Philmont Management, Inc. v. 450 S. Western Ave., LLC (In re 450 S. Western Ave., LLC), 633 B.R. 894 (9th Cir. BAP 2021)

SUMMARY

The Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals has determined that the period to give notice under Section 546(b) of the Bankruptcy Code for maintaining or continuing the perfection of a mechanic’s lien is not tolled by Section 108(c).  Philmont Management, Inc. v. 450 S. Western Ave., LLC (In re 450 S. Western Ave., LLC), 633 B.R. 894 (9th Cir. BAP 2021).  

To read the full published decision click here.

FACTS

In July 2018, a general contractor recorded a mechanic’s lien against the debtor’s shopping center after the debtor failed to pay for the contractor’s improvements.  The debtor then assured the contractor of payment from the proceeds of a forthcoming refinance of the shopping center.  So as not to risk the refinance, the debtor requested that the contractor forbear from suit.  The contractor complied.  Rather than sue the debtor within 90 days of recording its lien, the contractor re-recorded its lien against the property, four times. 

On December 19, 2019, the contractor recorded its last lien.  On January 10, 2020, the debtor filed a chapter 11 bankruptcy case.  On April 29, 2020, the contractor filed in the bankruptcy case a notice of perfection of mechanic’s lien.     

During bankruptcy, the shopping center was sold to the winning bidder at an auction held in October 2020.  While the sale proceeds were sufficient to pay the contractor, the debtor proposed a plan of liquidation through which it disputed the extent, validity, or priority of the contractor’s lien.

The contractor commenced an adversary proceeding in the bankruptcy case requesting a judgment that the contractor held an enforceable mechanic’s lien in the sale proceeds of the debtor’s shopping center.  The debtor responded with a motion to dismiss for failure to state a claim upon which relief can be granted.  The debtor argued (1) that the contractor had failed to bring suit to enforce its lien within the period required by state law and therefore that the lien had expired, (2) that there was no basis in equity to extend such period, and (3) that even if the last re-recordation of the lien worked to reinstate it, the contractor’s notice of perfection was untimely because it was filed more than 90 days later.  The bankruptcy court granted the debtor’s motion, dismissing the adversary proceeding with prejudice.  The Bankruptcy Appellate Panel (the BAP) affirmed the bankruptcy court. 

REASONING

The BAP first considered whether the notice of perfection of the lien filed by the contractor in the bankruptcy case was timely.           

The contractor and the debtor agreed that the first mechanic’s lien, recorded in July 2018, had been timely recorded.  A “direct contractor” must record its lien within 90 days after completing work or 60 days after an owner records a notice of completion or cessation, whichever occurs first.  Cal. Civ. Code § 8412.  Because the contractor failed to then commence an enforcement action within 90 days of recording that lien, any lien based upon the July 2018 recordation expired.  Cal. Civ. Code § 8460(a). 

Applying similar statutory-bar reasoning to the December 2019 mechanic’s lien, because it was recorded well after the completion of work or the property owner’s giving of notice, the debtor asserted it was also unenforceable. 

In response, the contractor invoked equitable estoppel to bar the debtor from claiming that the December 2019 lien had been untimely, given that it was the debtor who convinced the contractor to forbear from suit. 

However, even if the contractor’s fifth recordation of its mechanic’s lien in December 2019 were deemed timely, the contractor still had to “give notice” within the period fixed by “generally applicable law” to commence an action to maintain or continue the perfection of its mechanic’s lien.  11 U.S.C. § 546(b).  Such period is 90 days. Cal. Civ. Code § 8460(a).

The contractor did not file the notice of perfection of its lien in the debtor’s bankruptcy case until April 29, 2020, which was 132 days after the latest prepetition lien was recorded.  Thus, even if the December 2019 recordation had been timely, any lien based upon it would have expired before the filing of the notice of perfection.  In other words, it was impossible for the December 2019 recordation to be the basis of an enforceable lien.  As such, there was no need to discuss equitable estoppel and the timeliness of the last recorded lien because the result would be the same.

“Giving notice” under Section 546(b) to maintain a lien as perfected is an alternative in bankruptcy to commencing an action to achieve that purpose, which would violate the automatic stay.  11 U.S.C. § 362(a)(4).  However, that Section 546(b) alternative must be exercised within the period to commence the action under applicable nonbankruptcy law.

The BAP next considered whether the period to give notice of the perfection of the mechanic’s lien is tolled by Section 108(c). 

The contractor viewed California law as not requiring the commencement of an action to maintain its lien, which had been perfected.  Instead, the contractor contended that commencement of an action is merely enforcement.  Under that view, the exceptions to the automatic stay afforded by Sections 362(b)(3) and 546(b) for maintaining perfection would not apply.  Accordingly, the contractor insisted that it had actually been subject to the automatic stay.  The contractor then asserted that the 90-day period to commence an action was tolled under the provisions of the Bankruptcy Code governing “applicable nonbankruptcy law . . . [that] fixes a period for commencing . . . a civil action in a court other than a bankruptcy court on a claim against the debtor . . . [that] has not expired before the date of the filing of the petition.”  11 U.S.C. § 108(c).

The contractor argued that Miner Corp. v. Hunters Run Ltd. Partnership (In re Hunters Run Ltd. Partnership), 875 F.2d 1425 (9th Cir. 1989), supported its position.  In Hunters Run, Sunny Day Cement also had recorded its mechanic’s lien pre-petition and was perfected.  Likewise, Sunny Day had also failed to commence an action pre-petition to maintain the lien as enforceable. 

The Ninth Circuit ruled that the period for Sunny Day to commence an action to foreclose its lien was tolled by section 108(c).  To the Hunters Run court, such an action constituted enforcement activity that the automatic stay prohibited, and Sunny Day was not able to provide notice under Section 546(b) because the version of Section 546(b) in effect at the time of Hunters Run only permitted the giving of notice to perfect a lien (something that Sunny Day had already accomplished pre-petition) and did not also permit giving notice to maintain or continue perfection of a lien.

While Hunters Run did toll the period to commence an enforcement action on a mechanic’s lien, Section 546 has since been amended and the BAP’s discussion revealed that there would have been no tolling under Section 108(c) if Sunny Day had been able to maintain the perfected status of its lien by giving notice instead of needing to commence a stay-violating foreclosure action.  

Under Section 546(b) as amended in 1994, giving notice is available both (1) to perfect a lien and (2) to maintain or continue a lien where “generally applicable law” would otherwise mandate bringing suit or seizing property to achieve those ends.  The giving of notice in such circumstances is required.  Congress also added “acts” to maintain or continue the perfection of an interest in property to the exceptions to the automatic stay set forth in Section 362(b)(3).  Sections 362(b)(3) and 546(b) should be considered in tandem.  The Hunters Run ruling therefore was of no avail to the contractor in Philmont.

The contractor also did not persuade the panel that the BAP’s opinion in Village Nurseries v. Gould (In re Baldwin Builders), 232 B.R. 406 (B.A.P. 9th Cir. 1999), had been wrongly decided.  In that case, Village recorded a mechanic’s lien pre-petition after completing improvements.  As of the debtor’s filing of its bankruptcy case, Village had still not commenced an action to foreclose its lien.  Post-petition, Village filed, but did not serve, two state court foreclosure complaints, recorded a second lien, and filed a proof of claim asserting a secured claim.  The bankruptcy court found that the complaints were void as violations of the automatic stay and determined that the proof of claim was incapable of providing timely notice of the recorded liens. 

Like the contractor in Philmont: (1) Village had a perfected lien (the final lien in Philmont was deemed timely), (2) Village was subject to a statute requiring the commencement of an action to maintain the lien as perfected, and (3) Village had failed to give timely notice under the alternative to enforcement afforded by section 546(b).  By the time Baldwin Builders was decided, Sections 362(b)(3) and 546(b) had been amended.  Village therefore argued that its foreclosure actions did not violate the automatic stay because they were required to maintain the perfected status of its lien, and the new exception to the automatic stay for “any act . . . to maintain or continue the perfection” made them valid. 

The BAP had rejected Village’s position in Baldwin Builders and here also rejected the contractor’s assertion that those conclusions should be reconsidered.  It acknowledged that a foreclosure suit is required to maintain a mechanic’s lien, but that did not prevent the foreclosure suit from also constituting the very enforcement activity that would violate the automatic stay so as to be void. 

Mechanic’s lien creditors must be aware that commencement of an action on a lien is the device under California law by which the lien is both maintained (as to perfection) and enforced.  Because commencement of an action is needed to maintain a mechanic’s lien, Section 546(b) requires that notice of the lien be given instead.  The holding of Hunters Run that commencing an action to foreclose a lien would violate the automatic stay remains intact.  What differs since Sections 362(b)(3) and 546(b) have been amended is the addition of a specific procedure that must be adhered to in order to give notice to maintain a lien as perfected.  Notice must be given within the time mandated by state law to commence the foreclosure action.  Tolling under Section 108(c) of the period in which such notice must be given under Section 546(b) is not available pursuant to the BAP’s opinion in Philmont.

AUTHOR’S COMMENTS

Practitioners seeking to protect the secured status of their client’s mechanic’s liens after a bankruptcy case has been commenced should beware.  Although applicable nonbankruptcy law may call for an enforcement action within a specified time period, that is not an invitation to violate the automatic stay.  On the other hand, practitioners should not assume that their clients are barred from protecting their secured status and/or that the running of the state law period to start enforcement in order to preserve a lien will be tolled by Section 108(c).  Instead, the Bankruptcy Code expressly permits the creditor to maintain the secured status of its lien without violating the automatic stay.  The creditor does so by giving the notice set forth in Section 546(b) of the Bankruptcy Code.  The deadline to give this notice is before the time to commence an action under nonbankruptcy law expires.

These materials were written by Michael G. D’Alba (mdalba@danninggill.com), of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles.  Editorial contributions were provided by Brandon J. Iskander (biskander@goeforlaw.com) of Goe Forsythe & Hodges LLP.