California’s Ninety Day Statutory Deadline to Perfect Mechanic’s Lien by Filing Bankruptcy Code Section 546(b) Notice Not Tolled by Bankruptcy Code Section 108(c)

The following is an update analyzing a recent case of interest.

Summary:

The Ninth Circuit Bankruptcy Appellate Panel (the BAP) recently affirmed a bankruptcy court’s ruling that a mechanic’s lien was not timely perfected under California law, determining that the time for filing a notice under Bankruptcy Code § 546(b) was not tolled by § 108(c).  Philmont Management, Inc. v 450 S. Western Ave., LLC (In re 450 S. Western Ave, LLC), 2021 WL 5492765 (9th Cir. BAP 11/23/21).  To view the opinion, click here. 

Facts:

Debtor 450 S. Western Ave., LLC (Debtor) contracted with Philmont Management, Inc. (Philmont) in 2017 to perform tenant improvements on its shopping center property (the Property).  Philmont completed the improvements and billed the Debtor for more than $1,835,000.  The Debtor informed Philmont that it would not be paid until June 2018.  When it was not paid by then, Philmont timely recorded a mechanic’s lien in July, 2018.

         The Debtor repeatedly reassured Philmont that payment would be forthcoming from a pending refinance of the Property and requested that Philmont not file a lawsuit (required under California law to perfect the lien) because the suit would create a cloud on title which might jeopardize the refinance.  It also assured Philmont that it could continue rerecording the mechanic’s lien until it was paid and that it would not object to those recordings as being untimely.  Relying on those reassurances, Philmont did not commence suit and rerecorded the mechanic’s lien multiple times, with the fifth and final recording on December 19, 2019.

On January 10, 2020, the Debtor filed a chapter 11 petition.  Philmont filed a Notice of Perfection of Mechanic’s Lien under § 546(b) (the “§ 546(b) Notice”) on April 29, 2020, and timely filed a proof of claim, asserting a secured claim perfected by the lien. In September 2020, the Debtor sold the Property free and clear of Philmont’s lien, asserting for the first time that it was not timely perfected.  Philmont responded by filing an adversary complaint to determine the validity of its lien.  The Debtor brought a Rule 12(b)(6) motion to dismiss, asserting that Philmont had not taken steps to maintain perfection of its lien by filing an enforcement action within 90 days of recording as required by California law.  It also preemptively argued that estoppel and other equitable principles could not be invoked to extend the deadline for commencing the action.  Philmont responded, asserting the Debtor was estopped from contesting its lien and also that the time for filing the § 546(b) Notice had been tolled by § 108(c) and therefore the April 29, 2020 filing was timely to maintain perfection.

         The bankruptcy court granted the motion to dismiss without leave to amend.  Philmont appealed and the BAP affirmed in a published opinion.

Reasoning:

First, the BAP determined what it did not need to decide: whether a claim for equitable estoppel was viable.  Even if the December 2019 mechanic’s lien recording was deemed timely, the § 546(b) Notice was more than 90 days after the recording date and therefore was untimely to maintain perfection of the lien; therefore, estoppel against asserting the mechanic’s lien was late-filed would not save the untimely post petition failure to maintain perfection.  Therefore, its analysis turned on the requirements for perfection under California law, the impact of the automatic stay and § 546(b) on the necessary postpetition perfection, and whether the time to file the § 546(b) Notice was tolled by § 108(c).

         California Civil Code § 8460(a) mandates that in order to maintain perfection of a timely recorded mechanic’s lien, an enforcement action must be filed within 90 days.  Based on the December 19, 2019 recording date, 90 days expired on March 18, 2020.  Because the automatic stay of § 362(a) prohibits the commencement of an action against a debtor postpetition, § 546(b) gives a lien proponent the opportunity to maintain perfection by instead giving notice:

(b)(1):  The rights and powers of a [debtor in possession]…are subject to any generally applicable law that –

         ….

         (B) provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.

(2), If –

         …

         (B) such property has not been seized or such an action has not been commenced before the date of the filing of the petition; such interest in such property shall be perfected, or … maintained or continued, by giving notice within the time fixed by such law for such seizure or such commencement.  

         Philmont argued that pertinent case law and § 108(c) either excused the necessity of giving proper notice or tolled the time to do so.  To address the first argument, the BAP reviewed the pertinent case law, concluding that one of the cases – In re Hunter’s Run, 875 F. 2d 1425 (9th Cir. 1989) – was superseded by amendments to § 546 in 1994 – and that the other – In re Baldwin Builders, 232 B.R. 406, 412-12 (9th Cir. BAP 1999) – had ruled that the exception to the automatic stay provided in § 363(b)(3) did not relieve a party from giving the required notice timely.  That left only the tolling question, which the BAP succinctly addressed:

Ordinarily, when the filing of a civil action under nonbankruptcy law is prohibited by the automatic stay, § 108(c) operates to toll the expiration of the period for doing so.  But where the Bankruptcy Code provides an alternative to filing a civil action, as it does under § 546(b), neither § 362(a) nor § 108(c) are applicable… Put another way, while the filing of a foreclosure action is prohibited by the automatic stay, § 546(b)provides an alternative – the giving of notice – that does not violate the stay.

         The § 546(b) Notice here was untimely, the lien was not adequately maintained, and therefore it was not enforceable.

Author’s Comments:

This case may finally lay to rest exactly what a mechanic’s lien claimant must do to assure perfection of its lien when a bankruptcy case is filed between the recording of the lien and the requirement to commence a lawsuit within 90 days.  Anyone wishing to bolster his or her arguments on this issue to a bankruptcy court is well-advised to read – in order – Hunter’s Run, the amendment to § 546 in 1994, Baldwin Properties, and then this case.  The BAP had passed on the tolling issue in Baldwin Properties because it was not properly addressed in the lower court.  It was ripe for decision here and the BAP’s reasoning is compelling.  Attorneys for contractors should know this case law by heart.

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.) a member of the ad hoc group.  The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

This ebulletin was prepared by Walter K. Oetzell, Walter K. Oetzell, APC, wkoetzell@oetzelllaw.com.