9th Circuit Bankruptcy Appeals Board Addresses Refinement of Building Liens in Bankruptcy Proceedings

In a recent decision,¹ The United States Bankruptcy Appeals Board of the 9th Circuit has clarified an important step construction lien holders must take to perfect their liens when the debtor has filed a bankruptcy petition before the lien holder files a foreclosure action.

In this case, the debtor undertook to pay the contractor approximately $2 million for tenant improvement work in a shopping center owned by the debtor.² When the debtor failed to pay, the contractor registered a series of mechanic liens on the mall, the lien in question being registered on December 19, 2019.³ Under California law, the contractor has 90 days to “perfect” their lien by filing a lien foreclosure suit.⁴ However, before doing so, on January 10, 2020, the debtor filed for Chapter 11 bankruptcy.⁵

The filing of the bankruptcy petition triggered the “automatic stay” under 11 USC § 362, which prevented the contractor from filing its foreclosure suit.⁶ Although the contractor could not perfect his lien by filing a lawsuit, the court held that the contractor was still required to perfect his lien through the process provided by the bankruptcy code.⁷

According to the court, the contractor was required to notify the debtor under 11 USC § 546(b) of its claim within the 90-day perfection period established by California law.⁸ Unfortunately for the contractor, he did not notify the debtor of his claim until more than a month after the expiry of the 90-day period.⁹ Accordingly, the court held that the contractor’s attempt to obtain payment of his lien through the bankruptcy proceedings had been duly dismissed and the contractor had remained an unsecured creditor.^ten

Contractors should note in this decision that if a debtor files a petition for bankruptcy before the contractor has commenced legal action to foreclose its construction lien, the contractor is still required to provide notice of its claim by through the bankruptcy process and must do so by the state statutory deadline to file the foreclosure action. Failure to do so will likely invalidate the contractor’s lien and leave the contractor as an unsecured creditor.