Recent rulings by bankruptcy judges have affected Chapter 44A lien rights.

• Author: Smith, William C.
• Position: LAW JOURNAL 2010

Collections have never been as important--or as challenging--as now. North Carolina construction industry vendors have long held an advantage over other goods and services providers because they can impose liens upon real property improved by their efforts or upon funds in the contract stream. Three recent cases from the Bankruptcy Court of the Eastern District of the North Carolina have exposed limits to these rights and re-emphasized the importance of creditor diligence and proactivity.

Labor and materialman's liens in North Carolina

The rights of laborers and materialmen to assert liens are provided in Chapter 44A of the N.C. General Statutes. In most cases, persons who improve real property have lien rights. Improvement is broadly defined, encompassing engineering, building, demolishing and excavating structures or the land itself. Chapter 44A provides three distinct lien rights to general contractors and subcontractors.

Direct lien. A person contracting directly with an owner of real property may file a lien against the property for payment, filing it with the clerk of superior court within 120 days of furnishing labor or materials to the property. A significant benefit of the direct lien is that it relates back to the date of first furnishing of labor and materials by the lien claimant.

Lien on funds. Those subcontractors who have no direct contract with the owner (but contracted with the general contractor or upstream subs) are not left out. First-tier subcontractors are entitled to assert a lien upon funds owed by the owner to the general contractor; second-tier subs can lien funds owed by the general contractor to the first-tier sub; and so on. The lien is created upon giving notice of the claim, in writing, to the parties upstream [called "Obligors"]. There appears to be no statutory deadline for this notice. It is required that funds are owed to the entity with which the lien claimant contracted. Once the Obligor receives the notice from a subcontractor downstream of the contractor with whom it dealt, it is obligated to withhold enough funds from payment to its contractor to satisfy the lien. If it doesn't, it is liable to the lien claimant for this payment, and if the obligor is the owner of the real property, the subcontractor is entitled to claim a lien on it.

Subrogation lien. Certain higher-tiered subcontractors entitled to a lien on funds are also subrogated to the liens on funds and on the real property available to...