The short answer is: Yes, mechanics liens are enforceable in a bankruptcy and can provide bankruptcy protection. If you filed in the past, you may have learned in many cases your lien may even prime the GC, Owner and Construction Lender. NLB helps you access the strategies and legal counsel to determine your priority in a bankruptcy. Before you start to perfect, enforce or foreclose your lien contact NLB Legal Compliance Resources for Free Consultation.
A bankruptcy does not preclude you from enforcing your mechanics’ lien. In all chapter 11 or 7 bankruptcy cases, you can’t proceed with the lien until you lift an automatic stay. In other cases, if the court denies your motion you may have to wait for the bankruptcy to run its course, and while protecting your lien rights, you should file a proof of claim stating you’re secured with the bankruptcy court itself.
There are three important questions you must answer to determine how to enforce a lien during the bankruptcy proceeding and how to ensure your bankruptcy protection.
When did the bankruptcy occur?
As long as the bankruptcy occurred after you performed the work, you can probably enforce the lien during the bankruptcy proceedings- and not have to become part of the larger legal process. This requires that you take all of the standard steps (filing the lien and then enforcing the lien). Whether you have to take further steps is defined by the answer to the next question.
Who is the bankrupt party?
If the bankrupt party is a General Contractor or some other party to the process who did work or supplied materials/labor, you can probably enforce the lien independently of the bankruptcy proceedings- and not have to become a part of the larger bankruptcy process. This requires that you take all of the standard steps (filing the lien and then enforcing the lien). Because mechanics liens are rights against property to secure the debt, if the hiring party doesn’t own the property, the bankruptcy of the hiring party doesn’t affect the lien, or stop the lien claimant from getting paid.
If however, the bankrupt party is the property owner, you might have to complete one extra step- filing a notice of the lien with the bankruptcy court. When someone files for bankruptcy, the court puts into place an “automatic stay”. Those to whom the bankrupt party owes money, temporarily, can’t collect. Filing a notice tells the parties that the lien holder (you) intends to enforce the mechanics lien against the real property that is subject to the lien. This notice must be filed with the Bankruptcy Court and served on the debtor prior to the deadline for commencing an action to enforce the lien rights in the state where the work was performed. If this notice is correctly filed, it stops the lien deadline from running, until 30 days after the “automatic stay” is lifted. In extremely rare cases, the bankruptcy court might allow for the enforcement of the mechanics lien even though there is an “automatic stay” in place.
The good thing about a mechanics lien is that it is a secured debt. It is on equal footing with something like a mortgage- so you are near the top of the list to get paid, assuming there are some assets to pay those debts at the end of the bankruptcy process.
If the property is mortgaged, however, the mortgage will usually get paid first- before any liens. Also, the liens will be paid in the order they were put on the property, so the earliest lien will get paid first. If the property doesn’t have any equity above the mortgage, or if there are numerous liens before yours, and there is no value left in the property you might not get paid. But still, having a lien on the property puts you in the best position to get paid if funds are available.
Did you timely perfect the lien?
All of these other legal proceedings complicate the procedure of making sure you meet the deadlines to perfect and enforce the lien. First, you may need to file the notice of lien as described above to stop the timelines from running. Then you need to keep an eye on the bankruptcy to make sure that you file the appropriate documents to enforce the lien as the case progresses, and once the ‘automatic stay’ is lifted.
Throwing a bankruptcy into the mix of already complicated lien procedures can be confusing. For help understanding how the laws apply to your specific situation and to learn about the power of a strong contract, reach out to the experienced team at National Lien & Bond. Our attorneys are focused on helping you protect your interests during all points of a project, so reach out today and set up a free consultation with a member of our team.
Throwing a bankruptcy into the mix of already complicated lien procedures can be confusing. For help understanding how the laws apply to your specific situation and to learn about the power of a strong contract of Transaction + Power = Payment reach out to the experienced team at National Lien & Bond.
Since 1985 our members access our construction lawyer network in every state with attorneys focused on helping you protect your interests during all points of a project, so reach out today and set up a free consultation with a member of our team.
This blog post is for educational purposes only