• Preservation of Mechanic's Liens In Bankruptcy Cases
  • August 26, 2003
  • Law Firm: Atkinson, Andelson, Loya, Ruud & Romo, A Professional Corporation - Cerritos Office
  • California Civil Code Section 3144 provides that a mechanic's lien becomes void unless a complaint to enforce the lien is filed within 90 days after the recordation of the lien. United States Bankruptcy Code Section 362 provides that the filing of a bankruptcy petition either voluntary or involuntary immediately triggers an automatic stay which acts as an injunction to prevent creditors from attempting to collect any pre-bankruptcy claim or from enforcing any pre-bankruptcy lien or judgment against property of the bankruptcy estate. If a contractor is stayed from filing a lawsuit to enforce his lien when the owner files bankruptcy, how does he preserve his secured status?

    That question was answered in the case of In re Baldwin Builders 232 B.R. 406 (9th Cir. B.A.P. (1999)). In the Baldwin case, Village Nurseries, a landscaping subcontractor, recorded a mechanic's lien against the Debtor's property. After the lien was recorded, Baldwin filed bankruptcy. Subsequent to the filing, Village Nurseries filed a mechanic's lien complaint against Baldwin but never served its complaint or otherwise gave notice of the filing. When the Bankruptcy Trustee filed a motion to sell the Debtor's property free and clear of Village Nurseries' lien, the mechanic's lien holder objected.

    The Bankruptcy Court ruled that the filing of the complaint to enforce the lien after the bankruptcy filing was a violation of the automatic stay. In deciding this issue the Court specifically noted that filing, but not serving, the mechanic's lien complaint is the procedure recommended by § 4.57 of Marsh, California Mechanic's Lien Law (6th ed. 1996) but stated that the recommendation is in violation of the Bankruptcy Code.

    The Court went on to rule that in order to perfect and preserve a mechanic's lien filed pre-bankruptcy, a creditor must file a proof of secured claim and serve it on the Debtor and any Trustee appointed in the case within the 90 day statutory time frame for enforcement of a mechanic's lien. Alternatively, the creditor may file with the Bankruptcy Court and serve on interested parties a Notice of Perfection under Section 546(b) of the Bankruptcy Code. There is some authority (specifically Section 108(c) of the Bankruptcy Code) that the 90 day period in which to perfect the lien is tolled and extended by the Bankruptcy filing but the Ninth Circuit in this case expressly declined to rule on this issue so a contractor should not assume that the bankruptcy filing extends the ninety day time limit of California Civil Code Section 3114.

    Impact and Significance

    In bankruptcy cases if commencement of an action is required to maintain or continue perfection, § 546(b) unambiguously mandates that notice shall be given instead. The Baldwin holding also makes it clear that an action complying with § 546(b) notice "must be calculated to notify the holder of the property, be it the debtor or the trustee, that the lienholder intends to enforce its lien." Accordingly, any contractor who has recorded a mechanic's lien and then receives notice of a bankruptcy filing must serve a written notice on the debtor and the trustee which states that the contractor is claiming a security interest in the real property which was improved by the contractor's work and giving notice that the contractor intends to enforce the mechanic's lien. The notice must be served within 90 days of the recording of the mechanic's lien in order to preserve the lien claim. If this procedure is not followed, the likely result is that the claim will become a general unsecured claim not directly payable from the proceeds from a sale of the real property on which the mechanic's lien was recorded.