Supplier’s Claims of Lien and Claims of Lien Upon Funds

Supplier’s claims of lien and claims of lien upon funds held to be invalid against individual purchasers of residential properties.

In the case of Pegram-West, Inc. v. Sandra Anderson Builders, Inc., the city housing authority owned land and entered into a ground lease with a developer. In turn, the developer entered into subleases with a local builder for the purpose of constructing single-family homes upon the properties. From July 2007 to July 2008, the plaintiff, a material supplier, provided $260,539.60 worth of materials to the builder. In July 2008, the supplier filed claims of lien and notices of claim of lien upon funds against the properties. At the time of the filings, several of the properties had been sold to private owners. The bank foreclosed on the unsold properties. In August 2008, the supplier filed a complaint to enforce the liens against defendants and order a sale of the properties. The trial court issued an order discharging all of the liens.

Upon appeal, the supplier argued that it had complied with statutory requirements, and therefore the trial court erred by discharging the filings. The court of appeals agreed that the supplier complied with all requirements, and held that the trial court committed reversible error by discharging the notices of claim of lien upon funds in regard to the bank foreclosed properties. However, the court upheld the trial court’s discharge of the claims of lien and notices of claim of lien upon funds against the properties owned by private individuals.

In reaching its decision, the court confirmed that a claim of lien is only valid “to the extent of the interest of the owner.” N.C. Gen. Stat. § 44A-9. In the instant case, the supplier did not file an action to enforce the liens on the properties until after the builder’s sublease was extinguished by the sale and conveyance of the properties to the individual owners. Upon the termination of the sublease by a conveyance, the builder no longer possessed an interest in the property and the claims of lien were rendered invalid.

Additionally, the court held that the conveyance of the properties to the private owners extinguished the supplier’s filed notices of claim of lien on funds. Moreover, since liability only attaches to funds after the notice of claim of lien on funds is received, the court held that the bank had no duty to retain any funds subject to the lien or liens upon funds pursuant to its extinguished deeds of trust.

As the facts of this case demonstrate, the combination of the time limited nature of a leasehold interest and the time required to judicially enforce a materialman’s lien effectively, makes the protections of a lien against a leashold interest very tenuous for shorter-termed leases. Subcontractors and suppliers should exercise due diligence when providing materials and labor to builders or owners under these circumstances.

If you have any questions about this topic or any other legal issue, please contact Justin Hampton at 919-277-2541 or byemail.