Third Circuit Holds That Post-Petition Filing Of NJ Construction Lien Violates The Automatic Stay

On March 30, the Third Circuit Court of Appeals filed an opinion regarding whether the filing of a mechanic's lien after the commencement of a bankruptcy case violates the automatic stay. Given the frequent involvement of many companies in Delaware bankruptcy cases, you should be aware of the Third Circuit's ruling.

The Third Circuit case, In re Linear Electric Company, Inc., concerns the relationship between New Jersey construction lien law and federal bankruptcy law. Under New Jersey law, any contractor, subcontractor, or supplier who provides work, services, material, or equipment pursuant to a contract is entitled to a lien for the value of the work or services performed or materials or equipment furnished, in accordance with the contract, based upon the contract price. Linear Electric was a contractor to whom two suppliers, Cooper Electrical Supply Co. and Samson Electrical Supply Co., Inc., sold electrical materials that Linear Electric incorporated into several construction projects. On July 1, 2015, Linear Electric filed a petition in bankruptcy under chapter 11 of the United States Bankruptcy Code. As of that date, Linear Electric had not fully paid Cooper and Samson. On July 15, 2015, Cooper and Samson filed construction liens on the developments into which Linear Electric had incorporated the electrical materials supplied by Cooper and Samson. Linear Electric moved to vacate the lien filings as having violated the automatic stay of the Bankruptcy Code, which stays, among other things, any act to create, perfect, or enforce any lien against property of the estate. The bankruptcy court granted the motion, holding the liens to be void ab initio for violation of the automatic stay. On appeal, the district court affirmed, and the Third Circuit also affirmed.

The Bankruptcy Code provides an exception to the stay of the filing of liens. Specifically, section 363(b)(3) of the Code provides that the filing of a petition in bankruptcy does not stay any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee's or debtor-in-possession's rights and powers are subject to such perfection under section 546(b) of the Code. Section 546(b)(1) in turn provides that the rights of a trustee or debtor-in-possession to avoid a lien 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...

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