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).

Mechanics Lien voided by Old Work

Mechanic’s liens are strictly governed by statutory law.  This fact is well illustrated in the case of  Johnson v. Tadlock.  In Johnson the Fairfax County Circuit Court ruled that a mechanic's lien that included work performed before the 150-day statutory window was invalid in its entirety. Under the mechanic's lien statute, a memorandum of lien should not include any sums due for labor and materials furnished more than 150 days prior to the last day of work. However, the Court's decision in Johnson appears to be the first in which a Circuit Court has struck an entire lien based on the inclusion of stale work.
    In Johnson, the Court found as fact that a workman filed a mechanic's lien for $15,500 for various work, including lot clearance, removal of trees and installation of a storm drainage system and caissons. The property owner sought to have the lien released based on its inclusion of stale work. A portion of the lien (amounting to at least $1,500) was for work clearly performed within the 150-day statutory period. The property owner asserted that all or a part of the remainder of the work was performed more than 150 days prior to the workman's last day on the job.
    The Court ruled that the inclusion of a stale claim tainted the entire lien. The Court cited language in the mechanic's lien statute "no memorandum... shall include ....," to support his position. The Court pointed out that mechanic's liens are "creatures of statute" and therefore need to conform strictly to their statutory requirements. Accordingly, the court refused to remove the improper portions of the claim and rule on the proper portion of the claim - it survived or perished in its totality.
    The lesson of Johnson, as the lesson is in so many cases, obtain competent legal advise and representation in pursuing mechanic's lien claims.

Obtaining Possession after Foreclosure

Upon purchasing property at a foreclosure sale, it is not uncommon to have a “holdover tenant”.  If this occurs, you can obtain possession of the property by filing a Summons for Unlawful Detainer in the appropriate General District Court.  The applicable statute requires that the plaintiff prove “a right to the possession of the premises at the time of the commencement of the suit.”  The only evidence that is usually required is (a) a copy of the recorded trustee’s deed, since the facts recited therein are prima facie evidence of their truth, and (b) a copy of the notice to vacate sent to the occupant(s).

On the date of the initial return, if the defendant fails to appear, possession will be granted.  If the matter is contested, most courts set a new date for trial.  In contested cases, issues are usually related to notice and service, so the trustee should be prepared to present evidence that the foreclosure sale was properly advertised, noticed and conducted.

The judgment for possession is not final until 10 days after it is entered, and most courts will not issue a writ of possession during that 10-day pendency.  If an appeal is noted within the 10-day period, the defendant must perfect the appeal by posting an appeal bond and paying within 30 days of the date of the judgment the applicable writ and service fees for the circuit court.  Most judges are sympathetic to require significant appeal bonds equating with the former mortgage payments. 

Eviction is accomplished using a “Request for Writ of Possession.”  A writ of possession may be issued on an unlawful detainer for up to one year from the date of judgment.  When requesting the writ of possession, provide contact information for both the Sheriff and the person who will supervise the eviction of the new owner; the Sheriff will coordinate a date and time to serve the writ of possession and maintain the peace while the owner physically evicts the personal property of the occupant(s) and secures the property.

Criminal Liability for Misuse of Construction Funds

    Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.

The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.