Lien on Me When Your Claim is Not Strong—That’s an Unfair Trade Practice
Lien on Me When Your Claim is Not Strong—That’s an Unfair Trade Practice
If you sing the title of this post to the tune of Bill Withers’ 1972 hit “Lean on Me” you get something that might just be clever enough for this blog. What is not clever—and, really, a downright bad idea—is wrongfully asserting a mechanic’s lien. Filing a lien on real property without justification has long invited a slander of title claim. Now, a new decision in Gilmore’s Farm Inc. v. Herc Rentals, Inc. from the United States District Court for the Eastern District of North Carolina has recognized that wrongfully asserting a lien can be the basis for a claim under section 75-1.1.
A Problem that You’ll Understand
To appreciate why asserting a mechanic’s lien could violate section 75-1.1, it is helpful to have some background on North Carolina’s lien law. Chapter 44A of the General Statutes creates two types of mechanic’s liens: liens on real property and liens on funds. A lien on real property, the type most lawyers are familiar with, creates a security interest in real property to secure payment of a debt owing to the lien claimant for improving the property. A lien on funds, by contrast, secures a debt by asserting an interest in money owing to other parties in the contractual chain. Construction projects have vertical chains of privity from the owner of the project to the general contractor on down to lower tier subcontractors and suppliers. So, for example, a lien on funds by a first-tier subcontractor would assert an interest in money owing from the owner to the general contractor.
A liens on funds can create enormous leverage for a lien claimant. The effect of asserting a lien on funds is to stop the flow of money down the contractual chain. Under section 44A-20, if a person receives a lien on funds and continues to make payments over the lien, the payor incurs personal liability to the lien claimant even though there is otherwise no privity between the payor and the claimant. This risk means that payments stop until the lien on funds is resolved.
With a basic understanding of lien law, we can turn to Gilmore’s Farm. The case was a dispute between a first-tier clearing and grading subcontractor and a second-tier equipment supplier. Gilmore, the clearing and grading subcontractor, was hired by a prime (a.k.a. general) contractor to clear land for a subdivision. Herc, the second-tier equipment supplier, rented an excavator to Gilmore for the project. Foreshadowing the legal mess to come, the excavator allegedly “burst into flames” while Gilmore was working.
To the right you will find an actual photo from the case file of Herc’s excavator on fire.
The parties’ rental agreement included a “Rental Protection Program”, which Gilmore alleged limited its liability for loss or damage to the excavator to either 10% of the actual repair or replacement cost or $500, whichever was less. Despite the Rental Protection Program, Herc invoiced Gilmore for the full replacement cost of the excavator plus a relatively small amount of outstanding rent for a total of $109,556.39. To help recover the amount owed, Herc also asserted both types of mechanic’s liens—one on the real property of the subdivision and one on the project funds.
In response to these lien claims, Gilmore sued Herc alleging, among other things, breach of contract and a violation of section 75-1.1. The section 75-1.1 claim was based on two primary allegations. First, Gilmore alleged that Herc’s lien was wrongful because Herc, as a supplier of construction equipment, did not have any statutory lien rights. Second, Gilmore alleged that Herc’s lien claim “deliberately, unscrupulously, and deceptively” disregarded the terms of the Rental Protection Program by seeking the full replacement value of the excavator.
Herc moved to dismiss, arguing that there was no substantial aggravating factor attending the alleged breach of contract. Herc (correctly) argued that Gilmore misstated the law on whether equipment suppliers have lien rights. For that point, Gilmore relied on a 1993 opinion, Steel Erectors, Inc. v. Inco, Inc., in which the North Carolina Court of Appeals held that equipment suppliers did not have lien rights. But Steel Erectors was overturned legislatively in 1995 by amendments to section 44A-7. Herc also argued that, even if it Herc had breached its contract, Gilmore had not alleged a substantial aggravating factor which would raise the claim to the level of an unfair trade practice.
But if We are Wise…
In ruling on the motion, the court assumed without deciding that Herc had lien rights under Chapter 44A. The real issue was “whether [Herc] was contractually entitled to the proceeds on which it filed the lien.” Gilmore alleged that the $109,556.39 was more than it was contractually obligated to pay and that Herc knew or should have known that filing a lien for that amount was improper. Under these allegations, filing the lien was a substantial aggravating factor beyond a breach of the terms of the rental agreement. While the opinion did not address it directly, the leverage gained by Herc in asserting a lien on funds and stopping payments to Gilmore would surely have contributed to the determination that a substantial aggravating factor was present.
Query, though, whether the court needed to analyze the unfair trade practice claim as a breach of contract with a substantial aggravating factor. Gilmore alleged the lien claims were wrongful under section 14-118.6, a statute added in 2012 which addresses criminal penalties for the filing of a false lien or encumbrance. But neither the parties nor the court addressed section 14-118.6(d) which also provides for a per se violation of section 75-1.1 if a lien is determined to be “materially false, fictitious, or fraudulent”. After Gilmore’s Farm, there may now be two separate grounds for claiming an improper lien on real property violates section 75-1.1—a substantial aggravating factor attending a breach of contract and a per se violation under section 14-118.6(d). Note, however, that the per se unfair trade practice under 14-118.6(d) only applies to liens presented “for recording or filing with a register of deeds or clerk of superior court”. By statute, liens on funds are only served, not filed. For strategic reasons, subcontractors and suppliers often serve a lien on funds without filing a lien on real property. In that circumstance the only basis for a claim under section 75-1.1 would be to rely on Gilmore’s Farm to show a substantial aggravating factor attending a breach of contract.
We Know that There’s Always Tomorrow
Project owners and others who defend against liens will welcome Gilmore’s Farm. But should owners and others reflexively assert an unfair trade practice claim in response to every lien? Probably not. Gilmore’s Farm will be distinguishable from most other construction contract disputes because of the specific controversy between Gilmore and Herc. Under the terms of the Rental Protection Program, there was no reasonable argument that Herc could charge Gilmore the full replacement value of the excavator. Herc’s overreach, combined with the substantial leverage of mechanic’s liens, gave rise to an unfair trade practice. In most other construction disputes, however, the validity of the lien claim will not be so easy to determine.
The crux of nearly every construction dispute is the amount of money owed to a contractor for its work. A contractor might argue it is entitled to additional payment because it performed extra work. An owner might withhold payment because it says the work is defective or late. This is the standard script. Because the parties always dispute the amount owed under a contract, they will always dispute the amount of the lien which secures payment of the disputed amount. Gilmore’s Farm should not be read as authorizing a claim under section 75-1.1 every time someone thinks a claimant asserted a lien for more than they are actually owed. That would be an unworkable rule which would turn every garden variety construction contract case into a dispute under section 75-1.1—the type of thing our courts have repeatedly sought to avoid.
We All Need Somebody to Lien On
Section 75-1.1 claims rarely succeed in construction disputes, which often center on contractual claims. It is a high bar to show substantial aggravating factors attending a breach of contract. Gilmore’s Farm may have opened the door a little further to claims under § 75-1.1 but expect lien claimants to push back when an owner seeks to turn an exercise of lien rights and a reasonable dispute over payment into an unfair trade practice claim.
This week, the What’s Fair? blog welcomes guest author Luke Farley. Luke is a construction lawyer in the Raleigh office of Ellis & Winters. His practice focuses on complex, multi-party contract disputes, state and federal Miller Act claims, mechanic’s liens, OSHA citations, and contract negotiation.
Author: Luke Farley