Mechanic’s Lien Enforcement in Bankruptcy

    In the case of Concrete Structures, Inc. v. Tidewater Crane & Rigging Co. Judge Payne of the United States District Court in Richmond upheld a bankruptcy court’s decision that a mechanic’s lien in Virginia is a statutory lien that is not subject to avoidance under Bankruptcy Code §547(b), and that it was not necessary for a creditor to file an enforcement suit in order to maintain or continue perfection of a mechanic’s lien within the meaning of Bankruptcy Code §546(b)(2)(B).

In Concrete Structures a crane company filed a memorandum of mechanic’s lien pursuant to Virginia Code §43-4 against two parcels of property owned by a concrete company for unpaid labor and materials related to the construction of a commercial production building and a warehouse on the property.  Shortly thereafter, the concrete company filed Chapter 11 proceedings, then the crane company filed a proof of claim.  The debtor filed an adversary proceeding seeking to avoid the crane company’s lien.  The Bankruptcy Court granted the crane company’s motion to dismiss the avoidance action, and the debtor appealed.

    The Bankruptcy Court held that the mechanic’s lien fell within an exception to the trustee’s avoidance powers found in Bankruptcy Code §547(c)(6), which provides that a trustee may not avoid a transfer that is the fixing of a statutory lien that is not avoidable under Bankruptcy Code §545.  The District Court noted that for this decision to be correct, the mechanic’s lien must be a statutory lien.  The debtor admitted that, as a general rule, a mechanic’s lien is a statutory lien, but the debtor insisted, however, that Virginia law was not in accord with the general rule because the filing of a mechanic’s lien is a judicial proceeding in Virginia.

    The debtor cited Donohoe Constr. Co. v. Mount Vernon Assocs. for its statement that the filing of a memorandum of mechanic’s lien constitutes a judicial proceeding.  However, the Court in that case stated that for a claimant to obtain a remedy provided by statute, he must perfect his lien and sue to enforce it, and that the two proceedings are inseparable.  That explication was clarified recently in Lockheed Info. Mgmt. Sys. Co. v. Maximum Inc., in which the Virginia Supreme Court explained that both the filing of the memorandum and the suit to enforce the lien constitute a judicial act or judicial proceeding, not that the mere filing of the memorandum is a judicial proceeding.

    The District Court ruled that the law of Virginia and the Bankruptcy Code, given their plain meaning and considered together, make clear that a mechanic’s lien is properly considered to be a statutory lien so that it falls within the exception provided in Bankruptcy Code §546(c)(6).  Therefore, the District Court ruled that the Bankruptcy Court was correct in dismissing count II of debtor’s complaint.  The District Court ruled that the Bankruptcy Court likewise was correct in dismissing count II, in which debtor sought to avoid the crane company’s lien pursuant to Bankruptcy Code §544(a) on the ground that the company failed to maintain or continue the perfecting of its lien by instituting an action to enforce the lien under Virginia Code §43-22 or giving notice under Bankruptcy Code §546(b).