How Bankruptcy Affects Mechanic’s Lien Rights
While the process for filing and perfecting a mechanic’s lien (also called a construction lien in certain states) varies from state to state, federal bankruptcy law applies to all states. As a result, a bankruptcy filing by an owner of the subject real property, or in some states by a general contractor, alters the ways in which parties to a project may assert their mechanic’s lien rights.
Using Massachusetts mechanic’s lien law as an example, the mechanic’s lien process requires strict compliance with certain deadlines to record a notice of contract and a statement of account with the registry of deeds for the county in which the project is located to assert and perfect the mechanic’s lien, and to thereafter be able to enforce the mechanic’s lien through filing a foreclosure lawsuit in state court. However, once a party above the mechanic’s lien claimant in the chain of privity, such as the owner (or if the claimant is a subcontractor, the general contractor), files bankruptcy, the automatic stay prevents the claimant from taking any steps to enforce the mechanic’s lien unless relief from the automatic stay is obtained.
When an owner files for bankruptcy, a claimant can still perfect its mechanic’s lien by complying with certain provisions of the Bankruptcy Code. Specifically, Bankruptcy Code section 362(b)(3) allows the recording of a mechanic’s lien after the filing of a bankruptcy petition, and permits a mechanic’s lien claimant to take additional steps to perfect its mechanic’s lien by filing a notice with the Bankruptcy Court under Section 546(b)(2). Importantly, relief from the automatic stay is not required, but the claimant must take those steps in Bankruptcy Court within the same recording and filing periods required by the state mechanic’s lien law. The Bankruptcy Code, however, only allows a claimant to take steps to perfect its mechanic’s lien. If a claimant seeks to enforce that lien in state court, relief from the automatic stay is required.
It is also important to note that when a general contractor files for bankruptcy, a subcontractor or supplier might violate the automatic stay by taking action to assert or perfect a mechanic’s lien, even if the owner is not in bankruptcy. See In re Linear Electric Co., Inc., 852 F.3d 313 (3d Cir. 2017) (decided under New Jersey law) (taking actions to assert a mechanic’s lien against an owner’s property due to a contractor’s failure to pay violates the automatic stay because it seeks to assert control over payments that the owner owes to the contractor, which payments are property of the contractor’s bankruptcy estate). In this regard, attention to state law is paramount when determining if a contractor or subcontractor may assert its mechanic’s lien rights after a bankruptcy filing. For example, in Massachusetts, Pennsylvania, and other states, mechanic’s lien rights “relate back” to the date labor is first performed or materials are first provided. For example, in Massachusetts, Pennsylvania, and other states, mechanic’s lien rights “relate back” to the date labor is first performed or materials are first provided. Similarly, in Florida, such rights “relate back” to the date of the recording of a Notice of Commencement in the public records concerning the real property improvements, which typically precedes that start of the work. In those states, where the first date of labor or materials, or the recording of a Notice of Commencement, precedes a bankruptcy petition, a claimant may still proceed with asserting and perfecting its mechanic’s lien rights.
However, in those states whose mechanic’s lien laws do not provide for a claimant’s rights to “relate back,” such as New Jersey and New York, a claimant has no ability to assert or perfect its mechanic’s lien rights once a party files for bankruptcy protection without first seeking relief from the automatic stay.