Hat tip to Matt Bouchard (@MattBouchardEsq) of the NC Construction Law, Policy & News Blog for bringing our attention to this important appeals decision from the North Carolina Court of Appeals.  His blog post on the case, which offers a great analysis of the facts and law, can be found here:  Court of Appeals: Contractors’ Lien Claim Properly Dismissed Where “Owner” Owed Nothing On Date Of First Furnishing.

Mechanics lien laws have been in place for over 200 years, and so it makes you wonder how anything new can come up in the courts. Nevertheless, a few times every year courts are confronted with some bizzarre circumstance previously unconsidered. This is the case recently in North Carolina, where a mechanics lien claim was challenged because it was filed against an owner who owned the property at the end of the job, but not at the beginning.

The North Carolina Court of Appeals were called upon to construe the statutory definition of the term “owner,” and decide whether these circumstances qualified the contractors to file their lien. The majority of the appeals panel decided the lien right was not available, but one judge dissented.  The case is John Connor Construction, Inc. et al v. Grandfather Holding Company, Inc. et al.

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Majority Rules That Contract Must Be With An Owner Who Has Interest In Property At The Time Of First Furnishing

The right to file a mechanics lien in North Carolina arises from the act of furnishing labor or materials to a property owner.  This is clearly stated in Section 44A-8 of the North Carolina General Statutes:  “Any person who performs or furnishes labor or…materials…pursuant to a contract…with the owner of real property…”

The “owner” is defined as 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.”  N.C. Gen. Stat. § 44A-7(3).

In the John Connor Construction case, the court confronted a pretty unique circumstance. While the factual background is a bit unclear, for one reason or another the eventual property owner (Grandfather Holding Company) didn’t own the property when the project began. It’s not exactly clear how this happened, why it happened, or what Grandfather Holding Company’s role in the project was at its initiation.

Nevertheless, the court did look to a previous case with facts close to this situation.  In Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72. N.C. App 224 (1985), a mechanics lien was allowed against an “owner” who had not owned the property at the beginning of construction but was under contract to purchase the property.  Since the party under purchase agreement had a future interest in the property, it was considered by the 1985 appeals court to be an “owner” to allow the mechanics lien filing.

The majority in the John Connor case didn’t think the circumstances were analogous here.

Here, Grandfather Holding Company was not under a purchase agreement for the property.  Therefore, it was considered to have no interest in the property whatsoever, and accordingly, was not an “owner” by statutory definition. The court specifically stated:

[T]he plaintiffs’ admissions plainly belie a claim of materialman’s lien against GHC, since GHC did not have any interest, equitable or otherwise, in the property…when plaintiffs first furnished materials. Thus…[the plaintiffs] were not entitled to a materialman’s lien, as they did not contract with the “owner” of the subject property…We decline plaintiffs’ implicit invitation to extend the holding of Carolina Builders to cases in which the party against whom a lien is sought was not yet under a contract for sale at the time an alleged contract for work/materials was entered into.  Emphasis in original.

Dissenting Judge Calls The Ruling Unfair

I agree with the dissenting judge here, Judge Robert Hunter. He does a great job of framing the issue in this complicated case and directly calls upon the North Carolina Supreme Court to “clarify the answer to a question unanswered by this Court’s opinion in Carolina Builders…”  As a litigant who lost an appeals decision, you can’t ask for a better situation than to have a dissenting judge directly call upon the Supreme Court to review the decision.  We’ll see if this actually gets the Supreme Court to pick up the case.

In any event, Judge Hunter speaks about the issue a little differently than the majority judges. Namely, he mentions the phrase not uttered by the majority:  “subsequently acquired interest.”  Here is his full framing of the issue:

Does a ‘subsequently acquired interest…support a materialman’s lien even if no enforceable interest existed when the contract was made or the work commenced?”  I would extend the holding of Carolina Builders to stand for the proposition that GHC should be considered an “owner” under NC Gen Stat. §44A-8 and 44A-7(3), because it directed Plaintiffs to begin work on the subject property, and then later acquired legal title.

Judge Hunter discusses the facts here a little more intelligently, I believe.  Instead of just rattling off all the confusing transactions he cuts to the chase:  GHC ordered the work anticipating acquisition of title, and then it got title. Seems like the only difference between the current situation and the Carolina Builders matter, therefore, is a piece of paper:  the purchase agreement.

Why should the court’s overlook the piece of paper?  Because:

the purpose of the materialman’s lien statute is to protect the interest of the supplier in the materials it supplies; the materialman, rather than the mortgagee, should have the benefit of materials that go into the property and give it value…Thus, as these statutes afford new remedies, they are liberally construed to effect the legislative purpose.”