The “Brave New World” of Claims of Lien

“These,” he said gravely, “are unpleasant facts; I know it. But then most historical facts are unpleasant.”

Aldous Huxley-Brave New World

Major changes to North Carolina’s Mechanics’ Lien laws took effect April 1.

The sweeping revisions to Chapter 44A usher in a “brave new world” that entirely restructures the prior claim of lien system. These statutory changes should – in the long term – benefit lawyers, clients and title insurance companies alike.

But in the short term, there will be a risk of error as we learn a brand-new system that none of us were taught in law school.

In order to ease the learning curve, Lawyers Mutual sent our insureds a malpractice alert just a few days before the new system came on line.

This article will expand on the potential benefits – and pitfalls – of the new system.

 Change Was Needed

 The market downturn of 2008 proved that our existing Mechanics’ Lien statutes left much to be desired. Title insurance companies suffered tremendous losses due to the inchoate liens that were triggered as numerous developers and contractors went under. In response, the title companies tightened the language in their insured closing letters, commitment requirements and lien affidavits.

Lawyers Mutual saw an increase in malpractice claims related to claims of liens as well. Some attorneys were not reading the insured closing letters carefully enough to note that the lender had deleted coverage for certain claims of lien. Other attorneys were not reading the fine print of the various lien affidavits and consequently used the wrong form. In these claims, the title company usually denied coverage to the lender, which meant the lender went after the closing attorney.

Still other claims involved assertions that the attorney should have known the client was likely making untrue affirmations in the lien affidavit and should have questioned the developer/contractor as to the truthfulness of those affirmations. For example, Lawyers Mutual defended one lawsuit where the contractor executed a proper affidavit stating that there had been no work conducted on the property within the last 120 days. But it was alleged that the closing attorney knew from the title work that the loan being closed was a permanent refinance that paid off an existing construction loan, which should have triggered the attorney to question the client as to the truthfulness of the affidavit.  It was alleged that the attorney should have insisted on a long form lien waiver regardless of what the client had said.

For all the changes, though, it appears the high risk areas for malpractice claims under the new system will essentially be the same as under the old one.

First, you need to continue to read the requirements under the commitment very carefully. This is especially important in the early days of the new system, as each title underwriter may require different specific actions from the certifying attorney.

For example, NCGS 44A-11.1(f) states:

“Any attorney who, in connection with a transaction involving improved real property subject to this section for which the attorney is serving as the closing attorney, contacts the lien agent IN WRITING and requests copies of the notices received by the lien agent relating to the real property not more than five days prior to the recordation of a deed or deed of trust on the real property, shall be deemed to have fulfilled the attorney’s professional obligation as closing attorney to check such notices to lien agent and shall have no further duty to request that the lien agent provide information pertaining to notices received subsequently by the lien agent.”

(The bold highlight is additional language added to the statute by the technical corrections of House Bill 180 which became law on March 28, 2013. This may not have been included in your materials if you attended one of the numerous seminars sponsored by the various title companies in anticipation of the new statutes.)

Although the statute states you’ve met your professional responsibility if you’ve searched the website within five days before closing, it is our understanding that some of the title underwriters will want an update much closer to the closing date. I would expect that requirement to be especially true on larger commercial transactions.

Plus, there may very well be subcontractors such as carpet installers whose first day of work could very well be within those last five days before closing.

READ THE COMMITMENT LANGUAGE CAREFULLY to know exactly what the title underwriter expects you to do as far as reviewing the lien website. There could be a disagreement regarding a subrogation claim where the certifying attorney complied with the statute and reviewed the website 5 days or less before closing, but did not comply with a shorter requirement detailed in a title commitment requirement.

Do you want to be the test case over the applicable standard of care? Avoid trouble by reading the commitment carefully and following the requirements.

When I discussed the operation of the new lien statutes with a title insurance attorney, she pointed out that if the certifying attorney properly requests status updates on the lien website during the initial search, then the certifying attorney will be notified almost instantaneously in real time over their smartphone or other device as soon as notice of a new lien is filed.

Troy Crawford’s malpractice alert (referenced above) offers another good risk management tool: taking a screen shot of the list of filed lien notices when you do your search.

New Lien Affidavit Forms

Just as many of the pre-April 1, 2013 claim of lien malpractice claims involved using the wrong lien affidavit form, the same will probably be true under the new statute as well.

The North Carolina Land Title Association (NCLTA) has revised its lien affidavit forms due to the new statutes. It has also added new forms. Make sure you are using the most current forms. Look to the lower left corner of the form. It should say “North Carolina Land Title Association March 2013” and then the form’s appropriate number.

Here is the link to the newly revised lien forms of the NCLTA:

• Form 1 is an Owner’s affidavit and Indemnity Agreement where there have been no recent improvements within the last 120 days and there are no executory contracts for improvements.
• Form 2 is also an Owner/Contractor Affidavit, as well as a waiver of liens and indemnity agreement. This form is to be used where there has been no Mechanics’ Lien Agent (MLA) appointed and the construction was recently completed.
• Form 3 is also an Owner/Contractor Affidavit as well as an indemnity and lien subordination agreement. It too is used where no MLA has been appointed and construction is either recently completed or about to be completed. This form is used where only lien coverage for the lender is sought.
• Form 5 is probably the one that differs most from prior forms. This owner affidavit/indemnity agreement is used where a MLA has been named and construction is completed, contemplated or under way. Note that additional information has to be included in this affidavit regarding the MLA Entry Number, potential lien claimants, and the owner’s certifications.
• Form 6 is a waiver and release of liens to be executed by a potential lien claimant where a MLA has been appointed and lien coverage is sought by both lender and owner.
• Form 7 is a similar subordination of rights by a potential lien claimant where a MLA has been named, but where lien coverage is only sought for a lender.

These are all new forms or revisions of forms we’ve used in the past. Take time to read and review them, especially as we all become accustomed to the new system.

When in Doubt – Ask

If you have a question, as with any title issue, always seek guidance from a title attorney at your title company. Let them do their job. Don’t unilaterally “underwrite” the lien coverage on your own.

As with most malpractice issues concerning real estate law, the devil will be in the details. Take your time, especially early on. Get familiar with the system and the forms. Don’t assume anything. Ask questions.

This system appears to be well-designed. If used properly by both counsel for the contractor/developer and the closing attorney, it should take a lot of uncertainty out of one of the most uncertain title areas of our pure race system.

Aldous Huxley said in Brave New World that, “Words can be like X-Rays, if you use them properly-they can go through anything. You read and you’re pierced.”

With this new lien system, we would say if you don’t read the words or use them properly, you can get pierced as well.

Wayne Stephenson joined Lawyers Mutual in 1989. He has also worked with First Title and Investors Title as both an underwriting and claims attorney. He specializes in real estate matters. You can reach Wayne at 800.662.8843 or at wstephenson@lawyersmutualnc.com.