Holding a Car Pursuant to a Mechanic’s Lien Doesn’t Violate the Automatic Stay

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.

Remote Contractors Can’t Assert a Materialman’s Lien on Residential Property in Tennessee

In this booming economy, there’s money in real estate, and the contractors who went broke in the Great Recession are back on top. So, let’s talk for a moment about mechanic’s and materialman lien laws, i.e. the Tennessee laws that allow an unpaid contractor to assert a lien claim on the real property that is improved by his labor and materials.

If you’re a contractor and you provide labor and materials to a real property project, you can always assert a lien on the property, right? Well, like many things in the legal world, the real answer isn’t that easy.

Here’s a quick exception to keep in mind.

First off, are you a “remote contractor” or a “prime contractor”?

A contractor who contracts directly with the owner is a “prime contractor.” A “remote contractor” is anyone who provides material, services, equipment or machinery in furtherance of an improvement pursuant to a contract with a person other than an owner (i.e. a subcontractor who is brought on to the project by the general contractor).

Under Tennessee’s lien laws, remote contractors may not assert liens on what is defined as “residential real property.” Tenn. Code Ann. § 66-11-146(a)(1) defines “residential real property” as a dwelling unit in which the owner intends to reside. There’s an exception under Tenn. Code Ann. § 66-11-146(b)(2) for situations where the owner is operating as a de facto general contractor (in which case the remote contractor has contracted with the owner, so the remote contractor is really a prime contractor).

So, yes, lien laws are a great way to protect contractors and ensure that their debts are paid. Just not on residential projects.