Fourth Circuit Upholds Construction Lien Rights in Bankruptcy

For years, it was common practice in North Carolina to file liens against a construction customer, contractor, or developer who filed bankruptcy rather than pay its subcontractors.  In 2009, a pair of judges issued opinions holding that this common practice was unlawful.  The ruling shocked construction attorneys throughout the state, and a united legal front ensued.  Three years after the initial decisions, United States Bankruptcy Judge Randy Doub issued a separate ruling in the CSSI bankruptcy which reached the opposite conclusion and permitted post-bankruptcy mechanic’s lien filings.  The bank in CSSI appealed the ruling and embarked on a course which resulted in a decision by the second highest federal court in the land.  Lien claimants prevailed.

Nan E. Hannah represented several lien claimants in the appeal which moved through three levels of federal court, – bankruptcy court, district court, and the court of appeals.  The lien claimants consistently argued that post-petition liens do not violate the bankruptcy automatic stay as the lien arises upon first delivery which occurs before a bankruptcy is filed.  Alternately, the bank argued that a mechanic’s lien arises only at the time it is filed with a public entity and that a post-petition lien filing therefore violates the bankruptcy automatic stay.  In the end, the Fourth Circuit Court of Appeals sided with the lien claimants, holding that post-petition mechanic’s liens may be filed without violating the automatic stay.  The odds of appeal to the United States Supreme Court are very low, so this decision and recent changes to the lien statutes cement the historical practice of the North Carolina construction bar.  Post-petition lien filings are allowable by proper lien claimants as the underlying lien rights come into existence upon first performance and are perfected by the serving and filing of the lien with the appropriate public entity.

Translation:  Lower tier subcontractors and suppliers who have provided labor and/or materials to a project retain the right to file their lien, even after a contractor or subcontractor files bankruptcy.  The decision provides some protection to a lien claimant who waits a bit too long to serve a mechanic’s lien.  Sooner is still better than later when it comes to filing liens against financially strapped parties, as project funds may flow away from the job until liens are served.

 – Chad J. Cochran