If you are a supplier of construction materials, contractor, or subcontractor, you are taking a risk working with a developer, especially when they fail to pay you. Mechanics lien in California is an essential tool for those in the construction industry to protect themselves against unpaid construction debts. The purpose of having a mechanic’s lien is to enable the forceful selling of the particular property to get paid. However, to obtain a mechanics lien against a specific property, you must follow the legal process that involves filing a petition in a bankruptcy court.
If you notice a developer is having challenges paying your debt for the construction, you must move with speed to protect your liability. Find a bankruptcy lawyer that will help you file a mechanic’s liens to avoid losing your money. Get in touch with us at the San Diego Bankruptcy Attorney for more information on how we can help you get a mechanic’s lien.
Overview of Mechanic’s Lien
Construction materials cost a lot of money, just as the money contractors and subcontractors invest with a developer. If one is not paid their money, it can negatively affect their business and lead to the closure of one’s business. For this reason, it becomes crucial for a supplier, contractor, or subcontractor to protect themselves from a possible bankruptcy when they don’t get paid.
Under the normal process, when recording a mechanic’s lien, the initial step is to record it in the chain of title for the property at the Recorder's office in your county. Ninety days from the day the lien was recorded, a lawsuit should be filed in the civil court of the state. The purpose of the suit is for foreclosing on the mechanic’s lien. When the foreclosure lawsuit is successful, it means the court will mandate the selling of the property to pay pending debts in its construction. The process sounds simple, but it is complex, requiring the presence of a bankruptcy lawyer.
Recording the mechanic’s lien and filing a foreclosure lawsuit can be met with complications. The developer of the property with the recorded mechanics lien can petition the court for bankruptcy. When a developer files for bankruptcy before the recorded mechanic’s lien claimant has filed a foreclosure suit, some legal implications must be considered. These are essential before taking your next action, which your lawyer will advise accordingly. Generally, the below concepts are taken into consideration once a developer files for bankruptcy.
Bankruptcy Proof of Claim
The bankruptcy process begins when a developer files for bankruptcy in court. The people the developer owes money are written down as creditors in the bankruptcy petition. The court then sends each creditor a proof of claim form. Each creditor must fill, sign, and return it with attachments of documents that act as evidence of the debt. These may include the signed contract between the developer and creditor, mechanic’s lien recorded, or invoices, among others.
The form typically has a bar or deadline date. This is usually the deadline when the creditor needs to return the proof of claim form with the court and the necessary attachments. Returning the form on time with all the essential documents means your claim will get validly entered in the bankruptcy case. If you miss the bar or deadline date, your application may not get considered.
This form also has instructions on how the creditor should fill the form. If you had recorded a mechanic’s lien, it is essential to indicate that a mechanic’s lien has secured the debt. This is categorized as a secured claim in the proof of claim form. This you do by check the appropriate box, indicate the amount owed, and attach a certified copy of the mechanic’s lien. Documents in support of the claim are also crucial before returning the form to the court.
Once all the documents are in order, they must be returned to the court, where the debtor will be served with other papers by the court. Always ensure not to let the bar date pass because it may mean your claim will not get accepted.
Automatic Stay in Bankruptcy
When a debtor or, in this case, a developer files for bankruptcy, they will receive an automatic stay. The stay is an essential aspect of bankruptcy that must be obeyed by creditors. According to the law, when a person has obtained an automatic stay, other parties cannot file a lawsuit against them without the permission of the court first.
This means, if a party moves to court to file for bankruptcy, a creditor that has recorded a mechanic’s lien cannot file a foreclosure lawsuit on the lien without getting the bankruptcy court’s approval. Additionally, if there was already a case in court against the party filing for bankruptcy, it automatically stays. This stays as such until a determination of the bankruptcy case in court.
However, there are some avenues that your lawyer can use to complete or perfect the lien. This is through the selling of the said property that the lien gets recorded on. In achieving the completion of the mechanic’s lien, specific steps must be followed. These are:
Perfecting or Completing your Mechanic’s Lien when Faced with Bankruptcy
Over the years, lawyers felt filing a foreclosure lawsuit on a mechanic’s lien was an exception to the automatic stay issued by the bankruptcy court. This was believed because, according to code 546(b) of bankruptcy, the powers and rights of a trustee in a bankruptcy case are subject to applicable law. This law allows perfection or completion of any interest in a property affected against a party. The party will gain rights to the property before the perfection date.
Because mechanic’s lien, according to the law, is interest on a property, and the claimant has the right over the property before the perfection date, it is permissible to file a foreclosure lawsuit. Filing the foreclosure lawsuit will also protect you from missing the deadline of ninety days to register it in California. This seemed like an appropriate legal alternative, according to bankruptcy code 546(b).
Unfortunately, the 9th Circuit federal court did not agree on this to be the best option. The court made various statements that have, with time, evolved into the right procedure to follow. Below, we describe this procedure in detail.
Issuing a Notice of Perfection or Completion of the Mechanics Lien
The bankruptcy appellate panel of the United States in the 9th circuit disagreed that one can file a mechanic’s lien suit where an automatic stay following a bankruptcy case was in place. The court disapproved of the filing of the foreclosure lawsuit without notifying the bankruptcy court.
Based on two prior cases, it was concluded that instead of filing a foreclosure suit in a civil court, filing a notice to complete the mechanic’s lien in a bankruptcy court was the best way to do it. According to the federal bankruptcy law, this is the best way to complete a lien where a property developer under the lien can file for bankruptcy.
Filing the perfection notice or completion of the mechanic’s lien needs to get done in ninety days following the recording of the mechanic’s lien, according to code 8460. The contradiction is, as opposed to filing for a foreclosure of the mechanic’s lien, the claimant files a notice for completion of the mechanic’s lien. This is done at the bankruptcy court and will avoid the claimant from overpassing the deadline of ninety days.
Why the Use of Notice of Completion or Perfection Only is Dangerous
Although using the perfection notice is recommended, there are risks to using this method alone. If, as a claimant, you file perfection notice with the court and fail to file a foreclosure lawsuit with the state court, you risk losing your rights to a mechanics lien. This may happen when proceedings you and your lawyer are not aware of happening in court, and no notice gets issued.
For instance, if the appointed trustee abandons the property with the mechanic’s lien or the court or trustee gives in to another creditor’s request to relieve them from the stay. If the claimant with the mechanic’s lien is not made aware of this, he or she may lose their right to a foreclosure on the lien.
Requesting for Special Notice
Losing the right to a mechanic’s lien can be avoided if a claimant filed and served a demand for a special notice at the court. If the claimant had done this, he or she would have gotten notification from the court. The notice will warn them of the lifting of the stay. If the trustee for the case was considering leaving the property under the mechanic’s lien, a notice of the same would be given to the claimant. This notice is essential to the claimant because they will take action to protect themselves against the potential loss by preserving the mechanic’ lien.
After considering the above discussion, a leading legal treatise in California on mechanic’s liens comes up with one possible conclusion. Unfortunately, the outcome was in contrast to the legal guidelines discussed above.
Regardless of all the discussions around the subject of mechanic’s liens, the safest procedure would be to file a foreclosure notice within ninety days from the mechanic’s lien recording.
Filing a Motion for Automatic Stay Relief
Another popular way of ensuring a foreclosure of the mechanic’s lien is by getting permission to the claim removed from the court and file a lawsuit for it in a civil court. This is an assumption that the bankruptcy case had not been petitioned to begin with. This means if the developer never files a bankruptcy case, the foreclosure lawsuit on mechanic’s lien proceeds in the civil court. However, where the developer files for bankruptcy, the claimant is expected to file the mechanic’s lien notice with the court.
Following this option of getting relief from the automatic stay, there are two ways one can achieve this. If the case is already at the court, your lawyer can file a motion to get relieved from the stay. This is to seek permission to proceed with enforcing the mechanic’s lien from a superior court.
Based on Bankruptcy code 362, the petition requires one to demonstrate to the court there is a reason to grant the relief. This might include showing that there is a lack of sufficient protection for the claimant’s debt, for instance, if there was a default in previous security. This threat must also show that the claimant risks extinction of their mechanic’s lien. You can also prove no available equity exists for creditors with unsecured debt, and the property is not required to facilitate reorganization. An authenticated report or sworn declaration must accompany this motion.
Stipulating for an Automatic Stay Relief
An automatic stay can also be addressed less expensively and more naturally. The claimant can negotiate with the developer and file the agreed stipulation to allow automatic stay relief with the court. A stipulation is usually an agreement arrived by the claimant and the bankrupt developer through their attorneys. This agreement typically is to allow the request to be released from the court and allowing the state court to determine it.
All the other creditors in the bankruptcy case get issued with the stipulated agreement and are allowed to object if needed. If this agreement is reached and no creditor objects to it, the court will grant relief of the stay. A bankruptcy court must sign the relief before the parties proceed to the state civil court.
If you can use this method to obtain an automatic stay relief, you will save money and time that you would spend drafting and arguing the petition in court. If you can negotiate stipulation, it is the best option in bypassing the stay and moving with foreclosing the mechanic’s lien.
Mechanic’s Lien Before Bankruptcy
When you notice the developer that has contracted you for some construction or the supply of materials starts making excuses to pay, you need to act fast. One of the crucial things to protect your money is by recording a mechanic’s lien and filing a lawsuit for its foreclosure. If you don’t do this, the developer may file for bankruptcy, and dealing with a mechanic’s lien then may be complicated.
Steps Involved in Filing for Mechanic’s Lien
Filing a mechanic’s lien is the best way to secure your debt in construction. Almost every person in the construction industry in California has lien rights to protect them against unpaid debt. Lawyers and collection agencies agree that having a mechanic’s lien is the best way to protect your debt in the construction industry. There are three main steps to filing a mechanic’s lien in California. These are:
Getting your attorney to prepare your document for mechanic’s lien
Having a copy of the mechanic’s lien delivered to the developer or property owner
Making a record of the lien with the local county records office
When one has completed the job that they were hired for by the developer, they are expected to file a notice of completion. Once this is done ninety days from when the job was completed, you can register for the mechanic’s lien. You can also file it in sixty days from when the owner records the completion notice. This is usually for direct contractors.
For subcontractors, vendors, suppliers or workers, you can file for a mechanic’s lien at the earliest of:
In ninety days from the date of completion of the work
In thirty days after the developer records a completion notice
After obtaining the mechanic’s lien, it must get served to the property owner. You can use first-class mail, certified mail, or registered mail. These means of serving the lien are excellent because a mailing certificate backs them. If you fail to comply with the requirements of the lien, you may cause it to be unenforceable according to the law.
When preparing the mechanic’s lien, you should not include the attorney’s fees. A lien must be prepared with the invoice amount of the goods supplied or services rendered. However, when the court allows for the foreclosure of the lien, you may get awarded the money used in attorney fees and other costs.
Mechanic’s Lien against Other Pre-existing Mortgages
One of the common questions with individuals working in a construction project is whether their liens have a priority over other debts. The only time this lien has priority over other liens on the same property is following the start of the work. You may also have a priority if you were not recorded at the beginning of the work and had no notice.
Consult a San Diego Bankruptcy Attorney Near Me
Doing business is hard enough without risking losing your money or investment to a developer. When you supply construction materials or offer your services in a construction project, you expect payment because you want to sustain your business and cover your overheads. Unfortunately, as a business person, you can end up investing in a project that may cost you or cause you to make losses. If you are in the construction industry, you can protect yourself against potential losses from the developer. Having a bankruptcy lawyer draw up the mechanic’s lien on your behalf is a crucial way to protect yourself from potential losses. Get in touch with the San Diego Bankruptcy Attorney at 619-488-6168 to consult an experienced bankruptcy attorney on mechanic’s liens and bankruptcy.