4th Circuit shores up subcontractors’ positions on post-petition liens

Ignoring a trio of decisions from the U.S. Bankruptcy Court for the Eastern District of North Carolina that strayed from the industry standard, the 4^th U.S. Circuit Court of Appeals recently found that North Carolina law does allow subcontractors and suppliers to perfect their liens after a debtor has filed for bankruptcy.

The case, Branch Banking & Trust Co. v. Construction Supervision Services, Inc., raised the question of when construction subcontractors’ interest in property — and therefore entitlement to a lien — arises. The court found that time to be upon delivery of any materials and equipment.

Appellant BB&T had loaned CSS, a full-service construction company that filed for bankruptcy in January 2012, more than $1 million. The bank alleged that subcontractors lacked an interest in property because their liens on funds were not perfected when CSS filed for Chapter 11. To bolster its case, BB&T cited three 2009 district court opinions stating that lien claimants that had not served claim notices by the filing of the bankruptcy petition had no property interest.

The bankruptcy court disagreed, however, as did later the district and appeals court.

Generally, after filing for bankruptcy, debtors are provided an automatic stay on any attempt by creditors to collect on their claims. As stated by appeals court Judge James A. Wynn in the published opinion, “the stay protects the bankruptcy estate from dismemberment via a creditor race to the courthouse … avoiding a chaotic and uncontrolled scramble for the debtor’s assets.”

There are exceptions, however, including Section 362(b)(3) which addresses those with an interest in property predating the bankruptcy petition, but unperfected at the time of filing. The court found that the appellees here fit into this category.

Attorney Ethan Fleischer of Bugg & Wolf in Durham represented several subcontractors and suppliers in the BB&T case and said that in his experience, it was common practice for subcontractors and suppliers to serve and file post-petition liens before the three cases “called it into question,” but that this ruling adds clarity.

“The North Carolina lien law has been amended to actually effectively provide for what the 4^th Circuit did,” he said.

The North Carolina Constitution mandates “proper legislation for giving to mechanics and laborers an adequate lien on the subject-matter of their labor.” That legislation is codified in Chapter 44A of the state’s statutes.

The amendment Fleischer spoke of was made in 2013 while this case was on appeal. Section 44A-18(f) now reads, “A lien upon funds granted under this section arises, attaches, and is effective immediately upon the first furnishing of labor, materials, or rental equipment at the site of the improvement by a subcontractor. Any lien upon funds granted under this section is perfected upon the giving of notice of claim of lien upon funds in writing to the obligor as provided in G.S. 44A-19.”

In its initial ruling, the bankruptcy court referenced policy objectives from the North Carolina Supreme Court, referencing a lien’s intent: to foster a construction industry that operates largely on credit. “An adequate lien is necessary to encourage responsible extensions of credit, which are necessary to the health of the construction industry.”

Wynn said the legislature’s amendment, while not controlling, was instructive. And the intent of those amendments, he said, is to correct misinterpretations or overrule wrongly decided cases.

“With its clarifying amendment, the North Carolina legislature expressly sought to correct what it clearly viewed to be misinterpretations of state law,” Wynn wrote.

The 19-page decision is Branch Banking & Trust v. Construction Supervision Services Inc. (Lawyers Weekly No. 14-01-0495). A digest of the opinion is available online at nclawyersweekly.com.

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