Slide 1

Report
Avoiding the Landmines of
Amended Chapter 44A
A Primer on House Bill 1052 and Senate Bill 42
(Session Laws 2012-175 and 2012-158)
Introduction
 This summer, during its legislative “short session,” the North Carolina
General Assembly finally passed double-payment protection for
contractors under the public payment bond statute.
 The bill also includes protection for subcontractors when a higher-tier
party files for bankruptcy.
 At the insistence of the title insurance industry, however, the General
Assembly also passed legislation requiring lien pre-notices on most
private construction projects.
 Both bills have been signed into law by Governor Perdue.
 We’re here to help you understand the legislative changes and protect
your lien and bond rights under the revised Chapter 44A.
Background
 Beginning in 2010, the North Carolina Bar Association’s
Construction Law Section and Property Law Section
began an effort to analyze potential revisions to the lien
and bond laws under Chapter 44A of the North
Carolina General Statutes.
Background
 The revisions under consideration covered a number of issues:
 Addressing “hidden” mechanics’ liens;
 Protecting general contractors from incurring double liability under
payment bonds on public projects;
 Protecting subcontractors and addressing bankruptcy court rulings that
prevent subcontractors from perfecting and enforcing mechanics’ liens
after a bankruptcy is filed;
 Addressing the current Notice of Contract problem created when a
general contractor is hired to perform work more than 30 days after
the building permit is issued;
 Creating standard statutory forms for partial and final lien waivers;
 Wachovia case (lien waiver issue); and
 Pete Wall case (liens on leasehold interest).
Background
 When the long session of the North Carolina General
Assembly convened in 2011, the proposed revisions
were packaged as a single bill, and introduced as
House Bill 489.
 House Bill 489 passed the House and was referred to a
study committee for further analysis.
Background
 In February 2012, the appointed Study Committee
adopted findings which included:
 Addressing problems under the current law relating to federal
bankruptcy court decisions;
 Addressing the issue of double payment liability for prime
contractors on public projects; and
 The issue of “hidden liens” required further study and could
not be resolved during the legislative short session.
Background
 The aspects of the lien and bond law revisions adopted
by the Committee were incorporated into the bill
introduced as House Bill 1052 (“HB 1052”)
 The bill was enacted by the legislature and signed into
law on July 12, 2012
 Its provisions become effective January 1, 2013.
Background
 The title insurance industry
objected loudly and strongly to
the omission of hidden lien
protection from HB 1052.
Background
 Under enormous pressure from the title insurance
industry, the General Assembly considered Senate Bill
42 (“SB 42”), the so-called “lien agent” statute to
address the hidden lien problem.
 The bill was passed by the legislature and signed into
law on July 12, 2012
 Its provisions become effective April 1, 2013.
Presentation Roadmap
 Statutory changes to those portions of Chapter
44A related to mechanics’ liens
 Including the new lien agent / pre-notice provisions
of SB 42
 Statutory changes to those portions of Chapter
44A related to payment bonds
New Definitions
 Owner: “A person who has an interest in the real property




improved and for whom an improvement is made and who ordered
the improvement to be made.”
Contractor: “A person who contracts with an owner to improve
real property”
First tier subcontractor: “A person who contracts with a
contractor to improve real property”
Second tier subcontractor: “A person who contracts with a first
tier subcontractor…”
Third tier subcontractor: “A person who contracts with a second
tier subcontractor…”

N.C.G.S. § 44A-7(1-2, 6, 8-9)
New Definitions
 Lien Agent: “A title insurance company or title insurance
agency designated by an owner...”
 Obligor: “An owner, contractor, or subcontractor in any
tier who owes money to another as a result of the other’s
partial or total performance of a contract to improve real
property”
 Potential lien claimant: “Any person entitled to claim a lien
for improvements to real property under this Article…”
 N.C.G.S. § 44A-7(2a, 5, 6a)
New Perfection Requirements for
Claims of Lien On Real Property
Existing Law
 At the time of filing at the
Clerk’s office
Effective Jan. 1, 2013
 Only after filing and
service upon the
owner
 N.C.G.S. § 44A-11(a)
 Within 120 days of last
furnishing
 N.C.G.S. § 44A-12(b)
New Perfection Requirements Affect
Subcontractor Subrogation Liens
Existing Law
 At the time of filing at the
Clerk’s office
Effective Jan. 1, 2013
 Only after filing and
service upon the
owner and the
contractor
 N.C.G.S. § 44A-11(a)
 Within 120 days of last
furnishing
 N.C.G.S. § 44A-12(b)
Claims of Lien on Real Property Must
Include a Certificate of Service
 “I hereby certify that I have served the parties listed in
paragraph (2) above in accordance with the
requirements of G.S. 44A-11”
 N.C.G.S. § 44A-12
Complying with the New
Service Requirements
Method
 Personal Delivery;
 Deposit for delivery with
USPS; or
 Deposit with specified
overnight delivery services

N.C.G.S. § 44A-11(b)
Service Address
 Address listed on building
permit;
 Address listed on county tax
rolls; or
 Address for the party’s
registered agent (published
with the Secretary of State)
 N.C.G.S. § 44A-11(c)
Necessary Parties to a
Lien Enforcement Action.
 Former or subsequent purchasers of real property are
not necessary parties to lien enforcement actions, if no
additional relief is sought from those parties.
 N.C.G.S. § 44A-13
 Note that this provision is effective immediately.
The “Bankruptcy Fix”
 A notice of claim of lien upon funds is immediately
effective upon the first furnishing of labor, material or
services.
 N.C.G.S. § 44A-13
 The modification protects subcontractors of all tiers when
a party above them in the contractual chain files for
bankruptcy
The Dawn of the “Lien Agent”
 In May 2012, the first draft of a new title insurers’
proposal (SB 42) was circulated, based in concept upon the
lien agent model used in Virginia for one and two family
residential construction projects.
 Unlike the Virginia statute, the legislation passed in North
Carolina applies to commercial construction projects.
The Dawn of the “Lien Agent”
 Any party providing labor, materials, or services for the
improvement of real property (with certain limited
exceptions) will need to serve a “Notice to Lien Agent” to
preserve all lien rights against the real property.
 N.C.G.S. § 44A-11.2
 The lien agent must be registered with the Department of
Insurance, and only a representative of a title insurance
company is presently able to register as a lien agent.
 N.C.G.S. §§ 44A-7(a), 44A-11.1(b)
Exceptions
 The lien agent requirements do not apply for
improvements to an existing single-family
residence that is used by the owner as a
residence.
 N.C.G.S. §§ 44A-11.1(a)
 A lien agent need not be identified if the cost of
the undertaking at the time the original
building permit is issued is under $30,000.
 N.C.G.S. §§ 44A-11.1(a)
Complying with the Notice Requirement
 Service of the Notice to Lien Agent can be accomplished by
certified mail, signature confirmation, personal delivery,
facsimile, overnight delivery services (FedEx or UPS), or email.
 N.C.G.S. § 44A-11.2(f)
 The key requirement for any method is that delivery receipt or
confirmation must be obtained.
 N.C.G.S. § 44A-11.2(f)
 KEEP YOUR GREEN CARDS, FAX CONFIRMATIONS AND
E-MAIL READ-RECEIPTS!
Consequences of Failure to Comply
with the Notice Requirement
 Leads to loss of lien rights if the property is sold or refinanced.
 A potential lien claimant who has not served a Notice to Lien Agent prior to the
sale of the property to a bona fide purchaser for value may not perfect a claim of
lien upon that real property, unless the improvements provided by the party were
first furnished no later than fifteen days prior to the sale.
 If a potential lien claimant has not served the Notice to Lien Agent prior to the
recordation of a deed of trust, a subsequently filed lien will be deemed
subordinate in priority to the deed of trust.
 Every contractor, as well as every subcontractor, should serve Notice to Lien
Agent within 15 days of its first furnishing to avoid these dire consequences.
 N.C.G.S. §§ 44A-11.2(k)(1), 44A-11.2(l)(1)
What if You Miss the 15-Day Window?
 Under certain circumstances, a potential lien claimant may
perfect a claim of lien on real property in the event:
 the lien agent has received notice from the potential lien claimant
prior to advance or refinance of the improved real property; or
 the potential lien claimant has filed a claim of lien on real property
prior to the conveyance of the improved real property.
 N.C.G.S. §§ 44A-11.2(k)(1), 44A-11.2(l)(1)
 DON’T RISK IT. Get in the habit of sending the form in
within 15 days of first furnishing.
Sample Notice to Lien Agent
NOTICE TO LIEN AGENT
1) Potential lien claimant's name, mailing address, telephone number, fax
number (if available), and electronic mailing address (if available):
2) Name of the party with whom the potential lien claimant has contracted
to improve the real property described below:
3) A description of the real property sufficient to identify the real property,
such as the name of the project, if applicable, the physical address as
shown on the building permit or notice received from the owner:
4) I give notice of my right subsequently to pursue a claim of lien for
improvements to the real property described in this notice.
Dated:
Potential Lien Claimant
Obtaining the Lien Agent’s
Contact Information
 The identity and contact information for the lien agent is
required to be identified by the owner. It is to be included in
the application for a building permit, to be provided to the
inspection department and/or to be posted at the jobsite.
 N.C.G.S. §§ 44A-11.2(b)
 There is no specific sanction under the new statutes for failure
by the owner to identify the lien agent.
 However, a potential lien claimant is not required to comply with the
notice requirements if the owner has failed to identify the lien agent.
 N.C.G.S. §§ 44A-11.2(b)
Providing Lien Agent Information to
Material Suppliers
 Contractors or subcontractors who contract with “a
lower-tier subcontractor who is not required to furnish
labor at the site of the improvements” must give notice of
the identity of the lien agent to the material supplier
within three business days of the contracting.
 Failure to flow down the lien agent information to a
material supplier can result in liability for the actual
damages suffered by the supplier as a result of the failure.
 N.C.G.S. §§ 44A-11.2(c)
Subcontractor Subrogation Rights
Have Been Enhanced
General Contractor
1st Tier Subcontractor
(steps into GC’s “shoes”)
2nd Tier Subcontractor
Subcontractor Subrogation Rights
Have Been Enhanced
 Amendments to Section 44A-23 obtained through SB
42 protect subcontractors’ subrogated lien rights
against actions of the contractor (i.e., waiver), so
long as the sub or supplier has:
a)
b)
c)
Given notice to the lien agent under the new
requirements;
Served its notice of claim of lien upon funds upon the
owner; and
Served the notice of claim of lien upon funds to the lien
agent.
False Statements in
Lien and Bond Claims
 Class 1 misdemeanor and grounds for disciplinary action
 Must knowingly make false statement about amount due
 Must be made in writing
 N.C.G.S. § 44A-24
Elements of Criminal Misdemeanor
 False written statement,
 With knowledge it was false, and
 Receipt of payment for labor or materials by:
 Person signing false statement,
 Person directing another to sign, or
 Any person or entity for whom the document was signed.
Everyone’s at risk
 Applies to all persons and entities licensed under Chapter
87 of North Carolina General Statutes
 Contracting entity and qualifiers
 General Contractors
 building, highway, public utilities, grading
 Plumbing and heating contractors
 Electrical contractors
 Other persons or entities covered by Chapter 87
Licensed Contractors or Qualifiers
 Constitutes deceit and misconduct subject to disciplinary
action under Chapter 87 of the General Statutes,
 Sanctions:
 Revocation, suspension, or restriction of a license
 Ability to act as a qualifying party for a license
 DON’T EXECUTE FALSE LIEN WAIVERS!!!
 CONFIRM ALL CERTIFICATIONS ARE TRUE!!!
2012 Amendment to North Carolina
Little Miller Act
 Enacted to avoid “Double Payment” by contractors on
state and local public projects
 For projects with building permits issued on or after
January 1, 2013
 If no permit, for projects commenced after January 1,
2013
What is Double Payment?
 Contractor pays first-tier subcontractor all amounts owed
 First-tier subcontractor fails to make payment to second-
tier subcontractor
 Second-tier subcontractor makes claim against contractor’s
payment bond
How Does Double Payment Occur?
 Notice due from remote subcontractors 120 days after last
furnishing N.C.G.S. § 44A-27(b)
 If first-tier subcontract paid in full before Notice of Claim is
served
 Contractor obligated to cover payment bond claim
 Contactor ends up paying twice for same labor and
materials
How Can Double Payment
Be Avoided?
 Contractor must be able to identify accurately who is
supplying labor and materials to its subcontractors
 Sooner than 120 days after they have finished work on the
project
Contractors Project Statement
 Only on Public Projects where Payment Bond required
 Contractor responsible for preparing Project Statement
 N.C.G.S. § 44A-27(f)
Purpose and Content of
Project Statement
 Provides lower-tiered subcontractors with information
about project
 Information needed to service Notice of Public Subcontract
 N.C.G.S. § 44A-27(f)(1)
Service of Project Statement
 Contractor must provide to each of its First-Tier
Subcontractors
 N.C.G.S. § 44A-27(f)(1)
 Each Subcontractor must provide to each Subcontractor it
engages
 N.C.G.S. § 44A-27(f)(2)
 Second-Tier Subcontractors must provide to each Third-
Tier Subcontractor
Procedures Relating to
Project Statement
 Subcontractors should obtain a copy prior to extending
credit
 Contractors should adopt procedure for documenting
service of Project Statement
 Include as part of subcontract documents
 Have subcontractors sign acknowledgement of receipt
Failure to Provide
Project Statement
 Higher tier party cannot enforce its contract with its lower
tier subcontractor
 N.C.G.S. § 44A-27(f)(3)
Obtaining Copy of Payment Bond
 Until January 1, 2013
 May request from contracting body
 Must be provided by contracting body within 10 days of
request
 May also obtain copy of construction contract
 Contacting body may charge reasonable actual cost of
providing
 N.C.G.S. § 44A-31(a)
Obtaining Copy of Payment Bond
 After January 1, 2013
 May request in writing that contractor to provide copy of
payment bond
 Contractor must provide within 7 calendar days of
receipt of written request.
 Failure to comply exempts subcontractor from Notice of
Public Subcontract requirement
 Even if time for serving Notice expired

N.C.G.S. § 44A-27(b)
Notice of Public Subcontract
 Required only on Public Projects where Payment Bond required
 Subcontractors with a direct contractual relationship with any
subcontractor
but no contractual relationship with the contractor
 Similar to Notice of Subcontract form used for private projects
 N.C.G.S. § 44A-27(b)
Purpose and Content of Notice of
Public Subcontract
 To address double payment problem created by 120-day
notice from remote subcontractors
 Provides contractor earlier notice of:
 The names and addresses of remote subcontractors,
 The parties with whom they contracted, and
 The labor and materials provided.
 N.C.G.S. § 44A-27(d)
Service of Notice of
Public Subcontract
 By certified mail or U.S. Mail with signature confirmation
 Addressed to contractor:
 at address on Project Statement, or
 place where the contractor regularly maintains an office, or
 by any other means allowed for the service of a civil summons
 N.C.G.S. § 44A-27(c)
Who Should Serve Notice of
Public Subcontract
 Subcontractors with a direct contractual relationship with
any subcontractor, but no contractual relationship with the
contractor
 If subcontractor provides written request for copy of payment
bond and contractor timely complies, or
 If subcontractor fails to make written request for copy of
payment bond, and
 If subcontractor provides more than $20,000 in labor and/or
materials to the project
Effect of Serving Notice of
Public Subcontract
 Preserves remote subcontractor’s right to assert payment
bond claim
 75 days before service of Notice of Public Subcontract, and
 After service of Notice of Public Subcontract
Effect of Not Serving Notice of Public
Subcontract When Required
 Precludes recovery against payment bond for amounts over
$20,000
Effect of Delaying Serving Notice of Public
Subcontract When Required
 Precludes recovery for labor and materials supplied more
than 75 days before service.
 Subject to $20,000 exclusion
120-Day Notice of
Payment Bond Claim
 Requirement not changed
 Must still be served by subcontractors with a direct contractual
relationship
with any subcontractor but no contractual relationship with the
contractor
 Within 120 days of last date on which subcontractor furnished
labor or materials for the project
 Even if:
 Contractor fails to timely comply with subcontractors written request for copy of
payment bond
 Subcontractor serves Notice of Public Subcontract
 Subcontractor supplies no more than $20,000 in labor or materials

N.C.G.S. § 44A-27(b)
QUESTIONS

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