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Bankruptcy Construction Seminar, Stites & Harbison, PLLC


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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.

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Bankruptcy Construction Seminar, Stites & Harbison, PLLC

  1. 1. CONNECTIONSPeople | Ideas | Trends 1
  2. 2. GoalMitigate risk before a bankruptcy … 2
  3. 3. “Where are we going?” • Automatic Stay and Executory Contracts • Mechanic’s liens and “Relation Back” • Avoidable Preference Actions
  4. 4. It all depends on your …
  5. 5. Players
  6. 6. Liquidated damages of$1,000 per day if project isnot substantially completeby August 25, 2012.
  7. 7. On Time … On BudgetOn August10, 2012, project is 95%complete. And this iswhere our story begins…
  8. 8. What shouldcontractor do?
  9. 9. 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. 9
  10. 10. 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. 10
  11. 11. • 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. 11
  12. 12. The Bottom Line• When party files bankruptcy, be aware of the automatic stay… ….SEEK RELIEF!• Penalties include: – Voiding action – Paying damages – Contempt
  13. 13. Besides the “stay”… what else? Continue to protect your claims through lien rights. Compare: File lien … Perfect lien… Enforce lien…
  14. 14. Post-Petition Mechanic’s LienIs the constructionproject in a “relationback” jurisdiction?All liens “relate back”to the visiblecommencement ofthe job.Tenn. Code 66-11-1-4(a)
  15. 15. 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. 15
  16. 16. What if owner files bankruptcy?
  17. 17. 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
  18. 18. • 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.”Earmarking and the Debtor’s “Interest”
  19. 19. How to Mitigate Preference Liability 1. Perfected lien rights 2. Construction Trust Fund (Lien waiver strategy)3. Ordinary course 4. New value of business
  20. 20. Other Pieces
  21. 21. Questions? Alexandria Atlanta Frankfort Jeffersonville Lexington Louisville Nashville