Owner Who Pays Contractor After Receiving Subcontractor’s Lien Notice Becomes Personally Liable to Subcontractor, Even Though Owner Retains More than Lien Amount

O & M Indus. v. Smith Eng’g Co., 360 N.C. 263, 624 S.E.2d 345 (2006)

In this case, the subcontractor served a notice of claim of lien on funds owed to it by the contractor.  The owner paid the contractor after the subcontractor served notice, but also retained funds in excess of the subcontractor’s lien.  The subcontractor sued when neither the contractor nor the owner paid it.  The subcontractor moved for summary judgment, alleging that the owner was personally liable because it paid the contractor after the subcontractor served notice.  The owner also moved for summary judgment.  The trial court granted the subcontractor’s motion for summary judgment and denied the owner’s.  The Court of Appeals reversed, but the North Carolina Supreme Court reversed the Court of Appeals, holding, among other things, that the Court of Appeals failed to properly apply the applicable lien statutes, and that the owner’s retention of funds exceeding the lien did not relieve the owner of personal liability.

Section 44A-18 of the North Carolina General Statutes provides that a first tier subcontractor is entitled to a lien upon funds owed to the contractor arising out of the improvements on which the first tier subcontractor worked or furnished materials.  Under N.C. Gen. Stat. § 44A-20, the obligor (here, the owner) must retain funds up to the total amount of liens as to which notice has been given, and becomes personally liable if the obligor makes further payments to a contractor against whose interest the liens are claimed.  The court held that the “retain funds” prong of § 44A-20 is independent from the “wrongful payment” prong.  Therefore, while the owner at issue retained an amount exceeding the claimed lien, the court found that “the mere retention of funds equal to or in excess of the amount of the lien is not sufficient to avoid personal liability.”  In other words, regardless of the amount retained by the owner, if the owner pays the contractor after notice of claim of lien was served, the owner becomes personally liable to the noticing party up to the amount of the wrongful payment.  Further, the court held that the owner’s option, if any, to set off its cost to complete the project against the retained amount would not negate the owner’s personal liability to the subcontractor.