Kathy V.
A/R, Credit & Collections Supervisor at Heaat Transfer Sales of the Carolinas, Inc.
Can you file a lien against a property (end user) when your customer (not the end user) has filed for bankruptcy?
We sell HVAC equipment. We recently sold some equipment to a contractor who installed it at his customers property. The contractor we sold to has just filed for bankruptcy. I've been told by upper management to start the paperwork to file a lien against the property the equipment has been installed at. Is this legal?
Location specific: Greensboro/Winston-Salem, North Carolina Area
Answers (10)
Bruce B.
Investor at Blue Ridge Properties
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I think what you are talking about is a mechanic's lien, which is legal if used in the appropriate circumstances. If the end user is smart, he should have taken some steps to prevent a mechanic's lien having any effect on his property, but you won't know that until you file. I am certainly not an attorney, nor am I trying to offer legal advice, but this sounds like something you should do - or attempt to do. Legal advice is clearly needed, I think, as laws vary from state to state and the bankruptcy will effect what can be enforced. BTW, in general, all the lien will do is encumber the property so that the owner cannot sell it or (probably) get a loan on it until the lien is satisfied, so it can be a powerful weapon in your favor. A mechanic's lien is usually used when the contractor fails to pay his bill to the supplier; the bankruptcy may complicate that somewhat - as I said, I am not a lawyer, and as we all know, advice is worth what you pay for it!
Richard J.
Development coordinator at Bellingham / Whatcom County Housing Authority
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As Bruce says, yes, this is possible, but you definitely need advice from someone who specializes in construction law.
If I understand you correctly, the lien would be against the property that the contractor does NOT own. If so, the automatic stay of the contractor's bankruptcy should not affect the filing of the lien against the homeowner's property.
The general answer to your question: In most every state, those who perform construction services or provide construction materials can lien a construction project when unpaid.
The more detailed answer: the laws of every state are technical, and they are different. You must consult the rules of your state to determine how to file your lien, when it must be filed, and whether you were required to provide any notices to preserve your rights to lien.
My law firm practices construction law in Washington and Louisiana (wolfelaw.com). We file liens in both states.
We have a company that files construction liens, notices, cancellations, etc. in Washington, Georgia, Louisiana, Oregon, Nevada and California. This company is ExpressLien (www.expresslien.com), and liens are $295.00 each.
Links:
I am a construction attorney practicing in the northeast so I am not familiar with the laws of the North Carolina (I'm assuming the project is located near you), but I would strongly recommend that your reach out to an attorney who concentrates his/her practice in construction law. I have seen too many mechanic's liens invalidated by the courts up here because of really petty technical inaccuracies or omissions. For reasons that don't make sense to me, some attorneys that know nothing about construction or real estate law seems perfectly comfortable in taking a stab at filing a mechanic's lien without any real knowledge of the particular requirements. An attorney who knows those details and files mechanic's liens on a regular basis will provide you with the necessary guidance. Also, absent really complicated facts, the attorneys fees involved shouldn't be too much.
Good luck.
Geoffrey B.
Attorney at Law
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The advice to consult a knowledgeable attorney in your jurisdiction is sound, and I would second it.
Based only on my knowledge of California law, it does not appear to me that the contractor's bankruptcy filing would directly bar you from purporting to record a lien against the customer's property, although the bankruptcy court might take a dim view of it if the trustee is attempting to collect the same money on behalf of the bankruptcy estate.
In any case, the validity of such a lien may be in doubt. It appears that the end user (property owner) was in a contractual relationship with the contractor, but that your company is a stranger to that contract. Thus, it's not obvious what basis you have to assert a lien against the customer. You had a separate contract with the contractor to sell HVAC equipment to the contractor, but the contract between your company and the contractor probably does not give rise to lien rights in the absence of some kind of security instrument identifying the goods you sold to the contractor. Your company is therefore, I would assume, an unsecured creditor of the contractor in the bankruptcy case. The contractor presumably has the right to collect payment for the HVAC equipment installed at the customer's property, and the right to file a mechanic's lien against that property to secure payment. The customer will not have to pay twice, and the lien by the contractor will almost certainly be much more enforceable than any lien you would file. Again, because your company is presumably not in any contractual relationship with the property owner, any lien your company purported to file may be of no merit. There also may be legal consequences to filing a nonmeritorious lien against someone's property, and you should understand those consequences before moving forward.
All of this only underscores the value of getting some competent legal advice from an attorney in your jurisdiction who has experience in these matters. I am not familiar with North Carolina law, and there may be other factors and issues that would affect your decision.
Good luck.
Matthew D.
Real Estate and Business Attorney, Thomsen & Nybeck, P.A.
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I am a Minnesota attorney practicing in the areas of real estate, construction and creditor's remedies, so I see this kind of situation often. Although most states have mechanic's lien laws, they differ widely, so I cannot speak to the particulars of North Carolina law on the subject. Your situation is likely to involve some of the following considerations, however:
1. Your company may not have a right to record a mechanic's lien against the subject property unless the company provided a "pre-lien" notice to the owner, or the property is commercial. In Minnesota, when a sub-contractor or material supplier provides labor or materials for use in the improvement of property that sub or supplier can file a lien ONLY IF it provides a pre-lien notice to the property owner within 45 days of the first date it provided its service or materials. The pre-lien notice is to be delivered to the property owner by personal service or by certified mail. This is NOT something that you can provide with a two-sentence letter; there is very specific statutory language that must be used and it must be a particular size font, and/or in all capitalized letters. A failure to have the proper size type in your pre-lien notice can invalidate your lien. There is an exception in Minnesota, however, and the pre-lien notice is not required, as long as the property is commercial (not residential or agricultural) and it meets certain size requirements. I would expect North Carolina law to have similar provisions, but of course I cannot say for sure.
2. If your company is entitled to a lien, the lien probably will have to be recorded within a certain number of days from the last date that the equipment was delivered to the property. In Minnesota, a sub-contractor or supplier would have 120 days from the last item of work or material contribution to the improvement. Again, North Carolina timelines may be different, but I would expect you to have a limited amount of time to act to record a valid lien.
3. There are services which can assist with preparing pre-lien notices and lien documents, and of course it would be best to hire an attorney who knows this area of the law to assist you, but if you do try to record the lien yourself, there should be forms available for you to use. The devil is in the details, though, and the lien itself must contain certain information. Also, it must not only be recorded in the real property records, but it must also be served on the property owner either by personal service or by certified mail.
4. Even if a lien is authorized in your circumstances and is properly recorded, Minnesota law would require that the lienholder commence litigation to determine the priority of the lien and the ability to foreclose the lien within one year of the date of the last item of contribution. Once again, NC law is likely to be somewhat different, but the policy ensuring that lien rights are promptly adjudicated or voided is a sound one, and I would expect NC law to contain something similar. You're definitely going to need a qualified attorney to assist you with this step, even if you were able to navigate the above procedures on your own.
5. It would be best to involve a competent attorney at the earliest step. As one of the other answers already says, it shouldn't cost you too much to find out if you're dead in the water on this issue. Also, if you do have the opportunity to prusue your lien rights you will probably be entitled to recover your attorneys' fees (at least, you can in Minnesota).
I hope this helps you understand the process, so you can decide whether your company is entitled to a lien. Hopefully, even if you can't file a lien in this case you have an idea of what may be necessary in future situations.
-Matt D.
John F.
Consulting Software Technologist / Attorney
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Without more to the story, I can't imagine how you would be entitled to a lien. Consider a somewhat "folksy" analogy: you and your husband own a home and have ABC Cooling put in a new 4 ton unit; you pay ABC, and everything is wonderful until along comes NC Wholesale Refrigeration trying to slap a lien on your equipment on the grounds that ABC never paid them for them for the unit. Think NC can do this?
My guess is that you have a claim in bankruptcy against the contractor but that's about it. However, as others have suggested, you should consult a local attorney experienced in this kind of matter. And you should do so even if you conclude that you'll never recover a dime on this equipment. Like any business which regularly extends credit to trade customers, you should have a well-implemented process in place which minimizes your exposure.
Good luck.
First, when dealing with a bankruptcy issue, I would recommend that you consult with a local law firm that specializes in creditor's rights. Upon the filing of a bankruptcy, an "automatic stay" goes into effect. This automatic stay prevents you, or any other creditor from attempting to perfect a lien, or collect a debt that is owed by the party who filed, or any co-debtor.
Given the fact that you contracted with the contractor, not the property owner; the contractor is the party that is legally obligated to you. Therefore, your attempt to collect could be viewed by the Bankruptcy Court as a violation of the automatic stay.
In a similar situation, I had a client who had a judgment lien against property owned by one party while the judgment was against a prior owner who later filed bankruptcy. Being on the safe side, I moved for relief from the stay, which was allowed since the property was not part of the bankruptcy estate. Even if it was not required, it ensured that my client was protected from sanctions.
Since every district interpenetrates the bankruptcy code a little differently, an experienced bankruptcy lawyer in your area will be able to advise you if you should file a proof of claim, or seek relief from the automatic stay.
However, no matter what, you should not seek recourse against the land owner, or any other party without speaking with a bankruptcy attorney first; it could end up costing you a lot more money.
David L.
Financial Services and Bankruptcy Attorney - Chicago, Illinois and Wisconsin
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You cannot pursue a claim against the bankrupt entity. However, if mechanic's lien law in your state allows you to maintain a claim against the end user, there is no prohibition in pursuing such rights. The automatic stay provided in the Bankruptcy Code only prohibits actions against the debtor (the bankrupt company). See generally 11 USC section 362.
Mechanic's lien laws are very technical, so get help from an attorney in the state where the property is located who specializes in these matters or at least who is competent in the area.
Clarification added July 20, 2008:
You should definitely, however, file a proof of claim against the bankrupt contractor. In this way, you may participate in the estate if there is any dividend.
