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Do mechanics liens have a priority over county tax liens if mechanics lien filed first?

Mechanics lien filed and perfected in 2018. County filed a real property tax claim lien in 2019. Landlord files for bankruptcy in 2020. Does the mechanics lien have priority over real property tax claim? Will the bankruptcy court recognize this priority in a chapter 7 proceeding?

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Oct 1, 2019

In Pennsylvania, the priority of mechanics liens is set forth by 49 P.S. § 1508. That section provides that except for two exceptions, a mechanics lien has priority dating from a) the date of the visible commencement upon the ground of the work (for new construction); or b) the date of filing the claim (for alteration or repair). The two exceptions are that mechanics liens are subordinate to a purchase money mortgage, and an open-end mortgage used to pay for the construction project. While many states have provisions subordinating mechanics liens to governmental liens against the property, Pennsylvania does not. In fact, Pennsylvania specifically states that a tax lien has priority "from the date of entry of the lien" and that it "is subject to mortgages or other liens existing and recorded at the time of the entry of the tax lien." Bankruptcy and mechanics liens intersect in interesting ways. Since a mechanics lien is a claim against the property itself, and not a claim directly against the owner of the property a mechanics lien can survive a bankruptcy proceeding and emerge intact. However, there are potential situations in which a mechanics lien may be enforced despite the automatic stay that is brought about by a bankruptcy filing. If the lien is not able to be enforced during the automatic stay, the bankruptcy court can be petitioned to toll the enforcement deadline of the lien so that the lien does not expire during the bankruptcy proceeding. Everything you want to learn about mechanic liens and bankruptcy can be found here. Additionally, it's worth noting that, in Pennsylvania, an action to enforce a mechanics lien must be initiated within 2 years from the date on which the lien was recorded.

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Oct 1, 2019

Nate: Thank you for your prompt response to my issues. You stated that "Pennsylvania specifically states that a tax lien has priority “from the date of entry of the lien” and that it “is subject to mortgages or other liens existing and recorded at the time of the entry of the tax lien.” This statement is true but only with regard to an upset sale conducted by the tax claim office in PA. In PA, the first tax sale conducted is the upset sale. If a property in the upset sale is sold, then the buyer is subject to all liens, mortgages and taxes. If the property is not sold at the upset tax sale, then it may be sold at a judicial sale (which wipes out all liens, including mechanic's liens) and mortgages. The Judicial Sale is a sale permitted under the provisions of the Pennsylvania Real Estate Tax Sale Act, 72 P.S. §5860.101, et seq., which provides for an auction of real property due to delinquent property taxes that were not sold at an earlier Upset Tax Sale. As long as each owner and lien holder is notified of the Judicial Sale, the purchaser will take the property free and clear of claims, liens, mortgages, tax claims, charges and estates, except separately taxed ground rents filed through March 1, 2019. Therefore, it appears that my mechanics lien claim may be wiped out at the judicial tax sale. However, if the landowner files for a chapter 7 bankruptcy before the judicial sale, the mechanics lien would be a priority as it existed before the tax claim bureau. My mechanics lien would be a secured lien also. Is the bankruptcy trustee required to recognize the secured mechanics lien or can he simply reject it? Let me know. Thanks. Ivan

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Oct 2, 2019

Pennsylvania law appears contradictory to a certain extent. The mechanics lien law says that the "first in time, first in right" rule applies to mechanics liens in all situations other than those excepted by Section 508 (c), which states: "Any lien obtained under this act by a contractor or subcontractor shall be subordinate to the following: (1) A purchase money mortgage as defined in 42 Pa.C.S. § 8141(1) (relating to time from which liens have priority). (2) An open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction." And, as you note, the Pennsylvania Real Estate Tax Sale Act specifies that a taxing district's lien for properly levied taxes: "shall be and are hereby declared to be a first lien on said property. Such liens shall have priority to and be fully paid and satisfied out of the proceeds of any sale of said property held under the provisions of this act before any mortgage, ground rent, obligation, judgment claim, lien or state with which the said property may have or shall become charged, or for which it may become liable." And, additionally, that property sold pursuant to judicial sale under Section 612 shall be sold "sold free and clear of all tax and municipal claims, mortgages, liens, charges and estates of whatsoever kind. . ." Clearly, a judicial sale to discharge the tax obligations is to be avoided , if possible. One potential avenue is to initiate an enforcement action on the mechanics lien itself. The ultimate power of the mechanics lien is the foreclosure action to enforce. Eventually, (after 2 years from filing in Pennsylvania) a mechanics lien will be extinguished and it becomes unenforceable, and it makes no difference whether there are other encumbrances against the property, and no priority fight will matter. Similarly, given the above, if the bankruptcy to be filed in 2020 is filed more than 2 years from the date of the lien's filing, it makes no difference as to whether the trustee should recognize the mechanics lien as it will be expired. If the bankruptcy is filed while the lien claim is still a valid encumbrance on the property, the claim is a secured debt that the trustee should consider. As noted in this article, mechanics liens may occasionally be enforced during the automatic stay (as it is a claim against the property); or, the enforcement deadline may be tolled until the conclusion of the bankruptcy proceeding, at which point the lien may be enforced. Mechanics liens avoid the "lien stripping" of bankruptcy due to the fact that they are statutory liens rather than judicial liens or a non-possessory non-purchase money security interest.

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Oct 2, 2019

You state that "Clearly, a judicial sale to discharge the tax obligations is to be avoided , if possible. One potential avenue is to initiate an enforcement action on the mechanics lien itself. The ultimate power of the mechanics lien is the foreclosure action to enforce." If i initiate a foreclosure proceeding vs the landowner, will there be a stay in the tax sale proceeding? Does the foreclosure proceeding and subsequent sale of the property discharge the county tax lien? The county will be a secured party and may receive its pro-rate share of the sale proceeds. If the building is sold, is it first in time, first in right as to the proceeds of the sale?

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