CASE LAW SPOTLIGHT: Court of Appeals Holds That Partial Lien Waivers Do Not Reset The Date-of-First-Furnishing Clock

Fall is here, and in four short weeks, daylight savings time will “fall back” to eastern standard time.   Many of us will mark the occasion by checking the batteries in our smoke detectors, getting a much-deserved extra hour of sleep, and then awakening to the harsh reality that darkness will arrive an hour earlier than the day before, and will continue to descend earlier and earlier until Old Man Winter is finally upon us.   After enduring that chilling thought, we’ll walk through our respective homes and make sure all of our clocks, appliances and VCR’s (yep, I still have one) are set back an hour, to the proper time.

Filing a mechanics’ lien is a little bit like setting the clock back each Fall.  Sure, the date stamp applied by the clerk of court upon docketing a Claim of Lien bears the date of filing, but the contractor’s security interest in the property actually “falls back” to an earlier point in time — specifically, the date of the contractor’s first performance as recited in the Claim of Lien itself.  It is that date — and not the date of filing — that will establish the contractor’s priority in the property that is the subject of the contractor’s improvement vis-à-vis all other competing interests.

Or so we all thought, before the Business Court ruled in April 2010 that every partial lien waiver executed by a contractor in exchange for periodic payment effectively resets the date of first furnishing.  In all candor, many of my fellow construction law practitioners and I were shocked by that result.  Fortunately, order was restored this past July, when the Court of Appeals reversed the Business Court and held that a partial lien waiver does not affect a contractor’s place in the priority line.  Still, the Wachovia v. Superior Construction case discussed in this Case Law Spotlight article should serve as a “check-the-batteries-in-the-smoke-detector” moment for all contractors across the State: now would be a good time to make sure the partial lien waivers you execute every month aren’t too overbroad.   Details and analysis follow after the jump.

In Wachovia v. Superior Construction, Contractor commenced its performance one month before a deed of trust in favor of Lender was recorded with the Mecklenburg County Register of Deeds.  Generally speaking, that prior date of first furnishing would give Contractor a superior security interest in the land subject to the improvement.  However, in a declaratory action filed by Lender to establish lien priorities, Lender argued that the partial lien waivers executed by Contractor in exchange for periodic payment reset Contractor’s date of first furnishing.  The lien waivers read as follows:

Now, therefore, the undersigned, for and in consideration of the sum of $ [ ___, ___. ___ ] and other good and valuable consideration, the receipt whereof hereby acknowledged, do hereby waive, relinquish, surrender and release any and all lien, claim, or right to lien on the above said described project and premises, arising under and by virtue of the mechanic’s lien laws of the State of North Carolina on account of any labor performed or the furnishing of any material to the above described project and premises up to and including the (day) of (month), (year) 2005.

The Business Court ruled that such language waived not only the right to lien the property on account of the labor and material furnished through the date of the lien waiver, but also ruled that it waived Contractor’s position on the priority ladder.  As a result, the Business Court ruled that Lender’s priority was superior to Contractor’s.

On appeal, the Court of Appeals (“COA”) focused on the “on account of” language employed in the lien waiver.  Relying on the U.S. Supreme Court’s analysis in Rousey v. Jacoway, 544 U.S. 320 (2005), the COA held that “on account of” meant “because of,” “as a result of,” or “on the basis of” the work Contractor had done prior to the date recited in the lien waiver.  It therefore held as follows:

The language utilized in the partial lien waivers does not in any way refer to a waiver of [Contractor’s] ‘place in line;’ instead, it simply refers to a waiver of ‘any and all’ lien rights applicable to specific payments.  In essence, the partial lien waivers at issue in this case function as an acknowledgement that a payment for labor and materials expended through a certain date has been made and that [Contractor] has no further lien rights in the furnishing of labor and materials reimbursed by those payments.  Thus, we conclude that the partial lien waivers executed by [Contractor] merely operated as a waiver of its right to claim a lien on amounts for which it had been paid in return for supplying labor and materials before [the date recited in the waiver].

The COA clearly adopted a more narrow interpretation of the lien waiver language than the Business Court did.  In light of the North Carolina State Constitution’s mandate for an “adequate lien” for the protection of contractors, I believe this to be the proper result.  The case should serve as a warning to all general contractors: take great care in the drafting and/or execution of your lien waivers!  Had the language analyzed by the COA contained language expressly waiving Contractor’s place in line, such language very likely would have been enforced by the court.   See Cowper v. Watermark Marina of Wilmington, 2009 Bankr. LEXIS 3896 *4 (E.D.N.C. Bankr. 2009) (“Lien waivers are interpreted according to the principles applied to contracts in general”) (citing Chemimetals Processing, Inc. v. Schrimscher, 140 N.C. App. 135, 138, 535 S.E.2d 594, 596 (2000) (stating that “[r]eleases are contractual in nature, and their interpretation is governed by the same rules governing the interpretation of contracts”) (citations omitted).

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