In March of 2017, the Third Circuit examined whether the filing of a New Jersey statutory mechanic’s lien after the commencement of a bankruptcy case violated the automatic stay. The Third Circuit affirmed the District of New Jersey’s holding, and concluded that since the construction liens in question were effective as of their post-petition filing date, the automatic stay of Section 362(a)(4) applied and precluded the lien filing. Accordingly, the decision has significant impacts on commercial creditors—potentially removing one form of relief for a contractor’s failure to pay while in bankruptcy, and, state lien law dependent, may offer contractor-debtors certain strategic advantages within the Circuit.
While the Third Circuit’s ruling has, on its face, significant implications for contractors and suppliers, the court’s underlying reasoning quickly lends support to other broader, policy-driven bankruptcy arguments. In rendering its decision, the Third Circuit found that the bankruptcy court, even as a non-Article-III court, can constitutionally decide the issue presented in Linear as the scope of the automatic stay involved a matter of “public rights,” which bankruptcy courts could resolve even without the consent of parties. As an extension, the Third Circuit’s decision has been cited favorably in support of arguments for non-consensual third-party releases in bankruptcy actions.
