By order issued on February 23, 2012, the United States District Court for the Eastern District of North Carolina vacated the bankruptcy court’s decision in In re Mammoth Grading, Inc. This decision and the companion decision in In re Harrelson Utilities, Inc. held that the lien rights of construction subcontractors and suppliers cannot be perfected once a bankruptcy petition is filed by a party higher in the contract chain.

Prior to these decisions, it had been common practice in the Eastern District of North Carolina for subcontractors to perfect their liens post-petition. This approach was consistent with industry practice and the general reluctance of subcontractors to perfect their liens except as a matter of last resort. Without the ability to perfect their liens post-petition, subcontractors are compelled to perfect their liens earlier and more often to avoid losing their rights. The result has been controversy in the construction industry, as practitioners and industry groups expressed concerns over the heightened costs associated with more lien filings and the potential disruptions in construction project flow. These concerns ultimately spilled over into a legislative effort to revise North Carolina’s lien law. Now it appears, however, that the construction industry may not have to rely solely on the legislature for a solution.