By: Thomas S. Tripodianos Published: February 2009

Lien Law and Bankruptcy

Question. Mechanics lienor entered into a contract with the debtor whereby lienor was to be a general contractor providing contracting services in the construction of certain improvements on real property owned by the debtor.

The debtor is the owner of the premises with respect to which the lienor desires to perfect its mechanic's lien. Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code.

Lienor alleges that its services for the debtor are near completion and that under Sections 9 and 10 of the New York State Mechanics' Lien Law, a mechanic's lien must be filed within four months of the last day of work or furnishing of materials to the debtor in order to sustain its validity. May the lienor file the mechanics lien without first seeking relief from the automatic stay?

Answer. Yes.

This case illustrates the manner in which the relation-back principle for lien perfection under 11 U.S.C. s 546(b) operates as an exception to the automatic stay by reason of its incorporation by reference in 11 U.S.C. s 362(b)(3).

The automatic stay imposed under the Bankruptcy Code ordinarily prevents the perfection of a lien after the petition has been filed. Code s 362(a)(4) expressly stays “any act to create, perfect or enforce any lien against property of the estate.” The reason for such restraint is stated in 1 Norton Bankruptcy Law and Practice, s 20.08, Part 20-Page 9 as follows:

“The restraint on creating postpetition liens against the debtor's estate was intended to prevent the giving of preferential treatment to certain creditors by making them secured instead of unsecured. Thus the automatic stay operates to restrain unsecured prepetition creditors from improving their position as against the trustee.”

Consistent with the restraint expressed in Code s 362(a)(4) the courts have uniformly held that the post-petition filing of liens are not only stayed but any such filings are null and void.

However, Code s 362(b)(3) makes an exception for post-petition filing “to the extent that the trustee's rights and powers are subject to such perfection under section 546(b) of this title.” Hence, reference must be made to the latter section, which concerns the limitations placed on the trustee's avoiding powers and reads in relevant part as follows:

“s 546. Limitations on avoiding powers.

(b) The rights and powers of the trustee under section 544, 545, or 549 of this title are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection.“

Under s 10 of the New York Mechanics' Lien Law, the notice of lien must be filed in the clerk's office where the property is situated.

There is a relation-back provision that is set forth at s 13(5) of the New York Mechanics' Lien Law, which provides in pertinent part that:

“(5) No instrument of conveyance recorded subsequent to the commencement of the improvement, and before the expiration of four months after the completion thereof, shall be valid as against liens filed within four months from the recording of such conveyance, unless the instrument contains a covenant by the grantor that he will receive the consideration for such conveyance and will hold the right to receive such consideration as a trust fund to be applied first for the purpose of paying the cost of the improvement and that he will apply the same first to the payment of the cost of the improvement before using any part of the total of the same for any other purpose.”

“An examination of s 13 of the Lien Law indicates that the mechanic's lienor will have priority over any type creditor, unrecorded or recorded, after commencement and within four months of completion of improvements to the property except for the case where there is another mechanic's lien. In such case, the liens will be on a parity. N.Y. Lien Law s 13(1).

Since the availability of the relation-back procedure under the Mechanics' Lien Law is recognized under Code s 546(b) as effective against a debtor in possession in its capacity as trustee under 11 U.S.C. s 1107(a), so as to allow mechanics lienors to perfect their liens within the statutory four month period, notwithstanding the intervention of a Chapter 11 petition, it follows that the lienor should be allowed to file its notice of lien in accordance with the state law. The automatic stay is no bar because Code s 362(b)(3) expressly exempts such filing from the conduct otherwise proscribed under Code s 362(a). In referring to Code s 546(b).

However, the lienor may take no action to enforce its mechanic's lien, since any conduct beyond the perfection of the lien may tend to interfere with the reorganization process and is stayed under Code s 362(a)(5).

Accordingly, the lienor is permitted to file its mechanic's lien as provided by the applicable New York Mechanics' Lien Law, but is not authorized to take any further enforcement action.

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