Thursday, 22 March 2012

New bankruptcy court ruling strengthens lien rights for NC subcontractors and suppliers

Guest editorial from the NC law firm of Smith Debnam Narron Drake Saintsing & Myers, LLP.

Our firm’s recent article, posted on the North Carolina Construction News website, discussed the ruling questioning the 2009 decisions of the United States Bankruptcy Court for the Eastern District of North Carolina in In re Harrelson Utilities, Inc. No. 09-028158 (E.D.N.C. Bankr. July 30, 2009) (“Harrelson”), and In re Mammoth Grading, Inc., No. 09-01286-8 (E.D.N.C. Bankr. Aug. 24, 2009) (Mammoth”). Those rulings held that post-bankruptcy petition liens filed by Ferguson Enterprises Inc. of Virginia (“Ferguson”) and other subcontractors and suppliers to Mammoth and Harrelson violated the automatic stay imposed by 11 U.S.C. § 362.

Prior to Mammoth and Harrelson, it was generally accepted practice that the filing and service of post-bankruptcy petition claims of lien and claims of lien on funds were not a violation of the automatic stay and were freely allowed without seeking relief from the automatic stay. Ferguson, along with four other subcontractors, appealed the Bankruptcy Court’s orders in both cases to the United States District Court. On August 26, 2010, the United States District Court consolidated the Harrelson and Mammoth appeals.

The District Court’s Ruling in Mammoth

As discussed in our previous article, U.S. District Court Judge Malcolm Howard issued an order granting Mammoth’s Motion to Dismiss Ferguson’s appeal on February 23, 2012. However, in doing so, Judge Howard raised concerns about the Bankruptcy Court’s rulings in Mammoth and Harrelson. Judge Howard commented that the Bankruptcy Court’s rulings in Mammoth and Harrelson have, “turned the construction industry’s standard operating procedure on its head ,” and questioned if the Bankruptcy Court’s rulings prohibiting the post-petition filing of claims of lien and notices claims of lien on funds violated North Carolina’s Constitution and statutory lien law. Judge Howard vacated the Mammoth ruling and remanded the case to the Bankruptcy Court for further proceedings.

The Latest Ruling: Construction Supervision Services

The most recent ruling to impact the rights of lien claimants came from the Honorable Randy D. Doub in In Re Construction Supervision Services, Inc., (E.D.N.C. Bankr. March 14, 2012) (“CSSI”). CSSI, like Mammoth and Harrelson, involved a general contractor/subcontractor seeking Chapter 11 bankruptcy protection from its creditors. Many of CSSI’s creditors were material suppliers and subcontractors that prior to the rulings in Mammoth and Harrelson would have been able to protect their rights to payment with the filing of post-petition claims of lien and claims of lien on funds.

Several of these creditor suppliers filed emergency motions for relief from stay seeking the Bankruptcy Court’s permission to file and serve liens on funds in the hands of CSSI. The movants believed that CSSI was attempting to use money that would have normally been used to pay secured subcontractor/supplier lien claims to fund a portion of its reorganization plan.

Bankruptcy Judge Doub ruled that based on the instructive guidance from the United States District Court in its order resolving the Mammoth appeal and his own detailed analysis ofNorth Carolina lien law and the Bankruptcy Code:
  • subcontractors and suppliers have the right to file post-petition liens, and that doing so is not a violation of the automatic stay imposed by 11 U.S.C. § 362.; and
  • suppliers and subcontractors are not required to make a motion seeking relief from the automatic stay before filing such liens.
Immediate Impact for North Carolina Lien Claimants

While the ruling in Harrelson may still be considered “good law” as one bankruptcy court judge cannot overrule another, it is fairly clear that the Eastern District Bankruptcy Court recognizes that Harrelson and Mammoth were based on flawed reasoning and were in contradiction to the intent and meaning of Chapter 44A of the North Carolina General Statutes. Pending any appeal of Judge Doub’s CSSI decision, suppliers and subcontractors may once again protect their lien rights with the filing of post-petition liens in the Eastern District of North Carolina without the worry of facing penalties for violating the automatic stay of the Bankruptcy Code. Read More.

Byron L. Saintsing is a partner and John M. Sperati is an associate with the NC law firm of Smith Debnam Narron Drake Saintsing & Myers, LLP. Both concentrate their practices in construction law.

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