Timing Is Everything When It Comes To Enforcing Mechanics Liens
Timing is Everything When It Comes To Enforcing Mechanics Liens
William C Last, Jr.
California law requires that a lawsuit be filed to foreclose on a mechanics lien within 90 days (Civil Code section 3144) after recording it. If a timely lawsuit is not filed, the property owner can file a motion, under Civil Code section 3154, to have the court remove the lien. Therefore, if you intend to foreclose on the lien you must act in a timely manner.
If a property owner files for bankruptcy, his creditors are subject to an automatic stay on the filing and prosecution of lawsuits. The objectives of the automatic stay include maintaining the status quo, protecting the estate against a multiplicity of lawsuits in various forums, and preserving the relative priorities of creditors, pending a distribution of estate assets.
Yet, under California law, the filing of a foreclosure suit (i.e., an enforcement action) is required to maintain the lien. Quite simply, if no suit is timely filed, the lien becomes void. Thus, if you want to foreclose on a mechanics lien on a piece of real property owned by a bankrupt debtor you are subject to a “Catch 22.”
For a number of years the commentators recommended filing the lawsuit but not serving it on the debtor. In a recent case, entitled In re BALDWIN BUILDERS (BAP No. CC-97-1830BRiJ), the bankruptcy appellate court examined this issue and declared that the commentators’ advice should not be followed.
The Baldwin case concerned a landscaping contractor who provided landscaping services on property belonging to a builder who filed a bankruptcy. In the Baldwin case, the landscaping contractor recorded a mechanics lien and filed a lawsuit 90 days thereafter. However, the landscaping contractor chose not to serve the complaint on the debtor. In its briefs, the landscaping contractor argued that he followed the recommendations of the mechanics lien commentators.
The Baldwin court noted that the relevant bankruptcy laws had been modified after the commentators made their recommendation. The relevant Bankruptcy Code provides that, where state law requires “commencement of an action to accomplish … perfection, or maintenance or continuation of perfection of an interest in property” and the action has not been commenced before the bankruptcy is filed, “perfection of such interest shall be maintained or continued, by giving notice within the time fixed by such law for … such commencement.”
After concluding that filing a post-bankruptcy filing foreclosure lawsuit is a violation of the automatic bankruptcy stay, the Baldwin court next discussed the notice that must be given in the bankruptcy proceeding. The Court concluded that the notice must be in the form of a secured claim in the bankruptcy court. The Court also stated that the aforementioned notice must be filed with the bankruptcy court and a copy served on the debtor and the bankruptcy trustee within 90 days after the mechanics lien is recorded. The Baldwin decision makes it clear that if the requisite notice is not provided within the 90 day period, the lien claimant loses its lien rights. Conclusion
If you are providing goods and services to an owner who files for bankruptcy, you should file a notice of a secured claim in the appropriate bankruptcy court. The notice should be served on the debtor and the trustee. Since the bankruptcy laws are complex it is advisable to discuss your mechanics lien rights and obligations with an attorney.
If you fail to file a lawsuit to foreclose a mechanics lien within ninety days and the property owner has not filed for bankruptcy, you may have other options. If you failed to file a timely foreclosure lawsuit, you should determine if you can record a second mechanics lien in a timely manner (e.g., 30, 60, or 90 days after the project is substantially completed). If so, the first lien should be released and a new one recorded. However, the lien release should clearly indicate that the original claim remains unsatisfied. Conversely, if the lien has been satisfied the lien release should expressly state that the underlying obligation has been fully satisfied. If the lien release is not clear as to what is being released, the owner may then argue that the contractor has released all its rights to record a new lien.
This article, ©2000, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 866-904-4725 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.