I was out-scooped yesterday by good friend and fellow Raleigh construction lawyer Brian Schoolman, who announced via Twitter that the Fourth Circuit Court of Appeals has approved the filing of North Carolina mechanics’ liens even after a party higher up in the contractual chain seeks bankruptcy protection:
I highly recommend clicking the link and reading Brian’s blog post. It does a terrific job summarizing the Court’s rationale and discussing how CSSI puts the last nails in the coffins of the 2009 Shearin, Mammoth Grading and Harrelson Utilities decisions of a lower court that had reached the opposite result, before subsequently reversing itself a few years later in CSSI, which the 4th Circuit has now affirmed. (For additional legal context, check out my previous blog post on the Mammoth Grading and Harrelson Utilities cases.).
I write today to emphasize how important the 4th Circuit’s CSSI decision is to your construction business. Specifically, I write to answer this question: Why does having the right to file a mechanics’ lien, after the party immediately above you in the contractual chain seeks bankruptcy protection, matter?
When the party immediately above you files for bankruptcy protection, you want the best shot possible that the debt it owes you ultimately will be satisfied from the assets of its bankruptcy estate. Unfortunately, however, not all debts get paid in bankruptcy, at least not equally. When it’s all said and done, there will be winners and losers.
That’s where mechanics’ liens come in. They elevate your claim to secured status, and secured claims get paid before unsecured claims in bankruptcy. Heck, in most liquidation proceedings, unsecured claims receive pennies on the dollar, if anything at all. You absolutely want the priority that comes with being a secured creditor in bankruptcy. And by paving the way for mechanics’ lien claims to be filed even after your debtor files for bankruptcy, the Fourth Circuit has given you a considerable leg up in the battle for bucks against your fellow creditors.
Some critics are likely to say increasing the pool of secured creditors in a bankruptcy proceeding will only dilute the assets available to general unsecured creditors, making the ultimate distribution of assets less fair. Others might fret that the specter of post-petition lien claims will make Chapter 11 reorganizations less likely and Chapter 7 liquidations more likely. Both are fair criticisms.
But I represent contractors, suppliers and bonding companies for a living. I know just how damaging a bankruptcy filing can be to a construction creditor. Secured status means a good chance of getting paid; unsecured status means a good chance of getting bupkis. In my mind, it’s that simple, and I’m in favor of my clients getting paid. Further, the North Carolina State Constitution establishes a public policy requiring the General Assembly to provide contractors and suppliers with an “adequate lien” on account of their labor and materials; yesterday’s decision is squarely in line with and enhances that policy. And since the case applies to all three of North Carolina’s bankruptcy district courts, it will provide the clarity, certainty and consistency on the question of post-petition lien filings that, until yesterday, had been sorely lacking in the Tarheel State. Bottom line? Two big thumbs-up from this observer.
The Friday Forum microphone is all yours!