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.