Transcript 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:
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Owners who are not protected by the current law and who may be unable to obtain this protection on new construction, residential or commercial
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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
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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
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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
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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
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Contracting entity and qualifiers
General Contractors
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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:
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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
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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)
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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