By James E. Simon

A recent decision from the North Carolina Court of Appeals has highlighted the necessity for general contractors to ensure that they fully comply with notice and lien waiver requirements in order to avoid “double payment jeopardy” in North Carolina.

Under North Carolina law, a second-tier contractor may enforce a subrogation lien against real property if the first-tier contractor fails to pay it for work performed or materials supplied. This applies even if the general contractor had already paid the first-tier contractor for the same work or materials. In that situation, the general contractor can be exposed to “double payment jeopardy”; i.e., paying the first-tier contractor and the second-tier contractor for the same work/materials because the first-tier contractor failed to pass the payments down to the second-tier contractor.

To remedy this potential liability, the North Carolina Legislature established two methods by which general contractors can avoid this situation. Under N.C. Gen. Stat. § 44A-23(b)(1)(a), the general contractor can post a Notice of Contract at the job site within a certain time period after the building permit is issued or the contract is awarded, which forestalls enforcement of these types of subcontractor liens. Alternatively, under N.C. Gen. Stat. § 44A-23(c), the general contractor can issue lien waivers to the subcontractor, which would likewise eliminate the subcontractor’s subrogation lien rights.

In Atlantech Distribution Inc. v. Land Coast Insulation, Inc., the general contractor failed to follow these provisions and subsequently was found liable to pay the second-tier contractor even though it had already paid the first-tier contractor for the second-tier subcontractor’s materials. As the North Carolina Court of Appeals found, the general contractor made two significant errors that subjected it to this “double jeopardy.” First, while the general contractor had appropriately filed a Notice of Contract with the local county clerk, it did not post that Notice of Contract at the jobsite, which meant that it could not take advantage of the protections of N.C. Gen. Stat. § 44A-23(b)(1)(a). Second, while the general contractor had issued partial lien waivers to the subcontractor, it had not issued a final lien waiver. While partial lien waivers can limit the amount of the subcontractor lien to the extent of the lien rights that the general contractor possesses on the property, a partial lien waiver cannot eliminate the subcontractor’s subrogation rights (contrary to a final lien waiver, which does eliminate those rights). Although the general contractor argued that the cumulative total of the partial lien waivers should make them operate in the same manner as a final lien waiver, the Court of Appeals found that argument unpersuasive.

Atlantech should serve as an important reminder to general contractors that (1) double payment jeopardy is an important issue to be aware of in North Carolina, and (2) in order to avoid the situation that arose in Atlantech, general contractors should conscientiously ensure that they are satisfying every element necessary to establish their protections under N.C. Gen. Stat. § 44-23.