Another Way a Mechanic’s Lien Protects You

Here at Construction Law Musings, we have discussed mechanic’s lien law in Virginia on multiple occasions.  We have discussed everything from the very picky nature of the perfection and enforcement of these liens to the changes that the Virginia General Assembly periodically makes to these requirements and how to defend against such liens.

While the steps taken and content of a Virginia mechanic’s lien will be strictly construed by the Virginia courts, when perfected properly, a mechanic’s lien can and will put you as a construction company seeking payment in a better position than if no lien were recorded.  The direct benefit is that you now hold a lien on the property on which you performed work that takes a priority (read will be paid before) any mortgage or other lien on that structure.  In other words, if you, the bank, or the owner seeks to sell the property through foreclosure or otherwise, mechanic’s lien holders generally get paid first.  While there are exceptions to be explored with an experienced Virginia construction attorney, this is the general rule and the power of a mechanic’s lien.

Recently I was reminded of another less obvious, though no less powerful, benefit of having a mechanic’s lien is that these liens, both by their nature in Virginia and the bankruptcy code, survive bankruptcy in a way that a regular judgment would not.  The advantage is twofold.  One, a mechanic’s lien puts you in the pool of creditors with secured claims.  Basically, this means that you have a better shot at getting some payment out of a bankruptcy by the owner of the property when the smoke clears because you have an interest in the real estate that is likely to be the owner’s biggest asset.

Two, your lien will survive the bankruptcy.  Unlike most other creditor claims that are completely discharged (read wiped out) by the bankruptcy and that are unlikely to result in significant or any payment, a mechanic’s lien that is recorded either before or during the bankruptcy is not discharged automatically.  Your Virginia lien is considered perfected at the time of the recording and while the enforcement of that lien is stayed pending the bankruptcy, the lien itself remains in place (and the statute of limitations for enforcement is tolled) until the bankruptcy stay is lifted and the proceedings completed.  This is true whether your contract is directly with the owner or another party in the construction payment chain on that project.

The practical result in such situations is that without a lien in place when an owner/developer or someone north of you on the payment chain goes bankrupt, you may be left with an unpaid receivable.  However, a properly perfected mechanic’s lien can turn this seemingly hopeless collection situation into one that results in at least a large portion of the unpaid debt being paid out of the bankruptcy.

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