In the last couple posts we determined that a mechanics lien may be perfected during bankruptcy’s automatic stay, and that the time period to enforce a mechanics lien may be tolled (suspended) during the automatic stay. But what if you want to enforce your mechanics lien despite a bankruptcy filing; is that possible? Like many legal questions, the answer is: It depends.
Generally, if the property owner is the party who declared bankruptcy, a mechanics’ lien cannot be enforced during the bankruptcy proceeding. For a review of this question by a bankruptcy court, see In re Baldwin Builders 232 B.R. 406, 410-411 (Bankr. 9th Cir. 1999). However, despite the general prohibition of enforcing a lien during the bankruptcy, a mechanics’ lien holder may petition the bankruptcy court for relief from the automatic stay. If the court grants this relief, the mechanics lien holder may proceed against the property for the payment of the debt.
What happens when it is not the property owner who files for bankruptcy, but a different party involved in the project? In that situation, the mechanics lien holder may enforce their lien without requesting relief from the bankruptcy court.
As it happens, I was just involved in a case where a mechanics lien collided with a contractor’s bankruptcy filing. In that case, my client supplied and installed some industrial doors. When they were not paid for their work and supplies, we used Levelset to file a mechanics lien against the property listing the Owner, the Prime Contractor, and the Hiring Party as debtors. The company that hired my client to provide and install the doors then filed for bankruptcy. Among other causes of action, we were able to petition the court for enforcement of of our lien. While my client was ultimately paid without resorting to a seizure and judicial sale of the property, our lien rights facilitated the resolution of the case.
Because mechanics liens are rights against property to secure the payment of a valid debt, the bankruptcy of the hiring party did not affect the lien, or my client’s ability to get paid.
The take-away is this: If the bankrupt party does not have an ownership interest in the property being liened, the lien may be foreclosed upon despite the bankruptcy proceeding. If the bankrupt party does own the liened property, leave of the bankruptcy court is required to enforce the lien during the automatic stay, or, the lien may be enforced after the automatic stay is lifted.
More mechanics lien and bankruptcy discussion will be coming soon.