Eastern District Reverses 2009 Mammoth Grading and Harrelson Utilities Decisions
March 16, 2012
In 2009, a ruling by the Bankruptcy Court for the Eastern District of North Carolina dramatically affected subcontractors’ lien rights against bankrupt entities. Wednesday, a subsequent ruling by the Eastern District reversed the 2009 ruling, holding that post-petition service of a notice of claim of lien on funds does not violate the automatic stay placed on claims against a Bankrupt entity.
As most in the construction industry are aware, the 2009 decisions concerned the filing of claims of lien on funds by Ferguson Enterprises, Inc. against Mammoth Grading, Inc. and Harrelson Utilities, Inc. Because Ferguson filed the claims of lien on funds after Mammoth and Harrelson filed their Bankruptcy petitions, the Court held that the filing of the claims violated the Bankruptcy Code’s automatic stay on claims against the debtors. The automatic stay normally puts a stop to all legal proceedings against a Bankruptcy debtor until the resolution of the Bankruptcy case, but had not barred these types of lien claims in the past.
This decision came in the midst of a severe recession and severely impacted the legal landscape for N.C. subcontractors and suppliers, who have since been filing lien claims at the first hint of a contractor or owner’s financial woes in order to protect their rights. Although the new decision is welcomed by subcontractors, it will also now expose bankrupt entities to additional, unanticipated claims despite the automatic stay protection.
This week’s ruling, by Eastern District of N.C. Judge Randy Doub, reversed the Bankruptcy ruling on the effect of claims of lien on the automatic stay. A claim of lien on funds may now be filed even after an owner has filed its Bankruptcy petition. In his ruling, Judge Doub stated: “No longer will North Carolina subcontractors be deprived of their statutorily created and granted lien on funds. As the U.S. District Court stated, this practice has ‘turned the construction industry’s standard operating procedure on its head.'”
Associate Attorney with Anderson Jones, PLLC