The best way for material suppliers and subcontractors to ensure payment if a debtor files for bankruptcy is by creating a lien ahead of time. As a general bankruptcy rule, in most states, liens that are filed or perfected post-bankruptcy-petition are not successful.
But if a mechanic's lien was not filed properly, or not filed at all, that does not necessarily mean collecting on your claim is a lost cause.
"When a creditor is unable to file a lien claim and the debtor files a bankruptcy proceeding, there may be avenues of recovery still available to the creditor," said Randall K. Lindley, partner with Bell Nunnally & Martin LLP (Dallas, TX).
As a first step, Lindley recommends carefully reviewing the bankruptcy filing to make sure the name of the bankrupt debtor matches your contract. "Occasionally, a similarly named entity has filed … but not the actual debtor the creditor has a contract with," he explained.
Another way to increase the chance of collecting payment is by reviewing contract documents to determine if multiple entities or individuals are liable. While looking at the contract for other liable parties, you should also look for any "misrepresentations or false financial statements that the creditor relied on at the time it entered the original transaction." Finding misrepresentations could potentially build a case to object to the discharge ability of the creditor's debt, Lindley added.
If a debtor specifically files for Chapter 11 bankruptcy, he suggested hiring counsel to help with accessing the viability of the proposed reorganization plan and to "determine the treatment of the creditor's claim through the bankruptcy process."
Take the SoftBank-funded construction startup Katerra for example. The group filed for Chapter 11 bankruptcy last week in the Southern District of Texas, leaving numerous projects unfinished, between $500 million to $1 billion in assets, and $1 billion to $10 billion in liabilities.
In some cases, retroactive perfection of a mechanic's lien may be a way to turn back time. "If your lien rights arise pre-petition, and your opportunity to perfect a mechanic's lien under state law did not expire after the filing of the bankruptcy … the timely post-petition perfection of a lien is okay; it is allowed," said Bruce Nathan, bankruptcy lawyer with Lowenstein Sandler LLP (New York, NY) during an NACM Secured Transaction Services webinar, Navigating Lien and Trust Fun Rights, When a Party in the Construction Supply Chain Files Bankruptcy.
You will still need to have state law on your side in order to even have a chance at collecting your claim. Lien laws and regulations vary across the country so it is critical to have a clear understanding of your state's specific rules.
"Lien creation, perfection, enforcement, all those matters are subject to state law and have different requirements," Nathan said.
NACM's Lien Navigator breaks down lien laws by state and can help you avoid a missed deadline.
-Annacaroline Caruso, editorial associate