PAYMENT BONDS IN NC: THE PRE

CHANGES THEY ARE HERE!

EFFECTIVE JANUARY 1, 2013

Introduction / Background  Summer 2012 – Long session of legislature received

report from Legislative Study Committee recommending changes to Article 3, Chapter 44A  Bill known as House Bill 1052 addressed double payment in Little Miller Act projects, the “bankruptcy fix” for liens, false lien waivers, and “necessary and proper parties”

Background  An outgrowth of the North Carolina Bar

Association’s Construction Law Section’s initial efforts to overhaul Articles 2 and 3 of Chapter 44A to modernize the processes in lien and bond claims.

May 10, 2012 An Open Letter to Approved Attorneys of Chicago Title, Commonwealth Land Title, and Fidelity National Title Dear Approved Attorney: Chicago Title, Commonwealth Land Title, and Fidelity National Title announce that we will be curtailing mechanics' and materialmen's lien coverage in situations posing a significant risk of broken priority under applicable NC law at the time of their closing, effective for commitments issued after Friday, June 15, 2012. Historically, North Carolinians could be assured they had some of the lowest rates, the lowest closing costs and the lowest claims losses in the Country, -- but no longer. Unfortunately, in recent years, we have paid increasing and significant losses from mechanics' lien coverage in North Carolina, creating a significantly higher claims ratio than the national average. The claims submissions continue unabated in the current market. To address this problem, for the past several years, our companies and others have made extensive efforts, negotiating in good faith on a multitude of proposals and investing substantial amounts of time in attempts to create a legislative framework whereby innocent purchasers and lenders could be protected by law. Our goal was to provide protection for buyers purchasing and lenders extending loans on properties with recent or contemplated construction. Unfortunately, thus far, our attempts have been thwarted or ignored. Unless and until this priority protection for these innocent parties under the law is provided, the risk is uncontrollable and unacceptable. Situations affected will include commercial and residential properties with recent construction or construction loans or both, i.e. those for which potential lien claimants may have the ability to file timely lien claims under N.C.G.S. Chapter 44A, Article 2, and for which the proposed purchaser and/or lender cannot obtain legal priority of record over those potential liens not yet filed at time of closing. These are typically referred to as "broken priority" situations because priority cannot be assured at law and of record. We recognize that, due to current law, this will have a significant impact on:  Owners who are not protected by the current law and who may be unable to obtain this protection on new construction, residential or commercial  Lenders who are similarly unprotected by the current law and may be unwilling to provide loans for construction on or purchase of these properties without this coverage  Owner-builders who may be unable to provide assurance of the coverage to construction lenders, purchasers or their lenders  Contractors and suppliers who may no longer be able to assume title insurance policy coverage is available if they are not paid by the appropriate party with whom they contracted  Attorneys representing all of the above, whether in closing transactions or mechanics' lien litigation We have negotiated in good faith for a reasonable solution to this "broken priority" or "hidden lien" problem in North Carolina in the hopes of avoiding this eventuality. We continue to stand ready to participate in any constructive meaningful negotiations to that end. However, because no such solution has been reached and there appears to be no prospect of a solution in the near future, we are no longer in a position to provide this coverage with no means of effectively and reliably assessing and managing the risk, for ourselves or our insureds. We would be remiss in our fiscal responsibilities to all of our insureds to continue to provide this coverage in these high risk situations. Please feel free to contact your local Chicago Title, Commonwealth Land Title, or Fidelity National Title counsel to discuss any questions.

Relocated Definitions : Moved within the Statute  Owner: “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.” Contractor: “A person who contracts with an owner to improve real property.” First tier subcontractor: “A person who contracts with a contractor to improve real property” Second tier subcontractor: “A person who contracts with a first tier subcontractor . . .” Third tier subcontractor: A person who contracts with a second tier subcontractor . . .” N.C.G.S. § 44A-7 (1-2, 6, 8-9)

House Bill 1052  Part of Bankruptcy “Fix”  Section 44A-11 now clarifies that a claim of lien upon

real property is perfected when served upon the record owner, and filed under 44A-12

New Perfection Requirements for Claims of Lien on Real Property Previous Law

Effective January 1, 2013

 At the time of filing at

 Only after filing and

the Clerk’s Office

service upon the owner 

N.C.G.S. § 44A-11(a)

 Within 120 days of last

furnishing 

N.C.G.S. § 44A-12(b)

New Perfection Requirements Affect Subcontractor Subrogation Liens Previous Law

Effective January 1, 2013

 At the time of filing at

 Only after filing and

the Clerk’s Office

service upon the owner and the contractor 

N.C.G.S. § 44A-11(1)

 Within 120 days of last

furnishing 

N.C.G.S. § 44A-12(b)

Certification of Service  Section 44A-12 now requires the claim of lien on real

property to include certification of service of the name parties. The amended claim of lien on real property form provides: “I hereby certify that I have served the parties listed in paragraph (2) above in accordance with the requirements of G.S. 44A-11.”

Complying with the New Service Requirements METHOD

SERVICE ADDRESS

 Personal Delivery

 Address listed on

(hand delivery)  Deposit for delivery with USPS; or  Deposit with specified overnight delivery services

building permit  Address listed on county tax rolls; or  Address for the party’s registered agent (published with the Secretary of State)



N.C.G.S. § 44A-11(b)

Necessary or Proper Parties  Section 44A-13 now specifies that former or

subsequent purchasers of real property are not necessary or proper parties to lien enforcement actions, if no additional relief is sought from those parties.

Bankruptcy Fix (Part 2)  Section 44A-18 states that a notice of claim of lien

upon funds is immediately effective upon the first furnishing of labor, material or services.  The modification protects subcontractors of all tiers when a party above them in the contractual chain files for bankruptcy

First and Last Dates of Contractors  Section 44A-23 (subrogation liens for

subcontractors) permits subcontractors to use the dates of first and last furnishing of a higher-tier contractor – including the general contractor. (NOTE: wording of statute is or – as in “either” “or” claimant’s first/last date or higher-tier contractor’s)

Bankruptcy Fix Part 3: “Disconnecting”  The amended Section 44A-23 removes the

requirement that a notice of claim of lien upon fund be attached to the subrogated claim of lien on real property. (NOTE: Does not prohibit it being attached, just does not require).

False Lien Waivers  Amended 44A-24 adds a provision that the signing

of a false lien waiver shall constitute “deceit and misconduct” subject to disciplinary action by contractor licensing board  Continues to be a criminal misdemeanor

Elements of Criminal Misdemeanor  False written statement,  With knowledge it was false, and  Receipt of payment for labor or materials by:  Person signing false statement,  Person directing another to sign, or  Any person or entity for whom the document was signed

Everyone Is At Risk  Applies to all persons and entities licensed under

Chapter 87 of North Carolina General Statutes  

Contracting entity and qualifiers General Contractors 

  

Building, highway, public utilities, grading

Plumbing, heating contractors Electrical contractors Other persons or entities covered by Chapter 87

Licensed Contractors or Qualifiers  Constitutes deceit and misconduct subject to

disciplinary action under Chapter 87 of the General Statutes,  Sanctions:  

Revocation, suspension, or restriction of a license Ability to act as a qualifying party for a license

 DON’T EXECUTE FALSE LIEN WAIVERS!!!  CONFIRM ALL CERTIFICATIONS ARE TRUE!!!

In The Beginning: Why Change What Was Working Well? THE ISSUE: STATE AND LOCAL PAYMENT BOND CLAIMS

2012 Amendment to North Carolina Little Miller Act  Enacted to avoid “double payment” by contractors

on state and local public projects  For projects with building permits issued on or after January 1, 2013  If no permit, for projects commenced after January 1, 2013

Why Pre-Notice?  Truism: Under existing law, subs and suppliers were

entitled to recover whether the tier above them had been paid or not.  Only requirement of sub or supplier was to give timely notice within 120 days and file suit within one year  Reality: As the economy tightened, so did sureties – lawsuits and delays increased changing economics of payment bond claims

Purpose of Pre-Notice  Wave a flag without a threat  Let those from whom the money flows know who is

on the project and expects payment  Open lines of communication while preserving rights  Providing more accurate information to subs and suppliers earlier in a project

HB 1052: What stays the same?  Notice of claim on bond still must be given to

contractor within 120-days of last performance if unpaid and still cannot file a lawsuit until at least 90-days after last performance  Must file action to enforce within one year

What is new?  Contractor’s Obligations:  MUST provide a copy of the payment bond within 7 days of receiving written request from sub/supplier

Subcontractor/Supplier’s Duty  Must provide a Notice of Public Subcontract within

75 days of date of first performance HINT: Early is always better than late

Bail-out Provision for Delayed Notice  What if you miss the 75-day deadline?  Look back 75-days from date notice is actually given (recovery via bond for sum of invoices accrued in the 75-days prior to date of notice, and additional balance cannot be claimed)  If contractor fails to provide bond, then old law still applies  $20,000 maximum recovery if notice not provided by sub/supplier

How to Serve Notices?  Rules apply to both request for bond and to serving

Notice of Public Subcontract   



Certified mail Signature confirmation To contractor at office “regularly maintained for the transaction of business”; or to agent identified in Contractor’s Project Statement Or any method allowed for service of Summons – adds overnight courier with signature; private process server in certain circumstances

New FORM: Notice of Public Subcontract  Name and address of subcontractor giving notice  General description of property on which work

performed: street address, tax map lot and block number, reference to recorded instrument; any description that reasonably identifies the real property  General description of sub/supplier’s contract, including names and address of parties (who is up the chain from you to contractor); and

Notice of Public Subcontract (continued)  General description of the labor and/or material

performed and/or furnished

Safety Net  If total billed for project is less than $20,000 then no

notice required  If you blow the notice provisions (even the 75-day look back), still can claim up to $20,000

Contractors Project Statement  Only on State and Local Public Projects where

Payment Bond required  Contractor responsible for preparing Project Statement 

N.C.G.S. §44A-27(f)

How do I know who to serve?  Contractor’s Project Statement:  Name of the Project  Physical address of the Project  Name of the contracting body (governmental agency)  Name of the Contractor AND

Contractor’s Project Statement (CPS) (Continued) 



Name, phone number, and mailing address of agent authorized by Contractor to accept service of requests for payment bond, Notice of Public Subcontract, and Notice of Claim on Payment Bond Name and address of the principal place of business of the surety issuing the payment bond

How does one find the CPS?  Contractor required to provide to first tier subs  Failure to do so negates the protection from double

payment  Subcontractors are then obligated to provide to each of their subs (1st Tier to 2nd Tier; 2nd Tier to 3rd, presumably no farther since lower tiers not entitled to bond claim)  No harm in requesting it in order to be proactive

Subcontractor Fails to Provide CPS  If 1st Tier fails to provide to 2nd Tier, then 2nd Tier not

obligated to perform contract and cannot be sanctioned for failing to provide in timely manner (you have a right to protect yourself and can explain to the Contractor why you are not providing)  Important to establish this practice because right to claim against bond will most likely be cut if Contractor did what it was supposed to do and a sub failed – protection is non-performance

Reminders  Nothing changes with federal projects  These changes apply solely to North Carolina state

and local projects  Become effective for projects which begin on or after January 1, 2013

Point to Ponder  No service mechanism specified for CPS, so if you are

a first or second tier think about how you are going to prove receipt or delivery of a CPS  If a year later your 1st Tier testifies that he/she handed someone from your company the CPS how do you refute if it was not received, especially if you went ahead and delivered on the project. Once delivery is made, presumption is going to be against supplier

Another Reminder 120-day Notice of Claim on Payment Bond not changed Still must be served as currently required Still must bring the lawsuit in the one year period

QUESTIONS ON PAYMENT BONDS AND PRE-NOTICE?

What about the other changes?

More to come  Senate Bill 42  Lien Agent  Subject to “technical revisions” prior to April 1, 2013

effective date  Will be subject of future Webinar once it becomes clearer what happens with the proposed revisions