This is the first substantive post in the Bankruptcy Series. Throughout the next several days we will be examining a variety of issues related to the intersection of Mechanics’ Lien Claims and Bankruptcy. It is an unfortunate reality that sometimes the reason payments are not forthcoming is the significant financial distress of the responsible party. So, what can a party with mechanics’ lien rights do in the face of a bankruptcy petition?
One of the protections afforded through a bankruptcy filing is the “Automatic Stay”. The automatic stay is triggered by Bankruptcy Code Section 362(a), and bars collection efforts and other creditor actions against the debtor and/or his property. Actions prohibited by 362(a)(4) and (a)(5) include:
(4) any act to create, perfect, or enforce any lien against property of the estate;(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
“… to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under Section 546(b) [of the Bankruptcy Code] … ”.
This exception allows a mechanics’ lien creditor to perfect his lien after bankruptcy has been filed, during the automatic stay, provided the requirements of Bankruptcy Code Section 546(b) are satisfied. 546(b) allows the perfection, or continuation of perfection, of a mechanics’ lien after the bankruptcy petition has been filed if the lien arose prior to the filing of the bankruptcy petition.
Again, though, how does this help?
Well, although mechanics lien laws vary between states, the lien generally arises when the materials are delivered or the work was performed, well before the lien is perfected. Therefore, if the material was provided and/or the work was performed prior to the bankruptcy filing, the Bankruptcy Code permits the lien to be perfected after the filing and during the automatic stay. In other words, the Bankruptcy Code does not forbid a mechanics’ lien creditor who performed work and/or supplied materials prior to the filing of the bankruptcy petition from perfecting or maintaining his lien.
You may have noticed, however, that the exception does not apply to an action to enforce a lien during the automatic stay. Since mechanics’ liens must be enforced within a certain time period or risk being extinguished, is there a way to retain the lien rights you just got perfected? That question will be addressed in the next blog post in this series.