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.
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:
(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;
… 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] …