Perfection of Mechanic’s Liens in Bankruptcy

If you are a contractor, subcontractor or supplier, you may notice that bankruptcies of developers and owners became more frequent during the downturn and can cause major problems on your projects. A mechanic’s lien is a significant and powerful tool to getting paid, but what happens if you record your mechanic’s lien and the developer or owner files bankruptcy before you file a lawsuit to foreclose on the lien?

Fortunately, a bankruptcy does not automatically negate a lien, but specific procedures must be followed and they involve filings in the applicable bankruptcy court. It is important to preserve your lien rights even in the event an owner files bankruptcy because secured creditors are heavily favored and their debts take significant priority over unsecured claims in a bankruptcy proceeding.  A contractor, subcontractor or supplier that has recorded a valid and enforceable mechanic’s lien is considered a secured creditor and will theoretically be entitled to full payment assuming the property securing the lien has equity after prior liens, mortgages, and other encumbrances are fully paid.

First, the automatic stay prevents a contractor, subcontractor or supplier from filing a lawsuit against a bankruptcy debtor. Therefore, the party holding a valid mechanic’s lien needs to do the following:

  • File a Notice of Perfection of Lien with the bankruptcy court;
  • File a Proof of Claim with the bankruptcy court;
  • Request for Special Notice with the bankruptcy court to notify you in the event of a dismissal, granting of a request for relief from the automatic stay, or if the Trustee abandons the real property.
  • File your own motion for relief from the automatic stay, depending on the circumstances.

If a contractor/subcontractor, or supplier learns that the automatic stay has been lifted as to the subject property, they can then proceed with filing an action to foreclose on the mechanic’s lien in state court. However, they must do so within 30 days of the lifting of the automatic stay or within 90 days after the lien was perfected, whichever is later.

If you find yourself in a situation where you have a mechanic’s lien right, but the owner/developer has filed bankruptcy please contact an experienced construction law attorney with bankruptcy experience today.