N.C. Business Court: Online Lien Filing Service Engaged in Unauthorized Practice of Law

Screen shot of Lienguard's home page

Screen shot of Lienguard, Inc.’s home page on April 9, 2014. Click image to explore the site.

In a decision likely to impact out-of-state suppliers furnishing materials to North Carolina construction projects, the North Carolina Business Court ruled on April 4, 2014 that Lienguard, Inc., an online mechanics’ lien filing service, engaged in the unauthorized practice of law by preparing liens for others without first acquiring a license to practice law in the Old North State.

In The North Carolina State Bar v. Lienguard, Inc., Judge Jim Gale declared that Lienguard violated North Carolina’s statutes governing the licensure of attorneys (Chapter 84 of the N.C. General Statutes) by preparing liens, providing advice about liens and holding out that it was competent to file liens in North Carolina, all without being licensed to do so.  Judge Gale also ruled that the State Bar was entitled to a permanent injunction prohibiting Lienguard from engaging in similar acts in the future, giving the parties 20 days to draft and submit an appropriate order for the Court’s consideration.

In defending against the State Bar’s action, Lienguard argued that its services were clerical, not legal, in nature, and that the statutes governing licensure of attorneys did not apply to its services.  The Business Court disagreed.  It ruled that a claim of lien is a “legal document,” defined as “documents or contracts by which legal rights are secured,” State v. Pledger, 257 N.C. 634, 636–37, 127 S.E.2d 337, 339 (1962), and that preparing legal documents for another constitutes the practice of law, not simply a clerical task.  After reviewing the contents of Lienguard’s website, Judge Gale also found as follows:

Lienguard’s various statements, including its definition of lien law terms, warnings regarding time requirements, and reminders about sending out preliminary notices within five to ten days of beginning work, when combined with its preparation of legal documents in the manner described above, constitute providing legal advice.  Therefore, Lienguard’s statements are in violation of Chapter 84.

Finally, the Court ruled that the statements appearing on Lienguard’s website “are here made for the specific purpose of drawing a client to the commercial lien preparation service and in specific connection with drafting such claims of lien,” and as such violate Chapter 84.

The Business Court also rejected Lienguard’s argument that Chapter 84 is unconstitutionally vague:

The court finds no vagueness in the statutes’ prohibition against preparing legal documents without a law license. The court also finds that there is no vagueness involved in concluding that a claim of lien is a legal document. It is clear that Lienguard believes the claim of lien is a legal document. Its own website emphasizes the legal importance of a claim of lien to protect its clients’ interests.

The decision is subject to appeal, and so as a judicial matter, I suspect we haven’t heard the last word on whether online mechanics’ lien service providers are subject to Chapter 84 of the General Statutes.  For the moment, however, the decision could disrupt the activities of a number of online service providers, including Northwest Lien, LienItNow, Titan Lien Services and friend-of-the-blog, zlien.com.*

Wednesday WisdomIt could also affect how out-of-state suppliers of materials to North Carolina construction projects secure their right to get paid for their goods.  My recommendation to suppliers who currently rely upon online services to prepare their claims of lien is to verify that at least one person employed by the service provider is licensed to practice law in North Carolina, and that such person will supervise and sign their future lien claims.  Alternatively, out-of-state suppliers should consider retaining an experienced construction attorney licensed to practice law in North Carolina to preserve their lien rights.

* By way of clarification, I’ve developed a social media relationship with Scott Wofle, Jr., Seth Smiley and others at zlien.com, who have been kind enough to tweet about and link to my North Carolina lien law content over the last few years.  I sincerely appreciate the exposure they have provided my blog, which is why I describe zlien as a “friend-of-the-blog.”  I did not intend to suggest, however, that I have a business relationship with zlien.com beyond our social media connection.  I do not. 

6 Comments

Filed under Lien Law, NC case law, State law, policy & news, Subcontractors

6 responses to “N.C. Business Court: Online Lien Filing Service Engaged in Unauthorized Practice of Law

  1. Nice post Matt. It will be interesting to see if this is an aberration in North Carolina or if other states will follow suit. I’m all for keeping busy, but preparing preliminary notices, mechanic’s liens, and (in California) stop payment notices would consume my entire day as a construction lawyer.

  2. Garret – I think that’s hilarious :). It’s also true. It’s also worth wondering what national suppliers or similar companies do when they have thousands of projects each month all across the nation. Can they find attorneys in every county to fiddle around and constantly report back to them with all of these notice requirements, deadlines, and form-filling tasks? Is that what attorneys do?

    As to preliminary notices — the NC court in this case does not, and really cannot not, distinguish between preparing a preliminary notice versus preparing a lien notice. They are both legal documents.

    This case calls LienGuard’s preparation of notices illegal, but the UPL statute clearly enables or allows LiensNC, LLC – “a coalition of title insurance underwriters” – to assist contractors and suppliers with the state’s preliminary notices. See: http://www.liensnc.com/LiensNC__LLC.html

    It will be interesting to see how this plays out across the country, but more so, how it plays out within North Carolina as it goes up through the courts.

  3. Matthew C. Bouchard, Esq.

    Many thanks for your comments, Garret and Scott!

    For many lien filings, particularly preliminary notices, I’m inclined to agree that the scrivener’s exception, under appropriate facts, could come into play. But I’m struggling with the tricky issues that can arise in completing a claim of lien on real property. Here’s one example:

    The claimant must ID its date of last furnishing of labor and/or materials on its lien claim. That’s not always a straightforward proposition. Does completing punch list work count? Does it matter if the punch list work represents original scope not yet performed, or correction of work disturbed by other trades? Does warranty work count? Delivering attic stock? Site clean-up? How about attendance at a subcontractor coordination meeting? A site walk-through to review punch list?

    These questions would appear to create a Catch-22 for national lien filing service providers lacking an agent licensed to practice law in NC. On the one hand, if the date of last furnishing provided by the customer is accepted at face-value without detailed questioning, that could end up being a disservice to the customer, should discovery during the lien enforcement action reveal that the customer’s claimed date of last furnishing doesn’t hold up under prevailing legal authorities. On the other hand, if the date is questioned, and judgments are made about what date actually represents “last furnishing” under the applicable legal authorities, that could be construed as UPL.

    Another example that comes to mind is the property description and owner identification for residential condo projects. If the customer provides only the project’s address and owner/developer’s name and that information is accepted at face value, all of the “owners” of the property might not be captured, if the owner/developer has started conveying units; that, in turn, could jeopardize the lien service requirements under NC law. If, on the other hand, the service provider conducts the research necessary to correctly ID all current “owners” of the condo project and their respective addresses, wouldn’t that constitute UPL?

    Very curious to hear your reactions!

  4. Matt – There are a lot of issues that you bring up with your comment. And they cut deep into this topic. I’ll react to them on a high level.

    1) Distinguishing between documents not possible under current UPL definitions
    The first thing is that there is some momentum to distinguish between “serious” legal documents and maybe “easy” legal documents. The UPL “practice of law” definition and the case law surrounding it offers no opportunity to make this distinction. Preliminary notices, lien waivers, tax forms, UCC liens, business corporation annual reports, registered agent changes, employment contracts, non-compete agreements, demand letters, wills, meeting minutes, by-laws, etc, etc. They are all “legal documents.”

    2) Filling in Documents v. Giving Legal Advice
    Your comment states that you are “struggling with the tricky issues that can arise in completing a claim of lien on real property.” You give an example of a particular NC lien requirement: Inputting the last furnishing date. What exactly is the last furnishing date, you ask?

    Well, first, it’s complete gray matter. Lawyers may take a stab at it, but this stuff is disputed all the time and left to a judge or jury. That’s just an aside.

    Second, and more importantly, the exchange between a company and their counsel about what constitutes the last furnishing date is something that software cannot do. That’s a conversation and an analysis. However, this speaks nothing to the ability for a company to decide to for itself (or decide after speaking with counsel) what date they would like to use, and then to input it into a software platform to prepare the document with that date.

    Your struggle is that you are thinking of real legal advice: A company wonders what their last furnishing date is, and they go to an attorney to talk about it. To the extent that LienGuard is having these conversations with customers and giving them definitive answers (i.e. “Use Feb 1st”)…they are practicing law.

    However, what if they:
    –> Publish articles about the issues that must be contemplated in NC when selecting a last furnishing date; and
    –> Allow them to use a software platform to input a date into a blank field, which will in-turn input that into a form.

    The company is choosing the date, either with or without the assistance of counsel. But, the software platform is only taking that self-determined date and placing it onto paper.

    Your struggle has nothing to do with any software function. You worry about a Catch-22 because the lien “service” would be doing a disservice to the customer, but this is not true. The lien generating platform is doing the exact service it promises: to generate a document based on the inputted information.

    3) Lawyers Struggle To Understand The Value Of This and Thus They Are Experiencing Clayton’s Disruptive Innovation
    Lawyers (I am one of them) really struggle to understand the value of this. They wonder, “wait, the form is ultimately wrong then if they don’t get legal advice.” They are blinded by their involvement in the legal profession.

    Companies could care less about filing a lien. They care about getting paid. When you have 10,000 projects every month across the country and a credit department staff of 150 nationwide who understand this stuff marginally well, the companies are willing to get something slightly less perfect for the value: getting it every time at a price and in a deliverability situation that makes sense.

    This is disruption 101: http://en.wikipedia.org/wiki/Disruptive_innovation

    4) There is no difference between liens and notices and lien waivers and anything else
    As a final point, I want to just comment about the distinction between a preliminary notice and a lien…and I want to throw in a lien waiver. The lien document is not a complicated document.

    Of course, it’s subject to a lot of nuance and complication and potential dispute (I write an entire blog on the topic). At it’s core, however, it’s just a very, very simple form with very, very logical components (i.e. deadlines that count from one day to another, different forms for different project circumstances, etc.).

    However, there is nothing particularly special about the lien as opposed to the preliminary notice or the lien waiver.

    You probably agree that generating a lien waiver is something that software can do. However, when a lien waiver is generated, the user must make a lot of choices. What type of waiver (conditional v unconditional, partial v. final), what is the dollar value to use, etc?

    Insofar as preliminary notices the same issues are at play. For example, many states require the party to identify its labor and materials according to certain thresholds…what description will be enough? They require an “estimate of the contract value” — what exactly does that mean, especially for on-going work?

    5) Conclusion
    Lawyers practice law. They give legal advice. They cross-examine witnesses. I could go on and on. But do they own the law?

    The law is there for the public, and the public should be empowered to use the law. You do not need a lawyer to USE the law. And finally, I present this thought:

    What is the practice of law exactly – is it really something that a software product can do?

    If it is, then we must examine the relevancy of the profession. If it is not, then the software products are replacing non-lawyer functions and need not be a cause for concern.

    It seems like a compelling idea that the more a “legal”-type function may be automated by software, the less it actually constitutes the practice of law. Software is not able to prosecute or defend a case in court, or adapt to witness questioning, or any other number of things that require a lawyer – merging information into a form, however, it can, and should, do.

    A great blog post on this topic can be found on the “Truth on the Market” blog. The article is “The First Amendment and unauthorized practice of law (http://truthonthemarket.com/2011/07/19/the-first-amendment-and-unauthorized-practice-of-law/).” Larry Ribstein wrote it, and he is reviewing a 2011 law review article by Catherine J. Lanctot at the Villanova University School of Law, which is titled: “Does LegalZoom Have 1st Amendment Rights? Some Thoughts about Freedom of Speech and the Unauthorized Practice of Law. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1874986)

    Ribstein sums up the point of that law review paper with a warning to the bar associations, saying “by arguing that any individualized advice about the law by a non-lawyer is illegal, the bar has exposed all of this regulation to the risk of invalidation.”

  5. Thorny, thorny. I think if you were to ask three different courts you might just get three different answers. Outside of well defined parameters, such as trying a case, on one hand, of drafting a contract, on the other (and even those, I recognize, could be quarreled with), what is or is not the unauthorized practice of law is a grey area. Shades of grey, certainly, but grey nonetheless.

    To me, a good yardstick, at least when it comes to the typical documents you would see in construction, is whether a document is filed with a court or not. Preliminary notices, mechanic’s liens, stop payment notices, conditional and unconditional waivers and releases upon progress or final payment, while all documents with legal implications, should not be documents that only attorneys or self-represented parties should be able to complete.

    I feel this way for a few of reasons: (1) there are many other documents with potential legal implications such as grant deeds which are routinely prepared by non-lawyers; (2) while the cost of hiring an attorney to prepare, say a preliminary notice, might be a marginal cost in the grand scheme of things, construction can be and often is a business with tight margins already; and (3) I think the intent behind the laws to make payment remedies available to contracting parties who might otherwise be in difficult bargaining positions is better carried out if there isn’t a high cost of entry.

    My high, high reaction though is: Did you know you’ve got commentary from the East Coast, the West Coast, and the South? All you need is some construction attorney from Chicago to pipe in and you’ll have the entire nation covered.

    Cheers.

  6. Pingback: Lienguard, Inc. Found Itself in the N.C. State Bar’s Crosshairs; Might LiensNC, LLC Be Next? | N.C. Construction Law, Policy & News

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