My Contractor Has Become Insolvent! What Now?!

Priority of Subcontractor’s Lien Upon Funds

It is common practice for a contractor, in order to receive funding, to assign their lender a security interest in all their accounts receivables for a project. However, should the contractor become insolvent, who has the first right to money owed to the contractor; a subcontractor who has properly filed a lien on property and served a notice of a lien on funds, or the lender who has the security interest? The short answer is, in North Carolina, the subcontractor has priority.

Pursuant to N.C. Gen. Stat § 44A-22, liens which are properly filed and served have priority over all other interests or claims previously or thereafter held against the property upon which the lien is claimed. This includes, but is not limited to, liens arising from garnishment, attachment, levy judgment, assignments, security interest, and any other type of transfer, whether voluntary or involuntary.

This statute received support from the North Carolina Court of Appeals in the case of Trustees of Garden of Prayer Baptist Church v. Geraldco Builders, Inc., 78 N.C. Ct. App. 108, 336 S.E.2d 694 (1985). In Geraldco, the Court of Appeals held that “labor and material liens which have been properly perfected have priority over all other claims created in the funds by the person against whose interest the lien is asserted.” Id. at 115, 336 S.E.2d at 698. Based on this holding the Court found that liens filed by subcontractors are entitled to be paid prior to interests held by the contractor’s blanket lender.

For more information on this or any other construction related topic, please contact Todd Jones or Justin Hampton at (919) 277-2541 or by email.