Help! I’m a subcontractor who is owed money in a commercial project and the general contractor just filed for bankruptcy – IS IT TOO LATE TO LIEN THE JOB?

In many construction projects, subcontractors and materialmen are paid later than they want to be paid and later than the terms of their contract or purchase order.  Subcontractors hear from the general contractors that “you’ll get paid when I get paid.”  Subcontractors are also frequently cautioned not to file liens because that will  “stop the flow of money” and further delay payment.   So the subcontractor waits. Then the general contractor files for bankruptcy.  What is a subcontractor to do?

Generally, any actions against a party, including those by subcontractors seeking payment are stayed or “frozen” by a general contractor’s bankruptcy filing.  Can a subcontractor file a lien to protect its right to payment by the owner after a general contractor has filed for bankruptcy?  The answer may depend on what state you are working in.

Recently, the Third Circuit in RE: Linear Electric Company Inc., 852 F.3d 313 (3d Circ., March 30, 2017) confirmed that under the New Jersey Construction Lien Law, N.J.S.A.2A:44A-1 et seq. (the “CLL”) construction liens do not relate back to a  time before the bankruptcy was filed such as the date that the work or supplies in question was performed or provided. Therefore, the Third Circuit held that the filing of construction liens by two materialmen after the subcontractor bankruptcy filing violated the automatic stay because the filing of the construction liens was deemed to be an act against the subcontractor’s property and no exception to the automatic stay applied.  Thus, the automatic stay prevented filing the liens, and such liens would then be invalid.

But in Pennsylvania, it’s another story.   The Third Circuit in In RE: Linear discussed Pennsylvania law, noting Pennsylvania liens relate back to “the date of visible commencement upon the ground of the work of erecting or constructing the improvement.” [1]  Therefore, a subcontractor’s filing of a mechanic's lien, after a general contractor declared bankruptcy, related back to a time before the bankruptcy filing and fell within an exception to the automatic stay. Thus, the lien was still valid.

Subcontractors and material suppliers should be aware that New York mechanic’s liens, like Pennsylvania mechanic’s liens, do relate back to the time of the underlying debt’s creation. New York Lien Law § 13(5) (McKinney's 1982). In re Fiorillo & Co., 19 B.R. 21, 8 B.C.D. (CRR) 1169 (Bkrtcy.S.D.N.Y.1982). Thus, a subcontractor or materialman may file a mechanic’s lien after the general contractor (or subcontractor as the case may be) files for bankruptcy.

But even if a construction lien or mechanic’s lien may be filed in your state, you may still be prohibited from taking any steps to enforce the lien during the pendency of the bankruptcy, such as suing to foreclose on the lien.  You will be subject to the priority rules and laws governing the bankruptcy proceedings.

If you have any questions about this post or any related matters, please feel free to contact our Construction Law Practice Group.

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[1] 49 Pa.Stat.Ann.§1508(a); In Re Yobe, 727 F.2d207 (3d Cir. 1984).