In In re 450 S. Western Ave., LLC, BAP No. CC-21-1116, the Ninth Circuit Bankruptcy Appellate Panel (the “Panel”) affirmed the Bankruptcy Court’s dismissal of a complaint to foreclose a mechanics’ lien with prejudice because the plaintiff failed to properly perfect its lien under California law and did not timely file a Bankruptcy Code Section 546(b) notice to continue the perfection of its lien upon the filing of a bankruptcy by the property owner. The Panel clarified that the time to file a notice under Section 546(b) in lieu of commencing an action to foreclose a mechanics’ lien, or to maintain or continue perfection of a lien, is not tolled by Section 108.
California law requires an action to foreclose a mechanics’ lien to be filed within 90 days of the recording of the mechanics’ lien. If a bankruptcy is filed during that 90 days, Section 546(b) requires the claimant to give notice of claimant’s intent to continue the enforceability of its lien by the time a foreclosure action would otherwise be due to be filed under state law. In 450 S. Western Ave., the claimant did not file a timely notice as required by Section 546(b). The claimant asserted that the deadline provided by Section 546(b) is tolled by Section 108(c). The Bankruptcy Court and the Panel disagreed. The Bankruptcy Court reasoned that while the claimant could not file a civil action because of the automatic stay, Section 546(b) provides an alternative to maintain or continue the perfection of the lien. Because Section 546(b) provides a basis to maintain or continue the perfection of a lien, Section 108 does not toll the time to file a Section 546(b) notice. Prior to 1994 amendments, Section 546(b) did not provide for the continuation of the perfection of the lien and the foreclosure action was prohibited by Section 362. Thus, Section 108 tolled the time in which a foreclosure action must be filed. Under the 1994 amendments, Section 546(b) allows the perfection of the lien to be extended and thus, Section 108 does not apply. In other words, since Section 546(b) gives an alternative to filing a civil action, Sections 108 and 362 are not applicable.
The rules and deadlines for foreclosing on a mechanics’ lien in California are strictly construed and must be strictly adhered to. This includes filing a notice under Section 546(b) if a bankruptcy is filed before a foreclosure action is filed. If the contractor or subcontractor fails to timely file the Section 546(b) notice, it will lose its rights as a secured creditor. As such, they should familiarize themselves with the rules when a bankruptcy is filed.
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If you have any questions, please contact Melissa Lowe at 949-340-3400.