Please ensure Javascript is enabled for purposes of website accessibility
Home / Courts / Real Property – Lien Priority – Materialmans’ Liens – Lenders’ Liens – Execution Sale

Real Property – Lien Priority – Materialmans’ Liens – Lenders’ Liens – Execution Sale

Lawyers Title Insurance Corp. v. Zogreo, LLC. (Lawyers Weekly No. 10-07-1093, 24 pp.) (Linda Stephens, J.) Appealed from Wake County Superior Court. (Robert H. Hobgood, J.) N.C. App. Click here for the full text of the opinion.

Holding: Since the defendant-contractors didn’t join the plaintiff-lenders as parties in the contractors’ lien enforcement actions, the lenders are not bound by the factual determinations made in the lien enforcement actions.

We affirm summary judgment for the lenders and their title insurers.

Facts

In 2004, Bunn Construction Co. entered into a contract with the owner of land in Garner (the property). Bunn initially performed under the contract but ceased work due to nonpayment.

Bunn filed a claim of lien. The owner sold part of the property (Tract 1), and Bunn’s claim was paid out of the sale proceeds. Bunn canceled its claim of lien.

Trinity Builders, LLC, the new owner of Tract 1, borrowed the purchase money from BB&T on Feb. 22, 2005. BB&T recorded its deed of trust in Tract 1 as security for Trinity’s promissory note.

Bunn submitted a new contract proposal to Trinity on April 25, 2005.

Trinity borrowed $700,000 from Cardinal State Bank to buy the remaining two tracts of the property. Cardinal recorded its deed of trust on those two tracts on April 29, 2005.

On May 25, 2005, Trinity accepted Bunn’s April 25 proposal.

C.C. Mangum Co. contracted with Bunn to perform work on the property. Both contractors ceased work on the property on Sept. 29, 2006, due to nonpayment for their services. On Oct. 15, 2006, Mangum filed a claim of lien on all three tracts. The claim of lien asserted a principal amount of $389,438 and listed a date of first furnishing of May 15, 2006, and a date of final furnishing of Sept. 22, 2006.

On Dec. 18, 2006, Bunn filed a claim of lien on all three tracts. This claim of lien asserted a principal amount of $895,484, listed a date of first furnishing of May 5, 2004, and listed a date of final furnishing of Sept. 29, 2006.

The contractors filed separate actions to enforce their claims of lien.

On March 24, 2008, Judge Hight granted summary judgment for Mangum (the Mangum judgment). The Mangum judgment declares a lien on the property, relates the lien back to May 5, 2004, by right of subrogation to Bunn’s lien, and orders the sale of the property to satisfy the judgment.

On April 29, 2008, Judge Hudson granted summary judgment for Bunn (the Bunn judgment). The Bunn Judgment declares a lien on the property, relates the lien back to May 5, 2004, and orders the sale of the property to satisfy the judgment.

The lenders and their title insurers filed this action, successfully seeking to enjoin the execution sale.

Lien Enforcement

When a contractor’s lien is validly perfected under G.S. Chapter 44A and is subsequently enforced by bringing an action within the time period set forth in G.S. § 44A-13, the lien will be held to relate back to and become effective from the date of the first furnishing of labor or materials under the contract and will be deemed perfected as of that time.

Only the owner of the property subject to the lien is required to be a party to an action to enforce the claim of lien. Although subsequent encumbrancers are proper parties to such action, they are not necessary parties to an action to enforce a contractor’s lien.

However, a judgment cannot bind persons who were not party or privy to the action. Thus, subsequent encumbrancers who are not made parties to an action to enforce a lien are not bound by the lien judgment. Accordingly, a subsequent encumbrancer who was not made a party to a lien enforcement action may bring a subsequent action to determine the priority of its interest in the property.

Plaintiffs were not parties to Bunn’s or Mangum’s actions to enforce their materialman’s liens. Therefore, plaintiffs were not bound by the lien judgments and were free to bring subsequent actions to have the priority of their security interests determined as against the lien judgments.

The priority of plaintiffs’ security interests in the property can be ascertained with respect to Bunn’s and Mangum’s liens without declaring the Bunn and Mangum judgments invalid. While the effective date of the Bunn and Mangum liens, as declared by the trial court, is invalid as to plaintiffs in this action, the Bunn and Mangum judgments remain valid between the parties to the lien enforcement actions. Moreover, the declaratory judgment action brought by plaintiffs is specifically established by law for the purpose of having the priority of the security interests of the parties determined.

Plaintiffs need not plead or prove that the Bunn and Mangum judgments are void in order for the priority of plaintiffs’ security interests in the property to be ascertained with respect to Bunn’s and Mangum’s liens. Thus, plaintiffs’ declaratory judgment action is not a collateral attack on the judgments; rather, it is a permissible method of having the priority of the security interests of the parties determined while leaving the judgments intact as between the parties to the lien enforcement actions.

As plaintiffs do not seek “nullification” of the Bunn and Mangum judgments, and plaintiffs may be entitled to the relief requested without those judgments being declared void as between the parties to the lien enforcement actions, plaintiffs’ action in this case does not constitute an impermissible collateral attack on the Bunn and Mangum judgments.

A proceeding to enforce a mechanic’s lien is in rem. A judgment in rem binds the world to any decision affecting the res involved in the litigation.

In this case, we do not adjudicate any property rights already determined in the lien enforcement actions or order the sale of the property to satisfy a judgment; instead, we  consider the fact of the date of first furnishing upon which Bunn’s and Mangum’s claims of lien were based to determine the priority of plaintiffs’ security interests in the property. We see no reason why we should allow a judgment in rem to establish the facts on which that judgment is based in another suit, and we decline to do so.

A judgment in rem binds all the world, but the facts on which it necessarily proceeds are not established against all the world.

Accordingly, even if Bunn’s and Mangum’s lien enforcement actions were “actions in rem,” the resulting lien judgments did not establish the date of first furnishing upon which the Bunn and Mangum judgments were based as against plaintiffs.

Summary Judgment

A contractor’s lien for all labor and materials furnished pursuant to a contract is deemed prior to any liens or encumbrances attaching to the property subsequent to the date of the contractor’s first furnishing of labor or materials to the construction site.

The undisputed facts establish that Bunn was paid in full for its clearing and grading work under the April 8, 2004, contract. Moreover, Bunn submitted a contract proposal to Trinity on April 25, 2005, that, in Bunn’s chosen terms, replaced any other contract discussed or written in the past. Trinity executed the contract on May 25, 2005, and Bunn performed the work that is the basis for its claim of lien under this contract.

There was no forecast of evidence that Bunn completed any work pursuant to any contract between June 16, 2004, when it ceased working for non-payment under the original contract with the previous owner, and May 25 2005, when it entered into the new contract with Trinity. Accordingly, the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue that Bunn first furnished labor and materials under the May 25, 2005, contract on or after that date.

Bunn’s cancellation of its first claim of lien did not “re-set” Bunn’s date of first furnishing for the purposes of this case. Instead, Bunn filed the first claim of lien, cancelled it after receiving payment for the amount asserted in the lien, and thereafter, entered into a new contract, under which it commenced work. It was the commencement of work under a distinctly new contract that effectively “re-set” the date of first furnishing at issue here.

The BB&T deed of trust was recorded on Feb. 22, 2005. The Cardinal deed of trust was recorded April 29, 2005. As these instruments were recorded before May 25, 2005, they have priority over the contractors’ liens as a matter of law.

Affirmed.


Leave a Reply

Your email address will not be published. Required fields are marked *

*