Last year about this time, I posted a series of articles briefly examining the interplay between mechanics lien law and bankruptcy. The mechanics lien instrument can provide strong protection throughout a bankruptcy proceeding. Bankruptcy is all too common in the construction industry, as that industry faces some of the highest failure rates in the nation. This means that securing the debt owed for the extension of labor and/or materials on credit is paramount to good credit management. It is an unfortunate reality that in the construction industry, sometimes the reason that payment is not forthcoming is that the money just isn’t there – and the various creditors are forced to fight for the left-over scraps in a bankruptcy proceeding. Fortunately, however, the mechanics lien instrument can provide strong protection throughout a bankruptcy proceeding, and a recent North Carolina court’s decision highlighted this protection.

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It may be worthwhile to quickly review the intersection of mechanics lien law and bankruptcy prior to discussing the recent North Carolina case. One of the protections afforded through a bankruptcy filing is the “Automatic Stay”.  The automatic stay is triggered by Bankruptcy Code Section 362(a), and bars collection efforts and other creditor actions against the debtor and/or his property once the bankruptcy has been filed. Prohibited actions listed by 362(a)(4) and (a)(5) include:

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(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
Fortunately, however, as I explained in an earlier post, the bankruptcy code goes on to provide certain exceptions to the automatic stay. 362(b)(3) states that a creditor is allowed to:

… to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under Section 546(b) [of the Bankruptcy Code] …

This means that if an interest in property (in this case, the mechanics lien) arose before the bankruptcy filing, that interest could be perfected (or continue to be perfected after the bankruptcy petition has been filed. The Bankruptcy Code does not forbid a mechanics lien creditor who performed work and/or supplied materials prior to the filing of the bankruptcy petition from filing a lien after the bankruptcy was filed.  Since, in most states, the mechanics lien right attaches when the work is performed, this means that if the work was initiated prior to the bankruptcy filing, a mechanics lien based on that work may be filed (perfected) after bankruptcy has been filed without violating the automatic stay. In other words, the Bankruptcy Code does not forbid a mechanics lien creditor who performed work and/or supplied materials prior to the filing of the bankruptcy petition from filing a lien after the bankruptcy was filed.
This, of course, is how it is supposed to work.
And, the United States District Court for the Eastern District of North Carolina, (and the United States Bankruptcy Court for the Eastern District of North Carolina) agree. In Branch Banking and Trust Co. v. Hanson Aggregates Southeast, LLC, et al. the court concluded that a service and filing of a mechanics lien post-bankruptcy petition does not violate the automatic stay provisions set forth in the bankruptcy code for the same reasons set forth above. The work was initiated prior to the bankruptcy filing, so under North Carolina mechanics lien law, the lien attached prior to the bankruptcy petition, and was allowed to be perfected post-filing.
It is worth noting that this decision concerns the previous version of N.C.G.S. §44A-18, although the same result would have been reached under the current statute as recently revised, since the revision was intended to clarify this exact point. As mentioned on this blog previously, the revision to N.C.G.S. §44A-18 served to codify a long-standing rule. The recent court decision, coupled with the revised text of N.C.G.S. §44A-18, should allow mechanics lien claimants in North Carolina to rest assured that the filing of a bankruptcy petition will not sever the ability to perfect a mechanics lien.