By Dale Ortmann, Esq.
It is a commonly held belief that if a project owner files for bankruptcy, an automatic stay prevents any collection activity against the owner, including the recording of a mechanic’s lien against the owner’s property. Since a violation of the bankruptcy stay is a contempt of court, it is important to understand what can and cannot be done once a bankruptcy has been filed.
In a recently-published appellate opinion (in which Hunt Ortmann represented the successful appellant), it has been held that the recording of a mechanic’s lien against property owned by a party in bankruptcy is permissible and does not violate the bankruptcy stay. This important opinion gave the Court of Appeal the opportunity to harmonize federal bankruptcy law with California mechanic’s lien law. In summary, the Court held:
- The filing of a bankruptcy petition operates as an automatic stay of the commencement or continuation of any legal action against the bankrupt debtor.
- A mechanic’s lien claimant can record a mechanic’s lien after the property owner files for bankruptcy without violating the automatic stay.
- The mechanic’s lienor must file a notice of lien in the debtor’s bankruptcy proceedings to inform the debtor of the recording of the mechanic’s lien and its intention to enforce the lien.
- The time for filing a lawsuit to foreclose the mechanic’s lien is stayed during bankruptcy, but preserved, so long as the real property remains property of the bankruptcy estate. For further information regarding how a contractor may protect itself when an owner files for bankruptcy, please contact Dale Ortmann. Dale Ortmann is a shareholder with Hunt Ortmann, a leader in California construction law. If you have any questions about this bulletin or mechanic’s liens, please contact him at ortmann@huntortmann.com.