After a bankruptcy case is filed, a mechanic’s lien creditor must be careful to give a proper notice under the Bankruptcy Code or its lien will expire and be unenforceable. The Bankruptcy Code provides for a notice to be given in lieu of commencing a foreclosure action under state law. Since the proper notice was not given by the state deadline, the court held that it was “fatal” to the contractor.
Bankruptcy Code §§ 108(c) and 546(b) [1] both give slack to creditors when the automatic stay under Section 362(a) prohibits taking action that is required to perfect or maintain a claim against the debtor.
The Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that the extension of time for filing a complaint under Section 108(c) does not extend the time for giving notice to enforce a mechanic’s lien under Section 546(b).
(1) The Mechanic’s Lien Filings
The owner of a shopping center had a contract for a contractor to perform $1.8 million in tenant improvements. When the owner didn’t pay, the contractor filed a timely mechanic’s lien under California law.
To preserve the enforceability of a mechanic’s lien, California law requires commencement of a foreclosure action within 90 days after recording the lien. If foreclosure is not begun on time, state law provides that the lien expires and is unenforceable.
The owner pleaded with the contractor not to commence foreclosure, fearing it would wreck a planned refinancing. The owner promised to pay the contractor from refinancing proceeds. Evidently, the contractor reasonably relied on the owner’s promises.
For the next 18 months, the owner continued making the same plea with the contractor. Over that span of time, the contractor rerecorded the mechanic’s lien five times.
The last rerecording of the mechanic’s lien occurred on 11/19/19. The owner filed a Chapter 11 bankruptcy Petition on 1/11/20. On 4/29/20, the contractor filed a notice of perfection of the mechanic’s lien under Section 546(b).
In the Chapter 11 case, the owner filed a motion to sell the property. In the sale motion, the debtor for the first time took the position that the mechanic’s lien was invalid and unenforceable. The bankruptcy court authorized the sale of the property, with sufficient proceeds held in escrow to pay the mechanic’s lien in full if it were found valid.
The contractor commenced an adversary proceeding to declare that the mechanic’s lien was valid. The Bankruptcy Court granted the debtor’s motion to dismiss the contractor’s complaint for failure to state a claim. He reasoned that the contractor had not moved to enforce the lien within the time required by California law.
The BAP Affirms Under Section 546(b)
The BAP affirmed the Bankruptcy Court’s dismissal of the contractor’s complaint in a 11/23/21 opinion. Even if the contractor’s last rerecording was effective on 12/19/19, the BAP ruled that the contractor’s 4/29/20 notice under Section 546(b) was not timely. The court rejected the idea that the time for notice under Section 546(b) was tolled by Section 108(c).
The BAP summarized a Section 546(b) notice as follows:
In other words, if commencement of an action is required to perfect, or to maintain or continue perfection of an interest in property, and that action has not been commenced prepetition, the claimant may perfect or maintain or continue perfection, i.e., preserve the enforceability of its perfected lien, “by giving notice within the time fixed by such law for such seizure or such commencement.”
In the case on appeal, the contractor had rerecorded the lien for the last time on 12/19/19. Under California law, the 90-day window for commencing a foreclosure action ended on 3/18/20, but the contractor did not file the Section 546(b) notice until 4/29/20, more than a month too late. The expiration of the state deadline, the BAP held, was “fatal” to the contractor’s argument.
However, the contractor contended that Section 108(c) tolled the time for giving notice under Section 546(b). If non-bankruptcy law fixes a time for commencing an action, the BAP held that the section “suspends the time for commencing a civil action in a non-bankruptcy court so long as that time has not expired pre-petition.”
When the automatic stay prohibits filing a lawsuit, the BAP stated that Section 108(c) ordinarily “operates to toll the expiration of the period for doing so.” “But where the Bankruptcy Code provides an alternative to filing a civil action, as it does under § 546(b),” the BAP held that “neither § 362(a) nor § 108(c) are applicable.”
The BAP said it “would make no sense” for Section 108(c) to toll the deadline in Section 546(b). If there was a tolling, the court said, “the lienholder could simply wait for the automatic stay to terminate and then file its foreclosure action within 30 days . . . . Accordingly, such an interpretation would render § 546(b) meaningless.”
The BAP affirmed the bankruptcy court’s dismissal of the contractor’s complaint and held that “§ 108(c) is inapplicable to the time for giving notice under § 546(b).”
Promissory Estoppel
The contractor argued that promissory estoppel barred the debtor from contending after bankruptcy that the lien re-filings were untimely because the debtor had pleaded with the contractor for 18 months to hold off its foreclosure.
The BAP did not reach the question of equitable estoppel because it upheld the bankruptcy court’s ruling under Section 546(b). The court nonetheless was “skeptical that the complaint contained allegations sufficient to support the application of equitable estoppel or that any additional or alternative allegations would have done so.”
In dicta, the BAP gave three reasons why the contractor could not invoke equitable estoppel.
- Equitable estoppel does not arise from a promise not to assert a known legal right.
- Equitable estoppel does not “necessarily” arise from a promise to perform an act in the future; and
- On filing in Chapter 11 case, the owner became a fiduciary with a duty to maximize the recovery for all creditors.
Caution
The BAP’s holding may not apply in all states. The opinion turned on the intricacies of California law where commencement of a foreclosure action was required to maintain the enforceability of a mechanic’s lien.
[1] Unless otherwise noted, all references to “Bankruptcy Code § ____” or to “Section ___” are to Tile 11 of the United States Code, as amended.
If you have any questions or simply want to discuss this result or any bankruptcy related matters, contact Robert J. Berens at rberens@smtdlaw.com.