Monday, December 26, 2011

FYI: Cal App Holds Post-Petition Recording of Mechanics Lien Did Not Violate Automatic Stay, and BK Tolled Statute of Limitations

The California Court of Appeal, Second District, recently held that
California's limitations period for filing a complaint to foreclose on a
mechanic's lien was tolled during the pendency of bankruptcy proceedings,
and that the post-petition recording of a mechanic's lien did not violate
the automatic stay.

A copy of the opinion can be found at:

Debtor hired Plaintiff to perform construction services on property that
Debtor owned, but failed to pay for the construction work. Plaintiff
recorded a mechanic's lien against the property for the amount due, and,
almost two months later, Debtor filed for Chapter 11 bankruptcy
protection. Seven months after the bankruptcy filing, Plaintiff recorded
a second mechanic's lien against the property and filed a notice of
perfection of its security interest in the bankruptcy proceedings.

Various of the Defendants obtained relief from the automatic stay and sold
Debtor's property at a trustee's sale. Within three months after the
trustee's sale, Plaintiff filed a foreclosure complaint stating two causes
of action, one for each lien.

Defendants demurred based on the alleged invalidity of the liens, arguing
that: (1) Plaintiff's complaint had not been filed within 90 days of the
recording of the first lien as required by California Civil Code Section
3144; and (2) the recording of the second lien violated the automatic
stay. Plaintiff asserted that its notice of perfection preserved the
second lien until after such time as the property was no longer part of
the bankruptcy estate. Plaintiff also argued that its complaint had been
timely filed because the pendency of the bankruptcy proceedings tolled the
90-day period for filing the complaint. Concluding that the liens
violated the automatic stay and that the complaint was not timely filed,
the trial court entered judgment for the defendants. Plaintiff appealed.

Addressing only the second lien on appeal, the Court of Appeal reversed,
concluding that Plaintiff's complaint had been timely filed, and that the
recording of the second lien did not violate the automatic stay.

In so ruling, the appellate court noted that: (1) the mere recording of a
mechanic's lien post-petition does not violate the automatic stay in
bankruptcy; (2) a notice of lien must be filed in a bankruptcy proceeding
in order to provide the debtor and creditors notice of the lienor's intent
to enforce the lien; and (3) the bankruptcy trustee may not avoid a
properly perfected lien. See 11 U.S.C. §§362(b)(3), 546(b).

The Court focused on the tension between California's requirement that an
action to foreclose a mechanic's lien must be brought within 90 days of
the lien's recording and the Bankruptcy Code's prohibition on
post-petition lien foreclosure actions as a violation of the automatic
stay. See 11 U.S.C. §362(b); Cal. Civ. Code § 3144.

As you may recall, Bankruptcy Code Section 108, Subdivision (c) tolls
certain filing deadlines in civil actions against a debtor. Section 108,
subdivision (c) provides in pertinent part, "if applicable nonbankruptcy
law . . . fixes a period for commencing . . . a civil action . . . on a
claim against the debtor . . . and such period has not expired before the
date of the filing of the petition, then such period does not expire until
the later of . . . the end of such period, including any suspension of
such period occurring on or after the commencement of the case . . . or .
. . 30 days after notice of termination or expiration of the [automatic]
stay . . . ."

The Appellate Court thus determined that the period during which the
automatic stay was in effect did not count toward the limitations period
for purposes of enforcement of Plaintiff's lien. Accordingly, the Court
held that California's 90-day period for filing Plaintiff's complaint
began running from the time of the trustee's sale of the property when the
automatic stay terminated (the later of the two time periods contemplated
by Section 108, Subdivision (c)), and that Plaintiff's complaint, filed 79
days after the trustee's sale, was timely.

The Court rejected Defendants' argument that the doctrine of invited error
precluded Plaintiff from arguing on appeal the validity and enforceability
of the lien, because Plaintiff had stated at trial that the second lien
was null and void but nevertheless asserted that it could file a notice of
perfection and retain rights under the lien. The Court noted that for
the invited error doctrine to apply, a party must demonstrate by
affirmative conduct a deliberate tactical choice and that, in this case,
Plaintiff's counsel had merely applied one rule of law when another rule
should have been applied.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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