Guest Editorial by Byron L. Saintsing and John Sperati, partners, Smith Debnam Narron Drake Saintsing & Myers, LLP.
On March 26, 2013, United States District Court Judge Terrance Boyle affirmed the ruling of United States Bankruptcy Judge Randy Doub by holding that a subcontractor’s or supplier’s service of a post-petition claim of lien upon funds under N.C.G.S. § 44A-18, does not violate the automatic stay provisions of the United States Bankruptcy Code.
At issue again was the application of Section 362(b)(3) of the Bankruptcy Code, which excepts from the automatic stay “any act to perfect or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)…”
Appellant Branch Banking and Trust (“BB&T”), argued that lien claimants who had not served their liens prior to the filing of a bankruptcy petition do not have an interest in property as described by §362(b) because compliance with N.C.G.S. § 44A-18 by actually serving the claim of lien on funds must take place before a property interest is actually created.
The lien claimants conversely argued that a lien claimant need only show that the materials provided were delivered to the site of the improvement prior to the bankruptcy being filed and having made such a showing they would be entitled to an opportunity to perfect their liens after the bankruptcy case had been filed. They further argued that a plain reading of the North Carolina statute supports the notion that the property interest arises at the time the first materials are furnished, not at the time the lien is served. Therefore “compliance with N.C.G.S. §44A-18 in the form of service of the notice before a property interest is actually created is not required.
The District Court agreed with the lien claimants and in its ruling stated that the policy objectives behind North Carolina’s lien laws were the protection of such liens by the North Carolina Constitution and to foster the health of the construction industry by offering security to suppliers who risk non-payment by extending labor and material to contractors and subcontractors on credit. See Electric Supply Co. of Durham, Inc. v. Swain Elec. Co., Inc., 328 N.C. 651,659 (1991) Judge Boyle affirmed the Bankruptcy Court’s determination that post-petition service of a North Carolina statutory claim of lien of lien upon funds and the right to assert by subrogation the lien rights of the contractor against the real property pursuant to N.C.G.S. §44A-23 are permitted exceptions to the automatic stay pursuant to 11 U.S.C. §362(b)(3).
Judge Boyle’s decision pertains to the version of §44A-18 that was in effect prior to the most recent amendments to the lien statutes earlier this year. Those amendments now make clear that a supplier’s or subcontractor’s “interest” in the project arises at the time they first begin furnishing labor or materials to the project. Judge Boyle’s decision, together with the recent amendments to the lien statutes, should give subcontractors and suppliers comfort that their lien rights will not be prejudiced simply because one of the parties in the chain of contract has filed bankruptcy. Read More