In a recent decision by the Third Circuit Court of Appeals, the Court held that a mechanic’s lien filed by an unpaid supplier against a construction project, after the contractor through whom the materials were furnished filed for bankruptcy, was voidable. In re Linear Electric Co., No. 16-1477 (3rd Cir. March 30, 2017). Specifically, the Court held that once the contractor filed for bankruptcy, the automatic stay barred the filing of a mechanic’s lien. While the supplier argued that the lien only encumbered property of the owner of the construction project, rather than property of the contract, the Court rejected that argument. The Court held that because the lien permitted recovery of money owed by the owner to the contractor, the lien acted to seize a portion of the contractor’s accounts receivable, which was now an asset of the bankruptcy estate.
Interestingly, the Court noted that the result might have been different if another state’s law governed. The Court acknowledged that in another case, In re Yobe Electric, Inc., 728 F.2d 207 (3rd Cir. 1984), the filing of a mechanic’s lien by a subcontractor did not violate the automatic stay provision because, under Pennsylvania law, the date of filing the mechanic’s lien related back to “the date of visible commencement upon the ground of the work of erecting or constructing the improvement.” In In re Linear, the Court applied New Jersey law, which contained no such relate back provision and, therefore, the mechanic’s lien was effective only as of the date of filing.
This holding has particular significance to contractors and suppliers in the construction industry, who typically furnish materials or perform work on a project under an agreement where retainage is withheld and payment for the work performed is not due until forty-five or sixty days later, and too often after the contractor has filed for bankruptcy protection. Thus, it can be significantly important to know whether a particular state’s mechanic’s lien statute contains a “relate back” provision. Below is a brief summary of the applicable law in New York, Connecticut, Massachusetts and Rhode Island:
- In New York, a mechanic’s lien relates back to the date of the underlying debt’s creation. See NY Lien L. § 13(5). Accordingly, bankruptcy courts applying New York law have held that the filing of a mechanic’s lien is not barred by the automatic stay. See In re LoPriore, 115 B.R. 462, 463 (Bankr. S.D.N.Y. 1990); Matter of Fiorillo & Co., 19 B.R. 21 (Bankr. S.D.N.Y. 1982).
- Similarly, in Connecticut, a mechanic’s lien relates back to the date on which the lienor first furnished labor, materials or equipment to the construction project. Conn. Gen. Stat. § 49-33 (b).
- In Massachusetts, a mechanic’s lien becomes effective for all purposes upon the date the lien is perfected pursuant to statute. See MGL c. 254, §§ 1-33; Tremont Tower Condominium LLC v. George B.H. Macomber Co., 436 Mass. 677 (2002). The lien does not relate back to the date work commenced or when services were rendered.
- In Rhode Island, a mechanic’s lien relates back and protects all work performed by the lienor within 200 days prior to the recording date. This time period constitutes the “Lien Period.”
Suppliers and contractors in the northeast will want to understand the various differences in state law governing mechanic’s liens. In states lacking a “relation back” provision, a bankruptcy petition will likely bar the subsequent filing of a mechanic’s lien. However, in states where the law provides for the relation back of mechanic’s liens, a post-bankruptcy petition lien will likely fall outside of the scope of the automatic stay, at least for the applicable grace period for filing.
This post was authored by Andrew DePeau.