Guided Tour of HB 489 (NC Lien Law) – Part II

Posted on April 20, 2011 by Gregory L. Shelton Leave a comment

By: Gregory L. Shelton

Shelton Law Carolinas

(704) 940-9012

Part I of this series focused on the issues leading up to the introduction of HB 489. Now we will look at the nuts and bolts.

The primary motivation behind HB 489 is to provide the world with notice of potential lien claims. If HB 489 in its present form becomes law, subcontractors will be required to let the owner know early on that the subcontractor is performing work on the project. The notice is given in a document appropriately called the “Notice to Owner.”

If the subcontractor serves the owner with the Notice to Owner within 30 days of its first furnishing, the subcontractor’s lien will relate back to when the Notice of Commencement was filed by the owner.  If the subcontractor fails to timely serve the Notice to Owner, it may still file and serve a Notice to Owner, but the claim of lien on real property will not include a lien for the value of any unpaid labor, materials or equipment furnished more than 30 days before the filing and service of the Notice to Owner.  If, however, a Notice to Owner is filed no more than 5 days before the date that a deed (sale) or a deed of trust (mortgage) is recorded for the same property, the Claims of Lien on Real Property will be “conclusively presumed to be inferior in time and right to the rights created by the Deed and/or Deed of Trust; unless a contrary intention is expressed within the terms of the Deed and/or Deed of Trust.”

The Notice to Owner requirement would place an administrative burden on subcontractors that they currently do not bear.  Many subcontractors object to having to bear this additional burden to preserve rights they already enjoy.  Other subcontractors have told me that the Notice to Owner is a net benefit, because it gives them an excuse to make contact with the owner without offending their customer. Industry associations may split on this point, leaving it to the individual companies to make their case for or against the proposed revisions.

The big question right now is whether the Notice to Owner would also be filed with the Clerk of Court.  Subcontractors are comfortable with mailing documents, but not necessarily making a trip to the courthouse to file a legal document. Moreover, the court administrators are concerned with the flood of paperwork and the lack of funding to handle their new task. The filing issue has become a major sticking point with HB 489.

Chances are that HB 489 will not come up for vote this year.  Instead, the bill is likely to be forwarded to a study committee for further evaluation.

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Why We Attend Job Meetings

Posted on April 13, 2011 by Gregory L. Shelton Leave a comment

By: Gregory L. Shelton

Shelton Law Carolinas

(803) 670-0024

Job meetings serve many practical functions during construction, the foremost being coordination of sequencing, access, and the X’s and O’s of the work.

To the construction attorney, meeting minutes provide a succinct historical snapshot of the project. We can use the meeting minutes to show who was doing what, who knew what when, and what was going on where.  For example, an owner may deny authorizing the contractor to perform extra work, but if the extra work was discussed at a job meeting attended by the owner’s representative, the contractor’s claim for compensation will be much stronger.

There are those contrarian contractors who huff about meetings being a waste of time. And there are those contractors who see themselves as rugged individualists who know how to do their job and don’t need to talk about it.  The contractor secludes himself at his own peril. When things go wrong, it is much easier to scapegoat an empty chair. There are the stories from the east of the peasant farmers sitting for hours in communist party meetings until a traitor was identified. No one left early to beat the traffic.

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Poor Workmanship is no Accident in South Carolina, at Least for CGL Coverage Purposes

Posted on April 11, 2011 by Gregory L. Shelton Leave a comment

By: Gregory L. Shelton

Shelton Law Carolinas

(803) 670-0028

Contractors are often asked whether they have “insurance.”  This question really involves two levels of analysis.  First, there are many different types of insurance: Builder’s Risk, Errors & Omissions (E&O), Commercial General Liability (CGL), Key Man, Property, etc.

In the context of construction, the question usually relates to CGL coverage.  CGL coverage is designed to protect contractors and subcontractors against losses that may occur on the job arising from injuries to people and “other property” (property that is not the subject of the contract).  Other property may include a car parked under scaffolding or inventory in an adjacent retail establishment.

Which brings us to the second level of analysis.  Assuming our contractor does have CGL coverage, is the loss actually going to be covered?  This is where the fun begins, because now we venture into the realm of language, logic, policy-making, and even some philosophy.

As a case in point, consider the South Carolina Supreme Court’s landmark decision in Crossmann Communities of N.C., Inc. v. Harleysville Mut. Ins. Co., 2011 S.C. LEXIS 2 (Jan. 7, 2011). The issue before the court was whether water damage to a condominium building caused by faulty workmanship is covered under a CGL policy.  The insurer argued that coverage was not triggered because poor workmanship is not accidental.  The contractor’s hands hammer the nails, tighten the screws, apply the caulk; deliberate actions that cannot be compared to a bucket of nails falling from the roof onto a vehicle or person.  The owners, on the other hand, argued that the water damage was accidental, because the damage was neither foreseen nor intended.

The South Carolina Supreme Court agreed with the insurer, holding that property damage that is no more than the natural and probable consequence of faulty workmanship cannot be considered an “occurrence” (accident) covered under a CGL policy.

Crossmann has caused such a stir in the Palmetto State that two bills have been introduced in Columbia to legislatively overturn the decision.  House Bill 3449 and Senate Bill 431, both pending, would require insurers to evaluate CGL claims in manner favorable to the insured. The case is also the hottest topic in the construction bar and the insurance bar.

For the time being, expect insurers to deny coverage in construction cases that arise out of faulty workmanship.  As with everything else in the law, this is subject to change.

Photograph courtesy of Joan Perry (Charleston Daily Photo)

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Guided Tour of HB 489 (NC lien law) – Part I

Posted on March 30, 2011 by Gregory L. Shelton Leave a comment

 

Yesterday, I promised you a guided tour of the proposed lien law revisions (HB 489).

The proposed changes came about through an effort by the Construction Law Section of the North Carolina Bar Association to reach industry consensus on how to improve the current lien law. The council that governs the Construction Law Section voted 11-4 in favor of submitting the proposed revisions to the General Assembly.

The proposed revisions are the result of a compromise, and thus many folks will probably find things to like and dislike about the proposal. Moreover, even similarly situated industry participants may disagree on certain points depending upon their customer base, administrative capabilities, and business model.

The Section’s proposal started out as as an effort to address the vexing “hidden lien” issue. Hidden liens arise because, under current law, a lien upon real property relates back to the first day labor or materials were furnished to the property. If the date of first furnishing occurs before the sale of the improved property, and the lien claimant files its lien upon real property after the sale, the title insurance company must remove the lien even though the title insurance company had no way of knowing about the lien at the time of closing.

When the recession hit, the title insurance industry experienced a dramatic increase in hidden lien claims. In response, the title insurers proposed to eliminate the risk of “hidden” liens by adding a new section 44A-12.2, which states in part that a claim of lien “shall not be effective against real property owned by purchasers…whose interest has been registered…after the date of first furnishing…but prior in time to the filing of the claim of lien.” Under this proposed language, liens not perfected before closing would be wiped out. Naturally, contractors and suppliers vigorously opposed the bill.

In an effort to bridge the gap between the construction industry and the title insurers, the Construction Law Section appointed a committee to explore possible solutions to the hidden lien problem. The committee reviewed the lien laws of other states and discussed possible solutions with industry leaders. After many meetings and email discussions, the committee ultimately embraced Florida’s approach of an initial “Notice of Commencement” filed by the owner and a “Notice to Owner” filed by the subcontractor/supplier and served on the owner.

On our next stop, I will explain the Notice to Owner and Notice of Commencement in more detail.

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Forming a North Carolina Limited Liability Company

Posted on March 27, 2011 by Gregory L. Shelton Leave a comment

How to Form an LLC in North Carolina

Gregory L. Shelton

Shelton Law Carolinas

The recession has displaced many bright, creative folks in the construction industry.  Necessity being the mother of invention, many workplace refugees will start their own small businesses, whether it be in contracting, design, or sales.  These new businesses will take many forms, including sole proprietorships, corporations, limited liability partnerships, and limited liability companies.

The mere thought of forming a business entity can be daunting–even paralyzing–to those new to the world of small business.  There is always the “do nothing” option of operating as a sole proprietorship.  If two or more people are involved, and no separate legal entity has been established, the law will treat the business as a partnership.  Be warned:  Doing business as a sole proprietorship or default partnership is like walking a tightrope for the first time without a net.  If anything goes wrong, the sole proprietor or partner is personally on the hook, and his or her house, car, boat, furniture, cash and other personal assets will be tempting targets for creditors.

Once you have made the decision to form a business entity, you must then decide what type of business entity best suits your needs.  In many cases, the LLC (shorthand for “limited liability company”) will provide a good structure for a new business.  LLCs have become the entity of choice for small businesses because they combine the benefits of a corporation, where owners have limited personal liability for the debts and actions of the LLC, with the benefits of a partnership, including management flexibility and the benefit of pass-through taxation.  The LLC is, in essence, a hybrid business entity that is particularly well suited for upstart businesses.  As of January 2009, the North Carolina Secretary of State reported over 200,000 active LLCs in the state.

LLCs are owned by “members.”  Under North Carolina’s Limited Liability Company Act, members may include individuals, corporations, other LLCs and foreign entities.  North Carolina also permits the formation of LLCs having only one owner.

I have broken down the tasks necessary to form an LLC into eight steps.  While it is possible to form an LLC without completing steps three through seven, I have included them because I am assuming your goal is to start a viable business that complies with applicable laws and regulations.  If you lack the time or patience to set up your own LLC, some law firms perform “turn key” LLC formation services, often costing less than $1,000 for LLCs that do not require a complicated operating agreement.

Step One: Come up with an appropriate name for your LLC.  As a general rule, the name should describe your products or services without reaching for undeserved grandiosity.  For a local lawn maintenance company, “Mary’s Lawn Maintenance of Charlotte, LLC” is better than “Global Lawn Consultants, LLC.”  Next, check the North Carolina Secretary of State’s online search engine www.secretary.state.nc.us/corporations/CSearch.aspx to verify that the name is not being used by someone else.

Step Two: File your LLC’s “Articles of Organization” with the Secretary of State along with the $125.00 filing fee.  A fillable PDF Articles of Organization form, with accompanying instructions, is available online atwww.secretary.state.nc.us/corporations/thepage.aspx.  You must “check the box” to select either a “member managed” or “manager managed” LLC.  The “member managed” option is appropriate for most seedling LLC’s because the members run the day to day operations of the business.  You must also designate a “registered agent” to receive legal papers on behalf of the LLC.   While you can serve as the LLC’s registered agent, many LLCs delegate the task to a lawyer or to a private service for a small annual fee.

Step Three: Prepare and sign an “operating agreement.”  The operating agreement is similar to the by-laws for a corporation or the partnership agreement for partnerships.  The operating agreement constitutes the contract between the members of the LLC that establishes the members’ respective contributions and ownership interests and establishes the procedures for voting, daily management, the allocation of profit and loss, and other matters.  Operating agreements frequently contain “buy-sell” provisions, which determine the procedure for buying out a departing member’s interest in the LLC.  As a general rule, LLCs, including single-member LLCs, should have an operating agreement in place.  Otherwise, your LLC will be governed by the default rules set forth in the North Carolina Limited Liability Company Act.

Step Four: Apply for and obtain an Employer Identification Number (EIN) using the IRS’ online application form. Banks will require an EIN to open an account for the LLC.  Also, contact the North Carolina Department of Revenue to apply for and obtain a state privilege license and a state sales tax number (for the purpose of tracking sales tax).

Step Five: Open a bank account the name of the LLC.  The account should be opened in the exact name of the LLC (including the “, LLC” ending) and the signature card should reflect the signatory’s status as “member” or, if applicable, as “manager.”  Absent extraordinary circumstances, the account should never be owned jointly with another person or company.  To preserve the “limited liability” protection afforded to members, the account should be used solely for LLC business and never used for the personal expenses of the members.

Step Six: Get a handle on taxes.  This is one area where an experienced attorney or accountant may save you a lot of grief.  In a nutshell, single-member LLCs are “disregarded” by the IRS for tax purposes, and LLC income expenses are reported on the individual’s Form 1040 Schedule C, E or F.  Multiple-member LLCs are taxed as partnerships using Form 1065.  Although an LLC may elect to be taxed as a corporation (Form 8832) or, in some cases, a Subchapter S corporation (Form 2553), an attorney or accountant should be consulted before making such an election.  Unless you are a glutton for punishment, leave tax returns and other accounting matters to an accountant.

Step Seven: Check with your local jurisdiction on licensing and fees.  For example, if your LLC will conduct business in Mecklenburg County, contact the appropriate governmental agencies and file the necessary paperwork.  All businesses must obtain a “privilege license” to conduct business in Mecklenburg County.  Assumed names (d/b/a’s) must be registered with the Mecklenburg County Register of Deeds, phone number (704) 336-2443.  The fee for recording a one-page assumed name document is $14.00 for the first page and $3.00 for each additional page.  Businesses must list property for personal property taxes with the Mecklenburg County Business Listing Department, phone number (704) 336-6382.  Contact the zoning department, phone number (704) 336-3569, to determine whether your LLC is operating in conformity with zoning regulations.

Step Eight: File annual reports with the Secretary of State along with the $200 filing fee.  For an additional $2.00, annual reports may also be submitted online with the Secretary of State.

Congratulations!   You are now the proud member of an LLC.  Your next task is to provide goods or services that will benefit your customers and make their lives better.  Through effort, ingenuity, and a good reputation in the community, your LLC will take root and grow steadily over time.

© Gregory L. Shelton

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This Blog/Web Site is made available by the lawyer for educational purposes only as well as to give you general information about legal issues,  not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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