Avoiding the Landmines of Amended Chapter 44A A Primer on House Bill 1052 and Senate Bill 42 (Session Laws and )

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.

The title insurance industry objected loudly and strongly to the omission of hidden lien protection from HB 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)

Existing LawEffective Jan. 1, 2013 At the time of filing at the Clerk’s office 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 for Claims of Lien On Real Property

Existing LawEffective Jan. 1, 2013 At the time of filing at the Clerk’s office 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) New Perfection Requirements Affect Subcontractor Subrogation Liens

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

MethodService Address Personal Delivery; Deposit for delivery with USPS; or Deposit with specified overnight delivery services N.C.G.S. § 44A-11(b) 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) Complying with the New Service Requirements

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.

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 “Bankruptcy Fix”

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) The Dawn of the “Lien Agent”

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) Exceptions

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 e- mail. 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 READ-RECEIPTS! Complying 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) Consequences of Failure to Comply with the Notice Requirement

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. What if You Miss the 15-Day Window?

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 Sample Notice to Lien Agent

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) Obtaining the Lien Agent’s Contact Information

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) Providing Lien Agent Information to Material Suppliers

Subcontractor Subrogation Rights Have Been Enhanced General Contractor 1 st Tier Subcontractor (steps into GC’s “shoes”) 2 nd Tier Subcontractor

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) Given notice to the lien agent under the new requirements; b) Served its notice of claim of lien upon funds upon the owner; and c) Served the notice of claim of lien upon funds to the lien agent. Subcontractor Subrogation Rights Have Been Enhanced

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)

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