Construction Contracts and Bankruptcy: The Ultimate in “Value Engineering”

December 20, 2016

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You have just learned that the other party to your contract has filed for bankruptcy. That party owes you money for past work and the project is not yet completed. This is a difficult and confusing situation that your firm might encounter.

In this Practice Note, attorney Jeremy W. Katz provides insight into the bankruptcy mechanism and the steps you might take to protect your firm’s interests.

A prime designer or lead contractor on a design/build project files bankruptcy. Can a design professional/consultant working under contract to the entity filing for bankruptcy protection pack up its gear and walk off the job site or stop work? Can the consultant enforce its mechanics’ lien rights against the real property’s owner? Can the consultant look to the bankrupt’s payment bond for payment? A bankruptcy filed by one party to a construction contract creates significant problems that put at risk the other party’s right to payment. When this happens, the non-debtor party to the construction contract should be ready to act.

The construction business is a volatile one, and it makes little difference if times are good or bad. Prime contractors, consultants, subcontractors, and property owners are constantly filing for bankruptcy protection. They can be huge companies, such as Washington Group, International, Enron, and PG&E, or they can be small mom-and-pop operations. But no matter how large or small the bankruptcy, creditors are likely to suffer, because rarely are they paid in full. All bankruptcies have a ripple effect; the goal is to keep the waves as small as possible. In order to best protect its interests, the creditor should have some knowledge of creditors’ rights and remedies. This knowledge allows the creditor to recognize, anticipate, and act upon issues that arise in a bankruptcy.

This article identifies some of the issues that arise when a bankruptcy is filed, as well as steps a design professional/consultant or subconsultant can take to protect its interests in the project contract. First, this article describes the bankruptcy process from a general standpoint. Second, it discusses specific issues related to the bankruptcy of owners and primes, whether they are design firms or contractors on a design build project. This article is not intended to be a comprehensive study of the topic, nor is it a substitute for a good bankruptcy lawyer. Its purpose is to allow a consultant to identify problems that may affect a construction contract when a bankruptcy is filed. This knowledge makes it more likely that the contractor will fare better than other creditors in the fight to be paid.

Download the full article–Construction Contracts and Bankruptcy: The Ultimate in “Value Engineering”–to continue reading the following sections:

  • How Bankruptcy Works – An Overview
  • Pending or Executory Contracts
  • Perfect Your Mechanics’ Lien Rights!
  • The Automatic Stay
  • Unauthorized or Preferential Transfers, or Having to Give Money Back to the Debtor

If you have further questions on construction contracts and bankruptcy, contact your local a/e ProNet broker. We’re here to help!

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