When Your General Contractor Files Bankruptcy

by Pepper Hamilton LLP

This article was published in Law360 on October 16, 2014. © Copyright 2014, Portfolio Media, Inc., publisher of Law360. It is reprinted here with permission.

The case is Branch Banking & Trust Co. v. Construction Supervision Services Inc. (In re Construction Supervision Services Inc.), 753 F.3d 124 (4th Cir. 2014). After a general contractor filed bankruptcy, several of its subcontractors requested clarification from the court about whether they could file notices post-petition to perfect liens for construction materials and equipment supplied prepetition. The bankruptcy court agreed that they could, the district court affirmed, and a lender appealed to the Fourth Circuit.

Generally if a lien is unperfected on the date that a bankruptcy petition is filed, (1) the automatic stay prevents the creditor from perfecting post-petition, and (2) the unperfected lien can be avoided using the trustee’s “strong arm” powers.

However, Section 362(b)(3) of the Bankruptcy Code contains an exception from the automatic stay 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 limits 546(b) ...” (emphasis added). Section 546(b) limits a trustee’s powers when applicable laws permit perfection of “an interest in property to be effective against an entity that acquires rights in such property before the date of perfection” (emphasis added).

The court and the parties agreed that applicable law allowed retroactive perfection, so the appeal turned on whether the subcontractors had “an interest in property” on the bankruptcy petition date. Since “interest in property” is not defined in the Bankruptcy Code, the Fourth Circuit looked to the “plain language” and quoted definitions from Black’s Law Dictionary, American Heritage Dictionary and Oxford English Dictionary online. The court noted that it held in prior opinions that “interests” are broader than just “liens” and commented that other circuits have also drawn this distinction. In its view, this made sense because a lien is a mechanism for enforcement of preexisting rights.

In the context of the construction liens, state law provided remedies to subcontractors who furnished services and materials in connection with an improvement of real property, including the right to obtain a lien on funds owed to the general contractor arising from the improvements. As provided in the statute, the “liens upon funds granted under this section shall secure amounts earned by the lien claimant as a result of having furnished labor, materials, or rental equipment at the site of the improvement under the contract to improve real property, ... whether or not such amounts are due and whether or not performance or delivery is complete.”

Under the statute, the lien is granted by giving notice of the claim of lien and is effective upon receipt of the notice. However, a subcontractor is entitled to a lien upon delivery of the materials and equipment. As described in a state law treatise, the supplier has an inchoate lien that arises at the commencement of work that is preserved by providing notice. Upon perfection, the lien rights vest and relate back to the commencement of work.

There had been several previous bankruptcy court decisions that interpreted the state’s statute to mean that the notice of claim of lien both created the interest as well as perfecting the lien. This meant that subcontractors who had not given notice would not have an interest at the time the bankruptcy was filed, and thus would not have the benefit of Section 546(b) and the related exception from the automatic stay.

The statute was amended by the state Legislature in response to these decisions to clarify that the intent was that rights arose upon the delivery of materials, as opposed to only later when the notice is sent. Although the amendment was not applicable to the claims under consideration by the Fourth Circuit, it viewed this as relevant for interpreting the intended meaning of the statute.

In the end, the Fourth Circuit concluded that the subcontractors became entitled to a lien as soon as they furnished materials. Since the subcontractors delivered materials prior to the bankruptcy filing, they had an “interest in property” as of the petition date. Since the state statute provided that once the lien was perfected by giving notice it related back to the commencement of work, the subcontractor claims came within Section 946(b) and the automatic stay exception. The claims could not be avoided using the strong-arm powers and the subcontractors could provide the required notice of claim of lien post-petition based on the exception from the automatic stay.

There are many state-specific variations for construction liens. However, there is a common theme in many of the statutes that the priority of liens relates back to the commencement of work. Be aware that in these states, all is not lost when the general contractor files bankruptcy, and subcontractors may be able to perfect their construction liens post-petition.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.