Promptly file payment bond and mechanic’s lien rights

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by Jackson B. Boyd, Ober Kaler, Attorneys at Law

There are many reasons why a party to a construction project should promptly file a payment bond claim or a mechanic’s lien claim when those rights mature. The U.S. Court of Appeals for the Fourth Circuit recently emphasized this point in the bankruptcy context. In United Rentals, Inc. v. Angell, No. 09-1209 (Jan. 22, 2010), the Fourth Circuit upheld a bankruptcy court judgment allowing a bankruptcy trustee to avoid and recover $66,963.74 as preferential payments made by Partitions Plus of Wilmington, Inc. (“Partitions”) to United Rentals, Inc. (“United”) during the 90 days prior to Partitions’ bankruptcy petition.

At issue was United’s failure to make a payment bond or mechanic’s lien claim prior to receiving Partitions’ payments, which the Fourth Circuit determined was fatal to United’s argument that the payments were contemporaneous exchanges for new value because they extinguished United’s right to enforce its claims.

As background, United had subcontracted with Partitions to supply rental equipment for multiple construction projects, and Partitions had executed payment and performance bonds for several of those projects. Partitions then filed a Chapter 11 bankruptcy petition that was converted to a Chapter 7 proceeding. However, in the 90-day period prior to its bankruptcy filing, Partitions made three payments (the “transfers”) to United for amounts owed for United’s prior provision of rental equipment.

The bankruptcy trustee sought to avoid and recover the transfers as preferential payments under 11 U.S.C.A. § 547(b), arguing that the transfers were made (1) for the benefit of United, (2) on account of antecedent debts owed by Partitions before the transfers were made, (3) while Partitions was insolvent, (4) within 90 days before Partitions filed its bankruptcy petition, and (5) to enable United to receive more than it would have received from Partitions’ Chapter 7 bankruptcy on the debt the transfers extinguished if the transfers had not been made….

…While the Fourth Circuit’s decision reviewed lien rights under North Carolina law and the nuances of these rights vary from state to state, the decision is nevertheless an important reminder that parties to a construction project should consider enforcing their bond and lien rights as soon as they mature.

Had United filed a claim on the payment bond or sought to enforce a mechanic’s lien before the transfers were made, United may have obtained a security interest that it could have released in exchange for the transfers from Partitions during the 90-day preference period. This contemporaneous exchange for new value, in turn, may have enabled United to defeat the bankruptcy trustee’s preferential payment action instead of refunding almost $67,000 to the trustee.

Click Here to view the entire June 4 article published on Lexology.com.

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