{"id":57951,"date":"2014-10-13T06:07:15","date_gmt":"2014-10-13T12:07:15","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=57951"},"modified":"2014-10-08T16:07:39","modified_gmt":"2014-10-08T22:07:39","slug":"subcontractor-claims-can-general-contractor-files-bankruptcy","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/subcontractor-claims-can-general-contractor-files-bankruptcy\/","title":{"rendered":"Subcontractor Claims: What can you do once your General Contractor Files Bankruptcy?"},"content":{"rendered":"

Vicki R. Harding – Pepper Hamilton LLP – September 30, 2014<\/p>\n

Branch Banking & Trust Co. v Construction Supervision Services, Inc. (In re Construction Supervision Services, Inc.),\u00a0753 F.3d 124 (4th Cir. 2014)\u00a0\u2013<\/p>\n

After a general contractor filed bankruptcy, several of its subcontractors requested clarification from the court about whether they could file notices post-petition to perfect liens for construction materials and equipment supplied pre-petition. The bankruptcy court agreed that they could; the district court affirmed; and a lender appealed to the 4th Circuit.<\/p>\n

Generally if a lien is unperfected on the date that a bankruptcy petition is filed, (1) the automatic stay prevents the creditor from perfecting post-petition, and (2) the unperfected lien can be avoided using the trustee\u2019s \u201cstrong arm\u201d powers.<\/p>\n

However, Section\u00a0362(b)(3) of the Bankruptcy Code contains an exception from the automatic stay for \u201cany act to perfect, or to maintain or continue the perfection of, an\u00a0interest in property\u00a0to the extent that the trustee\u2019s rights and powers are subject to such perfection under section limits 546(b) \u2026\u201d (emphasis added). Section\u00a0546(b) limits a trustee\u2019s powers when applicable laws permit perfection of \u201can interest in property\u00a0to be effective against an entity that acquires rights in such property before the date of perfection\u201d (emphasis added).<\/p>\n

The court and the parties agreed that applicable law allowed retroactive perfection, so the appeal turned on whether the subcontractors had \u201can interest in property\u201d on the bankruptcy petition date. Since \u201cinterest in property\u201d is not defined in the Bankruptcy Code, the 4th\u00a0Circuit looked to the \u201cplain language\u201d and quoted definitions from\u00a0Black\u2019s Law Dictionary, American Heritage Dictionary, and Oxford English Dictionary\u00a0online. The court noted that it held in prior opinions that \u201cinterests\u201d are broader than just \u201cliens\u201d and commented that other circuits have also drawn this distinction. In its view, this made sense because a lien is a mechanism for enforcement of pre-existing rights.<\/p>\n

In the context of the construction liens, state law provided remedies to subcontractors who furnished services and materials in connection with an improvement of real property, including the right to obtain a lien on funds owed to the general contractor arising from the improvements. As provided in the statute, the \u201cliens upon funds granted under this section shall secure amounts earned by the lien claimant as a result of having furnished labor, materials, or rental equipment\u00a0at the site of the improvement under the contract to improve real property, \u2026 whether or not such amounts are due and whether or not performance or delivery is complete.\u201d<\/p>\n

Under the statute, the lien is granted by giving notice of the claim of lien and is effective upon receipt of the notice. However, a subcontractor is\u00a0entitled\u00a0to a lien upon delivery of the materials and equipment. As described in a state law treatise, the supplier has an inchoate lien that arises at the commencement of work that is preserved by providing notice. Upon perfection, the lien rights vest and relate back to the commencement of work.<\/p>\n

There had been several previous bankruptcy court decisions that interpreted the state\u2019s statute to mean that the notice of claim of lien both created the interest as well as perfecting the lien. This meant that subcontractors who had not given notice would not have an interest at the time the bankruptcy was filed, and thus would not have the benefit of Section 546(b) and the related exception from the automatic stay.<\/p>\n

The statute was amended by the state legislature in response to these decisions to clarify that the intent was that rights arose upon the delivery of materials, as opposed to only later when the notice is sent. Although the amendment was not applicable to the claims under consideration by the 4thCircuit, it viewed this as relevant for interpreting the intended meaning of the statute.<\/p>\n

In the end the 4th\u00a0Circuit concluded that the subcontractors became entitled to a lien as soon as they furnished materials. Since the subcontractors delivered materials prior to the bankruptcy filing, they had an \u201cinterest in property\u201d as of the petition date. Since the state statute provided that once the lien was perfected by giving notice it related back to the commencement of work, the subcontractor claims came within Section\u00a0946(b) and the automatic stay exception. The claims could not be avoided using the strong arm powers and the subcontractors could provide the required notice of claim of lien post-petition based on the exception from the automatic stay.<\/p>\n

There are many state specific variations for construction liens. However, there is a common theme in many of the statutes that the priority of liens relates back to the commencement of work. Be aware that in these states all is not lost when the general contractor files bankruptcy, and subcontractors may be able to perfect their construction liens post-petition.<\/p>\n

via Subcontractor claims: what can you do once your general contractor files bankruptcy? – Lexology<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Vicki R. Harding – Pepper Hamilton LLP – September 30, 2014 Branch Banking & Trust Co. v Construction Supervision Services, Inc. (In re Construction Supervision Services, Inc.),\u00a0753 F.3d 124 (4th Cir. 2014)\u00a0\u2013 After a general contractor filed bankruptcy, several of its subcontractors requested clarification from the court about whether they could file notices post-petition to… Continue reading Subcontractor Claims: What can you do once your General Contractor Files Bankruptcy?<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,8],"tags":[321,76,157],"class_list":["post-57951","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-mechanics-lien-rights","tag-general-contractor","tag-mechanics-lien","tag-subcontractor","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nSubcontractor Claims: What can you do once your General Contractor Files Bankruptcy? - Advise & Consult, Inc.<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/subcontractor-claims-can-general-contractor-files-bankruptcy\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Subcontractor Claims: What can you do once your General Contractor Files Bankruptcy? - Advise & Consult, Inc.\" \/>\n<meta property=\"og:description\" content=\"Vicki R. 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