Where Standing, Mechanic’s Liens, and Bankruptcy Collide

Photo Credit: Rett HillI have spoken often about mechanic’s liens and the implications of such liens as they relate to bankruptcy here at Construction Law Musings. A recent case out of Loudoun County, Virginia added another wrinkle to this discussion, that of standing and what happens on conveyance of the property and what interest in the property is required to allow a party to seek removal of the mechanic’s lien.

In Leesburg Bldg. P’rs LLC v. Mike Berger Inc. the Loudoun County Circuit Court faced the following scenario. Leesburg Building Partners developed certain condominiums and hired Lansdowne Construction to perform the work as general contractor and paid Landsdowne in full for the work. Lansdowne hired Mike Berger, Inc. (“MBI”) to perform concrete work for the project. Landsdowne didn’t pay MBI approximately $48,000.00 and subsequently filed for bankruptcy. MBI, seeking to protect it’s interest in the money it was owed, recorded a mechanic’s lien on the property. Leesburg Building Partners filed an action to declare the lien invalid and have it removed from the property based upon its “payment defense” and the fact that it had paid Landsdowne in full. A relatively simple scenario and one that has been discussed before here at Musings. Not so fast. . .

The wrinkle to this case is that after paying Landsdowne and before the bankruptcy and the lien were filed, Leesburg Building Partners sold all of the condominiums to third party purchasers. Because of this fact, MBI moved to dismiss the petition by Leesburg Building Partners, stating that Leesburg Building Partners did not have an interest in the property under Va. Code Section 43-17.1 and therefore did not have standing to pursue the claim. While even the Court acknowledged that this argument works on first blush, the devil is, as always, in the details.

Leesburg Building Partners had conveyed the property with special warranty of title that by Virginia statute required it to “forever warrant and defend such property. . .unto the grantee[s] … against the claims and demands of … all persons claiming … through . . . [the grantor].” Furthermore, a mechanic’s lien in Virginia is an inchoate lien that attaches at the time of the provision of labor or furnishing of materials and the lien recording process is merely a perfection of that lien and a notice to the world that the lien exists. Because the lien attached at the time of the work when Leesburg Building Partners owned the property and before the conveyance and MBI was therefore “claiming through the grantor” the Court found that Leesburg Building Partners had standing to challenge the lien stating:

Thus, despite the fact that all of the units in the Project had been conveyed by LBP to third party owners, having conveyed each of those units with special warranty of title, LBP retains an interest in the condominium units of the Project within the meaning of Code § 43-17.1. Accordingly, LBP has standing to file a separate proceeding by petition under Code § 43-17.1 challenging the validity of MBl’s Mechanic’s Lien against the Project.

After dismissing certain other arguments (that I recommend for your review), the Court found that Leesburg Building Partners had a good payment defense, denied MBI’s motion to dismiss and declared the lien invalid.

The takeaways? 1. Standing inquiries are not as easy as they look in these cases and 2. Somtimes even when you do everything you can to protect your interest, things don’t go your way. These cases are very fact specific and nuanced so I highly recommend that you find an experienced construction lawyer before moving forward with any action or defense relating to a Virginia mechanic’s lien and that you read the opinion linked above carefully and draw your own conclusions.

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