Isaacson Isaacson
Sheridan & Fountain, LLP
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July 21, 2011
Desmond new 2011
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The following alert is from Desmond Sheridan and Ashley Hansen

 

Court Rules Contractors Lien Trumps Wachovia's Mortgage

  

In a case decided by the North Carolina Court of Appeals on July 17, 2011 - Wachovia Bank, National Association v. Superior Construction Corp. - the Court considered whether a lien waiver executed by a contractor could effect a change in the date when the contractor first furnished materials and labor to a project. This is an important issue because North Carolina lien law provides that a contractor's lien for unpaid construction costs "relates back" to the first date when the contractor furnished labor and/or materials. That is, the lien will have priority of title as it relates to other lien claimants or encumbrances that arise after the date of first furnishing of material and/or labor by the contractor.

 

In this case, Wachovia was the lender and Superior Construction was the general contractor on a project to construct a condominium complex in Brunswick County. Superior first furnished labor and materials to the project roughly one month before Wachovia acquired a $19,000,000 mortgage on the project. While the project was underway, Superior made payment requests and Wachovia required Superior to sign lien waivers in exchange for construction payments from Wachovia. The project failed and both Wachovia and Superior were unpaid. Superior asserted that its lien was ahead of Wachovia's.

 

The Court of Appeals determined that the lien waivers signed by Superior functioned as an acknowledgement that a payment for labor and materials, expended through a certain date, had been made and that Superior had no further lien rights for the furnishing of labor and materials paid for by those payments. However, the Court ruled that those lien waivers did not change the fact that Superior's lien for other unpaid amounts related back to the first furnishing of labor and materials. Therefore, the Court of Appeals concluded that Superior's lien on the project had priority over the lien created by Wachovia's mortgage.

 

What we can take away from this ruling is the importance of prudent drafting of lien waivers. This problem could have been solved by a different lien waiver form which provided for the subordination of all of Superior's lien rights to the mortgage. While it's a technical issue, as Wachovia found out the hard way, it can have a major effect on who gets paid. 

About the Writers

Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant.  His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning.  Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a "Best Lawyer in America," a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina.  He has given numerous continuing education presentations to CPAs and attorneys.

Ashley Hansen is a third year student at Elon University School of Law in Greensboro.  She is interning with Isaacson Isaacson Sheridan & Fountain, LLP this summer.

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