Bankruptcy / 3 min read
When a general contractor files for bankruptcy, inevitably the material suppliers, subcontractors, and laborers face unique challenges that differ significantly from typical commercial creditor situations. The construction industry's complex web of relationships, lien rights, and payment structures creates both opportunities and pitfalls that require immediate attention and strategic planning. Understanding your rights and the urgency of certain deadlines can mean the difference between recovering what you are owed and becoming another unsecured creditor with minimal prospects for payment. You'll also need to evaluate whether any ongoing construction projects can continue and whether you should halt shipments or work to avoid accruing additional potential losses. If the general contractor has filed a chapter 7 case and is closing its doors, existing contracts are automatically rejected. However, if the debtor is using the bankruptcy process to reorganize the business and continue operating, the debtor can use its business judgement to determine whether it wants to assume or reject existing contracts with owners, subcontractors, and suppliers. In a reorganization bankruptcy (chapter 11 or subchapter V), if you have a contract in place for a particular project, you may not be able to stop performing just because the general contractor filed bankruptcy. If, however, you are supplying materials under a general credit agreement that is not project-specific, you likely can stop supplying materials to the debtor. Understanding the rights of the debtor, as well as your rights, will help you avoid a misstep in a bankruptcy case. The automatic stay that goes into effect upon bankruptcy filing creates immediate compliance obligations and strategic considerations. The stay prohibits collection efforts against the debtor general contractor without court approval. For that reason, one of your most critical concerns should be preserving and perfecting any mechanic's lien rights you may have against the project owner. Your liens provide security against the real property where you supplied materials or labor, and you can still continue to pursue your lien rights against the non-debtor property owner because the property is not an asset of the debtor general contractor. Payment bond claims present another layer of complexity that requires prompt attention. If the project involved payment bonds, you must ensure compliance with bond claim procedures and deadlines, which may provide an alternative source of recovery independent of the bankruptcy estate. The interplay between bond claims, lien rights, and bankruptcy procedures requires careful navigation to avoid inadvertently waiving valuable rights. Additionally, you should assess whether preference payment liability exists if you received payments from the debtor general contractor in the 90 days preceding the bankruptcy filing, as these payments might be subject to an avoidance action where a trust or the debtor attempts to claw back the payment. There are a number of defenses to these preference claims that will require to review your invoice and payment history with the debtor, and determine if you released any claims or liens when you accepted the payment from the debtor before they filed bankruptcy. When the general contractor files bankruptcy, you will need to evaluate immediately whether you have reclamation rights for goods delivered within 45 days of the bankruptcy filing. You also have to consider whether seeking critical vendor designation is appropriate based on your unique relationship with the debtor and the nature of the goods or services you can provide to the debtor. Andrews Myers bankruptcy lawyers have decades of experience navigating this complex intersection of legal requirements in construction bankruptcy cases, and can help maximize your recovery prospects while minimizing potential exposure to preference claims or other bankruptcyrelated risks. If you general contractor has filed bankruptcy, or even hinted that bankruptcy is on the horizon, we can prepare you for what lies ahead. Understanding your rights regarding whether and under what circumstances you can or must continue to perform work or supply materials, setoff claims, and ad.