Generally, if you’re a creditor and you have possession of a bankrupt debtor’s possessions, you have to give it back when they file bankruptcy. But not always.
Today, I’m talking about mechanic’s liens.
As you’ll remember in Tennessee, Tenn. Code Ann. § 66-19-101 allows a mechanic to assert a lien for repairs performed on a vehicle, and, in order to preserve the super-priority perfection in the vehicle, the mechanic has to retain actual, physical possession of the car.
But, what about when the customer files bankruptcy, and the demand to turnover the vehicle comes from a Bankruptcy Attorney, alleging a violation of the automatic stay?
Bankruptcy Courts say that the mechanic can still hold on to the car.
Certain actions are excepted from the automatic stay, including “any act to perfect, or to maintain or continue the perfection of an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)” 11 U.S.C.A. § 362(b)(3). Section 546(b) limits a trustee’s avoidance powers under 11 U.S.C.A. § 549 with respect to “the maintenance or continuation of perfection of an interest in property … [i]f a law … requires seizure of such property … to accomplish such perfection, or maintenance or continuation of perfection of an interest in property[.]” 11 U.S.C.A. § 546(b). Statutory liens such as mechanics liens fall within the scope of this exception.
That’s a lot of legal citations, so here’s the take away: if the repairman holds a statutory mechanics lien upon the vehicle for the repairs done, then the retention of the vehicle–even after the Bankruptcy Case is filed–does not violate the automatic stay.
In that case, the Debtor must either propose to pay the lien, fight it, or give up the car. Good news for mechanics.
Creditors Rights 101 