Contractors And Bankruptcy Law

Many residential contractors have filed or will file for bankruptcy protection as a result of the economic downturn of 2008-2009. With this in mind, I came across an excellent article on bankruptcy from the contractor’s perspective.

This article was written by my friend, attorney John McCants, who specializes in defending contractors on behalf of their General Liability insurance carrier as well as in bankruptcy law.

John’s article reviews bankruptcy under Chapter 7 (liquidation), Chapter 11 (reorganization), and Chapter 13 (reorganization). In addition, it address the following contractor related issues:

* The impact of bankruptcy filing on a contractors General Liability policy which is considered to be an asset of the bankruptcy estate. In some cases, a General Liability policy may be the most significant asset of a bankruptcy estate if a claim is pending. As a general rule, just because such a policy may be the property of the bankruptcy estate does not preclude the payment of a claim under such a policy to the claimant.

* The impact of bankruptcy filing on a performance or surety bond in the event of default. Here is the normal chain of events: contractor enters into a contract and procures a performance or surety bond; contractor does not finish the job; bond company steps in the shoes of contractor and completes job; bond company then subrogates against contractor for reimbursement. But……. how can the bond company subrogate against the contractor that has filed for bankruptcy protection? The courts usually rule that the bonding company has priority over bankruptcy creditors.

* The impact of Chapter 11 bankruptcy filing after a home owner or project owner has entered into a construction contract. In other words, can the home owner or project owner discontinue the contract? The answer is, that it depends on several factors which are outlined in the article!

* The impact of an arbitration clause in a construction contract where the contractor has filed for bankruptcy. Courts typically rule that an arbitration clause is enforceable under such circumstances.

For more information: John L. McCants, Ellis Lawhorne & Sims, P.A., Bankruptcy Law: Fundamentals For The Construction Law Practitioner,
John Sadler

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