Section 547 of the Bankruptcy Code allows a debtor or trustee, as applicable, to avoid/claw back certain “preferential” transfers made within 90 days of a bankruptcy filing. Most commonly, the transfers that debtors and trustees seek to avoid/claw back are payments of money to a creditor of the debtor. However, section 547 of the Bankruptcy Code also empowers a debtor or trustee to avoid/claw back the fixing or perfection of a lien occurring within 90 days of the bankruptcy filing. See Green v. HSBC Mort. Servs. (In re Green), 474 B.R. 790 (Bankr. D. Md. 2012). That said, not all liens are treated equally for purposes of lien avoidance, and the Bankruptcy Code distinguishes between “statutory liens” and “judicial liens.” While “judicial liens” are subject to avoidance if they otherwise satisfy the requirements of section 547 of the Bankruptcy Code, the “statutory liens,” section 547(c) of the Bankruptcy Code provides, in relevant part, that “the trustee may not avoid under this section a transfer … that is the fixing of a statutory lien that is not avoidable under section 545 of this title.” 11 U.S.C. § 547(c)(6) (emphasis added). Section 545, in turn, permits the avoidance of statutory liens, but only in very limited circumstances.
Both “statutory lien” and “judicial lien” are defined terms under the Bankruptcy Code. “Judicial Lien” is defined as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” 11 U.S.C. § 101(36). “Statutory lien” is defined as,
"[A] lien arising solely by force of a statute on specified circumstances or conditions, or lien of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute."
11 U.S.C. § 101(53).
The legislative history for section 101(53) of the Bankruptcy Code lists mechanic’s liens as an example of a statutory lien. See S. REP. 95-989, 27, 1978 U.S.C.C.A.N. 5787, 5811. Indeed, practically every court that has considered whether mechanic’s liens are “statutory liens” or “judicial liens” has held that a mechanic’s lien established under the respective state’s law is a statutory lien. See e.g., In re Chambers, 264 B.R. 818, 822 (Bankr. N.D.W. Va. 2001) (holding that West Virginia’s mechanic’s lien is a statutory lien); In re Concrete Structures, Inc., 261 B.R. 627, 635 (E.D. Va. 2001) (holding that Virginia’s mechanic’s lien is a statutory lien).
On July 26, 2024, in a matter of first impression, the United States Bankruptcy Court for the District of Maryland found that an examination of the distinctiveness of Maryland’s mechanic’s lien statute demonstrates why it is the exception that proves the rule, holding that mechanic’s liens created under Maryland law are judicial liens, and not statutory liens, as those terms are defined in the Bankruptcy Code. Vestoge Frederick MD, LLC v. Snyder Environmental Services, Inc. (In re Vestoge Frederick MD, LLC), Adversary Proceeding No. 24-00029-LSS. The parties were embattled in litigation, which was recently resolved, that preclude earlier reporting of this important issue.
Maryland’s mechanic’s lien regime is codified in Title 9, Subtitle 1 of the Maryland Code, Real Property, which, as the Maryland bankruptcy court found, “unambiguously provides that the establishment of a mechanic’s lien under Maryland law occurs only through judicial action. Only after success in the expedited judicial proceeding described in section 9-106, does the petitioner receive a mechanic’s lien by order of the court." Accordingly, the bankruptcy court found that Maryland mechanic’s liens do not arise “solely by force of a statute,” but rather “by judgment, levy, sequestration, or other legal or equitable process or proceeding.
Maryland’s distinctively judicial process for establishment of a mechanic’s lien was necessitated by the Maryland Court of Appeals’ decision in Barry Properties, Inc. v Fick Bros. Roofing Co., 352 A.2d 222 (Md. 1976). In Barry Properties, the court held that Maryland’s prior mechanic’s lien statute, which established a lien from the time work commenced or materials were provided, was unconstitutional under both the Federal and Maryland Constitutions. Accordingly, the court held that “there can be no existing lien on property until and unless the claimant prevails either in a suit to enforce the claimed lien or in some other appropriate proceeding providing notice and a hearing (i.e., a declaratory judgment action).” In response, Maryland’s legislature enacted the current mechanic’s lien statute.
While the bankruptcy court noted that the manner in which a lien arises is entirely a matter of state law, whether the Bankruptcy Code categorizes such lien, however established under state law, as a judicial or statutory lien for purposes of applying the provisions of the Bankruptcy Code is a matter of federal law for purposes of interpreting and applying sections 545 and 547 of the Bankruptcy Code.
Implications of This Decision. Prior to this decision, Maryland construction litigators and bankruptcy practitioners alike assumed that Maryland mechanic’s liens are statutory liens only avoidable in very limited circumstances under section 545 of the Bankruptcy Code. This should come as no surprise as the Maryland Code itself characterizes Maryland mechanic’s liens as “statutory” liens. Under the bankruptcy court’s decision, Maryland mechanic’s liens may, in fact, be avoided/clawed back as long as the trustee or debtor can otherwise satisfy the elements of a preferential transfer under section 547 of the Bankruptcy Code.
This decision adds an arrow to the quiver of debtors’ counsel, and, in the right circumstances, may provide another reason for a land owing entity to file for bankruptcy protection. But, the timing of a bankruptcy filing is imperative. At first blush, it would appear that the debtor would have 90 days from the entry of a final order awarding a mechanic’s lien to file for bankruptcy and preserve its right to avoid/claw back the mechanics’ lien, but section 547(e)(1)(a) of the Bankruptcy Code, coupled with section 9-102(e) of the Maryland Property Code, may require that the bankruptcy case be filed within 90 days of the commencement of the state court action seeking the imposition of a mechanic’s lien. Therefore, counsel should calendar the date that is 90 days after the commencement of the mechanic’s lien action as the potential outside date to seek bankruptcy protection. As for counsel representing mechanic’s lien claimants, this decision makes commencing the mechanic’s lien process all the more urgent to obtain an unavoidable lien on property.