Supreme Court rules general contractor’s default cannot extinguish subcontractor’s lien

The Supreme Court has recently held that a default judgment in favor of an owner against a general contractor cannot form the basis for extinguishing a subcontractor’s lien on property under N.C.G.S. §44A-23.

In the case of Carolina Building Services v. Boardwalk, LLC, the Supreme Court was faced with this issue after a general contractor abandoned a job project before completion of the project.  An unpaid subcontractor filed a lien on the project after the abandonment by the general contractor.  The subcontractor filed suit against the general contractor and owner to perfect the lien and the owner asserted a claim against the general contractor.  The owner moved for default judgment against the general contractor and presented affidavits that the cost to complete the project exceeded the balance of contract owed to the general contractor, effectively nullifying the subcontractor’s lien on funds.  The subcontractor presented competing affidavits showing the owner completed the project for less than the balance of contract, thus preserving the subcontractor’s lien rights.  The trial court indicated the subcontractor did not have standing to challenge the default judgment against the general contractor on the owner’s claim and entered judgment in favor of the owner, effectively cutting off the subcontractor’s subrogation lien rights.  On appeal, the Court of Appeals affirmed the trial court’s ruling.  However, on discretionary review, the Supreme Court held that the general contractor’s default on the owner’s crossclaim was an “action” prejudicing the subcontractor’s lien rights under the mechanics lien statute and the subcontractor should have had an opportunity to prove its entitlement to a lien on funds owed to the general contractor.  Writing for the Supreme Court, Justice Newby indicated, “[subcontractor] presented an affidavit that raised a genuine issue of material fact concerning [the owner’s] liability to [the general contractor] based on a lien against [the owner’s] real property. Rather than consider this affidavit, the trial court focused on the default judgment for [the owner] against [the general contractor]. By its plain meaning, an action is ‘[a] thing done.’  Thus, [the general contractor’s] choice not to defend [the owner’s] claims constituted an “action” which prejudiced the rights of [subcontractor] contrary to the statutory mandate of N.C.G.S. § 44A-23.  [Subcontractor] should have an opportunity to present its evidence concerning the merits of recovery under its lien on real property.”

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