Can You Declare Bankruptcy as a California Licensed Contracto?

The Big "B" – Bankruptcy on the Structure Project

Untitled It'south not often that I notice myself in bankruptcy court, but there I was. A alone construction attorney surrounded by defalcation lawyers speaking in a foreign tongue – "cram down!," "cash collateral!," "executory contract!"

And the natives weren't exactly friendly.

Defalcation on a construction project is one of the biggest fears for owners and contractors. At best information technology can tedious down a project and at worst it can crusade a domino effect of bankruptcies as contractors and suppliers aren't paid, causing the entire projection to fail.

A Very, Very Brief History of Bankruptcy

Before there were modern bankruptcy laws if you were a debtor any number of terrible things could happen to you. The Greeks would force yous and your family unit into slavery until the creditor recouped his losses. Genghis Khan was less forgiving, and if you became bankrupt three times, y'all were put to death. The English were perhaps the most lenient and would just throw you lot into debtor's prison.

Today in the United States yous won't exist put to death, forced into slavery, or thrown into jail. Rather, we Americans, perhaps shaped past our colonial roots, will give you lot a "fresh commencement" by allowing you to reorganize and pay down all or part of your debts (Chapters 9 – public entities, 11 – individuals and companies, 12 – farmers, or 13 – individuals only) or simply liquidate your assets and showtime afresh (Chapter 7 – individuals, couples and companies).

Defalcation Basics

I of the almost of import features of the U.Southward. Bankruptcy Code is the "automatic stay." When an individual or business organisation entity files for bankruptcy an automatic stay is triggered on all drove actions, legal proceedings and judgment enforcement activities. The idea is to maintain the status quo to requite the debtor fourth dimension to reorganize or liquidate its avails. Any action taken in violation of the automatic stay can be sanctioned by the court.

Also of import nether the U.Due south. Bankruptcy Lawmaking is the concept of "secured creditors," "unsecured creditors" and "priority claims." Secured creditors are creditors who hold a security interest in an asset of the debtor such as a deed of trust in connection with a mortgage or a security agreement in connection with a motorcar loan. Unsecured creditors are, equally their name implies, creditors who don't hold a security interest. And priority claims are claims given priority such as tax obligations, alimony and child support. Under the U.S. Bankruptcy Code, secured creditors and priority claims get paid get-go and unsecured creditors go paid last, which is extremely important in bankruptcy, because getting paid first means getting paid most and getting paid last means getting paid least, or non at all.

Generally, the most common bankruptcy scenarios on a structure project are: (1) the owner files for bankruptcy; (2) the general contractor files for bankruptcy; or (3) a subcontractor files for bankruptcy. Each presents its own unique challenges and solutions for getting paid.

When the Project Owner Files for Bankruptcy

How will I know when a project owner files for bankruptcy?

A bankruptcy begins when a debtor files a bankruptcy petition with the bankruptcy courtroom, usually, the U.S. District Defalcation Court in the district where the debtor resides or has his master identify of business. Typically, within a week after the petition is filed, the courtroom will transport a Detect of Commencement of Case to all creditors listed in the petition. When the debtor is the owner of an uncompleted construction projection the Notice of Showtime of Case will usually include the general contractor. Typically, though, give-and-take that a project participant has filed for bankruptcy spreads pretty quickly.

If you are a creditor and did not receive a Notice of Commencement of Instance y'all should file a Request for Special Notice with the defalcation court so that you lot receive future notices.

If I'm the general contractor do I need to proceed to perform work nether my contract with the owner?

Yes. Partially performed construction contracts are considered to exist "executory contracts" meaning the obligations of the parties to the contract have not yet been completely performed (i.e., completion of work past the full general contractor and payment past the possessor). The trustee, in a Chapter 7 case, and the debtor, in Chapter 11 and xiii cases, gets to choose whether to presume or pass up an executory contract.

The decision whether to presume or refuse an executory contract commonly turns on whether assuming the contract would result in a cyberspace economical gain to the bankruptcy estate.

In Chapter 7 cases, the deadline for bold or rejecting an executory contract is threescore days (unless extended) from the date the bankruptcy petition was filed with the defalcation court. In Affiliate 11 and 13 cases, the time for assuming or rejecting an executory contract is anytime prior to confirmation of the debtor's reorganization plan. A not-bankrupt party can also seek a court order requiring the trustee or debtor to presume or decline an executory contract before.

Merely what if at that place is a provision in the contract that says if the other party becomes insolvent or files for bankruptcy it is considered a material breach of the contract assuasive the non-breaching party to rescind the contract?

Generally, these types of provisions, known equally ipso facto ("by the fact itself") clauses, are unenforceable. They are simply two narrow exceptions in which they are enforceable: (1) if a party becomes insolvent but does not file for bankruptcy. However, if a bankruptcy is later filed, a termination based on insolvency may not be enforced; or (ii) if the trustee or debtor is not permitted under "applicable law" to assume or assign the executory contract. This likely would non apply to construction contracts, although an argument might be made on public works projects that a trustee or debtor in possession cannot presume or assign an executory contract under the California Public Contracts Code.

What happens if the trustee or debtor assumes the construction contract?

In Chapter 7 cases, if the trustee decides to assume a construction contract it must obtain an club from the bankruptcy courtroom permitting it to do then. In Chapter 11 and 13 cases, if the debtor decides to assume a construction contract it must receive permission from the court through a confirmed reorganization programme. The non-bankrupt party to the contract may object to the assumption of the executory contract.

If a trustee or debtor assumes a construction contract, the debtor'southward bankruptcy estate becomes bound by the contract, and all amounts owed thereafter by the debtor under the contract are ordinarily entitled to be paid in full as administrative expenses. Furthermore, if the debtor was in default prior to assuming the construction contract, the debtor must cure all monetary defaults and provide acceptable assurance of hereafter performance under the contract.

A trustee or debtor who has assumed a structure contract may, in addition to performing the contract, assign the contract to a third-political party. Contract provisions restricting the ability to assign the contract are generally unenforceable. If a trustee or debtor assigns a construction contract there must exist acceptable assurance of future performance by the assignee.

What happens if the trustee or debtor rejects the structure contract?

If a trustee or debtor rejects a structure contract,the bankruptcy estate loses any benefits it had under the contract, and is liable for all damages caused by the rejection, which is considered a breach of contract. Damages caused past the rejection of an executory contract such every bit lost profits, costs to retain a replacement contractor, etc. are treated as unsecured claims.

What can I do if I have not been paid for the work I performed?

If you have not been paid for work yous performed yous should file a Proof of Claim with the bankruptcy court unless the Notice of Offset of Case indicates that no claims are to be filed. In Chapter seven and 13 cases, the borderline to file a Proof of Claim is xc days later on the Outset Meeting of Creditors. In Chapter eleven cases, the court sets the deadline to file a Proof of Merits. If you did non timely file a Proof of Claim, you tin enquire the court for permission to file a late Proof of Merits but you have to bear witness "excusable neglect" for your failure to file a timely Proof of Claim.

Is there anything else I can do other than filing a Proof of Claim?

Possibly. As discussed, when an private or business entity files a defalcation petition at that place is an automated stay on all drove actions, legal proceedings, and judgment enforcement activities. Yet, the automatic stay just applies to drove actions, legal proceedings, and judgment enforcement activities directed at the debtor.

Therefore, if at that place is a construction lender on the project, the automatic stay does not forbid a not-bankrupt party from "serving" abonded finish payment detect on the construction lender, although information technology would likely prevent a non-bankrupt from party from filing or standing a lawsuit to "enforce" a bonded stop payment detect.

Furthermore, the automatic stay does not prevent a non-broke party from "recording" a mechanics lien. It does, however, preclude a non-bankrupt political party from filing or continuing a lawsuit to "foreclose" on a mechanics lien, and if lawsuit to prevent on a mechanics lien has already been filed, a Notice of Stay of Activity should be filed in the state court proceeding.

If a lawsuit to foreclose on a mechanics lien has not however been filed, the U.South. Bankruptcy Code allows the non-bankrupt party to file a Observe of Connected Perfection to toll the xc-day borderline to file suit to preclude on a mechanics lien. Similar the deadline to file suit to forbid on a mechanic'south lien, a Notice of Continued Perfection must be filed with the bankruptcy court within ninety days of recording the mechanics lien. A Notice of Proceed Perfection could besides likely be used to cost the deadline to file accommodate to enforce a bonded stop payment notice.

A party to a structure project can also file a motion for relief from the automatic stay to permit the party to file or continue pursuing a lawsuit to foreclose on a mechanic'south lien (or enforce a bonded stop payment notice). This is typically done if at that place is concern that the value of the property might decrease (eastward.g., waste material by the possessor), the position of the mechanics lien holder may erode (e.k., owner not able to pay real holding taxes), or if the owner lacks equity in the holding.

When the General Co ntractor Files for Bankruptcy

Unless otherwise noted, the comments above in the section "When the Projection Owner Files for Bankruptcy" besides applies to this section.

How will I know when the general contractor files for bankruptcy?

When the debtor is the general contractor on an uncompleted construction projection, the bankruptcy courtroom will send a Notice of Commencement of Instance to all creditors listed in the debtor's bankruptcy petition, which will commonly include the general contractor'due south unpaid subcontractors and suppliers. If yous are a creditor and did not receive a Notice of Commencement of Case you should file a Request for Special Find with the bankruptcy court so that y'all receive time to come notices.

If I'thousand the owner can I terminate the general contractor if it files for bankruptcy?

No. Partially performed owner-contractor construction contracts are considered "executory contracts," and only the trustee in a Chapter vii case, or the debtor in Chapter 11 and xiii cases, get to choose whether to assume or turn down an executory contract. Nevertheless, the trustee or debtor must obtain court approving.

If I'yard a subcontractor do I demand to continue to perform work under my contract with the full general contractor?

Yes. Partially performed subcontracts are considered "executory contracts," and only the trustee in the Chapter vii cases, or the debtor in Chapter 11 and 13 cases, become to choose whether to assume or reject an executory contract. However, the trustee or debtor must obtain court approval.

If I'thou the possessor what tin can I do to ensure my projection gets completed?

Because the U.Southward. Defalcation Lawmaking's automatic stay only applies to collection actions, legal proceedings, and judgment enforcement activities directed at the debtor, the owner tin can make a claim against the general contractor's operation bail, if whatsoever.

If I'g a subcontractor or supplier, other than filing a Proof of Claim with the U.Due south. Bankruptcy Court, what can I do if I have not been paid for the work I performed?

Again, because the U.S. Defalcation Lawmaking's automatic stay but applies to collection actions, legal proceedings, and judgment enforcement activities directed at the debtor, a subcontractor or supplier tin in addition to filing a Proof of Claim: (1) record and file accommodate to foreclose on a mechanics lien on the owner's belongings if it's a private works projection; (2) serve and enforce a stop payment notice on the owner, or bonded stop payment notice on the structure lender, if any; (3) brand a claim confronting the general contractor's payment bond, if any.

If an owner's contract with the genial contractor has a provision allowing the possessor to pay subcontractors and suppliers of the general contractor directly or by joint bank check, the owner may be able to contend that undisbursed contract funds are not part of the bankruptcy estate, and that the owner be allowed to cutting checks either direct or by articulation check to the general contractor's subcontractors and suppliers in order to avoid the recording of mechanic's liens or serving of stop payment notices.

When a Subcontractor Files for Bankruptcy

Unless otherwise noted, the comments above in the section "When the Project Owner Files for Bankruptcy" as well applies to this section.

If I'm the general contractor can I terminate a subcontractor if it files for bankruptcy?

No. Partially performed subcontracts are considered "executory contracts," and simply the trustee in a Affiliate 7 case, or the debtor in Chapter 11 and xiii cases, get to choose whether to assume or reject an executory contract. However, the trustee or debtor must obtain courtroom approval.

If I'1000 a supplier or second-tier subcontractor practice I need to go along to perform work under my contract with the subcontractor?

Yes. Partially performed subcontracts and purchase orders are considered "executory contracts," and but the trustee in the Affiliate 7 cases, or the debtor in Chapter 11 and 13 cases, go to choose whether to assume or decline an executory contract. All the same, the trustee or debtor must obtain court approval.

If I'1000 the general contractor what can I practice to ensure the subcontractor's scope of work gets completed?

Because the U.S. Defalcation Lawmaking's automated stay only applies to collection deportment, legal proceedings, and judgment enforcement activities directed at the debtor, a general contractor can make a claim against the subcontractor'south operation bond, if any.

If I'm a supplier or 2d-tier subcontractor, other than filing a Proof of Merits with the U.Due south. Bankruptcy Court, what can I do if have not been paid for the work I performed?

Over again, considering the U.Due south. Bankruptcy Code's automatic stay merely applies to collection deportment, legal proceedings, and judgment enforcement activities directed at the debtor, a supplier or 2nd-tier subcontractor can in add-on to filing a Proof of Claim: (1) record and file suit to foreclose on a mechanics lien on the owner'south property if it's a individual works project; (2) serve and enforce a end payment notice on the owner, or bonded end payment detect on the construction lender, if any; (3) make a claim against an upstream contractor'southward payment bond, if any.

If the full general contractor's contract with the subcontractor has a provision allowing the general contractor to pay subcontractors and suppliers of the subcontractordirectly or past joint check, the general contractor may be able to contend that undisbursed contract funds are not office of the defalcation estate, and that the general contractor be allowed to cut checks either directly or by articulation check to the subcontractor's suppliers and second-tier subcontractors in order to avert the recording of mechanic'due south liens, serving of stop payment notices, or claims against the general contractor's payment bond.

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Source: https://calconstructionlawblog.com/2014/02/03/the-big-b-bankruptcy-on-the-construction-project/