August 25, 2009
A North Carolina Bankruptcy Court recently ruled that a subcontractor’s service of a notice of claim of lien on funds after the date the contractor had filed a petition in bankruptcy violates the automatic stay. Thus, held the court, the lien on funds was void. Further, because under North Carolina law a subcontractor may file a lien on real property only upon the service of a valid notice of claim of lien on funds, the subcontractor’s lien on real property was ruled void as well. This trial court opinion has been appealed.
In re: Harrelson Utilities, Inc., Case No. 09-02815-8-ATS, United States Bankruptcy Court, Eastern District of North Carolina, Raleigh Division July 30, 2009), recognized that whether a post-petition claim of lien in North Carolina falls within the exceptions to the automatic stay found in Bankruptcy Code § 362(b)(3) depends on a question of state law. In particular, if under state law the subcontractor has an interest in the funds prior to perfection (i.e. prior to service of notice of lien), the exception applies and the lien is valid. However, if under state law the lien right is created by the giving of the notice, the exception does not apply and the lien is void.
In reaching its decision, the court distinguished between North Carolina liens on real property and liens on funds, ruling that the statutory provision that a lien on real property “relates back” to the time of first furnishing of labor or materials, creates an interest in the realty prior to perfection, whereas a lien on funds, the court found, was afforded no such benefit. No subcontractor interest in the fund is created until service and receipt of notice. Curiously, the court did not find NCGS § 44A-22 provides the priority necessary to enforce a post-petition lien on funds. Section 44A-22 provides that a lien on funds enjoys priority over all other interests or claims “theretofore of thereafter created.”
While a boon to owners seeking to avoid all liens, this distinction between real property and fund liens provides no solace for North Carolina subcontractors. Under state law subcontractors may exercise only a subrogated right of the contractor to lien real property and, further, must serve a valid lien on funds as a precondition to perfecting that subrogated right. Here, where a contractor’s bankruptcy cuts off an opportunity to perfect a lien on funds, the subcontractor is additionally precluded from perfecting a lien on real property.
The In re: Harrelson ruling has generated spirited debate in the North Carolina construction industry and construction law bar. Industry advocates warn that the ruling, if sustained on appeal, will require subcontractors to serve liens on funds as soon as they first supply labor or materials, with predictable negative results on project cash flow. Others observe that some subcontractors may receive word that the contractor is experiencing financial trouble and, thus informed, proceed to serve liens on funds to the detriment of subcontractors who do not have that information or who do not receive it until alerted to a contractor bankruptcy. This result, observers argue, is inconsistent with the effect and intent of North Carolina lien law to require all subcontractors to share pro rata where a fund is inadequate to satisfy all claims. Further, some observers say liens on funds should not be afforded less dignity because actual receipt of a formal notice of lien on funds is far better notice than the first provision of labor or materials. Often an owner has no practical means of knowing who is supplying the subcontracted labor or materials to the contractor. Some express concern that this ruling could be logically extended to void liens on real property as well.
Steven D. Hedges, Esquire Contributing Author
Nexsen Pruet, PLLC
Thursday, August 27, 2009
Lien Law Online eLert for 8/20/09 - North Dakota
August 20, 2009
For the first time in years, the North Dakota legislature has made a number of substantive changes to the mechanic's lien statutes. Effective August 1, 2009, the following changes took place in North Dakota:
1. Very significantly, the legislature added a new section providing that an owner that successfully contests the validity or accuracy of a construction lien by an action in district court must be awarded the full amount of all costs and reasonable fees incurred by the owner. This puts a huge burden on anyone claiming a mechanics lien.
2. The name of a mechanic's lien was changed to "construction" lien.
3. The legislature repealed N.D.C.C. Sec. 35-27-05 dealing with the filing of a notice of intent to claim a mechanic's lien, and the requirements thereof; instead the legislature added a sentence to N.D.C.C. Sec. 35-27-02 requiring that written notice that a lien will be claimed must be given to the owner of the real estate by certified mail at least ten days before the recording of the "construction" lien.
4. The legislature changed the provisions of N.D.C.C. Sec. 35-27-04 which dealt with mortgages given in good faith for the purpose of providing funds for payment of materials or labor for the improvement. Previously, a lien could be obtained, prior to such mortgages, by recording a notice of intent to file a mechanics lien prior to the recording of the mortgage. This generally did not happen because few people filed a notice of intent at the beginning of the project, and before the financing was in place; however, it was an option. The change is that the only way to obtain such priority now is to file the actual "construction" lien. Since the lien cannot be filed until an amount is due, from a practical standpoint, it is unlikely that a claimant could file a construction lien ahead of these mortgages.
5. The legislature repealed N.D.C.C. Sections 35-27-11 and 34-27-12. These set out the procedural requirements for the lien and the requirements for the recorder as far as indexing. However, N.D.C.C. 35-27-13, which provided that the lien is to be perfected by recording within 90 days was amended by stating the lien must include the dates of the first and last contribution, and the person with which the claimant contracted. (This statute already included that the lien had to describe the property and state the amount due, and that the person had to comply with all the provisions of the chapter. The practical effect is that the person claiming the lien must still keep an itemized separate account, separate and apart from all other accounts in order to comply with N.D.C.C. 35-27-10. The construction lien must include (a) the legal description of the property,(b) the amount due, (c)the dates of first and last contribution, (d) the name of the person with whom the claimant contracted. I recommend it also include (e) the name of the person in possession of the land with a statement that written notice that a lien would be claimed was given to the owner by certified mail at least ten days before recording of the lien (this notice would no longer ever be recorded) and (f) the date of the contract. In other words, the earlier form should still be the form to use after modifying "mechanics lien" to "construction lien", and modifying the language regarding the giving of the notice of intent, and adding the dates of the first and last contribution.
6. Previously the failure to file the lien within 90 days did not defeat the lien against purchasers or encumbrancers in good faith, for value, whose rights accrued after 90 days and before the lien was filed. This has now been changed to state that the failure to file does not defeat the lien as against these parties if the rights accrue before the filing of the lien. The effect of this is that if someone buys the property within the 90 day period the lien will be lost if the lien is not filed within the 90 day period. Before, if someone bought on, say, day 30 and a laborer had improved the property, the laborer could still get a lien against the buyer even if the lien was not filed within 90 days.
7. Finally, the legislature removed the class A misdemeanor criminal penalty for the filing of a lien that includes classes of materials not subject to a mechanic's lien.
The North Dakota chapter will be updated soon to reflect these changes.
Lyle W. Kirmis, Esquire Contributing Author
Zuger Kirmis & Smith
For the first time in years, the North Dakota legislature has made a number of substantive changes to the mechanic's lien statutes. Effective August 1, 2009, the following changes took place in North Dakota:
1. Very significantly, the legislature added a new section providing that an owner that successfully contests the validity or accuracy of a construction lien by an action in district court must be awarded the full amount of all costs and reasonable fees incurred by the owner. This puts a huge burden on anyone claiming a mechanics lien.
2. The name of a mechanic's lien was changed to "construction" lien.
3. The legislature repealed N.D.C.C. Sec. 35-27-05 dealing with the filing of a notice of intent to claim a mechanic's lien, and the requirements thereof; instead the legislature added a sentence to N.D.C.C. Sec. 35-27-02 requiring that written notice that a lien will be claimed must be given to the owner of the real estate by certified mail at least ten days before the recording of the "construction" lien.
4. The legislature changed the provisions of N.D.C.C. Sec. 35-27-04 which dealt with mortgages given in good faith for the purpose of providing funds for payment of materials or labor for the improvement. Previously, a lien could be obtained, prior to such mortgages, by recording a notice of intent to file a mechanics lien prior to the recording of the mortgage. This generally did not happen because few people filed a notice of intent at the beginning of the project, and before the financing was in place; however, it was an option. The change is that the only way to obtain such priority now is to file the actual "construction" lien. Since the lien cannot be filed until an amount is due, from a practical standpoint, it is unlikely that a claimant could file a construction lien ahead of these mortgages.
5. The legislature repealed N.D.C.C. Sections 35-27-11 and 34-27-12. These set out the procedural requirements for the lien and the requirements for the recorder as far as indexing. However, N.D.C.C. 35-27-13, which provided that the lien is to be perfected by recording within 90 days was amended by stating the lien must include the dates of the first and last contribution, and the person with which the claimant contracted. (This statute already included that the lien had to describe the property and state the amount due, and that the person had to comply with all the provisions of the chapter. The practical effect is that the person claiming the lien must still keep an itemized separate account, separate and apart from all other accounts in order to comply with N.D.C.C. 35-27-10. The construction lien must include (a) the legal description of the property,(b) the amount due, (c)the dates of first and last contribution, (d) the name of the person with whom the claimant contracted. I recommend it also include (e) the name of the person in possession of the land with a statement that written notice that a lien would be claimed was given to the owner by certified mail at least ten days before recording of the lien (this notice would no longer ever be recorded) and (f) the date of the contract. In other words, the earlier form should still be the form to use after modifying "mechanics lien" to "construction lien", and modifying the language regarding the giving of the notice of intent, and adding the dates of the first and last contribution.
6. Previously the failure to file the lien within 90 days did not defeat the lien against purchasers or encumbrancers in good faith, for value, whose rights accrued after 90 days and before the lien was filed. This has now been changed to state that the failure to file does not defeat the lien as against these parties if the rights accrue before the filing of the lien. The effect of this is that if someone buys the property within the 90 day period the lien will be lost if the lien is not filed within the 90 day period. Before, if someone bought on, say, day 30 and a laborer had improved the property, the laborer could still get a lien against the buyer even if the lien was not filed within 90 days.
7. Finally, the legislature removed the class A misdemeanor criminal penalty for the filing of a lien that includes classes of materials not subject to a mechanic's lien.
The North Dakota chapter will be updated soon to reflect these changes.
Lyle W. Kirmis, Esquire Contributing Author
Zuger Kirmis & Smith
Thursday, August 13, 2009
Revisions to Iowa Lien Law Under Consideration - 8/12/09
August 12, 2009
The Iowa legislature is considering the passage of HSB 173/ SSB 1215. It would revise Iowa Code Chapter 572, Mechanic's Lien Law, to require contractors and material providers to give public notice of their rights in order to perfect a mechanic's lien. Notice will be posted on a State Construction Registry.
The bill would also expand the right to recover attorney fees to any prevailing plaintiff and allows any prevailing defendant to recover attorney fees, not just those defending claims involving owner-occupied properties. Commercial construction would be exempt from the central registry requirement.
The bill has been assigned to subcommittee in House and Senate Judiciary Committees and will carry over to the 2010 session.
The Iowa legislature is considering the passage of HSB 173/ SSB 1215. It would revise Iowa Code Chapter 572, Mechanic's Lien Law, to require contractors and material providers to give public notice of their rights in order to perfect a mechanic's lien. Notice will be posted on a State Construction Registry.
The bill would also expand the right to recover attorney fees to any prevailing plaintiff and allows any prevailing defendant to recover attorney fees, not just those defending claims involving owner-occupied properties. Commercial construction would be exempt from the central registry requirement.
The bill has been assigned to subcommittee in House and Senate Judiciary Committees and will carry over to the 2010 session.
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