Mechanics Lien Rights During Bankruptcy

When Bankruptcies are filed construction Creditors are often faced with difficult decisions about money they are owed and how to protect their rights.  The use of mechanics liens even when a Bankruptcy exists, or immediately prior to a Bankruptcy can be substantial to Creditors.


First, if a Supplier or Sub-contractor can show that the priority of their Lien relates back to a date prior to the filing of a bankruptcy, then a lien can still be filed even though a bankruptcy petition is on file with bankruptcy court and the automatic stay is in place.  The justification for filing a mechanics lien post-petition, that the lien relates back to and takes priority over the trustees lien against the assets of the estate.  Additionally, under Utah Law, the deadline for foreclosing a Mechanics Lien is tolled while the bankruptcy is in place.  And once the Bankruptcy is completed, then the 180 day deadline for foreclosing the lien will begin to run again.


In addition to these Mechanics Lien protections, Suppliers and Sub-contractors may also be protected against preference claims by Trustees.  For example, if a Supplier or Sub-contractor receives payment during the 90 day preference period that person can avoid a preference claim from a Trustee if they can show that except for the payment, they would have been able to file a Mechanics Lien and that Lien would have put them in a fully secured position.  For example, if a supplier were to receive payment within the preference period, and then a Chapter 7 Trustee filed a Preference Claim, the Supplier would be able to keep the money and avoid the Preference if the Supplier could show that they had a Lien against assets of the estate, and that their Lien was of such a nature that the value of the Lien was fully secured by the value of the property.  Thus, if it was a first position Lien and there was enough value in the property to cover the total value of the Lien or if it was a second or third position Lien but the property was valuable enough that all of the prior Liens were covered, then the Supplier would be able to avoid the Preference action.  This rule was established recently in a Connecticut Bankruptcy case called: In re Johnson Memorial Hospital, Inc.


The upshot of this information is that if you find yourself in a situation where a Bankruptcy is filed but you have Lien rights, you may very well still be able to enjoy the protection of your Lien rights which can allow you to change your status from an Unsecured to a Secured Creditor.