Whenever contractors, subcontractors, and suppliers offer their services to a developer or a property owner, they expect their payment to be made on time and in good faith. However, there are particular situations where developers and property owners do not honor their payment requirements, forcing those that they owe to file a mechanic's lien.
A mechanic’s lien is a legal claim that reserves the right of a contractor, subcontractor, and supplier to seek unpaid compensation. Once your contractor or supplier files a mechanic's lien against your property, it does not matter whether you already paid the amount being claimed, but this allows them to come after it.
To understand how mechanic's lien and bankruptcy work, it is recommendable to seek the help of an experienced bankruptcy attorney who can guide you on the necessary steps that you should take to ensure full payment of your dues. At Los Angeles Bankruptcy Attorney, we comprehensively assess your situation and offer professional advice.
What You Need to Know About Mechanic's Lien and Bankruptcy
As described earlier, a mechanic's lien is a legal claim made on a home or property. Mechanic's lien is used by subcontractors and suppliers who have not received payment for property improvements. Property owners can face a mechanic's lien even when they were not the ones who missed the payment.
For instance, if your home remodels contractor fails to pay the material used in your bathroom remodel, the material supplier can place a lien on your house to recover his or her money. In short, as a homeowner, your home is at risk of being put under mechanic's lien if you did not make payments to suppliers, laborers, and sub-contractors.
It is unfair that homeowners can end up paying for a general contractor's irresponsible behavior. The reason behind allowing a mechanic's lien is that everyone involved in your construction project should be paid. This law also presumes that homeowners can, in turn, sue general contractors who fail to honor their payment to suppliers, but this cannot help you in the short run.
How Mechanic's Lien Works in California
In California, the subcontractor and the supplier should do the following:
- Provide a notice to the homeowner of the total amount that needs to be compensated within twenty to thirty days.
- File a mechanic claim in the county where the property is located if not paid within the stipulated timeline.
- Work for a solution with the property owner within two to six months or file a foreclosure on the property.
Failure to serve the notice forfeits the claimant’s lien rights on the property. Apart from that, the twenty-day notice is not necessary for contractors without a direct contract or working as laborers for wages.
California mechanic's lien law provides that contractors can only record a contractor's lien only after completing all the work indicated in the contract or not completing a project due to reasons like project shut down or termination. Recording a lien before completing your work can result in a premature and invalid lien. Simultaneously, the lien must be recorded within ninety days after completing the work unless there is a notice of completion.
If the notice of completion exists, an alternative deadline is applied. As a general contractor, you must record the lien at least within sixty days. Subcontractors or suppliers have thirty days to record the lien. On the other hand, the property owner must receive the notice of completion within ten days after the actual completion of the project. If multiple properties are involved in the project, the deadline applies to the individual property and not the project's completion date.
Contractor's lien Service Requirement in California
A contractor's lien is served as a Claim of mechanic's lien, meaning that claimants must use specific wording. The copy is served to the property owner. It is accomplished by sending it through certified mail, first-class mail, or registered mail that indicates a certificate of mailing and sufficient postage requirement. Claimants must address the mail to the property owner's home address, business, or the building where the property’s building permit was authorized. If these service requirements are not met, the lien might be unenforceable.
Lawsuit Deadline in California Contractor's Lien
Contractors must file a lawsuit within ninety days from the day of recording the lien as a measure of enforcing the lien. Missing this deadline prevents you from enforcing the lien and might require you to remove it. Failure to remove the lien might force the contractor to pay the property owner's attorney fee.
However, some situations like having an agreement between the contractor and owner to extend the time might extend the deadline without paying the attorney's fee. In that case, the deadline will extend to a further ninety days after the extended time has expired but not more than a year after completing the project.
The contractor is further required to serve the property owner with the enforced lien within sixty days after the filling. The contractor should also provide proof of legal services to the court within the same period.
California Bankruptcy in a Nutshell
Bankruptcy is a legal system that sets to remedy debts that debtors cannot repay their creditors. This is a way of benefiting both the creditors and debtors by seeing that debtors are relieved from debts they cannot pay, and creditors are paid from the assets that debtors do not need for basic living.
There are four types of bankruptcy proceedings that can impact an individual or a business. They are referred to as Chapters of the Federal Bankruptcy Code. These chapters are as follows.
Chapter 7 is usually the most commonly used bankruptcy proceeding. It involves liquidating the debtor's non-exempt assets and having the proceeds distributed among creditors based on the priorities established by this Code. The trustee has the authority to control these assets, sell them, and pay creditors as much as the money gained permits. However, after the proceeding has begun, any wages earned do not count as part of the liquidating assets.
Chapter 11 is usually referred to as the reorganization proceedings. In this proceeding, creditors can remain in possession of their assets and continue to operate their business, but through a court or committee oversight. A reorganization plan is agreed on only if it is considered by most creditors and binds the debtor and creditors to its terms of payment. The plan can call for sales of some of the assets, repayment out of future profits, or recapitalize or merge a company.
Chapter 12 applies to family farmers and works the same way as 11. However, debtors can only pay their creditors out of their future income.
Chapter 13 is a debt repayment plan for individuals with regular income and have unsecured less than $394,725 and secured less than $1,184,200. Under this proceeding, debtors keep possession of their property but have to make regular payments to the trustees out of their future income of three to five years. Repayment plans to creditors under this proceeding can range from 0 to 100%, depending on the debtors' income and their assets' value.
What makes this proceeding unique is the possibility of discharging certain debts that cannot be discharged under Chapter 7. It also provides a way for individuals to prevent repossession and foreclosure as debtors catch up with their secured debts, delinquent child support, and unpaid taxes.
How Bankruptcy Affects Mechanic's Lien
One of the complications that arise when a contractor, subcontractor, or supplier files a contractor's lien is when the property owner files a bankruptcy petition. A few legal concepts apply if a property owner files a bankruptcy petition before the person filing the contractor's lien files a foreclosure lawsuit. This is a rather tricky situation that needs a bankruptcy attorney's intervention before committing to any legal course of action. Below are a few things that a person filing a contractor's lien must do:
File a Proof of Claim
A bankruptcy petition starts with filing for bankruptcy in court. The bankruptcy filer usually lists all his or her creditors with the bankruptcy petition. The court will then send a proof of claim form to each creditor listed in the schedules. Each creditor who receives the claim should sign the proof of claim and attach necessary documents to prove their claim. This includes unpaid invoices, mechanic's lien, contracts, and other documents.
In Chapter 11 Bankruptcy, the proof of claims the court sends to the listed creditors contain specific "bar dates." A bar date is a deadline as to which the creditor must file with the bankruptcy court the completed Proof of Claim form and attachments to preserve the right to assert a claim against the party filing bankruptcy. As a person filing a mechanic's lien, missing the bar date can be fatal to the claim.
The Proof of Claim form also comes with detailed instructions that claimants must follow while filling out the form. In a mechanic's lien, it is crucial to note that you have a mechanic's lien on the bankruptcy party while filling the form. You can do this by checking the correct box, listing an exact debt amount, and attaching a copy of the mechanic's lien and other supporting documents. You must then file the claim form to the Bankruptcy Court before the bar date arrives. Once the court receives the filled form, they will send documents regarding the debtor’s bankruptcy estate administration.
How Mechanic's Lien and Bankruptcy Automatic Stay Work
Under California Bankruptcy Code 362, no state lawsuit should be filed against a bankruptcy party with an existing automatic stay without the Bankruptcy Court's permission. Therefore, the automatic stay prohibits any lawsuit to foreclosure on the property without the Bankruptcy Court’s approval. Apart from that, any filed lawsuit against the bankruptcy party is usually automatically stayed or suspended until the court decides on the bankruptcy proceeding.
Although a contractor could forgo a claim on the bankruptcy party's estate, there are a few ways to circumvent the automatic stay and pursue the mechanic's lien to completion by selling the property in question. Claimants should follow specific procedures to achieve this. These procedures are discussed below:
Perfecting a Mechanic's Lien in Bankruptcy
The obligation to file a lawsuit to foreclosure property through a mechanic's lien, whereas there is an automatic stay on the same property, has been in contention for quite some time. Under the California Bankruptcy Code 546(b), bankruptcy trustees can perfect a mechanic’s lien interest on a property if they file it before the perfection's date.
In that case, since a mechanic's lien is a form of interest in a property under the California laws, claimants who file a lawsuit to foreclosure property through a mechanic's lien within the ninety-day deadline would be on the proper course of protecting their rights.
However, the California 9th circuit has ruled out that it is not the proper course of action and has made statements on how the procedure should be followed. Under their new procedure, the lien claimant should give a separate notice to people participating in a bankruptcy process other than relying on the information provided on the proof of claim in the bankruptcy proceeding.
Despite the existence of this decision, legal practitioners have been extremely uncomfortable with the possibility of failure to file a mechanic's lien foreclosure action within ninety days as required under California Civil Code section 8460.
As a reminder, a mechanic's lien cannot be successful unless a file for foreclosure on the property in question is not filed within ninety days. Simultaneously, the existence of the mandatory automatic stay makes it hard to take note of the ninety-day deadline.
The best way to beat this dilemma is by filing a Notice of Perfection of Mechanic's lien in the Bankruptcy Court within ninety days after recording the mechanic's lien foreclosure lawsuit. This helps you avoid losing the right to foreclosure the property in question once the ninety-day deadline has passed due to the delay brought along by the automatic stay.
The Risk of Using a Notice of Perfection
An automatic stay can terminate a mechanic's lien lawsuit if the Bankruptcy trustee abandons the real property subject to the lien. A mechanic’s lien can also be terminated if the bankruptcy is dismissed or the court grants other interested parties a lift on the automatic stay.
If the court allows a lift on another party, a mechanic’s lien claimant might lose his right to foreclosure if the party decides to seize the property first. This means that you should go the extra mile to protect your interest. Fortunately, Federal Bankruptcy Procedure allows creditors to request special notices to the court by including orders dismissing the case, relief from stay, or abandonment of property. Once you learn that an automatic stay has been lifted, you can pursue foreclosure on your mechanic's lien, keeping in mind that you could lose your rights if you do not act promptly.
Motion for Relief from an Automatic Stay
You might file a motion for relief from the automatic stay to allow the mechanic's lien foreclosure action to proceed in court. Under the Bankruptcy Code section 362, creditors should file a motion for relief from the automatic stay that shows a "reasonable cause" to be granted the relief.
Some of these "reasonable causes" include lack of adequate protection like the default in prior security, lack of enough equity for unsecured creditors, or lack of effective reorganization. Having a sworn declaration and an authenticated appraisal report would be good to help you get the motion for relief.
However, you should beware of the existence of prior encumbrances and liens that might exceed the value of the property in question. If that is the case, an action of foreclosure on a mechanic's lien will not be beneficial, even after a forced sale of the property. The proceeds will not be sufficient enough to pay all your claim from the mechanic's lien. Therefore, keeping up with developments on the property in question, especially its bankruptcy proceeding, is necessary for a successful foreclosure of a property on which you intend to place a mechanic’s lien.
Find a Bankruptcy Attorney Near Me
Filing a bankruptcy petition can significantly derail an effort to foreclosure your property through a mechanic’s lien. If that is the case, you have to be careful of the construction's lien placed on your property to avoid the possibility of losing your property. There is a lot of uncertainty and costly errors in protecting your property amid a construction's lien. Seeking legal counsel in bankruptcy law and experience with bankruptcy law is recommendable to anyone in this situation.
At the Los Angeles Bankruptcy Attorney, we can help you better understand your financial position and various options while dealing with heavy debts and the threat of a construction's lien foreclosure. Our experienced attorneys will help you make an informed decision on how to file a bankruptcy proceeding amid a construction's lien. For a free consultation with our experts, do not hesitate to contact us anytime by calling 424-285-5525.