“Who Are You?” To Preserve Lien Rights Against Owners, Get the Right Answer to that Question!

I’m psyched to present another guest blogger this week: Lewis & Roberts construction & surety law associate extraordinaire, Jessica Bowers.  It’s been my distinct pleasure to work with Jessica since she joined L&R in October 2010.  Jess has represented owners, developers, GC’s and subs, and her practice has seen an increasing emphasis on serving the needs of surety companies.  A member of the State bar since 2005, Jess was a recipient of the bar’s Pro Bono Public Service Award that year.  

If you’re like me, you might find yourself softly singing the catchy chorus from the Who’s “Who Are You” as you consider the North Carolina Court of Appeals’ June 5, 2012 decision in Young & McQueen Grading Company, Inc. v. Mar-Comm & Assocs., Inc. et al.

The case involved a good deal of confusion regarding the correct identity of the owner of a construction project, confusion that complicated the contractor’s assertion of its mechanic’s lien rights against the owner’s property.

Rest easy, the contractor ended up prevailing and holding on to its lien rights.  But it sure wasn’t easy!  The decision reminds us how critical it is at the beginning of a project to determine the correct identity of the owner of the improvement by obtaining an accurate answer to one simple question:

Who are you?

The Facts of the Case

Young & McQueen Grading Company, Inc. (“Y&M”), a grading contractor, entered into an AIA-form contract with Mar-Comm & Associates of North Carolina, LLC (“Mar-Comm of NC”) for the improvement of a residential subdivision.  The contract named Mar-Comm of NC as both the contracting party as well as the owner of the real property that was the subject of the contract.

Even before the contract was signed, Y&M had provided some preliminary services to Mar-Comm of NC under a “Proposal and Contract” that also named Mar-Comm of NC as the owner of the real property.

Here’s the catch: Mar-Comm of NC was NEVER the owner of the real property!  That distinction belonged to an affiliated entity, Mar-Comm & Associates, Inc. (“Mar-Comm”).

When Y&M was not paid timely for its work (and we’re talking about over $250,000 – certainly not chump change), it filed a claim of lien on the real property.  Unlike the Proposal and Contract and the subsequent AIA-form contract, Y&M’s lien claim correctly identified Mar-Comm as the owner of the property.  That’s the good news.  However, the claim of lien arguably misidentified Mar-Comm as the “person with whom claimant contracted,” when, in fact, both the Proposal and Contract and the AIA-form contract had been entered into with Mar-Comm of NC.

Y&M proceeded to file its lien enforcement action in superior court.  Despite the arguable misidentification of the “person with whom claimant contracted” as recited in the claim of lien, the trial court entered a judgment in favor of Y&M, and further declared that Y&M’s lien rights took priority over a lender’s deed of trust.  Both the lender and Mar-Comm appealed, arguing that Y&M had failed to adequately preserve its lien rights in its claim of lien.

The Appeal

One of the key arguments made by the lender and Mar-Comm on appeal was that since Y&M failed to contract with Mar-Comm – i.e., the real property owner – as recited in the claim of lien, the trial court’s judgment was in error.  They had a point: under North Carolina law, only a contractor entering into a contract for the improvement of real property with the owner is allowed to assert a claim of lien against the real property.  Those without a contract with the owner are subcontractors, and have to serve a notice of claim of lien upon funds up the contractual chain prior to filing real property liens.  If Y&M didn’t have a contract with the owner of the improvement, then Y&M’s lien claim arguably was invalid.

The appellate court, however, reached the same conclusions as the trial court: Mar-Comm of NC was Mar-Comm’s legal agent, and Mar-Comm had “ratified” (fancy lawyer word for “accepted”) Mar-Comm of NC’s contract.  Despite the fact the Proposal and Contract and AIA-form contract were signed by Mar-Comm of NC, it was Mar-Comm that had paid Y&M’s invoices.  The courts also found that Mar-Comm had used Mar-Comm of NC as a liaison for the project.  Furthermore, Mar-Comm – but not Mar-Comm of NC – was authorized to conduct business in North Carolina.

All of these factual findings, taken as a whole, led the trial court to conclude, and the appellate court to affirm, that Mar-Comm of NC was, in fact, the legal agent of Mar-Comm.  As Mar-Comm’s legal agent, Mar-Comm of NC bound Mar-Comm to both the Proposal and Contract and the AIA-form contract.  So when Y&M filed its claim of lien reciting Mar-Comm as both the legal owner of the property and the party with whom Y&M contracted, Y&M was, based on the courts’ principal-agent analysis, correct!

But I’m sure Y&M and its attorneys were sweating it out ‘til the end.

Takeaway

The Court determined that the relationship between Mar-Comm and Mar-Comm of NC was sufficiently close-knit to salvage Y&M’s lien rights.  Unfortunately, Y&M had to litigate all the way up to the Court of Appeals to get the relief it was seeking under North Carolina’s mechanic’s lien laws.  Avoid a similar fate by making sure you know with whom you are dealing.  These tips might help:

• Don’t rely on the plans, specifications, proposals or other documents a contracting party may provide to you in determining the owner of the real property; they don’t necessarily answer the question “who are you?” accurately.
• Consider keeping your construction attorney on stand-by during the private contracting process; he or she can conduct a review of the real estate records to help ensure that you are, in fact, contracting with the genuine owner of the real property.
• Consult with an attorney in preparing and filing your claim of lien; one false move, and your mechanic’s lien rights could be out the window.