Category Archives: NC case law

Court of Appeals: Contractors’ Lien Claim Properly Dismissed Where “Owner” Owned Nothing on Date of 1st Furnishing

In a controversial 2-1 decision released October 2, 2012, the North Carolina Court of Appeals (“COA”) affirmed a trial court’s dismissal of a mechanic’s lien claim asserted by contractors who did not have a contract with the “Owner” of the improved real property as of the date of first furnishing — even though the “Owner” ultimately acquired title to the land during the course of the contractors’ performance.

Who is an "owner" under the mechanic's lien laws in North Carolina

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The John Conner Construction, Inc. v. Grandfather Holding Co., Inc. decision is significant to the construction industry because it limits the reach of the term “Owner” as that term is used in North Carolina’s mechanic’s lien statutes.  Since there was one dissenting vote from the three-judge panel, however, the case is likely to be reviewed by the N.C. Supreme Court, which could elect to expand who qualifies as an “Owner” for the purposes of the lien law.

A full exploration of the facts, holding, dissent and practical implications of the John Conner Construction decision follows:

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

Bucking the Trend: The “Completed and Accepted Work Doctrine” Lives On In North Carolina

Image by eschipul via Creative Commons license.

In recent years, a majority of states have ruled that a contractor can be found liable for personal injuries suffered by third parties from accidents occurring after the contractor’s work is completed and accepted.

Not North Carolina.

In a decision handed down on August 7, 2012, the N.C. Court of Appeals (“COA”) once again embraced the “completed and accepted work doctrine,” which provides that an independent contractor is not liable for injuries to third parties occurring after the contractor’s work is completed and accepted.  The doctrine has been the “law of the land” in the Old North State since 1946, and our appellate courts show no signs of reversing course.

This post explores the COA’s decision in Lamb v. D.S. Duggins Welding, Inc., considers the merits and drawbacks of the completed and accepted work doctrine and concludes with some observations about the rule’s exceptions and limitations.

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Filed under Construction Defects, Defect Claims, Feature story, NC case law, State law, policy & news

The Ties That Bind, and Those That Don’t: Subcontracts v. Sub-bids

I frequently receive phone calls from general contractors curious to know what their legal rights and obligations are with respect to subcontractors before a subcontract agreement is actually reached.  Invariably, these calls entail answering one of two questions:(1)  Can I sue a subcontractor who wants to back out of its sub-bid or estimate?  Or,

(2)  Am I obligated to use a subcontractor upon whose sub-bid or estimate I based my prime contract price?

Generally speaking, the answer to both questions is “No.”  That’s partially good news for subs, and partially good news for GC’s.  Here’s why.

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Filed under NC case law, Subcontractors

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

Image courtesy Sam Killermann / samuelkillermann.com. Lyrics from “Who Are You” by P. Townshend (c) 1978.

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?

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You Just Signed A Construction Contract That’s In Excess of Your Limited General Contractor’s License; Can You Still Compel The Owner To Pay You?

Yes, but only up to a point.  Specifically, once the statutory limit of the license is reached, no additional contract balance above that limit may be recovered.

Our analysis begins with the N.C. General Statutes, specifically Chapter 87-10, which states, in pertinent part, that “the holder of a limited license shall be entitled to act as general contractor for any single project with a value of up to five hundred thousand dollars ($500,000)[.]”  We also need to bear in mind that in 1983, the North Carolina Supreme Court adopted the rule that “a contract illegally entered into by an unlicensed general construction contractor is unenforceable by the contractor.  It cannot be validated by the contractor’s subsequent procurement of a license.”  Brady v. Fulghum, 309 N.C. 580, 586, 308 S.E.2d 327, 331 (1983).

Based solely on the cited language of Chapter 87-10 and the general rule expressed in the Brady decision, it would be tempting to conclude that a contract entered into in excess of the statutory limit is illegal, void and therefore unenforceable in a court of law as of the moment the contract is signed.  Fortunately, however, that is not how subsequent appellate decisions have handled the situation.

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Case Law Spotlight: COA Limits Reach of Sedimentation Pollution Control Act in 2-1 Decision

The Court of Appeals (“COA”) held last week that a general contractor can not be held liable under North Carolina’s Sedimentation Pollution Control Act (the “SPCA” or the “Act”) for land-disturbing activities that resulted in an offsite deposit of silt, mud, debris and water on an adjacent landowner’s golf course.  The 2-1 split decision limits the reach of the SPCA, codified at N.C. Gen. Stat. §  113A-50 et seq., to offsite sediment disposal into water; according to the COA, disposal onto land is not covered by the Act.

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COA: “No Damages For Delay” Clause Does Not Defeat Equitable Adjustment Clause

“Time is money.”  Sure, it’s an overused cliché.  But as construction industry participants know better than just about anyone else, there’s a whole lot of truth in those three simple words.  When projects run late, completion costs invariably rise, frequently resulting in the assertion of delay claims (and counterclaims.  And third-party claims.  And cross-claims … you get the picture).  “No damages for delay” clauses in construction contracts seek to manage loss exposure arising from delay by limiting a contractor’s remedy for delay to a time extension only.  A typical “no damages for delay” clause might read as follows:

The Owner shall not be liable to the Contractor and/or any Subcontractor for claims or damages of any nature caused by or arising out of delays.  The sole remedy against the Owner for delays shall be the allowance of additional time for completion of the Work, the amount of which shall be subject to the claims procedure set forth in the General Conditions.~ Werner Sabo, Legal Guide to AIA Documents, 2008 (5th ed.)

Such clauses aren’t always enforceable.  In fact, under North Carolina statutory law, “no damages for delay” provisions are unenforceable in prime contracts between public owners and general contractors.  See N.C. Gen. Stat. § 143-134.3.  But in all other cases where such clauses are enforceable, do they provide an impenetrable defense against increased costs arising from project delay?  Not necessarily. Continue reading

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Filed under Delay Claims, Feature story, Material Cost Escalation, NC case law

Court of Appeals Issues Lien Priority Decision Arising From Scrivener’s Error in Deed

Here’s a fact pattern worthy of a bar exam question:

A Trust intends to convey to Developer a 100%, undivided fee simple interest in a tract of land (for the non-lawyers, Trust seeks to convey the whole kit-and-kaboodle to Developer).  Unfortunately, whoever prepares the deed effectuating this transaction is a tad sloppy, and mistakenly describes the estate conveyed as a “one-half fee simple interest,” rather than the full, undivided interest actually intended by the parties.

Along comes Lender, apparently unaware of the scrivener’s error, who provides construction financing to Developer for planned improvements to the parcel.  The loan is secured by a deed of trust, of course, which describes Lender’s collateral as Developer’s full, undivided interest in the parcel (which, unbeknownst to Lender, Developer does not actually have, at least not yet).

Contractor then begins making improvements to the parcel, under the belief that Lender has a first-position priority interest in the parcel that pre-dates Contractor’s commencement of work.  Contractor, however, is completely unaware of the scrivener’s error in the deed from Trust to Developer.

In time, Trust and Developer realize the error and record a corrected deed.  When Lender catches wind of what has occurred, it, too, heads to the Registry of Deeds, re-recording its original deed of trust on the parcel.  Ultimately, Contractor alleges it’s been stiffed by Developer, files a claim of lien, and then files a civil action to enforce its mechanic’s lien rights.  The action names Lender for the purpose of determining the relative priorities in the parcel, as Contractor seeks a judgment that its mechanic’s lien rights are  superior to Lender’s deed of trust, at least with respect to the one-half undivided interest that was not originally conveyed from Trust to Developer.   Which party stands higher on the priority ladder with respect to that one-half interest — Lender or Contractor?

Pens down, bar examinees!

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COA: Transfer of Account May Result in Payment Guarantee

In an unpublished decision released this past Tuesday, the N.C. Court of Appeals (“COA”) has construed a letter by an electrical subcontractor announcing its transition from a corporate entity to a limited liability company as a guarantee of obligations incurred by the corporate predecessor.  The letter announced as follows:

Let it be known that on the 8th Day of September, 2006 WielTech Electric Company became a manager-managed Limited Liability Company between organizers Benjamin Joseph Wieland and Jennifer Dawn Fortenberry.  From this date forward any and all business transactions, accounts or any other business relationship formed for WielTech Electric Co. by Tony C. Height, Catherine Robertson or any other person shall be transferred wholly into the newly formed LLC and the two individual organizers.

A supplier of WielTech sued the successor entity, its managers and others for past due invoices owed by WielTech.  The supplier  argued that the announcement letter constituted a personal guarantee satisfying North Carolina’s statute of frauds.  For the non-lawyers who may be reading this, the “statute of frauds,” codified at NCGS c. 22-1 (2009), requires a “special promise to answer the debt … of another person” to be in writing.  The successor entity and its managers defended the lawsuit on the grounds that the letter was too ambiguous to serve as a “special promise” to answer for the debts of the predecessor.  The COA sided with the supplier, holding that the language in the announcement letter stating that all accounts “shall be transferred wholly” to the individual organizers constituted a payment guarantee satisfying the statute of frauds.

Image by Naypong via FreeDigitalPhotos.net

I don’t want to speculate too much about the motivations of the organizers of the successor LLC in the WielTech decision, other than to say that based on an affidavit I have read in the record on appeal, WielTech and its principals may have been maneuvering to salvage their business after being stiffed by a bankrupt general contractor to the tune of just under $200,000.   In any event, and to the extent the WielTech folks were attempting to wrap-up the business affairs of one corporate entity and transfer assets to another entity without also assuming the obligations of the predecessor, suffice to say, mission most definitely not accomplished.

The takeaway?  In an environment where getting paid for labor provided and materials furnished isn’t getting any easier, creditors and their attorneys will aggressively utilize all legal remedies available to them — piercing the corporate veil, successor liability theories such as the “mere continuation” doctrine, personal guarantees, the Uniform Fraudulent Transfer Act, etc. — to track down sources of potential recovery.  To those trying to avoid payment obligations, caveat scriptor.    That letter you want to send to retain your customer base in the midst of a corporate transition might say a whole lot more than you think.

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Filed under NC case law, Payment for Goods and Services

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.

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Filed under Feature story, Lien Law, NC case law