§ 16.11 Bankruptcy

LibraryConstruction Law in Oregon (OSBar) (2019 Ed.)
§ 16.11 BANKRUPTCY

§ 16.11-1 Filing the Claim of Lien

Construction liens are created when the claimant begins to provide the statutorily defined labor, equipment, materials, or services. ORS 87.010. Construction liens are perfected by compliance with ORS 87.035. Perfection by filing the claim of lien relates to the date of commencement of the improvement as defined in ORS 87.005(1). See § 16.7-1 (perfection).

Although the changes made in the Construction Lien Law in 1987 do not determine the status of the law before the enactment of Oregon Laws 1987, chapter 662, this legislation was enacted to acknowledge that the bankruptcy laws permit the perfection of a construction lien on property after the debtor files a bankruptcy proceeding. 11 USC § 362(b)(3); 11 USC § 546(b). See Or Laws 1987, ch 662, § 19. For further discussion, see § 16.11-2(b)(1) (perfecting the lien after bankruptcy is filed).

§ 16.11-2 Postlien Actions: Who Is the Debtor?

§ 16.11-2(a) Debtor Is Not an Owner or Mortgagee

Questions often arise about how to proceed after an owner (defined in ORS 87.005(8)) of a construction project files bankruptcy. See § 16.2-4(a) (discussing the term owner). What if the debtor is not a property owner?

If the debtor is not the project owner (which includes a lessee, see ORS 87.005(8)) or a mortgagee (defined in ORS 87.005(6)), then the bankruptcy should not affect the creditor's attempt to file its claim of construction lien and serve postclaim notices. Actions necessary to perfect the lien and to preserve statutory rights to attorney fees do not concern any parties other than the owners and lenders. As long as the debtor has no legal interest in the project property, the bankruptcy stay will not apply because neither the debtor nor property of the bankruptcy estate is involved.

However, if a creditor must foreclose a construction lien, bankruptcy issues may come into play.

First, the creditor should consider whether the debtor can be omitted from the lawsuit. In Osborn v. Logus, 28 Or 302, 308, 37 P 456, 38 P 190, 42 P 997 (1895), the court, construing prior Oregon law that is substantially the same as ORS 87.060(7), held that the contractor who owed debt and who was also the owner's statutory agent was not an indispensable party; the lawsuit could proceed against the owner without the contractor as a party. Also, the creditor should consider whether it can obtain relief from stay, as long as no collection action will be taken against the debtor.

Second, what if the debtor also recorded a construction lien or is another lien claimant, unrelated to the debt owed to the creditor who recorded a lien? Part of foreclosing a lien, as with any other security interest, is to foreclose as many other interests as possible. In either situation, the bankrupt party's lien against the project is property of the bankruptcy estate and the automatic stay bars all actions adverse to the lien. 11 USC § 362.

Here, there is no clear resolution. If the lien claimant in bankruptcy is not a debtor of the creditor, perhaps the creditor could simply omit from the foreclosure the party in bankruptcy—and by doing so, take the property subject to the bankrupt party's lien. A better tactic would be to seek relief from stay to foreclose the lien or at least to file and serve the party in bankruptcy to maintain the creditor's rights pending the outcome of the bankruptcy.

§ 16.11-2(b) Debtor Is an Owner or Mortgagee Who Files Bankruptcy

When an owner or mortgagee files bankruptcy, all aspects of perfecting, maintaining, and foreclosing the construction lien can be affected. The three crucial time periods are (1) the 75 days in which to perfect a claim of lien (ORS 87.035), (2) the 20 days after recording the claim of lien to serve post-claim notices (ORS 87.039), and (3) the 120-day time period in which to foreclose the lien (ORS 87.055). These crucial time periods are discussed in § 16.11-2(b)(1) to § 16.11-2(b)(4).

§ 16.11-2(b)(1) Perfecting the Lien after Bankruptcy Is Filed

Although the Bankruptcy Code's automatic stay prevents most actions against the debtor's property, a limited exception permits a creditor to perfect certain statutory liens as long as the creditor acquired its rights in the property before the act of perfection takes place. 11 USC § 362(b)(3); 11 USC § 546(b).

In 1986, the United States Bankruptcy Court for the District of Oregon suggested that a construction lien is not created until a claim of lien is recorded, leading to the conclusion that postpetition perfection by filing a lien claim was not available to creditors under 11 USC section 362. See In re N. Side Lumber Co., 59 BR 917, 922 (Bankr D Or 1986), aff'd, 83 BR 735 (BAP 9th Cir 1987), aff'd sub nom. Indus. Indem. Co. v. Seattle-First Nat'l Bank, 865 F2d 264 (9th Cir 1988) (citing Phillips v. Graves, 139 Or 336, 9 P2d 490 (1932)).

In response, the 1987 Legislature amended ORS chapter 87 to provide that construction-lien...

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