Builders and Contractors Exchange
Weekly Bulletin: 23 nov 2007
Bankruptcy And Mechanic’s Liens
By: John R. Lockard
Mechanic's liens are an effective tool for contractors to secure payment on a construction project. The bankruptcy of the owner or the general contractor for the construction project, however, can create obstacles to the filing and enforcement of a mechanic's lien and the collection of amounts due. The filing of a bankruptcy petition creates an "automatic stay" of any collection actions against the party filing the petition, including any actions to initiate court proceedings against the party filing for bankruptcy. Among other matters, the "automatic stay" prohibits any actions to "perfect or enforce a lien against the property of the debtor."
The filing of a bankruptcy petition by the general contractor (or other contractor on the project) does not prohibit a contractor or supplier from filing a mechanic's lien against the project. The filing of the bankruptcy petition only precludes actions against the contractor who filed the petition. Therefore, the contractor can still take actions to collect the amounts due through the mechanic's lien process, including filing a lawsuit to sell the owner's property to satisfy the lien.
A contractor can file a mechanic's lien against the property even if the owner files for bankruptcy. The bankruptcy code provides an exception to the "automatic stay" in order to "perfect" or file a mechanic's lien. The contractor, however, will have to provide notice to the bankruptcy court and seek permission before it can file a lawsuit to enforce the lien.
This article only provides a general overview of bankruptcy law as it relates to mechanic's liens. There are many other issues that arise when one of the parties to a construction project files for bankruptcy. In such circumstances, a contractor should consult with an attorney who is experienced in construction, bankruptcy and collection issues to protect its rights.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.