimant	Amount Claimed		Prorating Fraction	Prorated Lien Amount
FTS-1	$8,000	x	10,000	= $6,666.67
			12,000

FTS-2	$4,000	x	10,000	= $3,333.33
			12,000

Totals:	$12,000 (claimed)			= $10,000.00 (allowed)

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).

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).

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. 2^nd 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).

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 issues.

(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 court’s.)

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.