Construction Liens and Bankrupt Owners

A construction lien is a lien on title to property in favor of someone who has supplied labor or materials that improve the property. In easier terms, if a plumber installs pipe, he may have a lien on the property for the price of the pipe and labor, so that if he is not paid, he can file a lawsuit asking a judge to order the sale of the property to pay the plumber out of the sale price. It is difficult enough for a contractor, such as our plumber, to follow the technical rules which must be observed under Florida law in order to be able to enforce the lien rights. Many contractors will give up on lien rights altogether if the owner of the property files bankruptcy. Representing contractors, subcontractors, and material suppliers, I encounter frustration and confusion in situations where a contractor has carefully protected its construction lien (or rights to record a claim of lien) and the owner files bankruptcy.

Except on federally funded projects where the Miller Act kicks in (a situation quite beyond the scope of this post), my experience is that most construction lien and bond litigation generally involves the application of state law. However, if an owner files bankruptcy (an unfortunately common occurrence in recent Florida history), a contractor or other construction lienor has to deal with the intersection of state law and the Federal Bankruptcy Code. Even though bankruptcy is a federal law, the bankruptcy courts must often apply state laws to determine the debtors rights and the rights of various creditors.

Ideally, the claim of lien was recorded prior to the filing of the bankruptcy. In this event, the lienor (e.g., our plumber) is a secured creditor in the bankruptcy, and the lien may be enforced if the bankruptcy is dismissed.

However, in many cases, a lienor is taken by surprise when the owner files bankruptcy, and while the lienor hasn't been paid yet, he hasn't recorded his claim of lien either. Most creditors are familiar with the idea that a bankruptcy filing immediately prevents any collection action. This is because of the "automatic stay" provision of the bankruptcy code (§ 362), which creates penalties from any person who attempts to collect from the debtor, sue the debtor, or create liens against the debtor. However, there is a limited exception which allows a lien to be perfected (to "perfect" a lien means to take steps, such as recording a claim of lien, to make the lien effective against third parties and the debtor) even after the bankruptcy filing if the lien would relate back to some time prior to the bankruptcy filing. A construction lien relates back to (in other words, is effective as of the time of) the notice of commencement. Therefore, in some situations, a lienor may record his claim of lien after the bankruptcy filing if there is a notice of commencement on the project recording prior to the bankruptcy filing.

Even so, a lienor in this situation should talk to his lawyer to be sure that the technical bankruptcy (and state law) rules are being carefully followed. Consequences for fraudulent liens and violations of the stay are severe. (Never ever rely on this blog to make legal decisions -- these posts are not legal advice).

A sophisticated reader of this post might think that I've missed the forest for the trees. Even if a lienor goes to the expense of recording the claim of lien, no action can be commenced to enforce the lien while the bankruptcy is pending, and the lien will expire after a year, even if the bankruptcy is still going. Nevertheless, the right to record a claim of lien will be lost if it is not done within 90 days of final furnishing (under Florida law), and it would be doubly annoying if the time for recording expired and the bankruptcy was abandoned by the debtor or dismissed by the court for some reason. Further, a perfected lien may put the lienor, such as our plumber, in a better position compared to other unsecured creditors in the bankruptcy. In some cases, the bankruptcy court could allow a lienor "relief from stay," and by doing so let a lienor enforce the lien in court despite a bankruptcy (this is admittedly in limited situations).

In sum, a construction lienor who faces the loss of substantial lien rights may wish to consider consulting an attorney about the possibility of recording a claim of lien even after the owner files bankruptcy.