A common alternative to UCC financing statements (discussed in the February 27, 2012 installment of the Vann & Sheridan Blog) to secure the extension of credit or loans is the use of a Deed of Trust.  Whereas UCC financing statements convey and memorialize a creditor’s interest in the collateral of the debtor, a Deed of Trust conveys an interest in the real property owned by the debtor to the creditor.  Generally speaking, a Deed of Trust is a three party document where a debtor conveys an interest in real property to a Trustee, to be held for the benefit of the creditor until the underlying debt is paid.  In North Carolina, a Deed of Trust is filed with the Register of Deeds in the County where the real property is located, which becomes public record and memorializes the property interest conveyed by the debtor for the benefit of the creditor.  A properly filed Deed of Trust will remain an encumbrance on the title of the real property until the underlying debt is paid which, in turn, hinders the debtor’s ability to sell or convey the real property with clear title until the debt is paid.  When the debtor’s debt is fully paid, pursuant to the agreement between the debtor and creditor, the Trustee files a “Satisfaction” or marks the Deed of Trust “Satisfied”, which returns the full legal title to the debtor and releases the security for the debt.  It is important to note that while a property can be encumbered by multiple Deeds of Trust in North Carolina, the priority of competing Deeds of Trust is established by the date each Deed of Trust was recorded with the Register of Deeds. Please feel free to contact our office with any questions you may have regarding Deeds of Trust or secured lending.

Prior to the summer of 2009, a North Carolina supplier could file a lien against a project after its customer filed for bankruptcy protection.  North Carolina Bankruptcy Judge Small turned that standard on its head when he held that such lien filings violate the automatic stay (legal protection afforded to bankrupt entities).  Since the decision, suppliers generally refrained from filing liens against bankrupt parties in the Eastern District of North Carolina (Raleigh to the ocean).  The Middle and Western Districts required a case by case analysis.

On February 23, 2012, United States District Judge Malcolm J. Howard issued an opinion (Ferguson Enterprises, Inc.  v. Mammoth Grading, Inc.) which vacates the controversial ruling.  The opinion overturns Judge Small’s holding that a lien only arises at the time it is filed at the courthouse.   Instead, Judge Howard explains that a lien arises at the time a supplier first furnishes materials to a project.  Since first furnishing almost always occurs prior to a bankruptcy filing, the automatic stay should not apply to supplier liens.

As a result of the recent decision, we are very hopeful that North Carolina suppliers may file liens after their customer’s file for bankruptcy protection.  In fact, Bankruptcy Court Judge Doub recently followed the guidance provided by the appellate court. In that Chapter 11 case, Judge Doub issued a series of orders which hold that a supplier in the Eastern District of North Carolina may initiate lien claims after its customer files for bankruptcy protection.

This story will continue to develop in the coming weeks and months.  Construction lawyers across the state will undoubtedly push the fringes of the decision in the near future.  Further appeals are likely.  Nonetheless, for the time being, North Carolina construction suppliers hold a much better chance of bankruptcy recovery.

Obtaining a judgment in court is only the first step in pursuing delinquent accounts. While a judgment is a binding acknowledgement that money is owed, it does not actually force a debtor to pay. In light of that, and in order to combat a debtor’s avoidance efforts, there are some important things that need to be done after a judgment is entered to maximize the probability of collection.
 
Immediately upon obtaining a judgment in one county, a judgment creditor should transcribe the judgment to all other counties where the debtor resides or owns property. In North Carolina, judgments act as a lien on a debtor’s real property, but only in the county where the judgment is filed. For example, if a debtor owns real estate in Johnston County, but the judgment is only filed in Wake County, he could transfer that property without paying any part of the judgment. However, if the judgment has been transcribed to Johnston County, the creditor must be paid (or otherwise voluntarily release the property) before title can be transferred. By taking the time to determine where the debtor may own property, a creditor can increase its chances for recovery.
 
Similarly, creditors should periodically update their information for each judgment debtor and conduct an asset search. There are a couple of reasons why this is important. First, if the debtor has moved to a different county or acquired property in a different county, then the creditor can then transcribe the judgment to that county and obtain a lien on the property. Further, checking up on the debtor in this manner helps a creditor determine when would be an appropriate time to have a Writ of Execution issued to request a Sheriff to attempt to collect the judgment.
 
Gathering information with respect to a judgment debtor makes the post-judgment collection process more effective and efficient. It can increase the likelihood of collection or simply help a creditor determine whether to continue collection efforts.

A popular method to secure the extension of credit or loans, particularly in recent years, is the use of UCC financing statements.  UCC (Uniform Commercial Code) financing statements record and protect a secured party’s interest in the collateral offered by a debtor to secure the loan.  Moreover, a UCC financing statement gives notice to the public at-large that the secured party\lender has an interest in the property pledged as collateral by the debtor.  The financing statement is a legal form, filed with the North Carolina Secretary of State, required to contain 1) the debtor’s name and address, 2) the secured party\lender’s name and address, and 3) a description of the property or collateral that the secured party has an interest in.  Once the financing statement is filed with the North Carolina Secretary of State a lien is created against the property so that the debtor may not sell the property to a third party and convey clear title without the debt owed to the secured party\lender being first satisfied.  The filing of the financing statement also creates the ability of the secured party to take possession of the property should the debtor fail on its obligations to the secured party\lender.  Generally speaking, UCC financing statements can encumber most types of personal property, such as equipment or inventory, but can also be used to encumber less tangible property like accounts receivable.   It is important to note that a UCC financing statement cannot be used to encumber real property.  Please feel free to contact our office with any questions you may have regarding UCC financing statements or secured lending.

In a recent article entitled “When Mark Met Don” from the Wall Street Journal, the author discusses the benefits of a friendship between Washington Post’s Don Graham and Mark Zuckerberg of Facebook.  This article brought to mind how many of our business clients (and ourselves) learn from others.

Often times, our business clients derive valuable knowledge and wisdom from others in their industry and from similarly situated trade groups.  This is natural.  Many of these people have gained experience in their business/industry which they are willing to share with others.  What a valuable way to learn from the mistakes and fortunes of others.

We all can also learn from people who may appear to be different.  These differences are likely unlimited but could include age, business industry, socially, economically, politically, etc.

As we talk with our business clients about strategy, business growth, business opportunities, etc., it becomes even more obvious that most business owners enjoy learning and enjoy the challenge of business management.  Thus, it seems evident that at times we all could learn from those around us who are not even in our own industry.

As you ponder this year on how to grow your business, how to better manage your business and employees, how to improve your company profitability, and how to overall get better at what you do, consider seeking out those business leaders who may be totally different from you or your industry.  What might you learn?

The past year has been most interesting for a former social studies teacher turned lawyer.  As Chair of the North Carolina Bar Association’s Construction Law Section, I found myself shepherding an effort to update the North Carolina Lien Law.  Many do not realize that there have not been substantive changes to that portion of the general statutes since the 1960’s.  There have been numerous patches to address specific cases, but each effort to review and revise the full statutory scheme to ensure that it addresses changes in the construction industry over the past 40 years has run into a brick wall.  This effort may yet be no different, but this particular article is not about content, but about process.

What has fascinated me on a purely academic level is the realization that as legislators, our politicians are asked to become instant experts in so many different aspects of life, business, and the world.  Those reading this who have occasion to dabble in or delve into the lien law will understand that there is nothing easy about understanding the full range and the minute details of Chapter 44A, Article 2.  Add to that the public’s misperception that the legislature is filled with lawyers (it is not) and you are asking citizens who most likely have had no dealings with the construction industry to tease out the details and decide what is best for the industry.  The next element to add to the mix involves the lobbyists who represent the myriad of different trade associations in the construction industry.  These folks come from all walks of life.  Some have experience in the industry while others are learning on the fly, but in all cases, they are paid to protect the interests of their group.  While the term “lobbyist” generally brings to mind very negative thoughts, I have been impressed with the diligence I have witnessed as some of these folks work to learn the issues and to understand the various aspects of the problem.  I may not always agree with their positions and I always wish for more willingness to give and take, but I have gained an appreciation for the homework many of these folks are willing to put in.

What I have learned and the purpose of this article is that knowledgeable public input truly can make a difference.  The legislature has hundreds and probably even thousands of bills placed before them every year.  They cull to some extent by how much real interest they perceive from the relevant constituencies – if the groups or industry involved are not willing to get actively involved in the process, why should the legislature care?  Politics absolutely plays a role.  I have seen the “if you’ll vote for my bill, I’ll vote for yours” deals come to fruition where clearly there is no effort to understand the import or possible impact of bills and we have all seen the parties put their weight and considerable influence behind certain hot button items.  My keenest disappointment early in this process was to be told that the issue was “too complicated” for the legislature to tackle.  I would hope that there is a mechanism within the legislative process to create a commission, committee or task force to spend the time necessary to handle the really hard questions.  However, I have been heartened by the incredible work done by the staff attorneys in the Legislative Research Division who have done an amazing job in getting up to speed on the lien law in order to assist the legislators.

The moral of this story is that if you care about a piece of legislation, you need to be active and stay the course.  Things can happen, but you matter.

​The end of the year is often a busy time for business owners and other individuals. It is easy to let some seemingly less pressing business and personal legal updates get pushed aside until the new year. Of course, when the new year starts, different challenges and time commitments can cause people to forget about those basic, yet important, legal matters. So as 2012 begins, perhaps it is time for a legal checkup

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Some key items that should be periodically reviewed and updated include:

Corporate filings/meetings- Corporations and limited liability companies are required to file annual reports with the Secretary of State each year. The failure to make this simple filing probably causes more administrative suspensions and dissolutions than any other mistake. In addition, each corporate entity needs to hold an annual meeting, and minutes should be recorded and added to the corporate record book. Taking the time to make sure these items have been done will ensure that your corporation or limited liability company maintains its effectiveness and protects you from personal liability.

Wills/estate planning- A surprisingly substantial number of individuals have never had a will prepared or have one that is decades old and outdated. If there have been substantial changes in your income, assets or marital status, if you have added children, or if your children have reached adulthood, it is time to have your estate planning documents reviewed and updated. Otherwise, if something happens to you, the distribution of your estate, the disposition of your assets and even the custody of your children could be something other than you desire.

Other issues- Perhaps some of your company’s contracts are unfavorable or have expired. This may be an opportunity for you to negotiate in order to obtain more beneficial terms. Maybe your corporation has never adopted bylaws or your limited liability company has never adopted an operating agreement. If you have business partners, you may need a buy-sell agreement. The new year is an excellent time to make sure you are getting the most out of your business endeavors.

Making sure your legal matters are in order can help you position yourself and your business for a profitable 2012.

As we turned the calendar to January 1, 2012, certain news laws have come into effect here in North Carolina.  These new laws have resulted in changes to the purchase of gas or certain medicines in the State, while others affect North Carolina’s teen drivers.

Gas Tax Increase:  Commencing January 1, North Carolina’s state motor fuel tax grew an additional 3.9 cents per gallon to a record of 38.9 cents per gallon.  This increase is in addition to July, 2011’s increase of 2.5 cents.  The new law requires that the tax be recalculated twice annually based on a formula related to wholesale gas prices.

Cold Medicine Purchases: Beginning on January 1, North Carolina pharmacies and other retailers will be required to electronically submit a customer’s information to the National Precursor Log Exchange (NPLEx), administered by the National Association of Drug Diversion Investigators, before completing a sale of a product containing a pseudoephedrine product.  North Carolina already requires that these products be kept behind the counter, that the purchaser show a photo ID, and that the retailer record the buyer’s information.  The intent of this new law is to further track the sale of products which can be used in the manufacture of methamphetamine.

Revisions to Graduated License Program for Teens:  As of January 1, before obtaining a driver’s license in North Carolina, teens with a learner’s permit are now required to log 60 hours of drive time under the supervision of a parent or experienced drive before advancing to a the next step in the graduated process .  Teens must then log an addition 12 hours of driving time before obtaining their provisional driver’s license.