O&M Industries v Smith Engineering Co., (03-432) 08/03/2004

Appeal by defendant Kurz Transfer Products, L.P. from order filed 15 November 2002 by Judge Christopher M. Collier in Davidson County Superior Court. Heard in the Court of Appeals 14 January 2004.

Hendrick & Bryant, LLP, by Matthew H. Bryant, for plaintiff- appellee.

Smith, Currie & Hancock LLP, by Michael W. Knapp, Rolly L. Chambers, and David Hill Bashford, for defendant-appellant Kurz Transfer Products, L.P.

    BRYANT, Judge.

    Kurz Transfer Products, L.P. (defendant) appeals an order by Judge Christopher M. Collier filed 15 November 2002 granting summary judgment to O & M Industries (plaintiff) and denying defendant's motion for summary judgment.   (See footnote 1)     Defendant is a tenant of a manufacturing facility in Lexington, North Carolina. In December 2000, defendant contracted Smith Engineering Co. (Smith) to design, manufacture, and install various equipment at the facility (the project), including a regenerative thermal oxidizer system (RTO). Smith in turn contracted plaintiff to manufacture the RTO.
    Plaintiff began manufacturing the RTO in March 2001. By June 2001, plaintiff started to have concerns about Smith's financial situation. During the same time period, defendant was having similar concerns about Smith's ability to complete the project. On or about 6 June 2001, plaintiff shipped the completed RTO to defendant.
    Defendant received from plaintiff a “Notice of Claim of Lien by First, Second or Third Tier Subcontractor” dated 8 June 2001, in which plaintiff claimed a lien on funds owed by defendant to Smith in the amount of $113,655.00. The notice stated in part:
            The [plaintiff] lien claimant gives this notice of claim of lien pursuant to North Carolina law and claims all rights of subrogation to which it is entitled under Part 2 of Article 2 of Chapter 44A of the General Statutes of North Carolina.
On 6 July 2001, defendant made a payment under the contract to Smith in the amount of $164,831.25, and on 1 August 2001, defendant made an additional payment to Smith of $150,000.00. Following these payments, defendant still owed Smith $243,713.00 under the terms of the contract.
    On 22 August 2001, Smith informed defendant of Smith's filing for bankruptcy. The next day, defendant's controller Dave Seymourstated in an electronic mail (email) to defendant's vice president Drew Beringer and two others:
        The [project] is nearly complete. There are several issues with efficiency, electrical connections, and general appearance but these issues are likely solvable with a $25,000 investment. We still owe Smith $462,443.75. We have issues with them that could accumulate to well over $100,000 related to non[-] performance and contract issues. We have no intentions of making any further payments until these issues are settled.
Subsequently, defendant received another “Notice of Claim of Lien by First, Second or Third Tier Subcontractor” dated 23 August 2001 in which plaintiff claimed a lien on funds owed by defendant to Smith in the amount of $127,392.12.
    In an amended complaint filed 11 September 2002,   (See footnote 2) plaintiff alleged:
            31.    Defendant . . . had notice of [plaintiff's] Notice of Claim of Lien in the amount of $113,665 prior to [the] July 6, 2001 [payment to Smith].

            32.    Defendant . . . twice made payment to . . . Smith in amounts in excess of $113,665 after notice of [plaintiff's] Claim of Lien.

            33.    Defendant . . . made payment directly to Smith with [n]otice and knowledge of [plaintiff's] Notice of Claim of Lien.

            34.    Pursuant to N.C.G.S. § 44A-20(b), [d]efendant . . . is directly liable to [p]laintiff . . . up to $113,665 for all payments made to Smith after receipt of the First Notice.
            35.    Plaintiff has been damaged by [d]efendant['s] . . . failure to make payment to [plaintiff] in the amount of $113,665, and by its failure to abide by the First Notice.

            . . . .

            38.    Upon information and belief, [d]efendant . . . has retained $243,713.00 more or less, otherwise payable to . . . Smith.
    In an answer filed 8 October 2002, defendant responded to plaintiff's allegations:
        31.    Admitted.

        32.    It is admitted that [defendant] made payment to Smith; however, any payments were made after withholding an amount sufficient to cover the Notice of Claim of Lien. . . .

        33. Admitted.

        34. Denied.

        35. Denied.

        . . . .

        38.    It is admitted that the unpaid amount of [defendant's] contract with Smith is $243,713.00 and that [defendant] has retained this amount.
    On 26 September 2002, plaintiff filed a motion for summary judgment, alleging defendant was “liable to [plaintiff] in the amount of $113,655.00 as a result of its payments to Smith . . . on July 6, 2001 and August 1, 2001.” Plaintiff submitted the affidavit of Smith's former project manager Timothy Bingaman, who estimated the cost to complete the project to be approximately $40,000.00.
    Defendant also filed a motion for summary judgment dated 9October 2002, stating it had retained approximately $243,713.00 and that it was not obligated to pay plaintiff because the cost to complete the project unfinished by Smith would exceed the amount otherwise owed to Smith. In August 2001, Smith breached its contract with defendant, and refused to pay plaintiff the amount owed under Smith's contract with plaintiff. At this point in time the project remained unfinished, and defendant was forced to complete the project and resolve existing problems. In support of its motion, defendant submitted the affidavit of its vice president Drew Beringer, who stated:
        Toward the end of August 2001, Smith abandoned the Project, forcing [defendant] to undertake completion of the Project at significant additional expense. To date, [defendant] has received estimates from Langbein Engelbracht America that it will cost approximately $415,360.00 to complete the Project as called for in the contract between [defendant] and Smith and to correct defective work by Smith. This is $171,647 greater than the amount to be paid to Smith under its prime contract.
    The trial court granted summary judgment to plaintiff, denied defendant's motion for summary judgment, and ordered defendant to pay plaintiff $113,655.00 plus interest and attorney's fees.

________________________

    The dispositive issue is whether the trial court erred in granting summary judgment to plaintiff.
    Defendant argues the trial court erred in granting summary judgment to plaintiff. We agree and will only address the genuine issues of material fact that remain in dispute. The issues regarding the sufficiency of the funds retained by defendant andthe amount owed to Smith in light of the cost to complete the project constitute genuine issues of material fact that are in dispute.
    Summary judgment is appropriate if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law.” N.C.G.S. § 1A-1, Rule 56(c) (2003). The evidence presented is to be viewed in the light most favorable to the non-movant. Watson Elec. Constr. Co. v. Summit Cos., LLC, 160 N.C. App. 647, 649 n.2, 587 S.E.2d 87, 90 n.2 (2003).
    The controlling statutes in this case are found in Chapter 44A of the General Statutes of North Carolina. This Court has held that the primary purpose of our lien statutes is to protect the laborers and materialmen who provide labor and supplies to larger projects. Martin Architectual Products, Inc. v. Meridian Constr. Co., 155 N.C. App. 176, 181, 574 S.E.2d 189, 193 (2002). The relevant lien statutes provide:
            (1)    A first tier subcontractor who furnished labor, materials, or rental equipment at the site of the improvement shall be entitled to a lien upon funds which are owed to the contractor with whom the first tier subcontractor dealt and which arise out of the improvement on which the first tier subcontractor worked or furnished materials.
            . . . .
            (5)    The liens granted under this section shall secure amounts earned by the lien claimant as a result of his having furnished labor, materials, or rental equipment at the site of the improvement under the contract toimprove real property . . . .

            (6)    A lien upon funds granted under this section is perfected upon the giving of notice in writing to the obligor as provided in G.S. 44A-19 and shall be effective upon the obligor's receipt of the notice.

N.C.G.S. § 44A-18 (2003). “Upon receipt of the notice provided for in this Article the obligor shall be under a duty to retain any funds subject to the lien or liens under this Article up to the total amount of such liens as to which notice has been received.” N.C.G.S. § 44A-20(a) (2003).
    In the instant case, defendant is the obligor. See N.C.G.S. § 44A-17(3) (2003) (“'[o]bligor' means an owner . . . who owes money to another as a result of the other's partial or total performance of a contract to improve real property”). Smith is the contractor. See N.C.G.S. § 44A-17(1) (2003) (“'[c]ontractor' means a person who contracts with an owner to improve real property”). Plaintiff is the first tier subcontractor. See N.C.G.S. § 44A-17(2) (2003) (“'[f]irst tier subcontractor' means a person who contracts with a contractor to improve real property”).
    Plaintiff's first notice was properly made pursuant to N.C. Gen. Stat. § 44A-19. See N.C.G.S. § 44A-19 (2003). Therefore, defendant was obligated by statute to retain $113,655.00 as claimed in plaintiff's first notice, and after 23 August 2001, defendant was obligated to retain $127,392.12 as claimed in the second notice (which superceded the first notice). See N.C.G.S. § 44A-20(a); Martin Architectural Prods., 155 N.C. App. at 180-81, 574 S.E.2d at 192 (the obligor must retain the amount of the claimed lien afterreceiving a notice of claim of lien on funds); Mace v. Bryant Constr. Corp., 48 N.C. App. 297, 305, 269 S.E.2d 191, 196 (1980) (same). The parties do not dispute that defendant has retained approximately $243,713.00, an amount exceeding the claimed lien in either notice, and thus fulfilled its statutory duty.
    However, defendant argues it is not obligated to pay plaintiff because the set-off (the cost to complete the project) would exceed the amount otherwise owed to Smith. An obligor is entitled to set off the amount otherwise owed to the contractor against the damages caused by the contractor's breach of contract. Watson Elec. Constr. Co., 160 N.C. App. at 651-52, 587 S.E.2d at 91-92 (the first tier subcontractor is not permitted to recover against the obligor because the obligor's set-off amount exceeds the amount otherwise owed to the contractor); Lewis-Brady Builders Supply, Inc. v. Bedros, 32 N.C. App. 209, 213, 231 S.E.2d 199, 201 (1977) (“damages to owner from contractor's breach were in excess of all amounts that might otherwise have become due to the contractor”).   (See footnote 3) Here, the parties acknowledge Smith's failure to complete the project, but the evidence differs on the cost to complete the project.
    In an affidavit, Smith's former project manager Timothy Bingaman estimated the cost to be approximately $40,000.00. In an email dated 23 August 2001, one day after defendant learned ofSmith's filing for bankruptcy, defendant's controller estimated that such a cost would “likely” be $25,000.00. In an 8 October 2002 affidavit, defendant's vice president stated another entity (Langbein Engelbracht America) estimated the cost to be approximately $415,360.00, an amount greater than that otherwise payable to Smith under the contract.
    Viewed in the light most favorable to defendant, the evidence shows the existence of a genuine issue of material fact concerning the cost to complete the project. See N.C.G.S. § 1A-1, Rule 56(c); Watson Elec. Constr. Co., 160 N.C. App. at 649 n.2, 587 S.E.2d at 90 n.2. Accordingly, the trial court erred in granting plaintiff's motion for summary judgment. Having so held, we do not address defendant's remaining assignments of error.
    Reversed.
    Judges CALABRIA and ELMORE concur.
    Report per Rule 30(e).

Footnote: 1