Real Property – Mortgages – Contractor’s Lien – Priority

Wachovia Bank National Association v. Superior Construction Corp.. (Lawyers Weekly No. 11-07-0728, 20 pp.) (Sam Ervin IV, J.) Appealed from Mecklenburg County Superior Court. (John R. Jolly Jr., J.) N.C. App. Click here for the full-text opinion.

Holding: A construction company’s lien has priority over that created by the bank’s deed of trust. The trial court erred by construing partial lien waivers to effectively change the date of first furnishing and ruling that the partial lien waivers merely precluded the construction company from asserting a lien relating to the amounts already paid for work performed without having any further effect.

We reverse and remand.

Background

On Jan. 21, 2005, Intracoastal Living entered into a contract with defendant Superior Construction Corp. pursuant to which Superior, acting as general contractor, agreed to construct certain improvements on real estate owned by Intracoastal Living known as The Preserve at Oak Island. In return, Intracoastal Living agreed to pay $19,300,000 to Superior for performing the necessary construction work. Superior first furnished labor and materials under the contract on April 22, 2005.

In April 2005, Wachovia agreed to lend money to Intracoastal Living for the purpose of funding construction activities at The Preserve. On May 19, 2005, Intracoastal Living executed a construction loan agreement, a $22,835,000 promissory note, and a properly recorded deed of trust in favor of Wachovia.

As construction proceeded, Superior submitted numerous applications for payment. The first two applications, which were dated May 11, 2005 and June 9, 2005, were accompanied by documents titled Partial Waiver of Lien. The two partial lien waivers contained identical language, differing only in the amount of the requested draw, the date through which Superior waived and released its lien rights, and the identity of the person signing on behalf of Superior.

Superior last furnished labor and materials in connection with construction activities at The Preserve on June 29, 2007, at which point it stopped work at the project due to nonpayment. On Sept. 25, 2007, Superior filed a claim of lien applicable to The Preserve property in which it alleged that it first furnished labor and materials on April 22, 2005 and that Intracoastal Living owed it $1,286,000 for construction work performed under the contract.

On Oct. 23, 2007, Wachovia filed a declaratory judgment action in which it sought a determination that the lien resulting from Wachovia’s deed of trust had priority over the lien claimed by Superior. On Jan. 14, 2008, Superior filed an answer in which it denied that Wachovia’s lien had priority over Superior’s lien.

On July 24, 2008, defendant Western Surety Company sought leave to intervene. Western Surety’s request to intervene was allowed on Nov. 24, 2008.

On Dec. 4, 2008, Western Surety filed an answer denying the material allegations of Wachovia’s complaint and asserting a crossclaim against Superior and the receiver for Intracoastal and Coastal Sash & Door, George Rountree, III, in which Western Surety sought a declaration concerning the priority of Western Surety’s claim to the balance owed to Superior. Intracoastal filed its answer to Western Surety’s crossclaim on Jan. 9, 2009.

On Sept. 15, 2008, Preserve Holdings, LLC, moved to replace Wachovia as the plaintiff in this case. Preserve Holdings’ motion was granted on Oct.15, 2008.

On Nov. 3, 2008, Preserve Holdings moved for judgment on the pleadings. On Feb. 12, 2010, Superior moved for summary judgment.

On April 23, 2010, the trial court granted Preserve Holdings’ motion for judgment on the pleadings, finding the Wachovia deed of trust lien had priority over Superior’s claim of lien. This appeal followed.

Discussion

Superior first furnished labor and materials at The Preserve on April 22, 2005, approximately one month prior to the date upon which the deed of trust in favor of Wachovia was recorded. As a result, Superior’s lien would ordinarily have priority over that of Wachovia.

The only way in which Wachovia’s deed of trust could be deemed to take priority over Superior’s mechanics’ lien is if the partial lien waivers signed by Superior have the effect of subordinating its entire claim to those creditors with liens perfected prior to the date upon which Superior signed the second partial lien waiver. We do not believe that the partial lien waivers have that effect, and we conclude that the trial court erred by reaching a contrary conclusion.

As a result of the fact that, as the trial court concluded and both parties appear to agree, the language of the partial lien waivers is unambiguous, the only step we need to take in order to resolve the issues raised by defendants’ appeal is to construe the relevant language. Although the trial court concluded, consistently with Preserve Holdings’ argument, that the partial lien waivers signed by Superior effectively changed the date of first furnishing of labor and materials from April 22, 2005 to May 31, 2005, this argument misconstrues the literal language of the partial lien waivers. The critical language for the purpose of resolving the present dispute is the “on account of” provision, which clearly specifies the scope of the rights that Superior waived by signing the partial lien waivers.

We find the U.S. Supreme Court’s analysis in Rousey v. Jacoway, 544 U.S. 320 (2005), of the meaning of the expression “on account of” to be persuasive and conclude that the plain meaning of a waiver of lien rights arising “on account of” labor performed before May 31, 2005 is that the only lien rights being waived are those arising “because of,” “as a result of,” or “on the basis of” work done prior to the relevant date. The language used in the partial lien waivers does not in any way refer to a waiver of Superior’s “place in line;” instead, it simply refers to a waiver of “any and all” lien rights applicable to specific payments.

Thus, the partial lien waivers executed by Superior merely operated as a waiver of its right to claim a lien on amounts for which it had been paid in return for supplying labor and materials before May 31, 2005 relating back to April 22, 2005, the date upon which it first furnished labor and materials at The Preserve. We conclude that Superior’s lien has priority over that created by Wachovia’s deed of trust and that the trial court erred by concluding otherwise. We reverse and remand.