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Decided: May 22, 2014

The Fourth Circuit, affirming the decisions of the bankruptcy and district courts, held that under North Carolina law, where a creditor subcontractor is entitled to a lien upon funds a third party owes a debtor construction company, the subcontractor’s property interest in the liens arises upon delivery of the materials to the building site.  Therefore, if the debtor construction company files a bankruptcy petition, a subcontractor entitled to a lien is exempt from the automatic stay on debt collections imposed during federal bankruptcy proceedings, notwithstanding its failure to perfect the lien pre-petition.

Construction Supervision Services (CSS), a North Carolina construction company, placed orders with multiple subcontractors (the Subcontractors).  The Subcontractors in turn delivered the requested goods to the building site and invoiced CSS for the amount due.  CSS then failed to pay the creditor Subcontractors and filed for Chapter 11 bankruptcy.  While federal bankruptcy petitions trigger an automatic stay on creditor claims against the debtor, 11 U.S.C. § 362(b)(3) provides an exception for “any act to perfect . . . an interest in property to the extent that the trustee’s rights and powers are subject to perfection under section 546(b) . . . .”  Section 546(b) extends the exception to instances where state law creates a property interest before the date of perfection.  Under North Carolina law, the Subcontractors were entitled to a lien on funds owed to CSS and, with the belief that the exception to the stay applied, sought to serve notice to CSS’s debtors thereby perfecting the liens.  Branch Banking & Trust Company (BB&T), concerned with recovering funds in excess of one million dollars it lent to CSS, objected to the Subcontractors’ post-petition perfection.  BB&T averred that because the Subcontractors failed to notice and perfect their liens prior to CSS’s bankruptcy petition, they did not have a property interest in the liens; therefore, the exception did not apply and their claims were stayed by the federal bankruptcy court order.

Because the bankruptcy stay exception applies to any act to perfect a pre-petition property interest, the Court had to determine whether, under the relevant North Carolina statute, a subcontractor’s property interest begins when the subcontractor becomes entitled to a lien or instead only after the subcontractor perfects the lien.  After its analysis of the statute, the Court reasoned that the statute simply secures an already existing property interest.  Because entitlement to a lien arises at the time the creditor subcontractor delivers the materials, so does the subcontractor’s property interest.  Therefore, the Subcontractors had a property interest at the time that CSS filed its bankruptcy petition, and the bankruptcy stay did not preclude them from perfecting their interest post-petition.

Full Opinion

-Amanda K. Reasoner