What Happens to Mechanics Liens in Builder Bankruptcies: Lessons from Suncrest
Not all secured creditors are made equal. Similarly, the position of secured creditors holding mechanics & materialmen liens may not be as favorable as that of first lien lenders.
A couple of lessons which we can draw from the bankruptcy proceedings of Suncrest (a builder in Utah) are:
- Mechanics & materialmen liens might be primed by post-petition financing extended by banks and other lenders. While the priming of pre-petition liens is generally considered an extraordinary remedy, courts may allow it if, among others, the bankrupt builder can show that it is unable to secured credit without priming. In today’s environment with scarce liquidity, it is hardly difficult to prove this point.
- A section 363 sale of the bankrupt builder’s property means that the property will be sold free and clear of mechanics & materialmen liens, unless the purchaser agree to take the property subject to these liens.
Nonetheless, in situations such as these, other creditors are likely to agitate for various legal remedies to preserve their claims. In Suncrest, to avoid costly and time-consuming litigation, the lender, Zions Bank (which also purchased the property in the section 363 sale using a credit bid), came to a settlement with other creditors. Part of the settlement involved contributing cash to the pot for distribution to unsecured creditors. Zions also agreed not to pursue its deficiency claims. Read more in the Restructuring Strategies Report of Suncrest LLC.
