Navigating a “Construction” Bankruptcy

Stick around long enough and dealing with a bankruptcy during or after a construction project is inevitable.  Moreover, when a member of the construction “chain” – owner, contractor, or subcontractor – files for bankruptcy everyone is effected.

Receiving a Trustee’s “preference letters” might be largest cause of irate phone calls from clients to their attorneys.  Subcontractors and suppliers, in particular, are flabbergasted when they are told that the Bankruptcy Code permits a Trustee to require repayment of money even if the payment was due when the  debtor made it.  The Trustee’s “strong arm” power is a fitting moniker for Trustee’s ability to recover money rightfully owed when payment was made within 90 days of the date debtor filed bankruptcy.

In this month’s Construction Executive Magazine,  Michael R. King of Gammage & Burnham in Phoenix, gives a refresher  on what a contractor’s options are in responding to or defending against a Trustee’s demand for repayment of a “preferential” transfer.  The article also reminds us that further efforts to perfect, but not to collect or enforce, a mechanics lien are not subject to the Bankruptcy Code’s automatic stay provisions.  I recommend saving the article to your favorites as a quick reference guide for when you next receive a preference letter.

What the article does not discuss is an unpaid subcontractor’s super priority in unpaid funds either withheld from a debtor or retained by the debtor.  I have long been an advocate of subcontractors aggressively pursuing payment using this super priority. I am surprised how few subcontractors and suppliers pursue this claim.

Next time you have a payment owed form a debtor that files for bankruptcy, don’t simply write it off.  Instead, take a minute to explore your options.  What you will find is that you are not as bad off as you think.