Contractor’s liens on projects that go bankrupt in Washington

Contractors, engineers, architects, suppliers and other construction businesses face a potentially bad situation when the owners of a project they were working for go bankrupt. In the State of Washington, these people generally have a right to file a lien upon the property to secure payment for the services or materials they provided to improve the property.

But what to do if the owner goes bankrupt before the construction provider was able to establish a lien?

In bankruptcy, the general rule is that a creditor cannot do anything to further a claim against the entity going bankrupt during the period of the “automatic stay.” Section 362 of the bankruptcy code imposes this automatic stay, “applicable to all entities,” upon filing of a bankruptcy petition. In most cases, a creditor must file a motion with the bankruptcy court requesting “relief from stay,” and the request must be supported by facts showing specific reasons why the creditor should be able to get such relief ahead of other creditors.

But section 362 provides exceptions. 362(b) allows an exception for:

any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this title or to the extent that such act is accomplished within the period provided under section 547(e)(2)(A) of this title.

OK, maybe that is not helpful yet. Looking at section 546(b) we see that the powers of a trustee

are subject to any generally applicable law that—(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection. . . . such interest in such property shall be perfected, or perfection of such interest shall be maintained or continued, by giving notice with the time fixed by such law for such seizure or such commencement.

Putting 362(b) and 546(b) together, we see that the automatic stay does not apply to perfecting an interest against property if there is a general law allowing it.

Washington has such a law, RCW 60.04, which allows contractors and suppliers to place a lien upon property that they have worked on or provided supplies to. The statute has specific requirements that I won’t go into here, but generally, you must record your lien (called generally a “mechanic’s lien”) in the county of the property within 90 days of completion of services. (Note, there are other wrinkles for property owned by someone for whom you did not contract with—I am simplifying things).

After recording, in order to maintain your claim, you generally must file a lawsuit on the claim within 8 months of recording. In Washington, this period is tolled during a bankruptcy.

Keep in mind that the automatic stay prohibits you from filing a lawsuit to enforce your lien rights. But the bankruptcy code allows you to record your claim of lien in the 90 day period. And section 546(b) requires that you give notice in the bankruptcy court during the 8 month period after recording.

Summary: If you are a contractor who has not been paid for work on a project that has gone bankrupt, consider whether you have time to record a lien for your work or supplies. Once you have done that, be sure to file with the bankruptcy court a notice that you intend to pursue your claim. It also is a good idea to request the court to provide you special notice of all proceedings so that you can determine when the case is finished. It would be a shame for you to go to this trouble and find that the case was dismissed without you knowing, and the 8 month period for enforcement has lapsed.

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