Preserving Mechanic’s Lien Rights in Bankruptcy
A mechanic’s lien (called a construction lien in some states) is a powerful tool for contractors, subcontractors, suppliers, and virtually anyone who provides material or labor in connection with a construction project, to ensure that they are paid by providing a statutory lien on the property if they are not paid according to the terms of the contract with the owner or general contractor. The scenario usually goes like this… A general contractor is hired by a property owner to build a house. The general contractor in turn hires subcontractors to perform various specialized services such as pouring the foundation, framing, roofing, plumbing, etc. The general contractor fails to pay the plumber in full. The plumber has a mechanic’s lien in the amount of the unpaid services and materials and he can enforce that lien as long as the plumber complies with the state law requirements in the state where the property is located.
In Massachusetts, for example, mechanic’s liens are governed by General Laws chapter 254. That statute requires a lienholder to record certain notices and statements at the Registry of Deeds and eventually file suit to enforce the lien. These steps must be accomplished within very strict deadlines or the lien will not be enforceable. What if, in the meantime, a general contractor or property owner files for bankruptcy protection before a lienholder can file its complaint to enforce the lien?
The answer involves a complex interaction between state mechanic’s lien law and federal bankruptcy law, particularly the bankruptcy automatic stay, which typically stays most efforts to perfect a lien after a bankruptcy case is filed. There is an exception to this at § 362(b)(3) of the Bankruptcy Code which permits a to complete the lien perfection process if its lien rights arose before the bankruptcy case was filed. This includes mechanic’s liens for work and materials that were provided prior to the bankruptcy filing. Contractors may record the required documents to comply with the perfection process without violating the automatic stay, however, in states that require a contractor to file suit in order to enforce the lien (like Massachusetts), doing so would violate the automatic stay. Instead, the Bankruptcy Code provides a means at §§ 546(b)(2) and 108(c) to preserve the right to enforce the lien by filing a so-called “lien preservation notice” with the Bankruptcy Court within the same time period required under the state mechanic’s lien statute to enforce the lien. Although not required, it is advisable to also record a copy of the notice at the appropriate land records office. If the notice is timely filed, the statute of limitations to file an action to enforce the lien is extended or “tolled” until the automatic stay expires or is terminated, plus 30 days, thus permitting the contractor to enforce the lien in the bankruptcy case, if possible, or after the bankruptcy case has ended.
