Those in the construction and building trades have been hit especially hard by the ongoing collapse in real estate values. This is especially true in hard hit areas of California and in areas such as Los Angeles and Pasadena where property values have experienced major declines. Unfortunately, many construction companies and builders have been forced to declare bankruptcy as a result of debt and cash flow problems occurring during these challenging economic times. For those in the construction field considering bankruptcy, a chapter 11 may be the best option as it allows for the restructuring of debts without requiring a business to cease operating and liquidate assets as a chapter 7 would.
While a chapter 11 filing allows a construction business that is financially viable to have a chance to become profitable again, it is also a complicated process. In fact, a chapter 11 construction bankruptcy often presents some of the most challenging legal issues of any bankruptcy filing. It is, therefore, essential to have an experienced attorney who has handled many chapter 11 construction cases.
Construction Bankruptcy Challenges
All chapter 11 bankruptcies must be handled by consummate legal professionals in order for the debtor business to have the best chance of successfully improving its finances and emerging from bankruptcy as a stronger, healthier company, instead of being forced to convert the bankruptcy to a chapter 7. At DCDM Law Group, we understand this and our Los Angeles bankruptcy attorneys are experts in not only the legal aspects of a business bankruptcy, but also in business coaching as well.
However, a construction bankruptcy is especially complex because of certain inherent characteristics of construction law. In particular, there are three major types of legal issues that can arise in construction bankruptcies that are more unique to these particular types of chapter 11 filings: construction lien issues, surety bond issues and executory contract issues.
Contractors, subcontractors and construction companies often take advantage of a special kind of protection from non-payment called a mechanics lien. A mechanics lien allows for someone in the building trade who has performed work on a project to establish a claim of right to a piece of that project if he or she is not paid for the work performed. For instance, if an electrician is not paid for the lights installed in a house, the electrician could potentially place a lien on the home.
Construction lien issues can become very complex in cases where a contractor or construction company goes bankrupt and does not pay its subcontractors. Subcontractors must follow specific requirements under 546(b)(1) – (2) of the Bankruptcy Code in order to perfect their lien and they then have a priority claim in a bankruptcy filing, rather than just a general claim.
An experienced Los Angeles or Pasadena bankruptcy attorney can help a construction company involved in bankruptcy to understand how liens will be viewed by the bankruptcy court. At DCDM Law Group, we will also help debtors to understand the impact that a lien will have on a chapter 11 filing.
Surety Bond Issues
In many types of construction projects, a contractor or construction company must be “bonded.” This means the company must purchase a form of insurance protection that protects the person or entity commissioning the building project. When a construction company doesn’t perform work as required or otherwise is remiss in fulfilling its contractual obligations, the injured parties may seek compensation from the insurer who issued the surety bond.
Claims made against the surety are not subject to the automatic stay that provides protection from collection activities in a bankruptcy filing. When a surety pays out on a bond, however, it may attempt to collect from the debtor construction company. Further, when a debtor construction company assumes a project, the surety may have the ability to monitor the project and control the release of funds. This, too, can make a construction bankruptcy very complex. At DCDM Law Group, our experienced Los Angeles construction bankruptcy attorneys understand the issues raised by surety bonds and will help debtors to deal with these issues effectively during a chapter 11 filing.
Another common issue that arises in the case of a chapter 11 construction filing is that the debtor normally has outstanding contracts to complete projects or outstanding contracts with suppliers. Construction contracts are generally considered to be executory contracts, which means that debtors may either chose to assume the contracts or may choose to reject them.
When a debtor wishes to assume the contracts as part of maintaining business operations, this must be done prior to the reorganization plan being confirmed. The other party to the contract may also request that this decision be made sooner.
When assuming a contract, it becomes the debtors obligation to cure all defaults, including making any past-due payments and continuing to perform the work as you are contractually obligated to do.
If the debtor elects not to assume the contract, then anyone owed payments arising from the contract will be treated as any other unsecured creditor.
The experienced Los Angeles and Pasadena construction bankruptcy attorneys at DCDM Law Group can help debtors to evaluate the contractual obligations that exist at the time of the construction bankruptcy to make an informed choice about whether the contract should be assumed or rejected.
Getting Legal Help
These are just a few examples of the complexities associated with a construction bankruptcy. As you can see, a chapter 11 construction bankruptcy has many legal facets and an expert knowledge of this type of bankruptcy proceeding is necessary in order for the bankruptcy to proceed effectively in helping a construction business to reorganize its debts and come out of the bankruptcy a more profitable and strong business.