Atlantech Distribution, Inc. (COA 23-751) 7/16/2024
Contractor's Partial Lien Waivers Ineffective to Cut off Sub
Chris Burti, Vice President and Senior Legal Counsel

Atlantech Distribution, Inc. v. Land Coast Insulation, Inc. is an appeal by the defendants from the trial court's summary judgment order in favor of the plaintiff and is significant for real property practitioners. It is not uncommon for a loan to close in new construction situations before construction is complete and before the general contractor has been fully paid. In such situations the parties will, at times, agree to the general contractor furnishing a partial lien waiver.

The defendant Matrix (GC) entered into the $200,000,000 primary contract in 2019 with defendant PNG, a subsidiary of defendant Duke Energy, (the Primary Contract), to perform certain services for the construction project at issue (the Project). On August 9, 2019 the first building permit was issued for the Project and on July 3, 2019, GC filed a Notice of Contract with the Clerk of Court. The opinion notes that the GC has never provided any evidence that a Notice of Contract was physically posted at the Project site at any time.

On February 5, 2021, GC entered into a subcontract with the defendant LandCoast Insulation, Inc. (SC) to perform certain insulation work for the Project for $1,506,826. On April 13, 2021 SC entered into a subcontract with the plaintiff whereby the plaintiff serving as a second-tier subcontractor, agreed to furnish insulation and other related materials to be delivered to the Project on account. On February 1, 2021, the plaintiff provided a Notice to Lien Agent for its furnishing of materials on the Project.

Between March and July 2021, SC purchased a total of $762,724.74 materials from the plaintiff for use on the Project documented by an invoice and sales order issued by the defendant showing delivery of the materials to the Project without receiving any payment from SC. Due to the failure to make payment, the plaintiff served a Notice of Claim of Lien Upon Funds by Subcontractor to all of the defendants on July 29, 2021. Following SC's termination from the Project, the Plaintiff agreed to continue providing insulation materials for work on the Project and began directly assisting GC.

During the course of GC's work on the Project, GC submitted invoices and partial lien waivers on July 19, September 16, and October 14 of 2021 for the labor and materials it had furnished. These partial lien waivers stated:

"[GC], in consideration of payment in the amount of $ [invoice amount] waives and releases its lien of any right which it now has or in the future may have to claim a lien for Equipment provided or Services performed prior to or during the period for which the Payment Invoice to which this Lien Waiver and Release relates[.]"

On October 14, 2021, GC posted a Release of Lien Bond with defendant Fidelity as surety in the amount of $953,408.43 to discharge the plaintiff's July Lien upon Funds. Under the terms of the bond, Fidelity guaranteed payment by GC for the amount determined to be due in satisfaction of the plaintiff's lien as well as any subsequent lien filed on the Project.

On November 15, 2021, the plaintiff served a Notice of Claim of Lien upon Funds by Second-Tier Contractor-Supplement on the contract defendants (not Fidelity) in the amount of $762,724.74 plus interest. The same day, the plaintiff served a Subrogation Claim of Lien on Real Property by Second-Tier Subcontractor (Subrogation Lien on Real Property) on the contract defendants and filed a copy with the Clerk of Court on November 18, 2021.

At the time the plaintiff filed its Lien, GC was continuing to send invoices and partial lien waivers to PNG for work performed on the Project. In October 2021 after plaintiff's Notice of claim of lien on funds had been sent, GC issued invoices to PNG for $822,110.83 and $3,714,056.58 and PNG paid both invoices in December 2021, after the plaintiff had perfected its Subrogation Lien on Real Property. GC also submitted an invoice to PNG for $1,857,028.29 in November, which PNG paid in December 2021. In January 2022, GC submitted another invoice to PNG for $844,239.37, which PNG paid in February 2022.

In January 2022, the plaintiff filed a complaint in this matter asserting a lien on real property, a claim of lien upon funds, and a claim against the Fidelity bond. The trial court heard arguments on pending motions for summary judgment and subsequently entered an order granting the plaintiff's motion on its claim for a lien against real property and denying the defendants' motion for partial summary judgment with respect to the plaintiff's claim for a lien against real property.

The opinion rests its analysis on the North Carolina Supreme Court doctrine concerning the subrogation lien rights of second-tier subcontractors set out in Electric Supply Company of Durham, Inc. v. Swain Electric Company, Inc., 328 N.C. 651, 403 S.E.2d 291 (1991). In Swain, the Supreme Court held a second-tier subcontractor may enforce its subrogation claim of lien on real property when a first-tier subcontractor fails to pay it for works or materials supplied on a construction project. The second-tier subcontractor may "step into the general contractor's shoes" to enforce lien rights against the owner to the extent the general contractor has any such lien rights. The Court of Appeals opinion observes that:

When a second-tier subcontractor asserts its subrogation lien rights, the property owner is exposed to pay the second-tier subcontractor even if the owner has already paid the general contractor for the same work or materials. Thus, a second-tier subcontractor's right to claim a lien on real property exposes a property owner to a risk of double payment to its first- and second-tier subcontractors.

Following Swain, our General Assembly enacted N.C. Gen. Stat. § 44A-23(b), which established a statutory mechanism by which general contractors may protect themselves from this risk of double payment. The statute provides, in pertinent part, a subcontractor may not enforce a claim of lien on real property when [t]he owner or contractor, within 30 days following the date the permit is issued for the improvement of the real property involved or within 30 days following the date the contractor is awarded the contract for the improvement of the real property involved, whichever is later, posts on the property in a visible location adjacent to the posted permit, if a permit is required, and files in the office of the clerk of superior court in each county wherein the real property to be improved is located, a completed and signed notice of contract form . . . .

The Court points out that the GC could have physically posted at the job site the Notice of Contract that they had filed pursuant the statute in order to eliminate the double payment risk. The GC filed a Notice of Contract with the Clerk, but admitted it did not post a Notice of Contract at the Project site at any time. Failing to take advantage of the Notice of Contract provisions of the statute, GC also could have extinguished the plaintiff's subrogation lien rights by issuing an absolute lien waiver.

The Court of Appeals observes:

A lien waiver signed by the contractor before the occurrence of all of the actions specified in subsection (a1) [first-tier subcontractor's perfection of its claim of lien on real property] and subdivision (5) of subsection (b) of this section [second- or third tier subcontractor's perfection of its claim of lien on real property] waives the subcontractor's right to enforce the contractor's claim of lien on real property[.] N.C. Gen. Stat. § 44A-23(c) (2021).

Instead, GC only provided partial lien waivers to PNG with its invoices on the Project conditioned upon payment. The record on appeal reflects that the partial lien waivers at issue read: "[GC], in consideration of payment in the amount of $ [invoice amount] waives and releases its lien and any right which it now has or in the future may have to claim a lien for Equipment provided or Services performed prior to or during the period for which the Payment Invoice to which this Lien Waiver and Release relates[.]"

The opinion states:

While a lien waiver releases a claimant's right to file a claim of lien on real property in consideration for final payment upon completion of all work on a project, see Waiver (3), BLACK'S LAW DICTIONARY (11th ed. 2019), a partial lien waiver, by its plain language, releases a claimant's right to file a claim of lien on real property in consideration for progress payments made during the course of a construction project. See Wachovia Bank Nat'l Ass'n v. Superior Const. Corp., 213 N.C. App. 341, 351, 718 S.E.2d 160, 166 (2011) ("In essence, the partial lien waivers at issue in this case function as an acknowledgement that a payment for labor and materials expended through a certain date has been made and that Defendant Superior has no further lien rights in the furnishing of labor and materials reimbursed by those payments."). Thus, when a party issues a partial lien waiver, that party may then file a claim of lien only for services or materials furnished after the date of that partial lien waiver.

Applying strict statutory construction doctrine, the court concluded that N.C.G.S. Section 44A-23(c) only applies to "lien waivers" and not "partial lien waivers" as the latter words were not used in the statute. The opinion then observes:

In Swain, our Supreme Court expressly held "N.C.G.S. § 44A-23 provides first-, second-, and third-tier subcontractors a separate right of subrogation to the lien of the contractor who deals with the owner[.]" 328 N.C. at 660, 403 S.E.2d at 297. The Court clarified that "in light of the policy behind the passage of N.C.G.S. § 44A-23, the subcontractor may assert whatever lien that the contractor who dealt with the owner has against the owner's real property relating to the project." Id. at 661, 403 S.E.2d at 297 (citation omitted). This right could, however, be abrogated before the subcontractor began an action "through waiver of the lien or acceptance of payment." Id. at 661, 403 S.E.2d at 298 (citations omitted).

Following Swain, the Court of Appeals determined a subcontractor's subrogation right is "limited . . . by the lien rights the contractor has in the property." Further, citing Wachovia, Vulcan Materials Co. v. Fowler Contracting Corp., 111 N.C. App. 919 (1993) and N.C.G.S. Chapter 44A, the Court observes that though subcontractors are subrogated to the rights of the general contractor, they may only assert those lien rights the general contractor has in the project, may only enforce a lien for the amount due on the primary contract, even if the subcontractor is owed more than that amount and the lien for all labor and materials furnished pursuant to a contract is deemed to be prior to any liens or encumbrances attaching to the property subsequent to the date of the contractor's first furnishing of labor or materials to the construction site.

When a lien is properly perfected and enforced by bringing an action within the required statutory period, "the lien will be held to relate back and become effective from the date of the first furnishing of labor or materials under the contract, and will be deemed perfected as of that time." Id. at 347, 718 S.E.2d at 164 (quoting Connor Co., 294 N.C. at 667, 242 S.E.2d at 789).

It is critical for practitioners to note that the opinion is emphatic where it states:

The consistent teaching of these cases is that partial lien waivers do not extinguish a subcontractor's subrogation rights; however, a partial lien waiver may limit the amount of a subcontractor's claim to the amount remaining on the primary contract following the latest partial lien waiver if that amount is less than the amount owed to the subcontractor.

The court concludes:

Thus, because the amount of The Plaintiff's claim was less than the amount outstanding on the Primary Contract when The Plaintiff perfected its Subrogation Lien, The Plaintiff was entitled to lien rights for the entirety of its claim. Therefore, based on the pleadings and materials in the Record, we conclude The Plaintiff was entitled to judgment as a matter of law for the full amount of its lien. Consequently, the trial court did not err by granting Summary Judgment for The Plaintiff.

This case should be a stark warning to real property practitioners to require industry standard lien waivers when closing with transactions where construction has been recently completed or, more significantly, is currently ongoing and where contractors may not have been fully paid. The Court of Appeals makes it absolutely clear that a "partial lien waiver" has little significance beyond being a receipt for payment.