Appeals Court Upholds Voiding of New Jersey Construction Lien Claims

If you are a creditor in a construction contractor's Chapter 11 bankruptcy proceeding you better seek relief from the automatic stay of the bankruptcy proceeding before attempting to file a lien claim under New Jersey's Construction Lien Law.

This is the import of the Third Circuit's recent decision affirming the District Court's ruling that invalidated two construction liens totaling in excess of $1 million dollars filed against a project owner's property on the basis of violating the automatic stay of the general contractor's bankruptcy case. In re Linear Electric Company, Inc., Case No. 16-1477 (3d Cir. March 30, 2017). As a result of the Third Circuit's decision the lien claimants are now reduced to the status of unsecured creditors in the Chapter 11 bankruptcy case.

"The question this case presents is whether a supplier can file a construction lien under New Jerey law when the contractor has filed a petition for bankruptcy, which automatically stays any act to create or perfect any lien against the contractor's property," the Third Circuit noted.

The Third Circuit agreed with the lower courts' determination that the lien claims were created to collect an account receivable belonging to the debtor's bankruptcy estate. Because the liens were created to recover property of the bankruptcy estate the suppliers were required to obtain relief from the automatic stay of the contractor's bankruptcy case, the Third Circuit held. Because they failed to do so their lien claims the Third Circuit upheld the Bankruptcy Court's decision to discharge the construction lien claims. The Third Circuit rejected the argument advanced by the appellant suppliers that the automatic stay did not apply because their lien claims attached against properties belonging to third party owners:

"The District Court set out in its opinion how, under New Jersey law, the value of the liens depended on the amount that the contractor owed to the suppliers under their contracts and on the value of the contractor's accounts receivable. The District Court then affirmed the Bankruptcy Court's conclusion that the accounts receivable were part of the bankruptcy estate because they complied with the definition of property of the estate under 11 U.S.C. ยง 541 and because the ability of a supplier to create a construction lien depended on the existence of the bankrupt contractor's accounts receivable. For that reason, the Bankruptcy Court held that the automatic stay prevented filing the liens. District Court affirmed We agree and will also affirm."

Opinion, pp. 3-4.

Read the Third Circuit's reported decision.

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