Stites & Harbison attorneys Bob Goodrich, Madison Martin and Patrick Warfield on what to do if your contractor files for bankruptcy protection during your construction project.
Text of Bankruptcy Construction Seminar, Stites & Harbison, PLLC
1. CONNECTIONSPeople | Ideas | Trends1
2. GoalMitigate risk before a bankruptcy 2 3. Where are we going? Automatic Stay andExecutory Contracts Mechanics liensand Relation Back AvoidablePreference Actions 4. It all depends on your 5. Players 6. Liquidated damages of$1,000 per day if project isnot substantially completeby August 25, 2012. 7. On Time On BudgetOn August10, 2012, project is 95%complete. And this iswhere our story begins 8. What shouldcontractor do? 9. The Automatic Stay in Bankruptcy Debtors Estate = all legal and equitableproperty of the debtor at the time of filing. 362 Automatic Stay prevents a creditorfrom doing certain things to or with propertyof the Estate.9 10. Executory Contracts and the Stay What is an executory contract? A contract that is so far unperformed that ifeither party failed to act on its promise itwould constitute a material breach excusingthe performance of the other.10 11. Executory contracts are property of thebankruptcy estate. They can be rejected, assumed, or assignedto another party. Therefore, they have value ($$) to debtor andadd ($$) to the bankruptcy estate. 11 12. The Bottom Line When party filesbankruptcy, be aware ofthe automatic stay.SEEK RELIEF! Penalties include: Voiding action Paying damages Contempt 13. Besides the stay what else? Continue to protect yourclaims through lien rights.Compare: File lien Perfect lienEnforce lien 14. Post-Petition Mechanics LienIs the constructionproject in a relationback jurisdiction?All liens relate backto the visiblecommencement ofthe job.Tenn. Code 66-11-1-4(a) 15. Why Does Relation Back Matter? 362(b)(3) and 546(b) of the BankruptcyCode provide exception to the automaticstay. Permits perfecting a mechanics lien becausethe GC/SCs right to be paid relates backprior to the date of actual perfection. Thus, filing a mechanics lien would notviolate the stay. 15 16. What if owner files bankruptcy? 17. What is Avoidable Preferences? Payment of debt tocreditor within 90days of filing Creditor receivedmore than itwould inhypotheticalChapter 7liquidation 18. Require Owner to put construction funds inescrow. If debtor does not have an interest in theproperty, it is not property of the Estate. Thus, not a Preference.Earmarking and the Debtors Interest 19. How to Mitigate Preference Liability 1. Perfected lien rights 2. Construction Trust Fund (Lien waiver strategy)3. Ordinary course 4. New valueof business 20. Other Pieces 21. Questions?AlexandriaAtlanta Frankfort JeffersonvilleLexington Louisville Nashvillewww.stites.com