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NC Legal Updates for Construction Lenders

7/31/2011

By way of follow-up to our January 2011 article on the NC Lien Law Legislation and relevant case law, we want to report two recent developments. 

(1)        On July 19, 2011, the North Carolina Court of Appeals again addressed lien priority issues when it reversed the trial court’s entry of judgment on the pleadings in favor of Preserve Holdings, LLC (which purchased property out of foreclosure in January 2008 from the original plaintiff, Wachovia). Wachovia Bank, NA v. Superior Construction Corp., 2011 WL 2848234 (N.C. App., July 19, 2011). This opinion is important because it again highlights the uncertainty of predicting determining lien priorities. By way of background, Intracoastal Living agreed to pay $19,300,000.00 to Superior for performing construction work at The Preserve at Oak Island. Superior first furnished labor and materials under the contract on April 22, 2005. Shortly thereafter, on May 19, 2005, Intracoastal Living executed a construction loan agreement, a properly recorded deed of trust in favor of Wachovia, and a $22,835,000.00 promissory note. On May 11 and June 9, 2005, Superior executed partial lien waivers in connection with pay requests for construction work completed. Superior stopped construction in June 2007 for non-payment. A lawsuit followed in which Wachovia argued that its deed of trust had priority over Superior’s because Superior had waived its lien rights when it executed the two partial lien waivers. The Court of Appeals disagreed with the trial court’s conclusion that Wachovia’s deed had priority, reasoning as follows:

“The only way in which Wachovia's deed of trust could be deemed to take priority over Defendant Superior's mechanics' lien is in the event that the partial lien waivers signed by Defendant Superior have the effect of subordinating its entire claim to those creditors with liens perfected prior to the date upon which Defendant Superior signed the second partial lien waiver. We do not believe that the partial lien waivers signed by Defendant Superior have that effect and conclude that the trial court erred by reaching a contrary conclusion.” 

2011 WL 2848234 at *5. The Court of Appeals, however, did not decide the broader issue of whether the lien waivers can act to modify the date of first furnishing for purposes of determining priorities. Instead, the court’s opinion was narrowly focused on the exact language used in the partial lien waivers executed by Superior, and more specifically, what “on account of” meant:

“The critical language for the purpose of resolving the present dispute is the “on account of” provision, which clearly specifies the scope of the rights that Defendant Superior waived by signing the partial lien waivers. Thus, we must focus our inquiry on the meaning of the language providing that Defendant Superior waived “any and all” lien rights “on account of” the furnishing of labor or materials up to the date specified in the partial lien waiver.”

2011 WL 2848234 at *6. The Court of Appeals continued, “Having examined the relevant language on appeal, we conclude that the trial court erred by construing the partial lien waivers to effectively change the date of first furnishing and that the partial lien waivers merely precluded Defendant Superior from asserting a lien relating to the amounts already paid for work performed at The Preserve without having any further effect.” 2011 WL 2848234 at *7  Therefore, there is an argument that the opinion is limited to the contracts reviewed by the court in that case, and not instructive of how a court would rule or interpret priorities where similar partial lien waivers had been executed on other projects. In any event, the opinion establishes an argument for a case-by-case analysis of applicable documents.

(2)        The draft revised lien law statute introduced by the North Carolina Legislature this year and which we referenced in our January article was based upon a consensus bill prepared by the North Carolina Bar Association’s Lien Law Committee. The original proposed legislation has become a study bill. House Bill 489 allows the legislature to study proposed changes to the lien laws and was referred to the Judiciary I and to the Senate for a first reading on June 1. As the legislators have been busy working on redistricting matters, they are not expected to resume focus on the lien law study bill until the October Session. If the Study Commission’s Act does not pass, then the Lien Law Committee can further revise it and make it eligible for introduction in the 2012 Short Session. We will keep you apprised of further developments with the study bill, and with any proposed lien law. For additional information on this and other legislation of interest, you may go to ncleg.net.
 

For more information, please contact:

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Michael J. Basile / Responsible Attorney
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