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NC Opinion Highlights Importance of Addressing Lien Claims in Settlement Agreements
September 29, 2010
After having filed and perfected a claim of lien on real property, you, as general contractor, have just entered into a written settlement agreement to settle a payment dispute with the owner.  Your agreement requires the owner to pay you $300,000 in three monthly installments.  The owner makes the first payment, but then refuses to make additional payments.  You successfully sue the owner for breach of the settlement agreement, only to find out that the owner is insolvent and unable to pay.  Can you now go back and foreclose on your lien?  Or have you waived your right to enforce the lien by settling your claim and reducing the settlement to judgment?  The North Carolina Court of Appeals answered these questions this summer in Ellis-Walker Builders, Inc. v. Don Reynolds Properties, LLC, No. COA10-32 (July 6, 2010) (slip op.).  In short, the answer depends on the terms of the executed settlement agreement itself.

I.    The Ellis-Walker Builders Decision.
In January 2006, Don Reynolds Properties (“Reynolds”) contracted with Ellis-Walker Builders, Inc. (“Ellis-Walker”) to construct a Port City Java in Wilmington, North Carolina.  Following completion of the project, a dispute over costs arose between the parties, and Reynolds withheld payment in the amount of $209,310.17.  In response, Ellis-Walker filed a claim of lien on the real property and perfected its lien by filing a complaint against Reynolds, a co-owner of the property, and Reynolds’ construction lender.  After mediation, the parties entered into a settlement agreement that required Reynolds to pay Ellis-Walker $112,500 in three installment payments.  The settlement agreement further provided that Ellis-Walker would, “[p]romptly following payment of the total amount … by [Reynolds],” dismiss the lawsuit and cancel any claims of lien against the property.

Ellis-Walker received the first scheduled payment under the settlement agreement, but did not receive the second or third payments.  Ellis-Walker successfully moved the court for an order enforcing the settlement agreement.  The trial court awarded Ellis-Walker $100,000 and also concluded that all other provisions of the settlement agreement remained in effect.

Ellis-Walker was unable to collect on the $100,000 judgment, and filed a second complaint in April 2009 seeking enforcement of the lien on the Wilmington property.  The lawsuit also alleged fraudulent transfer of assets, punitive damages, and a bevy of other claims.  In August 2009, Ellis-Walker filed a motion to enforce the lien and foreclose on the property.  The trial court denied the motion due to the existing money judgment in Ellis-Walker’s favor.  Ellis-Walker appealed.

The North Carolina Court of Appeals reversed the trial court’s ruling, expressly holding for the first time that enforcement of a valid lien on real property is a cumulative remedy and therefore available in addition to a personal money judgment against the owner of the property for amounts owed.  Ellis-Walker was entitled to enforce its lien on the property while at the same time attempting to collect on the money judgment awarded it against Reynolds.

While no reported North Carolina court opinion had expressly held that lien rights are cumulative to other remedies, the Court of Appeals foreshadowed this result in dicta as early as 1980.  In Lowe’s of Fayetteville, Inc. v. Quigley, 46 N.C. App. 770, 266 S.E.2d 378 (1980), the court cited with approval the following language regarding the cumulative nature of materialman’s and mechanic’s liens:

“Enforcement of a . . . lien is not the exclusive remedy in regard to the obligation which such lien secures.  The enforcement of the lien is a cumulative remedy provided by statute . . . and may be pursued in connection with ordinary remedies.  The lienor may proceed to enforce his lien and simultaneously bring an action to recover a personal judgment for the amount due.”

This rule, the court noted, is in accord with the approach taken in the majority of other states.  The lienor can enforce its rights through foreclosure of its lien, by collecting on a money judgment, or through a combination of both means.

The Ellis-Walker Builders case, however, presented a somewhat unusual set of circumstances in that the parties had entered a settlement agreement after Ellis-Walker sued to perfect and enforce its lien.  Reynolds argued that Ellis-Walker had waived its right to pursue foreclosure of the lien by entering into the settlement agreement.  The court rejected that argument, however, because the agreement specified that the claim of lien would be cancelled only after payment of the total amount due.  Because Reynolds did not pay either the total amount due under the terms of the agreement or the subsequent money judgment, the court held that Ellis-Walker was not obliged to cancel its claim of lien and could continue to enforce its rights against the property.

II.    Practical Considerations.
There are several points to take away from the Court of Appeals’ decision in Ellis-Walker Builders.
  • Statutory lien rights in North Carolina are cumulative, meaning that they are in addition to other rights the lienor has to collect for the value of labor, equipment, or materials supplied to a project.
  • Although you, as the lienor, can pursue various remedies simultaneously, there can still be only one satisfaction.  In other words, the lienor is only entitled to recover the total amount of its damages once, regardless of the number of means employed to enforce its rights.
  • Because remedies are cumulative, merely agreeing to settle an underlying payment dispute does not, without more, impact a lienor’s right to enforce its perfected claim of lien through foreclosure on the property.  Written settlement agreements in lien cases will only waive or extinguish a lienor’s enforcement rights if the agreement expressly provides for immediate cancellation of a previously-filed claim of lien.  This rule has particular application where an owner may be on the verge of bankruptcy or insolvency.  By maintaining its lien on the owner’s real property, a lienor maintains its security interest and avoids being reduced to an unsecured creditor in a bankruptcy action.
  • Parties negotiating payment disputes in North Carolina must take heed to ensure that their settlement agreements specifically address existing claims of lien.  The onus is squarely on the settling property owner (or its lender) to insist on immediate discharge of all liens as a condition of settlement.

  III.    Conclusion.
Ellis-Walker Builders provides some clarity to the prosecution and settlement of lien claims in North Carolina, but it leaves several questions unanswered.  For example, it is not clear from the decision whether the result would have differed if the parties had executed the settlement agreement before, rather than after, the contractor filed and perfected its lien.  The absence of a previously-perfected lien at the time of settlement would undoubtedly have strengthened the owner’s waiver argument.  The decision also does not address claims of lien upon funds or subcontractor Swain Liens.  As a result, Ellis-Walker Builders’ impact on subcontractors remains to be seen.

Lien laws can be complicated and contain many traps for the unwary.  Parties faced with filing, defending, or settling claims of lien on real property in North Carolina should consult with a knowledgeable attorney to ensure their rights are adequately protected.
Please contact us with questions.

Spilman Construction Practice Group
Bryan G. Scott

Banking & Finance Law