BAP Rules that Tolling in Section 108(c) Does Not Apply to Notices Under Section 546(b)

Sections 108(c) and 546(b) both give slack to creditors when the automatic stay prohibits taking action after bankruptcy that is required to perfect or maintain a claim against the debtor.

The Ninth Circuit Bankruptcy Appellate Panel held that the extension of time for filing a complaint under Section 108(c) does not extend the time for giving notice to enforce a mechanic’s lien under Section 546(b).

The Mechanic’s Lien Filings

The owner of a shopping center had a contract for a contractor to perform $1.8 million in tenant improvements. When the owner didn’t pay, the contractor filed a timely mechanic’s lien under California law.

To preserve the enforceability of a mechanic’s lien, California law requires commencement of a foreclosure action within 90 days after recording the lien. If foreclosure is not begun on time, state law declares that the lien expires and is unenforceable.

The owner pleaded with the contractor not to commence foreclosure, fearing it would wreck a planned refinancing. The owner promised to pay the contractor from refinancing proceeds. Evidently, the contractor reasonably relied on the owner’s promises.

For the next 18 months, the owner continued making the same plea with the contractor. Over that span of time, the contractor rerecorded the mechanic’s lien five times.

The last rerecording of the mechanic’s lien occurred on December 19, 2019. The owner filed a chapter 11 petition on January 11, 2020. On April 29, 2020, the contractor filed a notice of perfection of the mechanic’s lien under Section 546(b).

In chapter 11, the owner filed a motion to sell the property. In the sale motion, the debtor for the first time took the position that the mechanic’s lien was invalid and unenforceable. The bankruptcy court authorized the sale of the property, with sufficient proceeds held in escrow to pay the mechanic’s lien in full if it were found valid.

The contractor commenced an adversary proceeding to declare that the mechanic’s lien was valid. Bankruptcy Judge Ernest M. Robles granted the debtor’s motion to dismiss for failure to state a claim. He reasoned that the contractor had not moved to enforce the lien within the time required by California law.

The BAP Affirms Under Section 546(b)

For the BAP, Bankruptcy Judge William J. Lafferty affirmed in an opinion on November 23. Even if the last rerecording was effective on December 19, he ruled that the contractor’s April 29 notice under Section 546(b) was not timely. He rejected the idea that the time for notice under Section 546(b) was tolled by Section 108(c).

Judge Lafferty summarized Section 546(b) as follows:

In other words, if commencement of an action is required to perfect, or to maintain or continue perfection of an interest in property, and that action has not been commenced pre-petition, the claimant may perfect or maintain or continue perfection, i.e., preserve the enforceability of its perfected lien, “by giving notice within the time fixed by such law for such seizure or such commencement.”

In the case on appeal, the contractor had rerecorded the lien for the last time on December 19. Under California law, the 90-day window for commencing a foreclosure action closed on March 18, but the contractor did not file the Section 546(b) notice until April 29, more than a month too late.

The expiration of the state deadline, Judge Lafferty said, was “fatal” to the contractor’s argument.

However, the contractor contended that Section 108(c) tolled the time for giving notice under Section 546(b). If nonbankruptcy law fixes a time for commencing an action, Judge Lafferty said that the section “suspends the time for commencing a civil action in a non-bankruptcy court so long as that time has not expired pre-petition.”

When the automatic stay prohibits filing a lawsuit, Judge Lafferty said that Section 108(c) ordinarily “operates to toll the expiration of the period for doing so.”

“But where the Bankruptcy Code provides an alternative to filing a civil action, as it does under § 546(b),” Judge Lafferty held that “neither § 362(a) nor § 108(c) are applicable.”

Judge Lafferty said it “would make no sense” for Section 108(c) to toll the deadline in Section 546(b). If there were a tolling, he said, “the lienholder could simply wait for the automatic stay to terminate and then file its foreclosure action within 30 days . . . . Accordingly, such an interpretation would render § 546(b) meaningless.”

Judge Lafferty affirmed the bankruptcy court and held that “§ 108(c) is inapplicable to the time for giving notice under § 546(b).”

Promissory Estoppel

The contractor argued that promissory estoppel barred the debtor from contending after bankruptcy that the lien refilings were untimely because the debtor had pleaded with the contractor for 18 months to hold off foreclosing.

Judge Lafferty did not reach the question of equitable estoppel because the BAP upheld the bankruptcy court under Section 546(b). He nonetheless was “skeptical that the complaint contained allegations sufficient to support the application of equitable estoppel or that any additional or alternative allegations would have done so.”

In dicta, Judge Lafferty gave three reasons why the contractor could not invoke equitable estoppel.

1. Equitable estoppel does not arise from a promise not to assert a known legal right.
2. Equitable estoppel does not “necessarily” arise from a promise to perform an act in the future; and
3. On filing in chapter 11, the owner became a fiduciary with a duty to maximize the recovery for all creditors.

Caution

The BAP’s holding may not apply in all states. The opinion turned on the intricacies of California law where commencement of a foreclosure action was required to maintain the enforceability of a mechanic’s lien.