Monday, July 17, 2017

PA Lien Law Changes Begin Impacting Projects

The Pennsylvania Mechanic's Lien Law was enacted in what seems now like another era: John F. Kennedy was still president, the Vietnam War was still a small, localized conflict, and for some reason, PA decided that 1963 was the year to codify a major new set of laws relating to the filing of construction liens.

No major changes to the Pennsylvania Mechanic's Lien Law were made for 50 years... quite a record. But over the years other things changed: such as the way construction financing is procured and recorded, how larger and larger project depend on an ever expanding number of suppliers and subcontractors, and the persistent problems of non-payment, notice of the filing of a lien, find out who owners are, and how to get in touch with them and general contractors.

In 2014, the Pennsylvania legislature finally took another look and decided to deal with some of these issues by updating the 1963 law by passing Act 142 Amending the act of August 24, 1963 (P.L.1175, No.497). Overall, Act 142 was intended to make PA construction projects more public: that is, to make the public aware of what the project is and who is building it. This takes some of the guesswork out of finding out who the owner is, putting that information online in a public database.

According to a recent article by The Legal Intelligence, "The amendments to Pennsylvania's Mechanics' Lien Law of 1963 are specifically relevant for owners, contractors and subcontractors."  When a law is involved, relevance is often just a word used to indicate that more regulations have been enacted. This is the case in PA.

What does the legislation do?
It establishes a database called the "Pennsylvania State Construction Notices Directory". This directory is online, and be accessed by anyone interested in construction projects. The database allows, but does not require, owners to register their projects with a value of $1.5 million.

Why would an owner register a project?
The new law provides incentives to the owner: if you register your project, additional required notices must be filed by contractors and subcontractors and suppliers prior to the filing of a lien.

What are the notice requirements for registered projects?

While there are four notices that can be filed, only two are required:

The owner must file a notice of commencement prior to beginning work (or obtaining materials). This notice must not only be filed with the Notices Directory, but also be posted at the project. It should also be included in the contract documents.

Subcontractors and suppliers are required to file a "Notice of Furnishing" within 45 days after the first day or work or delivering materials to the project. If that PA Notice of Furnishing (NOF) is not filed in time, the subcontractor or supplier waives its lien rights, unless their contract did not provide a warning that failure to file the NOF would result in a waiver of lien rights. Importantly, owners or others who discourage the filing of a NOF are committing a crime, punishable by second-degree misdemeanor charges, on top of damages to the aggrieved party of attorneys fees and court costs.

Notice of non-payment is recommended, and can be filed in the directory. This may be helpful to subcontractors and suppliers who have not been paid, and to owners who are trying to avoid liens or stoppage of the work because of a contractor's failure to pay its workers.

Notice of completion is similarly recommended, and is filed by the owner within 45 days of the completion of the work.

Our advice, if you are a subcontractor or supplier who is beginning work on a project with a value over $1.5 million: review the directory to see if that project is listed... and then comply with the new rules!

Friday, June 23, 2017

Texas Re-Affirms Lien Filings Are Constructive Notice to New Owners

No Obligation to Provide Actual Notice of the Filing of A Texas Construction Lien Claim

The issue of whether construction liens are binding after the transfer of property is a thorny one. The new owners did not commission the work, and in many cases may not have known that a lien claim was filed on the property. But the lien claimant also usually has no knowledge of the transfer of the property, or to whom it is being transferred. Additionally, the construction lien does not ask for potential owners...it asks for the name of the current owner.

Then there's the case of the transfer of properties from one entity to another just to avoid a mechanics lien being filed, or to make it invalid because the new owner is not known to the lien claimant. This happens more often than it should.

So what happens when a Texas construction lien is filed right before a property transfer? And how does this affect the new owner, who had no actual knowledge of the filing? Does the construction lien stay on the property, encumbering the new owner's interest, and making the new owner liable for payment of the lien, and subject to foreclosure of their newly purchased property? Or does the failure to give the new owner actual notice result in the lien being expunged or discharged, or simply not effective against the new owner's interest.

The longstanding law is that the new owner is saddled with the lien, and the payment of that lien, may have rights to recover against the prior property owner. Under Texas's codified bona-fide purchaser doctrine, an instrument reflecting a property conveyance or interest will not cloud the title of a subsequent purchaser, so long as the purchaser pays valuable consideration and lacks actual and constructive notice of the instrument. § 13.001.

So who has actual or constructive notice of construction liens, and when does it occur? According to Texas law, all persons have constructive notice of instruments that are "properly recorded in the proper county." § 13.002. These statutes place purchasers with constructive notice of a property interest on even footing with those who have actual notice; that is, the recorded instrument will cloud their respective titles equally.

This rule applies not only to construction liens, but also to the filing of a lis pendens: a document that is filed with the county clerk when a lawsuit is filed, and is intended as a follow up to a construction lien, providing notice that a lawsuit has been filed to foreclose on the lien). In turn, a notice of lis pendens qualifies as an instrument reflecting a property interest, and recording it in the proper county "constructively notif[ies] anyone taking an interest in real property that a claim is being litigated against the property." Long Beach Mortg. Co. v. Evans, 284 S.W.3d 406, 414 (Tex. App.—Dallas 2009, pet. denied).

Thus, a properly recorded lis-pendens notice places prospective buyers who don't actually know about the pending action in the same position as those who do: both will acquire their interest in the property subject to the claims being litigated. World Sav. Bank, F.S.B. v. Gantt, 246 S.W.3d 299, 303 (Tex. App.—Houston [14th Dist.] 2008, no pet.); see also Tex. Prop. Code § 13.004(b) ("A transfer or encumbrance of real property involved in a proceeding . . . to a third party who has paid a valuable consideration and who does not have actual or constructive notice of the proceeding is effective . . . unless a notice of the pendency of the proceeding has been recorded . . . in each county in which the property is located."). Again, actual notice and constructive notice have the same legal consequences. By providing a mechanism for constructive notice of an action involving real property, the Property Code protects the claimant's alleged rights in the disputed property. Collins v. Tex. Mall, L.P., 297 S.W.3d 409, 418 (Tex. App.—Fort Worth 2009, no pet.).

But litigations take a long time, and when a lis pendens or a construction lien are encumbering the property, the property itself is all tied up.  As such, the Property Code also provides a procedure by which another party to the action may seek to have the notice of lis pendens "expunged," that is, "erase[d] or destroy[ed]." Tex. Prop. Code § 12.0071; Expunge, Black's Law Dictionary (10th ed. 2014). This can be done by motion or summary action with a court of law, and the statute requires the trial court to order a lis-pendens notice expunged if "the claimant fails to establish by a preponderance of the evidence the probable validity of the real property claim." Tex. Prop. Code § 12.0071(c)(2). The claimant must therefore satisfy a threshold evidentiary showing on the merits of its real-property claim to continue to encumber the property during the pendency of the underlying suit. If the claimant cannot do so and an expunction order is entered and recorded, subsection (f) ensures that neither the notice of lis pendens nor the "information derived from the notice"—that is, the suit itself—is enforceable against a subsequent purchaser for value. Id. § 12.0071(f).

Read the full text of the recent Texas case that discusses the effect of the filing of Texas construction liens and lis pendens: Sommers v. Sandcastle Homes, Inc., 60 Tex. Sup. Ct. J. 1291 (2017). 

Thursday, June 22, 2017

CT Home Improvement Act Violations Allows Homeowner to Withhold Payment to Contractor

CT Supreme Court Holds Home Improvement Act Violations Relieve Homeowner of Payment Obligations Even if Work Was Performed.

Home Improvement Acts (HIA) have proliferated across the country. The purpose of these acts is to protect homeowners from unscrupulous contractors taking advantage, taking money, and doing no work or terrible work. In some states, such as New Jersey, HIA violations can result in treble damages, attorneys fees, and forfeiture of the right to payment. While the HIAs are strict and written to heavily favor and protect homeowners, many interpretations by the Courts have softened the blow for contractors.

A recent case in Connecticut did not follow that trend. The case of Burns v. Adler, 325 Conn. 14, 155 A.3d 1223 (2017) related to a contractor's action against a homeowner (HO), arising from home improvement services on a residential renovation project. The contractor sued the homeowner for a balance due for work performed on the home, including an action for foreclosure on a Connecticut Mechanic's lien. The contractor further alleged that the homeowner acted in bad faith in not paying the amounts due and owing.

In response, the homeowner claimed that the enactment of the Home Improvement Act, Conn. Gen. Stat. § 20-429 (Rev. to 2007), specifically removed a rule previously created by the courts that allowed judges and juries to consider whether a HO acted in bad faith.

The Court held that Judgment for the HO was warranted dismissing the contractor's breach of contract claim and request for judgment of strict foreclosure on a mechanic's lien.  The court held that the parties' contract did not comply with the Act and the bad faith exception was inapplicable in the circumstances (notably the court did not get rid of the bad faith exception, but rather held that it did not apply to the facts presented to it).

In holding that the HO was not required to pay the contract, the court relied mainly on the CT HIA. The court found that the contract did not satisfy § 20-429(a) or (f) because it was not signed by the contractor, did not contain a completion date, and there was no proof that a completed copy was delivered to the HO.

The message from CT is clear: if you are a contractor, ensure you comply with the HIA, or the homeowner has the right to withhold payment, even if you completed your work in a satisfactory manner. To make sure you are in compliance, contractors should visit the Connecticut Department of Consumer Protection webpage that provides Information for Home Improvement Contractors.


Wednesday, June 7, 2017

Proposed Mass Law Adds Prelien Notice For Private Construction Contracts

Notice of Identification Proposed by MA Legislature

The vexing problem of owners not knowing who is providing labor, materials or services for their project is once again being addressed by the Massachusetts legislature. Massachusetts already has a requirement that a "Notice of Contract" be filed with the county clerk prior to the filing of any lien claim. The Notice of Contract records the existence of a contract, and also provides the property owner with notice that a contract has been entered into. 

This notice, however, has been deemed not to be enough, since most Notices of Contract are not filed until there is a payment dispute. The timing of the filing of the Notice of Contract not only affects lien rights, but is also perceived to put the owner in an awkward position, since the owner would not know that there is a dispute until after it already arose, making it harder to resolve.

The latest proposal has been to require that subcontractors and suppliers, those who do not have a direct contract with the owner, serve the owner with a "Notice of Identification", at the start of the delivery of work or materials to the project. The Notice of Identification would provide the owner with the name of the subcontractor or supplier, the amount of the contract, and with whom the contract is with. Many other states have similar requirements (i.e. Florida Notice to Owner), and sending these notices is routine in these states.

Massachusetts is proposing, in 2017 Bill Text MA H.B. 3721, that the text of the notice also provide the owner with a rundown of its rights regarding potential lien claimants, and is as follows:

The notice must be in at least 10-point bold type, if printed, or in capital letters, if typewritten and must state as follows:
  • "(a)  Any person or company supplying labor or materials for this improvement to your property may file a lien against your property if that person or company is not paid for the contributions.
  • (b)  You have the right to pay persons who supplied labor or materials for this improvement directly and deduct this amount from our contract price, or withhold the amounts due them from us until 90 days after completion of the improvement unless we give you a lien waiver signed by persons who supplied any labor or material for the improvement and who gave you timely notice of identification and/or notice of contract as required under this section."



Friday, May 26, 2017

Pricing Change Order Guidance from ASA

Pricing Change Orders Like a Pro

Pricing change orders bedevils even the largest contractors. Since change order work is often an unexpected necessity, just the need for a change order creates immediate friction between the owner, the prime contractor, and any subcontractors and suppliers. The reasons for this are many:

  • The owner feels he has no negotiating power since the work has to be done, resulting in a sinking feeling that he is being blackmailed;
  • The prime contractor is frustrated that the new work is interrupting all the other work, increasing costs, and the owner is making it worse by taking forever to approve the changes;
  • The subcontractor provides a fair price, but is asked to reduce it because it wasn't in the owner's budget.  
  • Pricing construction contracts isn't easy or transparent, and change orders have the same problem.
  • The contractor pricing the change order does not want to disclose how it came up with the numbers because it exposes it to having to negotiate on its profit margin.

All of these headaches, and there are many more, cannot always be avoided, but the headache can be minimized if the change order pricing is fair and reasonable. Of course, everyone's definition of fair and reasonable varies, depending on their position.

The recent edition of "The Contractor's Compass", the American Subcontractor's Association's monthly magazine, provides an in depth discussion of ways to price change orders. According to "Pricing Change Orders Like a Pro," its no surprise to most of us that change order or claims include the following: Labor, Equipment, Materials, Indirect costs, Overhead, Profit, and Bond. More specifically, the article says that in pricing a change order, make sure you don't overloook any of these categories, along with suggested overall cost percentages (which may vary by region or project):

Labor •
Mobilization •
Demobilization •
Unloading of materials •
Sorting of materials •
Carrying materials to right location •
Distribution of materials •
Layout •
Clean-up •
Engineering [estimate or actual] •
Supervision (25 percent for foreman 12.5 percent for general foreman) •

The article also gives helpful notes on items that are often overlooked when pricing:
Equipment: "Make sure you have corresponding labor to operate equipment. Rates—Use Bluebook, Caltrans, Corps of Engineers, or whatever is specified."
Materials: if actual, provide invoices.
Indirect Costs: "These are suggestions to add to your change order: • Small tools—7 percent of labor [negotiate to 4 percent to 5 percent]. • Consumable—7 percent of labor [negotiate to 4 percent to 5 percent]. • Safety maintenance—2 percent of labor. • OSHA tool box meetings—1.25 percent of labor [½ hour / 40 hours]. • As-built fees—1 percent of labor. • Added warranty—2 percent of labor. • Degree of difficulty—5 percent to 10 percent of labor. • Coordination with other trades— Forman supervision in hours. • Change order preparation—hours and rate.
Overhead: Use actual or whatever is specified.
Profit: Ask 12 percent—settle for 10 percent, or whatever is specified. Federal contract—method of computing
Bond: Actual bond costs whatever is specified"

All great things to keep in mind when pricing a change order. The article also gives more specific information regarding what should compose a change order and how to  formulate it. Read the whole article here.

Thursday, May 25, 2017

Consensus Docs Form Contracts Updated

Design-Build and Construction Management At-Risk Standard Documents Revised

Form contracts are used throughout the construction industry. These standard contract forms provide predictability and consistency in the construction industry. While standard construction contract forms are meant to be modified to fit the specific project and terms for which they are used, most of the standard terms are generally left untouched during negotiations. The most popular, and oldest, of these standard construction contract forms is the American Institute of Architects AIA forms. However, building criticism that the AIA forms favor owners and architects lead to the formation of the ConsesusDocs, which were a result of the work of contractor and subcontractor organizations.

The ConsensusDocs, drafted and reviewed under the supervision of about 40 construction associations - mostly general and subcontractor associations - have spent significant time observing new methods and technology involved in design-build, as well as pitfalls and holes in construction management at-risk projects. Taking the information gathered, as well as feedback from the various associations, ConsensusDocs revised its design-build and construction management at-risk standard documents. These new documents attempt to provide revisions that take into account the concerns of owners, contractors, designers, and subcontractors.

The updated ConsensusDocs are:

• ConsensusDocs 410 Owner & Design-Builder Agreement (Cost of Work Plus Fee with GMP)
• ConsensusDocs 415 Owner & Design-Builder Agreement (Lump Sum)
• ConsensusDocs 420 Design-Builder & Design Professional Agreement
• ConsensusDocs 450 Design-Builder & Subcontractor Agreement
• ConsensusDocs 460 Design-Builder & Subcontract Agreement (Cost Plus with GMP)
• ConsensusDocs 500 Owner & Construction Manager Agreement (GMP with Preconstruction Services Option)

Wednesday, May 24, 2017

Kansas Law Protects Subcontractors on P3 Projects

Bonding Necessary in Public-Private Partnership (P3) Agreements

Construction, the backbone of the American economy, has been developing different techniques at a rapid pace over the last 100 years. Aside from the amazing strides made in the types of buildings being constructed, the construction industry has pushed itself to innovate in every facet. 

The constant change being seen in the construction industry is also affecting government. While commercial ventures have been adept at changing, government has been slower. With the advent and the embrace of Public-Private Partnerships (P3) in the construction of traditionally government infrastructure, such as bridges, airports and roads, new agreements have been formed to try to deal with the laws relating to government projects. 


In the past, governments were often required to publicly bid projects, with plans in hand, budgets ready with funds allocated, and the project itself usually required surety performance and payment bonds. P3 projects were never anticipated, and the law often does not cover P3 projects. This left a hole in the laws of many states, especially when it came to protecting subcontractors in the event of non-payment.


Kansas has taken steps to resolve one of the holes in their public construction laws, by enacting SB 55, Public construction contracts and performance and payment bonds. Recently, after the bill was passed by the Kansas Legislature, Governor Sam Brownback (R) approved the bill. The new bill will require a payment and performance bond from any prime contractor with a contract exceeding $100,000.00 on any P3 project. The purpose of the payment bond is for the "protection of claimants supplying labor or materials to the contractor or subcontractors in the performance of the work.” This will allow subcontractors and suppliers to make a notice of claim on payment bonds when they are not paid for the work they perform. The bill permits the claimants to seek attorneys fees and costs.


The official summary of Kansas SB 55 is as follows:


Bonding Necessary in Public-Private Partnership (P3) Agreements;
SB 55 SB 55 revises the Kansas Fairness in Public Construction Contract Act by requiring a contractor involved in a public-private partnership (P3) agreement with a public entity to furnish the following bonds: 


● A performance bond, which is equal to the full contract amount; and
● A payment bond, which is equal to the full contract amount for the protection of claimants supplying labor or materials to the contractor or subcontractors in the performance of work. 


The bill applies to P3 contracts valued at more than $100,000. The bonds must allow for the recovery of attorney fees and related expenses. 


The terms “public-private agreement,” “private contribution,” and “public benefit” are defined in the bill.

Tuesday, May 23, 2017

Innovative Website Seeks to Sell Real Estate Quickly in North Texas

Dallas/Forth Worth Website Provides Detailed Information on Properties

Innovation in the real estate industry, especially with online startups, is taking off, and becoming more local. While Zillow, StreetEasy, and Tulia provide real estate listings and a wealth of information about properties, those websites are missing one thing: local knowledge and information about the condition of properties.
A new website recently set up in the Dallas/Fort Worth area is attempting to ease the process of selling and buying real estate. The website is set up for both residential and commercial properties, with the goal of making the sales quickly. The website is designed to help buyers find real estate across North Texas.
According to news reports, the website was set up by licensed Realtor Jeff Morser, who indicated that the website will have content for distressed properties, including those that are damaged, or are encumbered by tax liens or Texas mechanics liens
It can be difficult to sell a property that is subjected to a mechanics lien, or other type of lien, so the inclusion of this information from the start may help both sellers and buyers achieve a faster sale.  Knowing information up front on the condition of the property, including the condition of title, will help avoid a surprise in the long run.

Monday, May 22, 2017

NJ US District Court Upholds Arbitration Provision

Standard AIA Construction Contract Language Binds Homeowners to Arbitration

The New Jersey Courts have been struggling to determine when homeowners are required to participate in arbitration in residential construction disputes. The pandora's box was opened by the New Jersey Supreme Court in the case of Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 99 A.3d 306 (2014), when the Court found that a homeowner on a residential construction project had not agreed to arbitrate disputes because the arbitration clause did not sufficiently warn the consumer homeowner that it was waiving its right to litigate the dispute in court and the right to a jury trial: "The arbitration agreement here is unenforceable because its wording did not clearly and unambiguously signal to plaintiff that, by entering the agreement, she was surrendering her right to pursue her statutory claims in court." 

Despite this ruling, the NJ Supreme Court also stated that "The Court emphasizes that no prescribed set of words must be included in an arbitration clause to accomplish a waiver of rights. Whatever words compose an arbitration agreement, they must be clear and unambiguous that a consumer is choosing to arbitrate disputes rather than resolve them in a court of law." This has resulted in a field day for lawyers, and a headache for the court system. Unintentionally, the Supreme Court allowed an opening for forum picking, and potentially the ability of homeowners to challenge an arbitration award even after they participated in the arbitration. 

Such was the case in Tedeschi v. D.N. Desimone Constr., Inc., 2017 U.S. Dist. LEXIS 69695. In Tedeschi, prior to the start of the NJ residential construction project, the contractor mailed the homeowner AIA Form A101-2007, which was to be the contract between the parties. The first page of the AIA A101-2007 states that the AIA A201-2007, General Conditions of the Contract for Construction, is adopted in the Standard Form by reference.  At some point, the parties had a dispute and the contractor filed a notice of unpaid balance, and a demand for arbitration in accordance with NJ residential construction lien law, as well as a demand for arbitration in accordance with the contract between the parties. The arbitration took place, and the contractor prevailed in the arbitration. After the award was issued, the homeowner filed a lawsuit in federal court, claiming the award should be vacated because they did not agree to arbitrate, and were never properly informed that there was an arbitration provision in the contract.

A few important things the District Court pointed out in its analysis:
  • The first page of the Standard Form provides, "This document has important legal consequences. Consultation with an attorney is encouraged with respect to its completion or modification."
  • Contractor asked the homeowner to review the documents, and if they met with homeowner's approval, sign and return one copy to the contractor. 
  • Homeowner signed the contract.
  • Homeowner admitted it signed the contract without reading it, but were given the time and opportunity to review and read it.
With regard to the arbitration provision itself, the court noted that the contract offered three choices:
  1. "Arbitration pursuant to Section 15.4 of AIA Document A201-2007," 
  2. "Litigation in a court of competent jurisdiction," or 
  3. "Other." 
"The box next to the first choice — arbitration — was marked with an 'X.' The boxes next to choice two — litigation — and choice three — "other" — were left unchecked." According to the District Court, "Even under Atalese standard, the selection of arbitration over litigation clearly explains in a simple way that the parties' disputes must be resolved in arbitration instead of litigation."

The court also noted that the arbitration provision explained, "If the Owner and Contractor do not select a method of binding dispute resolution below, or do not subsequently agree in writing to a binding dispute resolution method other than litigation, Claims will be resolved by litigation in a court of competent jurisdiction."

Given this explanation, as well as the three choices provided in the AIA standard form, the Court found that a reasonable person would have been sufficiently informed of their right to a trial in a judicial forum, and upheld the arbitration clause and award. The ruling should settle the issue of whether the language used in the AIA form is sufficient to bind a homeowner to arbitration, and provides much needed guidance on the language issue itself.

Friday, May 19, 2017

New Jersey Construction Lien Filings After Bankruptcy Permitted?

THIRD CIRCUIT COURT OF APPEALS ADDRESSES WHETHER CONSTRUCTION LIENS UNDER NEW JERSEY LAW VIOLATE THE BANKRUPTCY STAY 

The Third Circuit Court of Appeals on March 30, 2017 issued an opinion that two New Jersey construction suppliers who had filed liens violated the bankruptcy automatic stay. The construction liens, in typical fashion, had been filed by the material suppliers against the owners of the two developments where the prime contractor had installed the materials. The owners had not fully paid the prime contractor for the work on the projects and the contractor, in turn, did not pay the suppliers for their materials. Several weeks after the prime contractor filed for Chapter 11 Bankruptcy, the two suppliers of construction materials filed liens on the properties owned by the developers. The prime contractor filed a motion in bankruptcy court to discharge the liens.

The bankrupt entity (the prime contractor) argued that the bankruptcy’s automatic stay prevented the material suppliers from filing their liens. The court accepted the prime contractor’s argument that the liens were, in fact and in part, filed against the prime contractor’s property inasmuch as the liens could assist them in collecting against the prime contractor’s accounts receivable that was arguably due from the developers. In so holding, the court rejected the supplier’s argument that a filed lien is solely attached to the property interest of the developers/owners.

Rather, the court accepted the argument that the lien could be satisfied by payment of an asset of the bankrupt’s estate to the lien holder (i.e. paying off the lien and deducting the monies due the prime contractor) and, therefore, the lien is essentially against the property of the bankruptcy estate.

The uniqueness of this case (Linear Electric Co., Inc. v. Cooper Supply Co. and Samson Electric Supply, Third Circuit Court of Appeals, March 30, 2017) appears to be related to New Jersey’s Construction Lien Law. Specifically, the court focused upon New Jersey’s “Lien Fund,” which in general, states that an owner discharges a lien by paying into a lien fund from which claimants recover what they are owed. No lien fund can exist if at the time of service of a copy of the lien, the owner has fully paid the prime contractor for the work performed or services, materials, or equipment provided. Further, a claimant’s claim is limited to the “unpaid portion of the contract price of claimant’s contract for the work, services, materials or equipment provided.”

Applying the debtor’s logic, under New Jersey Law, if the lienors were fully paid, the amount that the prime contractor would be owed from the owners would be reduced accordingly. The Third Circuit concluded that this fact directly impacted the prime contractor’s “accounts receivable” which is clearly an “asset” of the debtor under the Federal Bankruptcy Laws.

In the end, the court, following numerous cases involving bankruptcy and lien filings, concluded that if the lienors, under these facts and under New Jersey Law, were allowed to receive full payment by virtue of the liens, the prime contractor would conceivably receive less as a result. In that situation, there would be less money for the bankrupt entity to put into a plan of repayment and, therefore, other creditors of the bankrupt entity would suffer. Thus, the lien filings improperly circumvented the federal bankruptcy laws.

In practical terms, it is interesting to note that the Third Circuit Court of Appeals did not address the well-accepted exception to the bankruptcy code’s automatic stay (Section 362(b)(3)), that permits an exception for mechanic’s liens. Further, the decision will significantly impact the construction industry in New Jersey inasmuch as many suppliers and lower-tier trade contractors rely upon the filing of a lien to protect their entitlement to get paid especially in the event of a bankruptcy filing by upper-tier general prime contractors. Without lien protection, often regarded under bankruptcy law as having some priority, the suppliers of construction materials would become unsecured creditors, forcing them to accept less money on their claim as is common with unsecured creditors.