Hidden Lien Legislation Appears Primed for Approval in General Assembly

The train is on the track, and there’s no slowing it down.That was the impression left on construction industry stakeholders after House Judiciary Subcommittee B approved Senate Bill 42 unanimously yesterday.

Although the bill was initially re-referred to the Finance Committee, that referral was subsequently withdrawn, and a quick scan of today’s legislative calendar suggests the bill will be considered by the entire House at 11:00 a.m. this morning (the House calendar is here; see bottom of page 2).

Changes to the legislation have come fast and furious over the past three days.  On Monday evening (June 18), interested stakeholders received a copy of SB 42.  While the essence of this draft is really no different from what the title insurance industry had been seeking in its draft — specifically, a requirement that all potential lien claimants notify the owner’s designated “lien agent” of their project involvement in order to preserve future lien rights — the details and mechanics of SB 42 are considerably different from what is contained in the title insurers’ draft.   By yesterday morning (June 20), even before the 10:00 a.m. subcommittee hearing, SB 42 itself had undergone some substantive revisions overnight.  That required interested stakeholders to scramble mere moments before the hearing to understand and address what had changed since the Monday draft.

The subcommittee’s consideration of the revised version of SB 42, including two amendments thereto, lasted just over an hour — arguably an inadequate time to fully discuss and deliberate over the fine details (and trust me, when it comes to this bill, the devil is most certainly in the details).  But at the end of the day, it’s fair to say that the details are taking a backseat to the perception that the state’s economy, or at a minimum its residential development sector, could collapse if the three title insurers who have threatened to curtail writing mechanic’s lien coverage were to carry out that threat.

And so a bill is likely to pass, warts and all.  The subcommittee agreed to an April 1, 2013 effective date so that the kinks can be ironed out early in the next legislative session.

The following is a non-exclusive list of some of the bill’s details that are worth noting:

(1)  SB 42 improves protection for late-performing trades.  So long as the lien agent receives notice from the potential lien claimant of its project involvement within 15 days of its first furnishing, that claimant’s rights would be preserved — even if the land were conveyed or refinanced over the interim period.

(2)  SB 42 does not make a distinction between residential and commercial projects.  Despite the protestations of this blogger and others, there appears to be no appetite to separate residential and commercial projects.  ALL private projects for which the cost at the time of permitting is $30,000 or more will fall under this new regime.

(3)  Administrative burdens for non-laborer suppliers have been reduced.  A supplier who is not required to furnish any on-site labor will have to be provided with contact information for the lien agent from the party above it in the contractual chain.  That’s an improvement.  More problematic is the penalty for not providing that information downstream — unfair and deceptive trade practice liability (and therefore exposure to triple damages and attorneys’ fees) if the information is not provided within three days of contracting and the supplier suffers actual harm as a result of the non-compliance.  Seems to this blogger that the penalty for not providing the information should be something less draconian — specifically, the supplier should have no obligation to perform until the lien agent contact information is received.  That’s the way the new “double payment” protection for contractors will work if the payment bond revisions in HB 1052 become law.

(4)  SB 42  eliminates a “Gotcha!” defense to lien liability.  The whole purpose of notice to the lien agent is to let the title insurer know who’s involved on a particular project.  Once a claim of lien on real property is filed, however, the title insurer has  “record notice” of that claimant’s project involvement.  It stands to reason that if a claim of lien on real property is filed prior to a conveyance or re-financing of the land subject to the improvement, that should be good enough, even if the lien claimant had inadvertently failed to provide the pre-notice to the lien agent.  In other words, a title insurer shouldn’t be allowed to say “You failed to file notice to the lien agent, so even though I had record notice of your project involvement, you’ve got no lien rights.  Gotcha!”  SB 42 deprives title insurers of that “Gotcha!” defense — a lien claimant who files a claim of lien on real property prior to conveyance will still have its lien rights.  It’s less clear, however, whether a claimant’s lien priority would be maintained upon the recordation of a deed of trust upon project re-financing; the statute’s language is arguably ambiguous on the point.

I will continue to monitor the situation and report back.  Thanks for staying tuned.  In the interim, check out this post on N.C. Construction News.  It states that the American Subcontractors Association of the Carolinas (“ASAC”) is asking its members to:

call Pryor Gibson, who is Governor Perdue’s aide, at 919-733-5811, to let Mr. Gibson and the Governor know that if the lien agent bill passes as it is currently being considered, it will remove over 140 years of constitutionally mandated protection of mechanic lien rights from subcontractors and suppliers, who are in North Carolina, who pay taxes in North Carolina, and who employ tens of thousands of North Carolinians.

As Mr. Gibson is a construction man himself, GC’s, subs and suppliers might find a sympathetic ear in the governor’s office.

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Filed under Lien Law, State law, policy & news

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