Chapter 19 - § 19.6 • HOW DOES BANKRUPTCY AFFECT A MECHANICS' LIEN CLAIM?

• Jurisdiction: Colorado

§ 19.6 • HOW DOES BANKRUPTCY AFFECT A MECHANICS' LIEN CLAIM?

The owner of the subject real estate could file a petition in bankruptcy at any one of several stages in the life of a mechanics' lien claim. In addition, the general contractor or a subcontractor could be the party filing bankruptcy.

The first stage could be after the labor was performed and/or the materials were supplied but prior to the lien being served. The second could be after the lien was served but before it was mailed in for recording. The third could be after it was mailed in for recording but before the document was actually recorded in the office of the county clerk and recorder. The fourth could be prior to a mechanics' lien foreclosure action being instituted. The fifth could be after the suit was filed but prior to actual trial. And the sixth and final possibility could be after the trial court issued a decree in foreclosure through a sheriff's sale but prior to the sale itself.

For a person seeking to assert a mechanics' lien claim at any of the above stages, the important thing to remember is that once a petition in bankruptcy is docketed, there is an automatic stay of execution that is supposed to bar any effort to collect a debt.

Because the lien claim is an in rem action, rather than an in personam proceeding, lien claimants argue that proceeding with the lien claim is not really a violation of the bankruptcy stay order. The best way to proceed is to file a motion in the bankruptcy court for relief from the stay order.

One impact of a bankruptcy filing is that certain payments made within a certain time before the bankruptcy are sometimes deemed a preference and subject to return. But payments made within the time by which a creditor could have perfected a mechanics' lien might not be deemed an avoidable preference, assuming the creditor would have had statutory lien rights if it had not been paid and if the value of the collateral would have covered the creditor's claim.¹⁹⁰

The reader is directed to three provisions of the Bankruptcy Code: 11 U.S.C. § 108, Extension of Time; § 362, Automatic Stay; and § 546(b), Limitations on Avoiding Powers. In the case of In re Cantrup,¹⁹¹ the U.S. Bankruptcy Court for the District of Colorado had occasion to deal with this exact issue.

In Cantrup, the materials were delivered to Cantrup's property prior to Christmas 1982. Cantrup filed a petition in bankruptcy on March 22, 1983, and the supplier recorded his mechanics' lien statement on...