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DIP Lien Doesn’t Prime Mechanics’ Liens Perfected Prior to Entry of Final DIP Order

By Evan T. Miller

On August 30, 2012, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware issued a Memorandum Opinion in The Newhall Land and Farming Company v. American Heritage Landscape, LP, C.A. Rasmussen, Inc., Granite Construction Company, and R&R Pipeline, Inc. (In re Landsource Communities Development LLC) (Adv. No. 09-51074 (KJC)), granting partial summary judgment in favor of the defendant mechanics’ lienholders (the “Defendants”). The Court rejected the Plaintiff-Debtor’s (the “Plaintiff”) argument that the mechanics’ liens were not primed by the DIP facility.

The Plaintiff, a land management company and one of several jointly administered debtors in the In re Landsource Communities Development LLC bankruptcy matter, executed prepetition contracts with the Defendants. The work performed by the Defendants led them to file prepetition mechanics’ liens against the Plaintiff’s property as well as post-petition 11 U.S.C. § 546(b) notices of perfection. The Debtors subsequently negotiated a DIP facility (the “DIP Facility”) which secured borrowings via priming liens (the “DIP Liens”) on the Debtors’ property. The Plaintiff filed the present complaint seeking to have the Defendants’ secured claims declared (1) invalid since the Plaintiff did not own the encumbered land at the time of lien recording and (2) primed by the DIP Liens. The Plaintiff argued that since the Defendants had failed to file an objection to the DIP financing motion and the Debtors’ obligations under the DIP Facility exceeded the value of the collateral securing the DIP Liens, then the Defendants did not have valid secured claims. In contrast, the Defendants argued that their liens should be considered permitted liens and not primed liens.

Judge Carey agreed with the Defendants, finding that their notices of perfection were sufficient to alert the Plaintiff that they opposed the DIP Liens, especially since they were filed prior to the Final DIP Order being entered. As a result, the Court held that their mechanics’ liens should be considered permitted — not primed — liens. The Court refused, however, to issue summary judgment on the question of whether the Plaintiff owned the encumbered real property at the time of the lien perfection, reasoning that material issues of disputed facts remained.

A copy of the opinion can be found here.

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