Court of Appeals Confirms Partial Lien Waivers Do Not Waive Lien Rights

In a recent decision, the North Carolina Court of Appeals held that a general contractor’s execution of partial lien waivers did not prejudice a supplier’s lien rights on the construction project. The case is Atlantech Distribution v. Land Coast Insulation and was decided on July 16, 2024.

Atlantech supplied insulation to Land Coast Insulation on the project. Land Coast, in turn, contracted with the project’s general contractor. Land Coast was terminated from the project by the general contractor and failed to pay Atlantech for the materials provided. There was a dispute between Land Coast and the general contractor as to what amounts, if any, the general contractor owed to Land Coast. However, there was no dispute that the project owner owed the general contractor amounts well in excess of the amount owed to Atlantech by Land Coast.

In order to protect its right to payment, Atlantech filed a mechanic’s lien against the project. The general contractor noted that the owner had already paid the general contractor for the materials provided by Atlantech, that the general contractor had already paid Land Coast for those materials, and that the general contractor had signed partial lien waivers for the progress payments made by the owner to the general contractor for those materials. However, the general contractor had not signed a final lien waiver, because it was still working on the project. The general contractor argued that the partial lien waivers precluded Atlantech from asserting a lien against the project.

As a result of the lien filed by Atlantech, the general contractor was exposed to having to pay twice for the same materials. The Court noted that under North Carolina’s lien statute, there were ways that the general contractor could protect itself from double payment jeopardy. One way was to file and post a Notice of Contract on the project. The general contractor had filed a Notice of Contract but failed to post it on the permit board at the project. Therefore, this avenue to avoid double payment was not available to it. Another way to avoid double payment was for the general contractor to have executed a final lien waiver prior to Atlantech filing its lien. If it had done so, Atlantech’s lien rights would have been cut off.

The general contractor argued that it had executed multiple partial lien waivers prior to Atlantech’s lien being filed, which related to money that would have been owed to Atlantech, and therefore, Atlantech’s lien rights should have been terminated. The Court disagreed and held that the statute does not allow a supplier or subcontractor’s lien rights to be terminated by the execution of a lien waiver unless it is a final lien waiver. The Court made clear that a partial lien waiver executed by a general contractor is not sufficient to prejudice the lien rights of a supplier or subcontractor. Because the general contractor had not executed a final lien waiver, it still had lien rights against the owner of the project. The Court determined that as long as a general contractor has lien rights against the owner of a project,  a lower-tier subcontractor/supplier can assert the general contractor’s lien rights by right of subrogation. While the partial lien waiver might affect the amount of the lien that a subcontractor could assert depending upon how much remained owing from the owner to the general contractor, it does not otherwise prejudice the subcontractor’s lien rights. In this case, it was undisputed that the owner owed the general contractor more than the amount of Atlantech’s lien claim, and therefore, Atlantech was free to enforce its lien rights.

Double payment is a bitter pill for general contractors to swallow. The legislature has provided a statutory mechanism to protect general contractors so they are not exposed to double payment. In this case, the general contractor did not take advantage of those protections and instead attempted to equate the execution of partial lien waivers to the execution of final lien waivers. The Court rejected that argument and made clear the critical distinction between partial lien waivers and final lien waivers as they relate to the lien rights of a subcontractor or supplier.