A mechanic’s lien filed by a supplier after the contractor filed a chapter 11 petition was void for violating the automatic stay, according to the Third Circuit’s interpretation of New Jersey law.
The result would be different, and the lien would be valid, if state law provided for the lien to relate back to the beginning of the work, the circuit said.
A supplier provided goods to an electrical contractor on a construction job. Two weeks after the contactor filed a chapter 11 petition, the supplier filed a mechanic’s lien, now called a construction lien under New Jersey law.
The contractor filed a motion to declare that the lien was invalid as a consequence of violating the automatic stay under Section 362. The supplier contended that the lien was an encumbrance on the owner’s property and thus did not violate the stay.
The bankruptcy court found a stay violation and voided the lien. In the absence of a stay pending appeal, the owner paid the contractor what it was owed. The district court upheld the bankruptcy court.
In an opinion on March 30 written by Circuit Judge Jane R. Roth, the appeals court agreed that the lien was invalid.
The pivotal factor was Judge Roth’s interpretation of New Jersey lien law. She concluded that the lien would allow the supplier to recover against the account receivable owing to the contractor from the owner and, thus, was a lien against the debtor’s property. The conclusion therefore followed that the filing of the lien was void as a violation of the automatic stay.
Judge Roth said that In re Yobe Electric Inc., 728 F.2d 207 (3d Cir. 1984), was not to the contrary. There, the case turned on Pennsylvania law, where the filing of a mechanic’s lien relates back to the date when the work began. Consequently, there was no stay violation in Yobe because the work began before the contractor’s bankruptcy.
In short, Judge Roth said that “Pennsylvania liens relate back, and New Jersey liens do not.”
Invalidating the lien, Judge Roth said, was consistent with “numerous cases from other courts,” including the Ninth Circuit.
Judge Roth rejected the supplier’s argument that the bankruptcy court, an Article I tribunal, did not have constitutional power to rule on the validity of a lien arising under state law. She said that the debtor’s motion was based on federal bankruptcy law and thus entailed issues of public rights where the bankruptcy court has adjudicatory power.