Although it is important for suppliers and subcontractors to maintain positive working relationships with their customers, they also must do their due diligence when securing their lien rights and follow appropriate state statutes, as a recent California appellate case illustrates.
The Facts of the Case
In July 2018, Philmont Management Inc. filed a mechanic's lien against 450 S. Western Ave., LLC, in Los Angeles, according to court documents. Over the next 18 months, 450 S. Western Ave. repeatedly reassured Philmont it would receive payment once a pending refinance on the property was completed and asked the subcontractor not to file a lawsuit to perfect its lien. Both parties understood that Philmont would re-record its mechanic's lien if it was not paid from the refinance within 90 days of the recording. They further agreed that the debtor would not claim the successive liens were untimely. Philmont rerecorded its lien four times. Philmont recorded its fifth and final mechanic's lien against the property on Dec. 19, 2019 for $2,361,878.40, including statutory interest. On Jan. 10, 2020, 450 S. Western Ave. filed a Chapter 11 petition. On April 29, 2020, Philmont filed a timely Notice of Perfection of Mechanic's Lien under the California mechanic's lien statute. On May 28, 2020, Philmont filed a timely Proof of Claim in Debtor's bankruptcy case, again reasserting its mechanic's lien. On Sept. 23, 2020, the debtor filed a motion to approve the sale of the property, subject to overbids. In the sale motion, the debtor claimed for the first time—and contrary to its prior repeated assertions and requests—that Philmont's mechanic's lien was invalid and disputed.
On appeal, in November, the U.S. Bankruptcy Appellate Panel of the Ninth District upheld the lower court's decision that the mechanic's lien and the notice were not timely filed and therefore, not valid.
"The lienholder, in good faith, appeared to be doing the right thing in order for the refinance to go through so it could get paid," said Chris Ring, of NACM Secured Transaction Services (STS). However, "Milestones in state statutes related to when suit action is commenced are fairly straight forward."
California case law "allows for the re-filing of liens as long as you are still within the timeframe to re-file and have released the previous lien filing," said Connie Baker, CBA, director of operations for NACM STS. The release should not state the claimant's claim for materials was satisfied and the second lien must be filed timely according to statute to be valid, Baker added.
"Once bankruptcy was filed, 450 S. Western Ave. was successful in getting the lien dismissed as the milestone to commence suit action had come and gone," Ring said. "Mechanic's lien statute milestones can be unforgiving and can be used as a leverage tool for payment as well." The lienholder should have commenced suit within 90 days of recording the lien and used that as leverage for payment, Ring explained.
Baker agreed. "They should have simply filed suit to foreclose in lieu of their continued lien re- filings. The lien holder trusted them to get the refinancing, but in the end the bankruptcy filing hurt them. Sometimes it is more cost effective to engage an attorney and simply proceed with suit," Baker said. "Once you have missed a deadline per statute, there is no going back. They did everything right at the beginning to be secured, but waited too long on their suit action."
-Bryan Mason, editorial associate