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In re Linear Electric Company, Inc.

United States Court of Appeals, Third Circuit

March 30, 2017


          Submitted under Third Circuit LAR 34.1(a) on October 7, 2016

         On Appeal from the United States District Court for the District of New Jersey (D. C. Civil Action No. 2-15-cv-06429) District Judge: Honorable Susan D. Wigenton

          Michael Nord, Esquire Michael J. Stafford, Esquire Nord & DeMaio Counsel for Appellants

          Leonard C. Walczyk, Esquire Wasserman Counsel for Appellee

          Before: SHWARTZ, COWEN and ROTH, Circuit Judges


          ROTH, Circuit Judge

         This case concerns the relationship between the New Jersey Construction Lien Law and federal bankruptcy law. Under New Jersey law, if a supplier sells materials on credit to a construction contractor and the contractor incorporates those materials into property owned by a third party without paying the supplier, the supplier can file for a lien on the third-party property.[1] In essence, the supplier can step into the shoes of the contractor and collect a debt owed to the contractor from the third-party property owner in order to recoup what the contractor owes to the supplier.

         The question this case presents is whether a supplier can file a construction lien under New Jersey law when the contractor has filed a petition for bankruptcy, which automatically stays any act to create or perfect any lien against the contractor's property.

         The suppliers here argue that the construction liens did not attach to the contractor's accounts receivable but attached to the interests of the owners of the third-party properties; thus, creating the liens was not an act against the property of the bankruptcy estate. On the other hand, the contractor contends that the creation of the liens was intended to collect the portion of the accounts receivable owed by the owners of the third-party properties to the contractor so that the creation of the liens was an act against the property of the bankruptcy estate.

         The District Court set out in its opinion how, under New Jersey law, the value of the liens depended on the amount that the contractor owed to the suppliers under their contracts and on the value of the contractor's accounts receivable. The District Court then affirmed the Bankruptcy Court's conclusion that the accounts receivable were part of the bankruptcy estate because they complied with the definition of property of the estate under 11 U.S.C. § 541 and because the ability of a supplier to create a construction lien depended on the existence of the bankrupt contractor's accounts receivable.[2] For that reason, the Bankruptcy Court held that the automatic stay prevented filing the liens. The District Court affirmed We agree and will also affirm.

         I. Background

         A. Statutory Background

         In order to understand the events in this case, some review of the New Jersey Construction Lien Law and of bankruptcy law is helpful.

         1. New Jersey Construction Lien Law

         Under New Jersey law, in general, "[a]ny contractor, subcontractor or supplier who provides work, services, material or equipment pursuant to a contract, shall be entitled to a lien for the value of the work or services performed, or materials or equipment furnished in accordance with the contract and based upon the contract price . . .."[3] As relevant here, "[t]he lien shall attach to the interest of the owner or unit owner of the real property development . . .."[4] The lien itself is "limited to the amount that [the owner] agreed in writing to pay, less payments made by or on behalf of that person in good faith prior to the filing of the lien."[5]

         In general, an owner discharges a lien by paying into a lien fund, from which claimants recover what they are owed.[6]A "claimant" is "a person having the right to file a lien claim on real property pursuant to [the Construction Lien Law]."[7]The claimants themselves are split into different tiers. A "first tier claimant" is "a claimant who is a contractor."[8] A "second tier claimant" is "a claimant who is, in relation to a contractor: (1) a subcontractor; or (2) a supplier."[9]

         Numerous limitations on the lien fund and lien claims exist. As relevant here, "the lien fund shall not exceed: in the case of a first tier lien claimant or second tier lien claimant, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim . . .."[10] In addition, generally, "no lien fund exists, if, at the time of service of a copy of the lien claim, the owner or community association has fully paid the contractor for the work performed or for services, material or equipment provided."[11] Finally, each claimant's claim is limited to "the unpaid portion of the contract price of the claimant's contract for the work, services, material or equipment provided."[12]

         In the allocation process, if there are both first and second tier claimants, the lien fund is allocated to first tier claimants "in amounts equal to their valid claims."[13]Thereafter, "[f]rom the allocation to each first tier lien claimant, amounts shall be allocated equal to the valid claims of second tier lien claimants whose claims derive from contracts with that first tier lien claimant."[14] If money is left over in a first tier claimant's allocation after the second tier claimants within that allocation are paid, then the first tier claimant receives the rest.[15] However, if there are only second tier claimants, "the lien fund for second tier lien claimants shall be allocated in amounts equal to that second tier's valid claims."[16] In any event, if the total claims exceed the maximum liability of the owner or the maximum allocation to a tier, the allocations are reduced pro rata to the allowable maximum.[17]

         2. Bankruptcy Law

         A debtor in need of relief may file a voluntary bankruptcy petition, which commences a bankruptcy case.[18]"The commencement of a [bankruptcy] case . . . creates [a bankruptcy] estate" that generally consists of all of the property of the debtor.[19] Filing the petition also automatically stays, among other things, "any act to create, perfect, or enforce any lien against property of the estate . . .."[20] In general, we interpret the breadth of the stay broadly.[21]

         B. Factual and Procedural Background

         Cooper Electrical Supply Co. and Samson Electrical Supply Co., Inc., sold electrical materials to Linear Electric Co., Inc., which Linear Electric incorporated into several construction projects. As of July 1, 2015, the development owners had not fully paid Linear Electric for its work on these projects, and Linear Electric had not fully paid Cooper and Samson for their materials.[22]

         On July 1, 2015, Linear Electric filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Two weeks later, on July 15, Cooper and Samson filed construction liens on the developments into which Linear Electric had incorporated the materials that it had purchased from Cooper and Samson. On July 20, Linear Electric filed a motion with the Bankruptcy Court to discharge the liens as violating the automatic stay that resulted from the bankruptcy petition. On July 31, after hearing argument, the Bankruptcy Court granted the motion. Linear Electric then collected the full amounts owed to it by the development owners. On August 13, the Bankruptcy Court held that the construction liens were void ab initio for violation of the automatic stay. Linear Electric has continued to operate as a debtor-in-possession.

         Cooper and Samson appealed the Orders of the Bankruptcy Court of July 31 and August 13, 2015. The District Court affirmed. Cooper and Samson then appealed to this Court.

         II. Discussion[23]

         Both parties raise procedural issues for the first time in this Court. Linear Electric argues that the case is moot, and Cooper and Samson argue that the Bankruptcy Court could not constitutionally resolve the issue in this case in the first instance. We will address those issues before proceeding to the merits of this appeal.

         A. Mootness

         When the Bankruptcy Court issued an order to discharge the construction liens, Cooper and Samson requested a stay but were not granted one. Linear Electric then collected full payment from the development owners. Linear Electric argues that, as a result, the value of the constructions liens is zero. Hence, Linear Electric concludes that this case is moot and subject to dismissal.

         Linear Electric is correct that we generally cannot resolve a dispute once the dispute has become moot, even if mootness was not raised below (as it was not here).[24] "In general a case becomes moot when the issues presented are no longer live or the parties lack a legally cognizable interest in the outcome."[25] Here, Cooper and Samson would have no cognizable interest in the liens if no money could be collected through them.

         Furthermore, Linear Electric is correct that, under New Jersey law, payments from the development owners to Linear Electric could potentially reduce or eliminate the value that could be collected under the constructions liens. However, such payments do not always do so, and they do not do so here. In general, the value of the lien, the lien fund, and any claimant's claim are all determined at the time of filing the lien or service of a copy of the lien claim.[26] Thus, payments from the development owners after the filing of the lien and the service of a copy of the lien claim do not reduce the value of the lien, the lien fund, or the lien claims.

         Here, Linear Electric was paid in full after the Bankruptcy Court decision, which came after filing and service occurred. Thus, the payments to Linear Electric do not affect the amounts that Cooper and Samson would recover if the liens were proper. As we discuss supra, Cooper and Samson, as creditors of Linear Electric, may recover some amount in relation to the lien amounts under the approved plan of liquidation. Moreover, in its Order of August 13, 2015, the Bankruptcy Court, while discharging the liens, recognized that the "filing of the Liens shall be deemed to have occurred on the date of each such filing and treated as notices under 11 U.S.C. § 546(b) for the purposes of determining whether (a) such Lien was timely filed under applicable state law and (b) any such Supplier is entitled to the protections of 11 U.S.C. § 546(b) or other applicable law." As a result, Cooper and Samson still have an interest in the outcome of this bankruptcy proceeding. The case is not moot.

         B. Constitutionality

         Cooper and Samson argue that the Bankruptcy Court could not constitutionally enter an order invalidating the construction liens. Their argument is based on the limitations imposed by Article III of the Constitution. Article III vests "[t]he judicial Power of the United States" in the judicial branch, the judges of which "shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office."[27] Because of this clause, "in general, Congress may not withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty."[28] Hence, courts outside the scope of Article III-that is, courts, such as bankruptcy courts, whose judges do not have the life tenure and salary protection guaranteed to Article III judges-cannot conclusively resolve certain state common law claims between private parties without the consent of both parties.[29] However, Congress may assign cases involving "public rights" to non-Article III courts.[30] Public rights ...

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