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What lien rights does a 4th tier sub-contractor have to receive payment in excess of final payment due to 3rd tier contractor.

New YorkPayment Disputes Right to Lien

Hi, we are an artist studio , who has been hired by a consultant firm (CLIENT) to provide an artwork for a developer ( OWNER) for a project in North Carolina. We have provided design work and have hired a GC to fabricate and install the work. The GC has himself hired a sub-contractor to install the work. The project is now substantially complete and the CLIENT is currently holding final payment subject to punchlist corrections being completed. Sub-contractor is owed payment from GC with about $50k in excess of final payment due to GC. Sub-contractor has placed a lien on the building (Subject to Subrogation Claim) and a lien on the funds of final payment. Question: 1. Is installation sub-contractor 4th tier (OWNER - 1.CLIENT - 2.US ( design firm) - 3.GC - 4.SUB-CONTRACTOR) and therefore what rights does he have as 4th tier? (Installer has omitted CLIENT from his Notice of lien and only notified OWNER, our firm and GC. ) 2.Is he legally allowed to put lien on building, if he is 4th tier? 3. Who is legally required to pay installer sub-contractor for lien claim - CLIENT, US or GC? 4. Who has the role as GC in this case?

1 reply

Dec 17, 2018

These are interesting questions. First - regarding tier, it's important to recall that, for the purposed of deciding whether or not lien rights are present, the party hired directly by the property owner will typically be considered the "direct contractor", the parties that "direct contractor" hires are considered first-tier subcontractors, and then so on down the chain. In establishing "tiers" - North Carolina law is actually pretty clear as to how tiers work among contractors and subs. To quote § 44-A17 of the North Carolina mechanics lien statute: " “Contractor” means a person who contracts with an owner to improve real property." That's simple enough. Then: “'First tier subcontractor' means a person who contracts with a contractor to improve real property." Moving on, "'Second tier subcontractor' means a person who contracts with a first tier subcontractor to improve real property." And finally, "'Third tier subcontractor' means a person who contracts with a second tier subcontractor to improve real property." So, in North Carolina, the "tiering" system really starts with the party hired by the "contractor" - which, regardless of the work they do, is defined as the party who contracts with the "owner" for the improvement of property. While it might not be particularly consequential here, the definition of "owner" also allows for some flexibility which could bump a subcontractor to a "contractor" and subcontractors below that up a tier. Under § 44-A7(3), an "'Owner' includes successors in interest of the owner and agents of the owner acting within their authority." So, if an owner hires someone to act on their behalf, that party themselves might also be considered the "owner" for purposes of tiering. Regarding parties who are more remote than a 3rd tier subcontractor - these parties are entitled to a lien upon contract funds - but they are not entitled to file a lien against the property via subrogation, so their interest will not encumber the project real estate under § 44-A18(4). Finally as to who is responsible for payment - that can also be a tricky question to answer. First and foremost - regardless of whether a lien claim has been filed, the party who was responsible for paying the unpaid party will still be the party responsible for that payment. A mechanics lien claim does not put them off the hook and mean it's someone else's job to pay. At the same time, a mechanics lien puts the owner's interest in jeopardy, so while that owner might not technically be the one "responsible" for payment, if the debt remains unpaid, it's the owner's property that could be lost. That's why a mechanics lien filing is so effective - even in a situation where the owner is relatively far removed from the unpaid party, that unpaid party can still make noise and force payment. So, while the nonpaying party is still "responsible" for payment - the tiers above that nonpaying party may feel the wrath of the owner and try to make sure payment is made. Plus the owner could potentially hold these tiers responsible for payment. Last but not least, regarding the amount that can be liened - North Carolina is an "Unpaid Balance" state, meaning, mechanics liens filed in North Carolina cannot exceed the amount owed to the contractor. Thus, while payment might actually be owed to a subcontractor in one amount, if that amount exceeds what is owed to the contractor, the property owner will be protected from making payments twice, and the lien will only be enforceable in the amount that is unpaid to the contractor. Levelset discusses "Unpaid Balance" and "Full Price" lien states in this article: Full Price Lien or Unpaid Balance – This Infographic Can Help.

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