New Mammoth Grading ruling impacts lien rights of North Carolina subcontractors and suppliers

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Guest Editorial from NC law firm of Smith Debnam Narron Drake Saintsing & Myers, LLP:  On February 23,  the District Court for the Eastern District of North Carolina  issued its decision on the appeal of the bankruptcy Court’s ruling in the infamous Mammoth Grading case that dramatically impacted the lien rights of NC subcontractors and suppliers.

The  Court vacated the Mammoth ruling and remanded the case to the Bankruptcy Court for further proceedings.  This means that the ruling of the Bankruptcy Court in the Mammoth case is no longer good law.

The District Court issued an order granting Mammoth’s Motion to Dismiss Ferguson’s appeal.  However, the order went on to comment on the Mammoth ruling.   In the order, the District Court questioned if the Bankruptcy Court’s rulings prohibiting the filing of notices of claims of lien upon funds and claims of lien after a bankruptcy case had been filed were in accordance with North Carolina statutory lien law and the constitutional protections afforded laborers and materialmen by Article X Section 3 of the North Carolina Constitution.

This provision of the North Carolina Constitution specifically requires the General Assembly to make adequate provisions for a lien to protect the rights of those that provide labor and materials for the improvement of the lands of another.

The District Court went on to express particular concern that the Bankruptcy Court may have erred in determining that a lien under Chapter 44A, Article 2,  Part 2 of the North Carolina General Statutes does not arise until the filing of a notice of claim of lien by the subcontractor.  The District Court elected to dismiss Ferguson’s appeal as being moot and therefore did not reach a decision on the merits of Ferguson’s appeal.

What does this mean for NC lien claimants?

Even with this ruling from District Court, not much has changed. In the Eastern District of North Carolina, the rulings from Harrelson, holding that the filing of a post-petition claim of lien or notice of claim of lien upon funds are a violation of the automatic stay, still remains.

Given the decision by the District Court there is now some doubt regarding the reasoning behind the rulings in Harrelson and Mammoth. That may lead other bankruptcy court judges to re-evaluate the Eastern District’s stance on post-petition liens in future cases.  Also the Harrelson/Mammoth analysis of post-petition lien filings has not been adopted by the Bankruptcy Courts in the Middle or Western Districts of North Carolina.

Finally, a legislative study commission has been formed to look at changing North Carolina’s lien law statutes.   The study commission has met once and has two more meetings scheduled.  It is still early in the process, but it appears that the study commission may recommend changes to the lien statutes that they believe would effectively nullify the rulings in the Harrelson/Mammoth cases.  Read More.

Byron L. Saintsing is a partner and John M. Sperati is an associate with the Raleigh, NC law firm of Smith Debnam Narron Drake Saintsing & Myers, LLP.   Both concentrate their practices in construction law.

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