A recent ruling in the United States District Court for the District of New Jersey has significantly altered the legal landscape for filing Construction Liens in New Jersey.[1] The Court in Cooper Elec. Supply Co. v. Linear Elec. Co., affirmed a bankruptcy court’s decision holding that a construction lien filed after a debtor had filed for bankruptcy was void ab initio because it violated the automatic stay provision of 11 U.S.C. § 362, which provides for a stay on any “act or to create, perfect, or enforce any lien against property of the [debtor’s] estate.” No. CV 15-06429 (SDW), 2016 WL 781770 (D.N.J. Feb. 29, 2016); 11 U.S.C. § 362. Central to the Court’s reasoning was its expansive reading of the property of the debtor’s “estate,” as defined in 11 U.S.C. § 362, to include accounts receivable. This expansive reading made way for the Court to conclude that the accounts receivable underlying the “Appellants’ construction liens were [property] of the estate” and thus fell “squarely within the broad prohibitions of the automatic stay provisions.” Id. at *3. An appeal to the United States Court of Appeals for the Third Circuit was filed on March 8, 2016.
The New Jersey Court’s novel approach stands in stark contrast to the Construction Lien Laws in New York. Just across the river, the courts in New York hold that the automatic stay provisions of 11 U.S.C. § 362 are inapplicable to a timely filed mechanic’s lien even if the lien was filed after a debtor filed for bankruptcy. Two separate rationales provide for this result.
First, in New York, the property of the debtor’s estate does not extend to construction accounts receivable which New York courts find are statutorily created lien law trust funds and not debtor property. In re Midway, Inc., 166 B.R. 585, 591 (Bankr. D.N.J. 1994) (“Moreover, [in New York], persons having claims for which the trustee is authorized to use trust assets are deemed beneficiaries whether or not they have filed a notice of lien.”); Aquilino v. United States, 10 N.Y.2d 271, 277, 176 N.E.2d 826 (1961) (Subcontractors and statutory beneficiaries are permitted to enforce their interest in the trust regardless of whether they perfect it by filing a notice of lien)
Second, the courts in New York apply a relation-back doctrine which permits mechanic’s lienors to perfect liens notwithstanding intervention of Chapter 11 petitions where the lienor provided supplies or services prior to the filing of bankruptcy. See Denoyelles Co. v. Requa Elec. Supply Co., 155 Misc. 2d 451, 452, 588 N.Y.S.2d 753, 754 (Sup. Ct.. Monroe County 1992) (“Further, it is clearly established that 11 U.S.C. Sec. 362(b)(3) provides for an exception to the stay provisions where, as in New York, the lien relates back to the date of the underlying debt’s creation.”); Matter of Fiorillo & Co., 19 B.R. 21 (Bankr. S.D.N.Y. 1982) (mechanic’s lienors can perfect liens notwithstanding intervention of Chapter 11 petition); In re LoPriore, 115 B.R. 462, 463 (Bankr. S.D.N.Y. 1990) (the automatic stay imposed under 11 U.S.C. § 362(a) does not preclude lienors from perfecting liens after a debtor has filed for bankruptcy).
For material suppliers in New Jersey, the implications of the Cooper decision are serious. Material suppliers who sleep on their lien rights risk forfeiting the protections of the state’s Construction Lien Laws and are in danger of becoming unsecured creditors in the debtor’s bankruptcy proceeding. If a material supplier has questions about the solvency of a business to which it provides services or materials, the supplier must keep in mind this new change and should be wary when providing materials in the Garden State. We await with interest the Third Circuit decision in the Cooper case.
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[1] Construction Liens are also frequently and interchangeably referred to as Mechanic’s Liens or Materialman’s Liens.
