It’s commonplace for plaintiffs in construction cases, especially owners, to assert unfair trade practice claims. But those claims rarely succeed. Most construction disputes involve a breach of contract between two sophisticated parties. In those circumstances, North Carolina law requires a substantial aggravating factor to turn the breach of contract into an unfair trade practice under G.S. 75-1.1 But a new decision in Gilmore’s Farm, Inc. v. Herc Rentals, Inc. from the U.S. District Court for the Eastern District of North Carolina has recognized that wrongfully asserting a lien can be the basis for a claim under G.S. 75-1.1.

A Dumpster, Err, Excavator Fire of a Case

Gilmore’s Farm was a dispute between a first-tier clearing and grading subcontractor and a second-tier equipment supplier. Gilmore, the clearing and grading subcontractor, was hired by a prime contractor to clear land for a subdivision. Herc, the second-tier equipment supplier, rented an excavator to Gilmore for the project. Foreshadowing the legal mess to come, the excavator allegedly “burst into flames” while Gilmore was working (yes, that’s an actual photo below).

The parties’ rental agreement included a “Rental Protection Program,” which Gilmore alleged limited its liability for loss or damage to the excavator to either 10% of the actual repair or replacement cost or $500, whichever was less. Despite the Rental Protection Program, Herc invoiced Gilmore for the full replacement cost of the excavator plus a small amount of outstanding rent for a total of $109,556.39. To help recover the amount owed, Herc asserted both a lien on real property and a lien on funds.

In response to the lien claims, Gilmore sued Herc alleging, among other things, breach of contract and a violation of G.S. 75-1.1. The G.S. 75-1.1 claim was based on two primary allegations. First, Gilmore alleged that Herc’s lien was wrongful because Herc, as an equipment supplier, didn’t have any statutory lien rights. Second, Gilmore alleged that Herc’s lien claim “deliberately, unscrupulously, and deceptively” disregarded the terms of the Rental Protection Program by seeking the full replacement value of the excavator.

Herc’s Motion to Dismiss

Herc moved to dismiss, arguing that there was no substantial aggravating factor attending the alleged breach of contract. Herc argued (correctly) that Gilmore misstated the law on whether equipment suppliers have lien rights. For that point, Gilmore relied on a 1993 opinion, Steel Erectors, Inc. v. Inco, Inc., in which the N.C. Court of Appeals held that equipment suppliers did not have lien rights. But Steel Erectors was overturned legislatively two years later by amendments to G.S. 44A-7. Herc also argued that even if it had breached its contract, Gilmore had not alleged a substantial aggravating factor which would raise the claim to the level of an unfair trade practice.

In ruling on the motion, the court assumed without deciding that Herc had lien rights under Chapter 44A. The real issue was “whether [Herc] was contractually entitled to the proceeds on which it filed the lien.” Gilmore alleged that the $109,556.39 was more than it was contractually obligated to pay and that Herc knew or should have known that filing a lien for that amount was improper. Under these allegations, filing the lien was a substantial aggravating factor beyond a breach of the terms of the rental agreement. While the opinion didn’t address it directly, the arguably unfair leverage Herc gained by asserting a lien on funds and stopping payments to Gilmore undoubtedly contributed to the determination that a substantial aggravating factor was present.

Two Bites at the Unfair Apple

Query, though, whether there was even a need for the court to analyze the unfair trade practice claim as a breach of contract with a substantial aggravating factor. Gilmore alleged the lien claims were wrongful under G.S. 14-118.6, a statute added in 2012 which addresses criminal penalties for the filing of a false lien or encumbrance. But neither the parties nor the court addressed subsection (d) of G.S. 14-118.6, which provides for a per se violation of section 75-1.1 if a lien is determined to be “materially false, fictitious, or fraudulent.” Currently, there are no reported cases citing to G.S. 14-118.6(d), a sign that the construction bar has been slow to incorporate this tool into its toolbox.

After Gilmore’s Farm, there may now be two separate grounds for claiming an improper lien on real property violates G.S. 75-1.1—a substantial aggravating factor attending a breach of contract and a per se violation under G.S. 14-118.6(d). Note, however, that the per se unfair trade practice under G.S. 14-118.6(d) only applies to liens presented “for recording or filing with a register of deeds or clerk of superior court.” For the most part, this excludes liens on funds, which are only served, not filed. For strategic reasons, subcontractors and suppliers often serve a lien on funds without filing a lien on real property. In that circumstance the only basis for a claim under G.S. 75-1.1 would be to rely on Gilmore’s Farm to show a substantial aggravating factor attending a breach of contract.

Unfair Trade Practices Claims after Gilmore’s Farm

Project owners and others who defend against liens will welcome Gilmore’s Farm. But should owners and others reflexively assert an unfair trade practice claim in response to every lien? Probably not. Gilmore’s Farm will be distinguishable from most other construction contract disputes because of the specific controversy between Gilmore and Herc. Under the terms of the Rental Protection Program, there was no reasonable argument that Herc could charge Gilmore the full replacement value of the excavator. Herc’s overreach, combined with the substantial leverage of mechanic’s liens, gave rise to an unfair trade practice. In most other construction disputes, however, the validity of the lien claim won’t be so easy to determine.

The crux of nearly every construction dispute is the amount of money owed to a contractor for its work. Because the parties always dispute the amount owed under a contract, they will always dispute the amount of the lien which secures payment of the disputed amount. Gilmore’s Farm shouldn’t be read as authorizing a claim under G.S. 75-1.1 every time someone thinks a claimant asserted a lien for more than they are actually owed. That would be an unworkable rule which would turn every garden variety construction contract case into a dispute under G.S. 75-1.1 – the type of thing our courts have repeatedly sought to avoid.

Conclusion

Section 75-1.1 claims rarely succeed in construction disputes, which often center on contractual claims. It’s a high bar to show substantial aggravating factors attending a breach of contract. Gilmore’s Farm may have opened the door a little further to claims under G.S. 75-1.1 but expect lien claimants to push back when an owner seeks to turn an exercise of lien rights and a reasonable payment dispute into an unfair trade practice claim.

December 10, 2021/by Construction