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Construction
CONNECTIONSPeople | Ideas | Trends
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Goal
Mitigate risk before a bankruptcy …
“Where are we going?”
• Automatic Stay and Executory Contracts
• Mechanic’s liens and “Relation Back”
• Avoidable Preference Actions
It all depends on your …
Players
Liquidated damages of $1,000 per day if project is not substantially complete by August 25, 2012.
On Time … On Budget
On August 10, 2012, project is 95% complete. And this is where our story begins…
What should contractor do?
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The Automatic Stay in Bankruptcy
• Debtor’s Estate = all legal and equitable property of the debtor at the time of filing.
• § 362 Automatic Stay prevents a creditor from doing certain things to or with property of the Estate.
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Executory Contracts and the Stay
• What is an executory contract?
– A contract that is so far “unperformed” that if either party failed to act on its promise it would constitute a material breach excusing the performance of the other.
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• Executory contracts are property of the bankruptcy estate.
• They can be rejected, assumed, or assigned to another party.
• Therefore, they have value ($$) to debtor and add ($$) to the bankruptcy estate.
The Bottom Line• When party files
bankruptcy, be aware of the automatic stay…
….SEEK RELIEF!
• Penalties include:– Voiding action– Paying damages– Contempt
Besides the “stay”… what else?
Continue to protect your claims through lien rights.
Compare:File lien … Perfect lien…
Enforce lien…
Post-Petition Mechanic’s Lien
Is the construction project in a “relation back” jurisdiction?
All liens “relate back” to the visible commencement of the job.Tenn. Code 66-11-1-4(a)
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Why Does Relation Back Matter?
• § 362(b)(3) and 546(b) of the Bankruptcy Code provide “exception” to the automatic stay.
• Permits perfecting a mechanic’s lien because the GC/SC’s right to be paid relates back prior to the date of actual perfection.
• Thus, filing a mechanic’s lien would not violate the stay.
What if owner files bankruptcy?
CAN THEY DO THIS?
What is Avoidable Preferences?
• Payment of debt to creditor within 90 days of filing
• Creditor received more than it would in hypothetical Chapter 7 liquidation
Earmarking and the Debtor’s “Interest”
• Require Owner to put construction funds in “escrow.”
• If debtor does not have an interest in the property, it is not property of the Estate.
• Thus, not a “Preference.”
1. Perfected lien rights
(Lien waiver strategy)
How to Mitigate Preference Liability
2. Construction Trust Fund
3. Ordinary course of business
4. New value
Other Pieces
Reclamation
Trust Fund
Performance Bond
Payment
Bonds
Questions?
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