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N.C. Court of Appeals: John Conner Construction v. Grandfather Holding Company- No Materialman’s Lien when Debtor did not own the property at commencement of construction

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By Ed Boltz, 10 October, 2012
Summary: John Conner Construction (“JCC”) and the other plaintiffs, provided labor and materials for the improvement of a parcel of land owned by Grandfather Holding Company (“GHC”), which had obtained financing for the purchase and improvement of the parcel from Mountain Community Bank (“MCB”). The construction was commenced prior to GHC actually purchasing the property. On completion of the construction, JCC presented a bill for $1,377,774.02, but GHC only had $262,000 remaining from the financing. This amount was paidl, leaving a substantial balance. Subsequently, GHC defaulted on the loan and the bank foreclosed, with MCB purchasing the property at the foreclosure sale for $4 million. JCC asserted a claim of lien against GHC in the amount of $1,774,119.84 dating from January 16, 2009, eventually filing a complaint seeking enforcement of its claim of lien as superior to any claim to the subject property or loan proceeds by defendant bank. MHC moved to dismiss the complaint for failure to state a claim based upon lack of an express contract between any of the JCC and MHC, lack of a legal duty owed by MHC to JCC, and inability of plaintiffs to avail themselves of any equitable remedy vis-à-vis MHC. The trial court granted the motion to dismiss and JCC appealed. The majority affirmed this dismissal, beginning by recognizing that N.C.G.S. § 44A-8 provides that: Any person who performs or furnishes labor or . . . materials . . . pursuant to a contract, either express or implied, with the owner of real property for the making of an improvement thereon shall, upon complying with the provisions of this Article, have a right to file a claim of lien on real property on the real property to secure payment of all debts owing for labor done ... or material furnished . . . pursuant to the contract. (Emphasis added.) Even though the term “owner” can include person under contract to purchase property, See Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985), GHC was neither te owner nor under a contract to purchase at the time construction commenced. Further, the majority rejected the argument that MHC had been unjustly enriched by the improvements made by JCC. The majority distinguished this case, where all of the financing had been exhausted (including use of $262,000 to partially pay JCC) from Embree Construction Group, Inc. v. Rafcor, Inc., 330 N.C. 487, 411 S.E.2d 916 (1992). There the lender had refused to pay the money remaining in the loan fund to satisfy the balance owed for construction, the North Carolina Supreme Court held that the lender had been unjustly enriched. That decision recognized that if all of the financing had been disbursed, it would be inequitable for the lender to have to disburse further funds. Judge Hunter dissented, in the hope that the North Carolina Supreme Court would extend Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985), to hold that a subsequently acquired interest, such as with GHC, supports a materialman’s lien even though no enforceable interest existed when the contract was made or the work commenced. For a copy of the opinion, please see: John Conner Construction v. Grandfather Holding Company- No Material man’s Lien when Debtor did not own the property at commencement of construction.pdf

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