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Bankruptcy Notice – Now What Do You Do

Alan L. Stefaniak

Those of you engaged in construction whether as a general contractor, subcontractor or material supplier know that you have mechanic’s lien rights to secure payment from the owner or contractor for whom you have worked.  On a private job the property stands as security for what is owed.  On a public job the money owed to the general contractor by the governmental entity provides the security for what is owed.  In these difficult economic times questions often arise as to what you should and can do if you receive the dreaded notice that the owner, general contractor or subcontractor with whom you have contracted has filed for bankruptcy.

Once a petition in bankruptcy has been filed an “automatic stay” order is issued by the Bankruptcy Court.  The “automatic stay” is an injunction-like prohibition.  It prohibits a creditor during the pendency of the bankruptcy case from instituting any action against the debtor or against its property on account of a pre-petition debt.  However, the “automatic stay” does not prohibit perfection of your mechanic’s lien rights.  Whether it’s the owner, general contractor or subcontractor that has filed for bankruptcy you can and should proceed to perfect your mechanic’s lien.  If you are a general contractor record your lien within four months of your last day worked.  If you are a subcontractor or material supplier send out the ninety day notice within ninety days of your last date worked or last delivery of material and then proceed to record your lien claim within the four month requirement.

Once your lien claim is recorded you are protected as far as security for the money that is owed.  However, you still need to enforce your lien in order to recover the amount due.  This is done by filing a mechanic’s lien lawsuit.  Under the Illinois Mechanic’s Lien Act a lawsuit to enforce a lien has to be filed within two years from your last date worked.  However, when an owner or general contractor or sub has filed bankruptcy, you cannot file a foreclosure lawsuit without approval of the bankruptcy court.  This is commonly referred to as lifting the stay order.  When the owner is in bankruptcy lifting the stay order can be more difficult than when it’s the general contractor that has filed for bankruptcy protection.  Usually if the owner is in bankruptcy the stay is not going to be lifted unless there is no equity in the property.  If it’s the general contractor or a subcontractor that has filed for bankruptcy you can usually get the stay order lifted so long as you agree not to seek any direct relief against the general or sub.  The reason the Court usually allows the stay to be lifted against the general contractor is because the general is required to be a named defendant in a mechanic’s lien lawsuit and so long as you are not seeking direct relief against the general contractor the bankruptcy proceeding is not affected.

What happens with regard to the two year time limit to file the mechanic’s lien lawsuit when a bankruptcy petition is filed.  The Illinois Supreme Court took care of that issue in its decision in Garbe Iron Works Inc. v Priester and held that the two year limitation is tolled during the pendency of the bankruptcy.  The two year limitation is tolled until the automatic stay order is modified.  The same tolling takes place if an owner serves a Section 34 notice to commence a lawsuit and a bankruptcy occurs.  In Chicago Whirley v Amp Rite Electric a subcontractor perfected a lien. The owner served notice to commence a lawsuit which meant the subcontractor had thirty days to do so.  However, the general contractor filed for bankruptcy.  The Appellate Court held the thirty day requirement was tolled until the stay order was lifted.  You can also encounter bankruptcy issues after the mechanic’s lien lawsuit has been commenced.  If a general contractor or subcontractor files for bankruptcy during the foreclosure proceeding the lawsuit is stayed until either the general or sub is discharged or the stay order is lifted.

As you can see all is not lost if you receive a notice of bankruptcy.  While you cannot proceed on a breach of contract claim, you can perfect and enforce your mechanic’s lien rights.  It is always important to act within the required time limits for sending notice and recording the lien.  It is even more important to do so when an owner, general contractor or subcontractor has filed a bankruptcy petition.  Once you perfect your mechanic’s lien claim you then have plenty of time to try and reach a settlement before having to file a lawsuit to enforce the lien.

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