Southeastern Steel Erectors, Inc. v. Inco, Inc.

Citations: 424 S.E.2d 433; 108 N.C. App. 429; 1993 N.C. App. LEXIS 102Docket: 919SC807

Court: Court of Appeals of North Carolina; January 5, 1993; North Carolina; State Appellate Court

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Southeastern Steel Erectors, Inc. engaged in an equipment rental agreement with Inco, Inc. for a crane intended for use on various jobs, which included an option to purchase after six months. Inco did not provide an operator but made repairs on two occasions outside the rental agreement. Disputes arose over the crane’s condition, leading Southeastern to cease payments and return the crane. Inco sought payment for the rental agreement and repairs, claiming lien rights as a third tier subcontractor, and filed a notice of claim of lien against Iams Company and others involved in the project.

Southeastern responded with a declaratory judgment action asserting Inco's lien claim was invalid. The Superior Court granted Southeastern's motion for summary judgment, determining Inco's claim did not meet the requirements of North Carolina General Statute Chapter 44A for third tier subcontractor liens. The court noted that for Inco to claim a lien, it needed to prove it was a third tier subcontractor that furnished labor or materials for the property improvement. The definition of a third tier subcontractor requires a contract with a second tier subcontractor for property improvement. The court concluded that the rental agreement was not for the improvement of a specific property, thereby rendering Inco's claim invalid. Inco subsequently appealed the summary judgment ruling.

Inco did not engage Southeastern to enhance real property but rather to provide a crane, thus not qualifying as a third tier subcontractor under relevant statutes. Even if considered as such, Inco cannot claim a lien on the Iams property, as the rental agreement does not meet the statutory definition of "labor or materials." North Carolina law lacks a specific definition for these terms in Article 2 of Chapter 44A, and no precedent has explicitly addressed this issue. However, existing case law indicates that the rental of equipment falls outside the scope of "labor or materials" as intended in the statute. The lien statute aims to protect laborers and materialmen who contribute labor and materials to property improvements, as established in Carolina Bldrs. Corp. v. Howard-Veasey Homes, Inc. This statute is remedial and should be interpreted to fulfill legislative intent, but must not be overextended beyond its intended meaning. The distinction between subcontractor liens under section 44A-18 and direct owner dealings under section 44A-8 emphasizes the necessity for furnishing labor or materials. Historical context shows that the definition of "labor" evolved to include contributions beyond manual labor, particularly following a 1969 amendment that broadened the definition of "improve" to encompass various forms of construction and related activities.

Section 44A-8 was introduced to replace the previous lien statute, section 44-1, establishing that individuals providing labor or materials under a contract with a property owner for improvements have a lien on that property. Unlike section 44-1, which covered various properties being built or improved, section 44A-8 specifically recognizes not only physical labor but also professional design services from architects and similar professionals as qualifying for a lien. However, providing rental equipment does not qualify as furnishing labor, as it is viewed as an indirect means of aiding property improvement. Statutory construction rules clarify that "labor" is interpreted in its common sense, as physical or mental effort directly contributing to work on the property, excluding rental equipment from this definition. Similarly, "material" is defined as the fundamental components from which a physical entity is created, meaning that rented equipment cannot be classified as material either. The court has established that the visibility of materials at a work site is essential for lien priority, emphasizing that materials must be physically present to provide notice to subsequent lienors. Overall, the definitions of "labor" and "material" point to contributions that can physically integrate into the real property.

Rental equipment does not qualify as a material provided by Inco for real property improvement. North Carolina's Article 3 of Chapter 44A, which governs Performance Bonds, defines "labor or materials" to include all materials or labor used in a construction contract, explicitly mentioning rental equipment. However, this definition is not found in Article 2, leading to the conclusion that Article 3's definition should not apply to Article 2. The appellant references *Interstate Equipment Co. v. Smith*, which held that rental equipment falls under "labor or materials" in bond contracts. The North Carolina Supreme Court, citing *Wiseman v. Lacy*, indicated that renting machines is akin to substituting mechanical power for manual labor, justifying its inclusion in the bond language. Nonetheless, because the legislature has not included this definition in Article 2, the reasoning from these cases does not apply here. 

The suretyship relationship involves three parties: the bond obligee, the bond obligor, and the surety, and it requires the surety to be aware of the contractor's equipment capabilities when issuing a bond. The surety’s obligations start when the bond is issued, requiring knowledge of whether the contractor has the necessary equipment or will need to rent it. In contrast, a property owner's responsibility to a subcontractor only arises when a lien claim is filed, and they do not have the same obligation to inquire about the ownership or rental status of equipment used by contractors or subcontractors. Thus, a surety is held to a higher standard of knowledge regarding the contracts of its principal than a property owner is regarding the contracts of their subcontractors.

The legislature's inclusion of rental equipment in Article 3's definition for bond cases is logical; however, extending this definition to Article 2 is deemed illogical. Various jurisdictions have addressed whether rental equipment qualifies as "labor or materials," with a prevailing consensus that it does not, unless specified by statute. Notable cases include Logan Equipment Corp. v. Profile Constr. Co., which illustrates that rented equipment becomes the lessee's property and does not contribute labor to property improvement, thus not qualifying for a lien. Jurisdictions emphasize the need for "actual participation in the work done" to merit a lien, which mere provision of equipment does not satisfy unless accompanied by operation by the lessor. In North Carolina, absent specific legislative provisions, rental equipment is not classified as "labor" or "materials" under Article 2 of the lien statute. While some jurisdictions consider rental akin to purchase, making it non-lienable, a minority, such as the Tennessee Supreme Court, argues that rental equipment can be considered consumed in contract work under specific circumstances. The evolving nature of the construction industry is acknowledged, but any statutory changes are viewed as the legislature's responsibility.

The court determined that the rental equipment's use, rather than its purchase, classifies it as lienable material under North Carolina law. However, this interpretation conflicts with the legislature's definition of "material" as something that physically becomes part of real property improvements. It was concluded that Inco did not qualify as a third tier subcontractor under Article 2 of Chapter 44A. Even if Inco were considered a third tier subcontractor, the term "labor or materials" in Article 2 does not include rental equipment, as evidenced by the absence of a corresponding definition in Article 2, despite its inclusion in Article 3. Consequently, the court overruled the appellant's first assignment of error, ruling that the crane's general lease is not lienable under Article 2.

Regarding the second assignment of error, the appellant claimed that repairs made by Inco to the crane constituted a lienable item. The court rejected this argument, stating that it would be illogical to assert that rental equipment does not create a lien while simultaneously claiming that repairs to that equipment do. North Carolina statute N.C.Gen. Stat. 44A-18(3) allows a third tier subcontractor to secure a lien for work or materials affecting real property directly. The appellant referenced a bond case to support their argument, but the court clarified that repairs for wear and tear, which do not significantly enhance equipment value, are not lienable, especially if intended to make the equipment available for other jobs. Thus, the court affirmed the trial court's decision.