NC Supreme Court Questions Lien Law Heirarchy

In Carolina Building Services' Windows & Doors, Inc. v. Boardwalk, LLC, ___ N.C. ___, ___ S.E.2d ___ (April 11, 2008), the Supreme Court of North Carolina threw into question "the lien law hierarchy" created by North Carolina General Statutes 44A-7 through 24 and held that a default judgment in favor of an owner of real property against its general contractor cannot form the basis for extinguishing a subcontractor's lien on such real property.

Boardwalk, LLC ("Owner") entered into a contract with Miller Building Corporation ("Contractor") for the construction of a condominium project. Before completion, Contractor removed its personnel and equipment from the project site and failed to pay its subcontractors, including the plaintiff Carolina Building Services' Windows and Doors, Inc. ("Subcontractor").

Subcontractor properly gave notice of its claim of lien on funds, filed a subrogation lien, and filed suit against Owner and Contractor to perfect its lien. The Contractor failed to answer or appear, and the trial court entered a default judgment. Two years later, Owner filed a crossclaim against Contractor and obtained a default. Owner then sought entry of a default judgment, and Subcontractor objected; these actions were consolidated with each party's motion for summary judgment.

The trial court granted Owner summary judgment on its request for entry of default judgment, holding that Subcontractor lacked standing to contest the entry of default judgment. It then granted summary judgment to Owner on Subcontractor's lien claims based on such entry of default judgment. (Presumably, this judgment is because Owner established it owed no money to Contractor and Contractor had no claim of lien against the property so it follows that Subcontractor could not have a claim of lien on the property.) The Court of Appeals upheld the trial court's decision.

The Supreme Court of North Carolina reversed. It noted that, pursuant to N.C.G.S. 44A-23, "upon filing of a notice and claim of lien and the commencement of an action, no action of the contractor shall be effective to prejudice the rights of the subcontractor without his written consent." It then reasoned that Contractor's failure to answer or appear constituted an "action" by defining it broadly as "a thing done." It concluded that Contractor's action had the effect of prejudicing Subcontractor in contravention of the law, and, therefore, Subcontractor should have a right to present evidence concerning the merits of recovery under its claim of lien.

The dissent notes that this ruling has several implications. First, by permitting the Subcontractor to present evidence, the Court must have necessarily concluded that the default judgment against Contractor, which established that Owner owed no money to Contractor and Contractor had no claim of lien, had no effect. This brings into question the soundness of default judgments. Second, the Court also brings into question the lien law hierarchy (i.e., the idea that if Contractor has no claim of lien against the real property, then the subcontractor has no such claim of lien). Finally, the Court may have upset the risk-shifting mechanism of the statute. The statute is designed to distribute risk to the party best able to protect its interest. In this case, the subcontractor could have protected its interest by filing a claim of lien on funds sooner.

Professional Liability Insurance for BIM

In working on an architectural services agreement recently, I struggled with how to address professional liability for the use of Building Information Modeling (BIM). Its anticipated use on the project is by the Architect and its consultants, with potential input from a construction manager. While this use is fairly narrow, it nevertheless seemed to me important that the issue of professional liability for the use of BIM needed to be expressly addressed, so that the Architect could obtain coverage (via a BIM endorsement or otherwise) under its professional liability insurance.

What I came up with goes something like this: "If Building Information Modeling (BIM) is used by the Architect, the Architect's consultants, a Construction Manager or any contractors or subcontractors in the preparation of the Drawings, Specifications and other Construction Documents, the Architect shall take responsibility for whatever information is ultimately adopted from the BIM process into the final Drawings, Specifications and other Construction Documents. The Architect agrees to manage the BIM process and the BIM model, granting and restricting (as appropriate to the purpose for which the model is used) rights to access the model and to make changes to the model. The Architect also shall procure and maintain a BIM endorsement to its professional liability insurance, which endorsement shall provide coverage to the Architect in its role as BIM manager and for technical consulting and errors and omissions (including technology-related errors and omissions) arising out of the use of BIM."

It will be interesting to see how contract language evolves as the use of BIM becomes more widespread and is used not only by design professionals and construction managers, but also trade contractors, suppliers and others involved in the construction process. (This entry published by Karen Estelle Carey, a member in the Real Estate Development and Construction practice group at Womble Carlyle).

Fair Housing Act Accessibility: Examples of Covered Multi-Family Dwellings

As litigation over Fair Housing Act (FHA) design and construction accessibility requirements continues to increase around the country, we are getting more and more questions about what kinds of multi-family housing are, in fact, subject to these requirements.

To start with, the accessibility design and construction requirements apply to all buildings built for first occupancy after March 13, 1991, that fall under the definition of "covered multifamily dwellings (CMFDs)". CMFDs are:

1. all dwelling units inside buildings that have one or more elevators if there are at least four dwelling units in the building, and
2. all ground floor dwelling units in buildings without an elevator that have at least four dwelling units.

If a dwelling unit falls into one of the above two categories, it is a CMFD. This is true regardless of whether it is an apartment, condominium, townhouse, vacation timeshare unit or college dormitory.

Continuing care retirement facilities (CCRCs) (a fast-growing sector in our aging society) are covered even if they include health care facilities, providing that the CCRC has at least one building with four or more dwelling units ---- but there is a nuance here. To be a "dwelling" under the FHA, the unit must be intended to be used as a residence for more than a brief period of time. It is possible, therefore, for some units in a CCRC to be deemed CMFDs while others are not. While this nuance might be useful to a CCRC encountering an accessibility challenge, certainly the safest approach would be to design and construct each unit about which there could be a question as if it were a CMFD. (This entry posted by Karen Estelle Carey, a member of the Real Estate and Construction practice.)

Getting More Green by Going Green: New Study Finds Strong Economic Case for Developing Green Buildings

In recent weeks, there have been a number of news articles published on the growing trend among owners, developers and contractors in the area of "green" building and "sustainable development". Until recently, most buildings that obtained LEED certification were mostly found in the areas of higher education and government according to the U.S. Green Building Council ("USGBC"). That trend is changing in part due to the results of new studies being conducted to examine the business case for "going green".

In a recent study published by the CoStar Group ("CoStar"), LEED buildings actually outperformed their non-LEED peers in "key areas such as occupancy, sale price and rental rates, sometimes by wide margins." According to the CoStar study, "LEED buildings command rent premiums of $11.33 per square foot over their non-LEED peers and have 4.1 percent percent higher occupancy. Rental rates in Energy Star buildings represent a $2.40 per square foot premium over comparable non-Energy Star buildings and have 3.6 percent higher occupancy." One factor in the increased return on green investment dollars is the high demand for green buildings across market sectors according to the CoStar study. Nationally, the supply has simply not been able to keep up with demand.

In North Carolina, the supply of LEED certified buildings has seen a dramatic increase as many real estate investors are also lauding the financial benefits of going green. According to a recent article in The Charlotte Observer, "In search of investors, builders going green", "[w]ithin five years, buildings that aren't constructed to environmental sustainability standards likely will have difficulty finding investors, experts predict." According to a recent article in the Triangle Business Journal, "Eco-friendly groups rise in shadow of LEED ratings agency", there are some 26 LEED certified buildings in North Carolina. Of these, over half are located in the Triangle according to the TBJ. There are also some 54 projects in the Triangle that are currently being considered for LEED certification according to the USGBC. Based on these numbers, which reflect a 100% increase in the total number of North Carolina LEED certified projects, just in the Triangle, it appears that the business case for going green is being realized here in the Triangle and across North Carolina and that owners, developers and contractors are likely to see more green by going green in the future. (This entry published by Culley Carson, a member of Womble Carlyle's construction law practice group.)

Choosing an Insurer for Builder's Risk

In assisting a client evaluate alternative proposals for providing builder's risk coverage recently, I prepared a sort of "checklist" of issues to be considered when comparing the policy forms of two different insurers (builder's risk policy forms are not standard, thus each insurer's policy form needs to be reviewed and evaluated). Here are ten items from the checklist:

1. Is the policy "all-risk"? If so, be sure to review carefully the exclusions to coverage to determine what may need to be added back by endorsement.
2. Is the policy written on a "completed value" form or a "reporting form" (reporting forms impose significant penalties for late or under-reporting the increasing value of the project).
3. What, exactly, is the description of "Covered Property"? It should be something like "all property that is used in, or incidental to the construction project" as opposed to "property that will ultimately become part of the completed structure". The former provides more expansive coverage.
4. Is there flood damage coverage? If so, is there a sublimit to the coverage? Is there a separate deducible applied to this, and if so, how is the deductible figured --- on percentage of loss (better) or percentage of value?
5. Is there wind/hurricane damage coverage? If so, what is the sublimit and deductible and how is it figured? Is there different coverage/deductible for a "named storm"?
6. Is there an exclusion for losses covered by a guarantee, warranty or other obligation? If so, make sure that this exclusion does not apply to a contractor's warranty.
7. Is there an exclusion for loss arising out of professional services? If so, get the exclusion deleted or add coverage back by endorsement.
8. What are the policy provisions on owner occupancy? Are there any restrictions? Be sure to understand if/when partial occupancy will cause the coverage to terminate.
9. Federal law mandates that insurers provide terrorism coverage, confirm that this applies to domestic as well as international terrorism.
10. Does the policy give you the right to make pre-loss waivers of subrogation rights? Many standard form construction contracts (including AIA forms) include this pre-loss waiver, and you need to confirm that the policy allows for this if you have already entered into a construction contract.

These are only some of the items that need to be reviewed and evaluated before deciding on a builder's risk insurer. It is worth taking some time to review with your insurance agent or broker how these and other important items are handled under different builder's risk policies. (This entry posted by Karen Estelle Carey, member of the Construction and Real Estate Group at Womble Carlyle).

Full Ninth Circuit Court of Appeals to Hear Fair Housing Accessibility Case on March 25, 2008

Some time ago, we reported on the Garcia v. Brockway case (503 F.3d 1092 (9th Cir.2007), an important fair housing accessibility lawsuit. At issue is when the two-year statute of limitations for actions alleging defective design and/or construction under the Fair Housing Act begins to run --- when construction is completed, or when the alleged violation is discovered. The plaintiffs appealed a decision from a panel of the Ninth Circuit affirming two lower court rulings that the statute begins to run when construction is completed (when the last certificate of occupancy is issued).


The plaintiffs argued the "continuing violation" theory, that there is no statute of limitations on these claims as long as a unit is allegedly out of compliance with the accessibility requirements of the Fair Housing Act. On January 7, 2008, the court ordered a full 15-judge panel to rehear the case. The "en banc" rehearing is set for March 25, 2008.


The National Multi-Family Housing Council and the National Apartment Association filed a friend of the court brief, arguing that application of the continuing violation theory would render the statute of limitations contained in the Act meaningless. To read NMHC/NAA's amicus brief, go to http://www.blogger.com/www.nmhc.org/goto/4499.