Summary:
In In re Mammoth Grading, Inc., No. 09-01286-8-ATS (Bankr. E.D.N.C. July 31, 2009), the bankruptcy court stated “[a]fter a thorough analysis of the legal arguments set forth by the parties in both this case and in Harrelson Utilities, the court in an order entered in the Harrelson case on July 30, 2009, held that serving a notice of claim of lien on funds due to the debtor postpetition violates the automatic stay under § 362(a)(4) of the Bankruptcy Code.” Both the Harrelson Utilities and Mammoth Grading cases were appealed, but Harrelson Utilities settled and was dismissed and Mammoth Grading was then dismissed as moot. In dismissing Mammoth Grading, the district court did, however, express concern that the rulings in Mammoth Grading and Harrelson Utilities had “turned the construction industry’s standard operating procedure on its head.”
This case presents the very issue addressed in the Harrelson Utilities and Mammoth Grading cases and while the District Court’s comments were dicta, the Bankruptcy Court felt is judicious to revisit the issue.
To fit within § 362(b)(3)’s exception to the automatic stay, the following three elements must
be present:
(1) an ‘act to perfect’;
(2) an ‘interest in property’; and
(3) a statute authorizing perfection in accordance with section 546(b)(1)(A).
Only the second element is determinative in this case. As § 362(b)(3) and §546(b) both refer to ‘an interest in property,’ a phrase that encompasses more than a ‘lien’, the court must determine “what interest the creditor had in property before the petition was filed and the effect of that interest on a
hypothetical purchaser who might have purchased the property before the creditor’s ‘interest was fully perfected and enforceable by virtue of a statutory lien.’” In re Harrelson Utilities, Inc., 2009 WL 2382570 at * 2 (Bankr. E.D.N.C. July 30, 2009) (citing Maryland Nat’l Bank v. Mayor of Baltimore (In re Maryland GlassCorp.) 723 F.2d 1138, 1141-42 (4th Cir. 1983)). The plain and clear statutory language of N.C.G.S. § 44A-18 explicitly provides that the lien on funds is granted upon the furnishing of materials, labor or rental equipment and the subcontractor is granted and
entitled immediately to the absolute right to an interest in the property (i.e. funds) which serve as
collateral for the lien. Although the lien is not yet perfected, the subcontractor still has the right to the benefit of a lien on funds, (i.e. the contractor’s right to payment), and must then proceed to perfect pursuant to N.C.G.S. § 44A-18(6) in order to be given superpriority status. Accordingly, “[n]o longer will North Carolina subcontractors be deprived of their statutorily created and granted lien on funds” and Debtors be allowed to pay other creditors with “the ‘blood, sweat and tears’ of its subcontractors.”
For a copy of the opinion, please see:
Construction Supervision Services - Statutory Claim of Lien on Funds Are Excepted from the Automatic Stay nder 11 U.S.C. § 362 (b)(3).pdf
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