The Saga Continues: Lien Law, Bankruptcy and the Fourth Circuit

By: Nan E. Hannah

With the recently enacted changes to the North Carolina Lien Law and the Federal District Court’s affirmation of Judge Doub’s ruling in the Construction Supervision Services, Inc. (“CSSI”) case, many folks thought (hoped?) that the issues raised by the Eastern District Bankruptcy Court in the Shearin-Mammoth-Harrelson trilogy had concluded.  No such luck!

BB&T elected to appeal the CSSI decision to the Fourth Circuit Court of Appeals.  The two sides have submitted their briefs, and BB&T is at work on a reply brief.  Once that reply brief is submitted, the court will determine whether it wishes to hear oral arguments or will instead make a decision based upon the arguments in the brief.

What difference does this make to those in the construction industry?  If the 4th Circuit upholds the District Court, then the appeal will have been a wonderful intellectual exercise for the attorneys of Hannah Sheridan and others involved in briefing the issues.  If the 4th Circuit reverses the decision of the lower courts, then the question will rest on the wording of the 4th Circuit’s decision.  The underlying case was decided pursuant to the pre-2013 lien law.  The 2013 revisions addressing the bankruptcy concerns, were aimed at clarifying the law and addressing the concerns spotlighted in the Harrelson decision.  The intellectual question which will come to the fore if CSSI is reversed will be whether the court would reach the same conclusion under the new law as it reached under the old?  That opens a version of Pandora’s Box in that the question as to whether post-petition liens can be filed will only be reviewed if another bankruptcy occurs which catches subcontractors and suppliers before they file liens and the lawyers in that case decide to try their luck.

For all the subcontractors and suppliers who received payments in CSSI thanks to liens filed post-petition, there is a more immediate concern.  Should the decision be reversed, it is unclear what might occur in terms of efforts to un-ring a very large bell.  BB&T’s outstanding secured claim balance is less than the total funds paid as a result of the various post-petition lien claims, but the trustee is now in place and could seek to recover “overpayments” resulting from the lien claims.  There is a legal principle known as “equitable mootness” which in layman’s terms says that if a web is too tangled to fairly untangle, then the court should not try to undertake the effort.  It is quite possible that principle could arise if this matter is returned to the lower courts.

In the meantime, keep your ears open and your fingers crossed.  The concerted hope and belief is that Judges Doub and Boyle got it right and the 4th Circuit will uphold their decisions