Thanks to North Carolina’s Construction News I have been following some interesting developments in North Carolina’s bankruptcy courts that placed the states mechanics lien laws on a collision course with US Bankruptcy law. While the developments regard North Carolina mechanics liens, the friction between the federal bankruptcy code and the concept of mechanic liens in any state is well represented by review of these particular circumstances.
The North Carolina Cases – What Happened?
Here’s what happened.
In 2009, Ferguson Enterprises Inc. wasn’t paid for materials supplied to a North Carolina construction project, where Mammoth Grading Inc and Harrelson Utilities Inc. were acting as the prime contractor. Ferguson went on to file a mechanics lien, but not until after Mammoth Grading and Harrelson Utilities filed for bankruptcy protection.
Mammoth & Harrelson filed a motion in bankruptcy court to remove the North Carolina mechanics lien claim because it was filed after the bankruptcy proceeding, which they argued was a violation of the US Bankruptcy code’s automatic stay.
The bankruptcy court agreed, and removed the liens. Ferguson appealed the ruling, but it was dismissed for other reasons and so the bankruptcy judge’s decision still stands as good law in the state.
Just last week, Hon. Randy D. Doub, another bankruptcy judge, in In Re Construction Supervision Services, Inc., held opposite of the bankruptcy judge in the Mammoth and Harrelson decision. Specifically, Hon. Doub ruled that subcontractors and suppliers can file a mechanics lien after a bankruptcy filing, and such filing is not a violation of the bankruptcy code’s automatic stay.
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Result: Uncertain Law in North Carolina
As a result of this mess, bankruptcy courts in North Carolina have now made opposite rulings, and since one bankruptcy judge cannot overrule another (that must happen at the appellate level), there is a lot of uncertainty in North Carolina law as to which rule is correct.
The conflicting rulings in North Carolina comes as a surprise to many construction attorneys in the state. Consider the statement by the firm Smith Debnam Narron Drake Saintsing & Myers LLP in a firm update about the cases, where they write as follows:
Prior to the bankruptcy court’s decisions in Harrelson and Mammoth, most North Carolina construction lawyers, contractors, subcontractors and suppliers operated under the belief that providing labor and/or materials for the improvement of real property within the definition of Chapter 44A of the North Carolina General Statutes provides them with inchoate lien rights that arise upon the furnishing of work or materials. It was also the belief that these inchoate lien rights may be perfected after a bankruptcy petition as an exception to the automatic stay provisions of the Bankruptcy Code.
National Impact on Mechanic Liens Filed Post-Bankruptcy?
Some may wonder whether this mess in North Carolina has any impact nationally. The answer is…yes and no.
First, there is no formal impact nationally. The North Carolina decisions aren’t even precedent in North Carolina’s bankruptcy courts, and therefore, its really not precedent in bankruptcy courts or any courts anywhere else in the nation.
Second, however, there may be a non-direct impact. When attorneys in other states are confronted with this situation, they may see the decision in North Carolina and cite it in their briefs as persuasive authority. While the decision seems to be out-of-line with the understanding of bankruptcy stay and its impact on mechanic lien laws, some attorneys may consider the North Carolina case as a bit of daybreak to substantiate any arguments elsewhere.
Don’t Statutes of Limitations Toll with Bankruptcy Stays?
Some who are educated about federal bankruptcy statutes may wonder why there’s no discussion about the tolling of statutes of limitations whenever there is a bankruptcy stay. Indeed, the federal bankruptcy code provides for such in Bankruptcy Code’s § 108(c):
..if applicable non-bankruptcy law . . . fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor . . . and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of –
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.
This tolling statute has been cited in the mechanics lien law context before; for example, in Washington state, the court in In re Hunters Run Ltd. Partnership, 875 F.2d 1425, 1426 (9th Cir. Wash. 1989) held that a mechanics lien claimant was not required to foreclose on its mechanics lien claim until after the automatic stay was lifted. The period to file the lawsuit, therefore, was tolled pursuant to §108(c).
The distinction here may be that the filing of a notice of claim is not a “civil action in a court other than a bankruptcy court.” That is probably literally true when read in the context of North Carolina’s lien laws. In some states like Maryland, however, where the filing of a lien claim is an action commencement of a civil action, the tolling statute likely applies.
Conclusion
More will come of this, and perhaps we’ll soon see examples of related rulings elsewhere, but overall a very interesting situation.
Special hat tip goes out to North Carolina’s Construction News and the guest editorial thereon by Smith Debnam Narron Drake Saintsing & Myers, LLP. for excellent coverage on these cases.