Branch Banking & Trust Co. v. Construction Supervision Services, Inc.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1560
In Re: CONSTRUCTION SUPERVISION SERVICES, INC.,
Debtor.
------------------------------
BRANCH BANKING & TRUST COMPANY,
Creditor - Appellant,
v.
CONSTRUCTION SUPERVISION SERVICES, INC.,
Debtor – Appellee,
HANSON AGGREGATES SOUTHEAST, LLC; COUCH OIL COMPANY OF
DURHAM, INC.; R.W. MOORE EQUIPMENT CO.; H.D. SUPPLY
WATERWORKS, LTD; WATER WORKS SUPPLY, INC.; MSC WATERWORKS,
INC.; GREGORY POOLE EQUIPMENT COMPANY; THOMAS CONCRETE OF
CAROLINA, INC.; THE JOHN R. MCADAMS COMPANY, INCORPORATED,
Creditors - Appellees.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh. Terrence W. Boyle,
District Judge. (5:12−cv−00533−BO; 8:12-bk-00569-RDD)
Argued: January 28, 2014 Decided: May 22, 2014
Before KING, SHEDD, and WYNN, Circuit Judges.
Affirmed by published opinion. Judge Wynn wrote the opinion, in
which Judge King and Judge Shedd joined.
ARGUED: Nicholas C. Brown, HOWARD, STALLINGS, FROM & HUTSON,
P.A., Raleigh, North Carolina, for Appellant. William John
Wolf, BUGG & WOLF, PA, Durham, North Carolina, for Appellees.
ON BRIEF: Joseph H. Stallings, James B. Angell, Russell W.
Johnson, HOWARD, STALLINGS, FROM & HUTSON, P.A., for Appellant.
Ethan J. Fleischer, BUGG & WOLF, PA, Durham, North Carolina, for
Appellees Hanson Aggregates Southeast, LLC, Couch Oil Company of
Durham, Inc., and R.W. Moore Equipment Co. Paul A. Sheridan,
Nancy E. Hannah, HANNAH SHERIDAN LOUGHRIDGE & COCHRAN, LLP,
Raleigh, North Carolina, for Appellees H.D. Supply Waterworks,
LTD, Water Works Supply, Inc., Gregory Poole Equipment Company,
Thomas Concrete of Carolina, Inc., and The John R. McAdams
Company, Incorporated.
2
WYNN, Circuit Judge:
Generally, after a debtor files a bankruptcy petition, 11
U.S.C. § 362(a)(4) provides for an automatic stay of any
attempts by creditors to collect on their claims against the
debtor. But exceptions exist, including an exception under
Section 362(b)(3) for “any act to perfect, or to maintain or
continue the perfection of, an interest in property to the
extent that the trustee’s rights and powers are subject to such
perfection under [11 U.S.C. § 546(b).]” 11 U.S.C. § 362(b)(3).
In essence, Section 362(b)(3) provides an exception for those
with an interest in property that predates the bankruptcy
petition but is not yet perfected at the time the debtor files
for bankruptcy if, in the absence of the bankruptcy filing, the
perfected interest would be effective against a third party
acquiring rights prior to that perfection.
At the heart of this appeal is whether construction
subcontractors entitled to a lien on funds under North Carolina
law had an interest in property when the debtor contractor filed
for bankruptcy, by which time the subcontractors had not yet
served notice of, and thereby perfected, their liens. A careful
review leads us to conclude that the answer is yes. And because
there is no dispute that the other criteria of the applicable
bankruptcy stay exception have been met, we hold that the
bankruptcy court and district court correctly allowed the
3
subcontractors to serve notice of, and thereby perfect, their
liens post-petition.
I.
Debtor Construction Supervision Services (“CSS”), a full-
service construction company, filed a Chapter 11 bankruptcy
petition in January 2012. CSS, acting as general contractor or
as a first tier subcontractor, placed orders with the Creditor
Appellee Subcontractors (named in the case caption) (the
“Subcontractors”). These first tier and second tier suppliers
in turn provided CSS with materials such as stone, concrete, and
fuel to run equipment. The Subcontractors delivered the
requested materials to CSS on an open account, later invoicing
CSS for the amounts owed them.
After CSS’s January 2012 bankruptcy filing, the
Subcontractors sought to serve notice of, and thereby perfect,
liens on funds others owed CSS. Specifically, they asked the
bankruptcy court to clarify the extent of the stay to determine
whether their post-petition notice and perfection would fall
within the stay’s ambit.
Branch Banking & Trust Company (“BB&T”), which had lent CSS
over one million dollars, secured by, among other things, CSS’s
accounts and real property, objected to the Subcontractors’
post-petition notice and perfection. BB&T argued that the
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Subcontractors lacked an interest in property because they had
not yet served notice of, and thereby perfected, their liens by
the time CSS filed its bankruptcy petition. The Subcontractors
maintained that the stay did not block them from noticing and
perfecting post-petition because doing so fell under a stay
exception for property interests that predate bankruptcy
petitions, the post-petition perfection of which would be
effective against third parties who acquired a pre-perfection
interest.
The bankruptcy court acknowledged that there existed
opinions from its own district (the Eastern District of North
Carolina) in BB&T’s favor. In re Constr. Supervision Servs.,
Inc., 12-00569-8-RDD, 2012 WL 892217, at *1 (Bankr. E.D.N.C.
Mar. 14, 2012). But the bankruptcy court disagreed with those
decisions and ruled against BB&T, holding that the
Subcontractors had an interest in property upon delivery of the
materials and equipment, i.e., before lien notice and
perfection. Id. at *2-4. And because all other requirements
for the pertinent stay exception were concededly met, the
Subcontractors were not stayed from noticing, i.e., perfecting
their liens. Id.
BB&T appealed to the district court, which, like the
bankruptcy court, held that Creditor Appellees’ post-petition
notice and perfection of their statutory claim of lien on funds
5
constituted a permitted exception to the bankruptcy code’s
automatic stay. BB&T further appealed to this Court, which
reviews the legal issues at stake here de novo. See, e.g., In
re Quigley, 673 F.3d 269, 271 (4th Cir. 2012).
II.
On appeal, BB&T primarily contends that because the
Subcontractors failed to notice their liens on funds before CSS
filed for bankruptcy, the Subcontractors lacked an interest in
property at the time CSS filed its petition. We disagree.
A.
Upon the filing of a Chapter 11 bankruptcy petition,
creditors are automatically stayed from attempting to collect on
claims against the debtor. In other words, the stay protects
the bankruptcy estate from dismemberment via a creditor race to
the courthouse in favor of a systematic and equitable asset
distribution. See, e.g., Safety-Kleen, Inc. (Pinewood) v.
Wyche, 274 F.3d 846, 864 (4th Cir. 2001) (“A chief purpose of
the automatic stay is to allow for a systematic, equitable
liquidation proceeding by avoiding a chaotic and uncontrolled
scramble for the debtor’s assets in a variety of uncoordinated
proceedings in different courts.” (quotation marks omitted)).
Bankruptcy Code Section 362 describes the scope of the stay,
listing what does, and does not, fall within its ambit. Amongst
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those things the stay bars are “any act[s] to create, perfect,
or enforce any lien against property of the estate[.]” 11
U.S.C. § 362(a)(4).
As with most things, exceptions to the stay exist.
Crucially for this case, Section 362(b)(3) provides an exception
for “any act to perfect, or to maintain or continue the
perfection of, an interest in property to the extent that the
trustee’s rights and powers are subject to such perfection under
section 546(b) . . . .” 11 U.S.C. § 362(b)(3).
Section 546(b), in turn, subjects the bankruptcy trustee’s
rights and powers to generally applicable laws that “permit[]
perfection of an interest in property to be effective against an
entity that acquires rights in such property before the date of
perfection . . . .” 11 U.S.C. § 546(b). In other words,
Section 546(b) “protect[s], in spite of the surprise
intervention of a bankruptcy petition, those whom State law
protects by allowing them to perfect their liens or interests as
of an effective date that is earlier than the date of
perfection.” S. Rep. 95-989, 86, 1978 U.S.C.C.A.N. 5787, 5872.
See also In re Maryland Glass Corp., 723 F.2d 1138, 1141 (4th
Cir. 1983) (“‘[T]he intervention of a petition . . . should not
cut off an interest holder’s opportunity to perfect where the
interest holder could have perfected against an entity
subsequently acquiring rights in the property if bankruptcy had
7
not intervened.’” (quoting 4 Collier on Bankruptcy § 546.03[2],
at 546-48 (15th ed. 1983))).
Both Section 362(b)(3) and Section 546(b) refer to “an
interest in property”—the phrase on which this appeal turns. If
the Subcontractors had an “interest in property” when CSS filed
for bankruptcy, the parties agree that the Subcontractors
fulfill all of the other Section 362(b)(3) exception criteria
and may thus notice and perfect their interests post-petition.
To determine whether the Subcontractors had an interest in
property, we must consider what “interest in property” means.
In doing so, we look first to the plain language of the term,
which Congress failed to define. We may consult dictionaries to
get at its “‘plain or common meaning.’” Blakely v. Wards, 738
F.3d 607, 611 (4th Cir. 2013) (en banc) (quoting Nat’l Coal. for
Students with Disabilities Educ. & Legal Def. Fund v. Allen, 152
F.3d 283, 289 (4th Cir. 1998)).
According to Black’s Law Dictionary, an interest in
property is “[a] legal share in something; all or part of a
legal or equitable claim to or right in property.” Black’s Law
Dictionary 816 (7th ed. 1999). The American Heritage Dictionary
defines interest as a “right, claim, or legal share[.]”
American Heritage Dictionary 914 (5th ed. 2011). And the Oxford
English Dictionary Online defines it as “legal concern in a
thing; esp. right or title to property, or to some of the uses
8
or benefits pertaining to property.” Oxford English Dictionary
Online, available at
http://www.oed.com/view/Entry/97735?rskey=rk3c1C&result=1&isAdva
nced=false#eid (last visited April 21, 2014).
This Court has already made plain that the broad term
“interest in property” encompasses more than just liens. In re
Maryland Glass Corp., 723 F.2d at 1141–42 (stating that “section
546(b) speaks of an ‘interest in property’ and does not limit
its scope to ‘liens’” and holding that, under local law,
government had an interest in land for tax purposes, the absence
of perfected liens notwithstanding). We are not the only
circuit court to have done so. See, e.g., In re 229 Main St.
Ltd. P’ship, 262 F.3d 1, 7 (1st Cir. 2001) (“We hold that
‘interest in property,’ as that term is used in 11 U.S.C. §
362(b)(3), is unequivalent to, and broader than, the term
‘lien.’”); In re AR Accessories Grp., Inc., 345 F.3d 454, 459
n.4 (7th Cir. 2003) (calling a wage lien “a mechanism for . . .
enforcement of a preexisting right” that does not “create any
new interest within the meaning of 11 U.S.C. § 546(b)”).
That courts have differentiated between “interests” and
“liens” makes sense—because, while they are closely related,
they are logically distinct from one another. Specifically, a
lien secures an interest that already exists. See, e.g., In re
AR Accessories, 345 F.3d at 458-59 (describing lien as “a
9
mechanism for . . . enforcement of a preexisting right”); 51 Am.
Jur. 2d Liens § 2 (2014) (“A lien is a cause of action, a remedy
. . ., or a method by which to enforce an underlying claim.
That is, a lien is part and parcel of the underlying claim, the
former existing only because of the latter.” (footnotes
omitted)). Indeed, BB&T essentially concedes as much when it
notes that “Chapter 44A provide[s] certain remedies . . . to
laborers and materialmen who furnished services or materials
toward the improvement of real property[,]” “includ[ing] the
right to obtain a lien on funds . . . .” Appellant’s Br. at 21.
We find the Seventh Circuit’s analysis in In re AR
Accessories particularly illuminating. In that case, state law
provided a government agency with a statutory lien on the
property of an employer that failed to pay its employees for
services rendered. 345 F.3d at 458. Per statute, the lien took
effect only upon the agency’s filing a verified petition
claiming the lien. Id. at 456-57. Despite the absence of
express statutory language to that effect, the Seventh Circuit
held that the effective date of the lien in the employer’s
property was when the employees performed the last unpaid
services. Id. at 459 n.4. The Seventh Circuit noted that the
filing of the lien petition merely provided notice of the claim
on the employer’s property for unpaid services but did not
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“create any new interest” in property for Section 546(b)
purposes. Id.
Similarly, here, we must determine whether the
Subcontractors had an interest in property despite their not yet
having served noticed of, i.e., perfected, liens under North
Carolina law prior to CSS’s filing for bankruptcy. To determine
when the Subcontractors’ interests in the funds arose, we must
turn to the pertinent North Carolina laws.
B.
The North Carolina Constitution mandates that the General
Assembly “shall provide by proper legislation for giving to
mechanics and laborers an adequate lien on the subject-matter of
their labor.” N.C. Const. art. X, § 3. To this end, the North
Carolina legislature has enacted laws codified in Chapter 44A of
North Carolina’s General Statutes.
The main statute at issue in this appeal is Section 44A-18,
titled “Grant of lien upon funds; subrogation; perfection[.]”
N.C. Gen. Stat. § 44A-18 (2012). 1 Under this law, a
subcontractor “is entitled to a lien upon funds owed to the
contractor with whom the . . . subcontractor dealt arising out
1
As discussed in more detail below, Section 44A-18 was
amended in 2012, effective January 2013—hence the specification
of the date. It is undisputed that the 2012 version of the
statute, and not the 2013 version, is the operative law for this
case.
11
of the improvements on which the . . . subcontractor worked or
furnished materials.” O & M Indus. v. Smith Eng’g Co., 624
S.E.2d 345, 348 (N.C. 2006). Specifically, the statute states:
Upon compliance with this Article:
(1) A first tier subcontractor who furnished labor,
materials, or rental equipment at the site of the
improvement shall be entitled to a lien upon funds
that are owed to the contractor with whom the first
tier subcontractor dealt and that arise out of the
improvement on which the first tier subcontractor
worked or furnished materials.
(2) A second tier subcontractor who furnished labor,
materials, or rental equipment at the site of the
improvement shall be entitled to a lien upon funds
that are owed to the first tier subcontractor with
whom the second tier subcontractor dealt and that
arise out of the improvement on which the second tier
subcontractor worked or furnished materials. A second
tier subcontractor, to the extent of the second tier
subcontractor’s lien provided in this subdivision,
shall also be entitled to be subrogated to the lien of
the first tier subcontractor with whom the second tier
contractor dealt provided for in subdivision (1) of
this section and shall be entitled to perfect it by
notice of claim of lien upon funds to the extent of
the claim.
* * *
(5) The liens upon funds granted under this section
shall secure amounts earned by the lien claimant as a
result of having furnished labor, materials, or rental
equipment at the site of the improvement under the
contract to improve real property, including interest
at the legal rate provided in G.S. 24-5, whether or
not such amounts are due and whether or not
performance or delivery is complete. In the event
insufficient funds are retained to satisfy all lien
claimants, subcontractor lien claimants may recover
the interest due under this subdivision on a pro rata
basis, but in no event shall interest due under this
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subdivision increase the liability of the obligor
under G.S. 44A-20.
(6) A lien upon funds granted under this section is
perfected upon the giving of notice of claim of lien
upon funds in writing to the obligor as provided in
G.S. 44A-19 and shall be effective upon the obligor’s
receipt of the notice. The subrogation rights of a
first, second, or third tier subcontractor to the
claim of lien on real property of the contractor
created by Part 1 of Article 2 of this Chapter are
perfected as provided in G.S. 44A-23.
N.C. Gen. Stat. § 44A-18 (emphasis added). 2
Section 44A-18’s text makes plain that it secures an
interest that already exists. It states that a lien on funds
created “under this section shall secure amounts earned by the
lien claimant as a result of having furnished labor, materials,
or rental equipment at the site of the improvement under the
contract to improve real property . . . .” N.C. Gen. Stat.
§ 44A-18(5).
Further, a subcontractor’s entitlement to a lien on funds
arises upon delivery of the materials and equipment: “For this
entitlement, he need only show that the materials were delivered
to the site of the improvement.” Contract Steel Sales, Inc. v.
Freedom Const. Co., 362 S.E.2d 547, 551 (N.C. 1987). See also
N.C. Gen. Stat. § 44A-18(1) (“A . . . subcontractor who
furnished labor, materials, or rental equipment at the site of
2
Because the Subcontractors in this case are all first or
second tier subcontractors, we need not look further down the
chain.
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the improvement shall be entitled to a lien upon funds that are
owed to the contractor . . . .”). And North Carolina’s Section
44A-18 is, apparently, no anomaly with such timing:
Under most mechanics lien statutes, a supplier of
labor or materials to a construction site enjoys an
inchoate lien which arises at the commencement of work
on the project. To preserve their lien rights, unpaid
mechanics and materialmen must file a notice of lien .
. . . When these perfection steps are taken, the
claimant’s lien rights ‘vest’ and relate back to the
commencement of work. By Section 546(b), the trustee
has no right to avoid what would otherwise be an
unperfected lien.
Thomas G. Kelch & Michael K. Slattery, Real Property Issues In
Bankruptcy 4-17-18 (West 1999).
In 2012, the North Carolina legislature amended Section
44A-18 with language intended to make clear that a subcontractor
is entitled to a lien on funds as soon as construction materials
are delivered: “A lien upon funds granted under this section
arises, attaches, and is effective immediately upon the first
furnishing of labor, materials, or rental equipment at the site
of the improvement by a subcontractor.” N.C. Gen. Stat. § 44A-
18(f) (2013). This amendment, effective as of January 2013,
does not control here. But because the North Carolina
legislature deemed it a clarifying amendment, we nevertheless
find it instructive. Cf. Brown v. Thompson, 374 F.3d 253, 259-
60 (4th Cir. 2004) (recognizing that a legislature may amend a
statute “to clarify existing law, to correct a
14
misinterpretation, or to overrule wrongly decided cases” and
noting that to determine whether an amendment clarifies or
changes existing law, courts “look[] to statements of intent
made by the legislature that enacted the amendment” and “accord
great weight” to “subsequent legislation declaring the intent of
an earlier statute” (quotation marks and citations omitted)).
With the amendment, the North Carolina legislature sought to
“[c]larif[y] when certain subcontractor lien claims arise to
prevent loss of subcontractor lien rights under bankruptcy court
interpretation of [the] current statutory language.” Research
Div. of the N.C. Gen. Assembly, Summaries of Substantive
Ratified Legislation 25 (2012). See also Legislative Research
Commission’s Mechanics Lien on Real Property Committee, Report
to the 2012 Session of the 2011 General Assembly of North
Carolina 11 (2012) (“The Committee recommends the changes . . .
to address problems under the current law, including
subcontractor claims of lien upon funds being impaired by
decisions of federal bankruptcy courts interpreting current law
. . . .”).
The bankruptcy court decisions that the North Carolina
legislature sought to neuter with its clarifying amendment were
In re Mammoth Grading, Inc., No. 09-01286-8-ATS (Bankr. E.D.N.C.
July 31, 2009); In re Harrelson Utilities, Inc., No. 09–02815–8–
ATS, 2009 WL 2382570 (Bankr. E.D.N.C. July 30, 2009); and In re
15
Shearin Family Investments, LLC, No. 08–07082–8–JRL, 2009 WL
1076818 (Bankr. E.D.N.C. Apr. 17, 2009). “Prior to these
decisions, it was . . . commonly accepted practice that a lien
on funds was an inchoate right, arising at the time funds became
owed to the obligee.” North Carolina Construction Law § 3:78
(2013). But in those decisions, the bankruptcy court appears to
have conflated the lien with the underlying interest it secures.
See, e.g., In re Shearin Family Invs., 2009 WL 1076818, at *2.
The bankruptcy court somehow read the future tense into the word
“shall.” Id. (“[T]he statute creating the lien, N.C.G.S. § 44A–
18(1), is written in the future tense: ‘A first lien
subcontractor . . . shall be entitled to a lien upon funds which
are owed to the contractor. . . .’”). And then the bankruptcy
court held that the notice of claim of lien not only perfects
but actually creates the interest. Id. With its clarifying
amendment, the North Carolina legislature expressly sought to
correct what it clearly viewed to be misinterpretations of state
law.
C.
Now turning to the case before us, the parties agree that
the only live issue on appeal is whether the Subcontractors had
an interest in property when CSS filed for bankruptcy. The
bankruptcy court and district court both held that they did, and
we agree.
16
As we have already explained, an interest in property is
broad and covers more than simply liens, which serve to secure a
pre-existing interest. See, e.g., In re Maryland Glass Corp.,
723 F.2d at 1141–42. There is no dispute that the
Subcontractors delivered materials and equipment to CSS for its
building work before CSS filed for bankruptcy. Under North
Carolina law, the Subcontractors became entitled to a lien
securing the funds earned “as a result of having furnished
labor, materials, or rental equipment . . . .” N.C. Gen. Stat.
§ 44A-18(5). And the Subcontractors’ entitlement to a lien
arose upon delivery of the materials and equipment. See, e.g.,
Contract Steel Sales, 362 S.E.2d at 551 (“For this entitlement,
he need only show that the materials were delivered to the site
of the improvement.”). We therefore conclude that the
Subcontractors had an interest in property when CSS filed its
bankruptcy petition.
BB&T counters that any rights or interests the
Subcontractors had at the time CSS filed its petition were
“inchoate” and meaningless until noticed and thereby perfected.
No doubt, an entitlement to a lien under Section 44A-18 may be
lost if not noticed and perfected as prescribed. BB&T focuses
on the fact that without a perfected lien, the subject funds
could be “extinguished” or “diluted.” Appellant’s Br. at 52.
17
But just because an entitlement, right, or “interest” may be
lost does not mean that it therefore fails to exist.
BB&T also places heavy emphasis on the phrase “[u]pon
compliance with this Article” set out at the top of Section 44A-
18 before the statute’s enumerated subsections. According to
BB&T, that phrase must mean that no interest exists unless the
statutory notice and perfection requirements have been met. We
freely admit that the purpose of the phrase “[u]pon compliance
with this Article” is less than clear. But if the law requires
no more than delivery for entitlement to a lien to arise—and
that is precisely what we have just held—then delivery is all
that is required to be in “compliance with this Article” for
purposes of being entitled to a lien. Further, North Carolina’s
legislature removed the phrase in its 2012 clarifying amendment.
Clearly, it did not view that phrase as important to, much less
determinative of, when interests in property arise under Section
44A-18.
In sum, we hold that the Subcontractors had an interest in
property at the time CSS filed its bankruptcy petition. The
parties agree that all other conditions for Section 362(b)(3)’s
bankruptcy stay exception for “any act to perfect, or to
maintain or continue the perfection of, an interest in
property,” 11 U.S.C. § 362(b)(3), are met. We, like the
bankruptcy court and district court, thus hold that the Section
18
362(b)(3) exception applies and that the Subcontractors are not
barred by the bankruptcy stay from noticing, i.e., perfecting,
their extant interest in property post-petition. 3
III.
For the foregoing reasons, the district court’s affirmance
of the bankruptcy court’s order is
AFFIRMED.
3
BB&T also claimed that the Subcontractors are precluded
from asserting subrogated lien rights on real property under
N.C. Gen. Stat. § 44A-23. BB&T noted that these rights are
“contingent on the giving of notice of claim of lien upon funds”
under Section 44A-18, analyzed in detail above. Appellant’s Br.
at 55. BB&T claimed that the Subcontractors “are not permitted
by an exception to the automatic stay to assert, postpetition,
Subrogated Lien Rights against the obligor’s real property
because they are stayed from serving the notice of claim of lien
upon funds.” Id. But as we have already held, the
Subcontractors may indeed notice, post-petition, their claim of
lien on funds. This related argument therefore necessarily
fails.
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