This document discusses strategies a contractor can take if a project owner files for bankruptcy. It provides information on the automatic stay in bankruptcy and how it prevents creditors from taking actions against the debtor's estate. It also discusses executory contracts and how they are treated in bankruptcy. The document advises contractors to seek relief from the automatic stay to protect their claims. It also recommends contractors continue protecting their claims through mechanic's liens, which may relate back before the bankruptcy filing date. The document also discusses avoidable preference actions and strategies to mitigate preference liability, such as obtaining perfected lien rights or arguing the payments were made in the ordinary course of business.

1. CONNECTIONS
People | Ideas | Trends
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2. Goal
Mitigate risk before a bankruptcy …
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3. “Where are we going?”
• Automatic Stay and
Executory Contracts
• Mechanic’s liens
and “Relation Back”
• Avoidable
Preference Actions

4. It all depends on your …

5. Players

6. Liquidated damages of
$1,000 per day if project is
not substantially complete
by August 25, 2012.

7. On Time … On Budget
On August
10, 2012, project is 95%
complete. And this is
where our story begins…

8. What should
contractor do?

9. The Automatic Stay in Bankruptcy
• Debtor’s Estate = all legal and equitable
property of the debtor at the time of filing.
• § 362 Automatic Stay prevents a creditor
from doing certain things to or with property
of the Estate.
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10. Executory Contracts and the Stay
• What is an executory contract?
– A contract that is so far “unperformed” that if
either party failed to act on its promise it
would constitute a material breach excusing
the performance of the other.
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11. • Executory contracts are property of the
bankruptcy estate.
• They can be rejected, assumed, or assigned
to another party.
• Therefore, they have value ($$) to debtor and
add ($$) to the bankruptcy estate.
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12. The Bottom Line
• When party files
bankruptcy, be aware of
the automatic stay…
….SEEK RELIEF!
• Penalties include:
– Voiding action
– Paying damages
– Contempt

13. Besides the “stay”… what else?
Continue to protect your
claims through lien rights.
Compare:
File lien … Perfect lien…
Enforce lien…

14. Post-Petition Mechanic’s Lien
Is the construction
project in a “relation
back” jurisdiction?
All liens “relate back”
to the visible
commencement of
the job.
Tenn. Code 66-11-1-4(a)

15. Why Does Relation Back Matter?
• § 362(b)(3) and 546(b) of the Bankruptcy
Code provide “exception” to the automatic
stay.
• Permits perfecting a mechanic’s lien because
the GC/SC’s right to be paid relates back
prior to the date of actual perfection.
• Thus, filing a mechanic’s lien would not
violate the stay. 15

16. What if owner files bankruptcy?

18. What is Avoidable Preferences?
• Payment of debt to
creditor within 90
days of filing
• Creditor received
more than it
would in
hypothetical
Chapter 7
liquidation

19. • Require Owner to put construction funds in
“escrow.”
• If debtor does not have an interest in the
property, it is not property of the Estate.
• Thus, not a “Preference.”
Earmarking and the Debtor’s “Interest”

20. How to Mitigate Preference Liability
1. Perfected lien rights 2. Construction Trust Fund
(Lien waiver strategy)
3. Ordinary course 4. New value
of business

21. Other Pieces

22. Questions?
Alexandria
Atlanta
Frankfort
Jeffersonville
Lexington
Louisville
Nashville
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