Avoiding the Wrecking Ball: Effectively Dealing with Competing Claims in a Construction Bankruptcy Case — An Analysis From the Perspective of the M&M Lien Claimants

By: Joseph J. Wielebinski
Presented at the State Bar of Texas' 25th Annual Advanced Business Bankruptcy Course
February 2007

I. INTRODUCTION
Generally, bankruptcy cases impact all parties having a business relationship with the debtor. The impact is amplified in a construction company bankruptcy because of the numerous competing creditors and interests that are typical in this type of bankruptcy. The creditors, who possess unique rights and protections pursuant to state law, compete with each other for the greatest recovery possible. However, this application of these rights and protection in the bankruptcy context, is not always discernable or intuitive. However, the holders of a mechanic’s and materialman’s lien (“M&M Lien”) must develop a comprehensive strategy that allows the claimant to survive the sometimes complicated and protracted process that may be foreign to an unsuspecting bankruptcy neophyte.

This Article will focus on the serious and complex issues and problems that bankruptcy practitioners will encounter when representing a creditor in a construction company. This Article is not intended to address every legal issue that may arise in a construction company bankruptcy proceeding, nor is it intended to analyze how a factually sensitive determination might change under different scenarios or offer advice applicable to every situation. This Article is designed to address the likely challenges and problems an M&M lien claimant will encounter and some of the pitfalls that practitioners should avoid, or at least recognize, while serving as counsel to a M&M lien claimant.

II. M&M LIENS UNDER TEXAS LAW
M&M Liens are statutorily created interests, unique to each state, and outside the scope of the Uniform Commercial Code.1 There are two sources of protection for mechanics and materialmen in Texas: (1) article XVI, section 37, of the Texas Constitution (the “Constitutional M&M Lien”) and (2) chapter 53 of the Property Code, formerly known as the Hardeman Act (the “Statutory M&M Lien”).2 A Statutory M&M Lien exists through compliance with the applicable statute, while a Constitutional M&M Lien arises by virtue of the Texas Constitution, without the aid of the statute.3 This Section will provide a basic understanding of each type of M&M Lien recognized in Texas.

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