RECENT DEVELOPMENTS: BANKRUPTCY AND THE CONSTRUCTION INDUSTRY

1. INTRODUCTION. 5
2. STATUTORY FRAMEWORK. 5
   1. Extensions of Time 5
   2. The Automatic Stay 7
      1. Introduction 7
      2. Actions Against Third Parties 8
      3. Injunctions 9
      4. Exceptions to the Automatic Stay 9
      5. Duration of the Automatic Stay 9
      6. Violation of the Automatic Stay 9
      7. Relief from the Automatic Stay 9
      8. Procedure to Obtain Relief From the Automatic Stay 10
      9. Adequate Protection 10
      10. Failure of Adequate Protection 10
      11. Lack of Equity and Not Necessary for Effective Reorganization 11
   3. Executory Contracts and Unexpired Leases 11
   4. Discharge of Third Parties 13
   5. Property of the Estate 13
   6. Perfection of Lien and bond Claims 14
   7. Reclamation 15
   8. Set-Off 15
   9. Others 16
3. THE OWNER'S PERSPECTIVE. 16
   1. Retainages 16
   2. Contract Balances 16
   3. Contractual Defaults 17
   4. Financing 17
   5. Surety Bonds 17
   6. Arbitration and Venue Clauses 17
4. THE GENERAL CONTRACTOR. 17
   1. Retainages 17
   2. Progress Payments 18
   3. Financing 18
   4. Getting the Work Done 18
   5. Performance of Contracts 18
5. SURETIES. 18
   1. Claims 18
   2. Sureties v. Creditors 19
   3. Preserving Funds 19
   4. Lifting the Stay 19
   5. Discovery 19
6. SUBCONTRACTORS. 19
   1. Constitutional Liens 19
   2. Statutory Liens 19
   3. Miller Act 21
   4. McGregor Act 21
   5. Insolvency of Surety 22
7. RECENT CASES. 22
   1. Preferences. 22
   2. Modification of Stay. 24
   3. Subrogation. 25
   4. Abstention. 26
   5. Removal. 27
   6. Set-Off. 27
   7. Involuntary Bankruptcy. 28
   8. Jurisdiction. 29
   9. Dischargeability. 31
   10. Cash Collateral. 31
   11. Executory Contracts. 32
   12. Property of the Estate. 34
   13. Jury Trial Right. 34
   14. Time Deadlines. 35
   15. Claims. 35
   16. Lien Avoidance. 36
8. CONCLUSION. 36

Abstract

In a construction context, a number of situations typically arise in bankruptcy cases. Owners hit hard times and file a bankruptcy case in the middle of construction; general contractors may be underfinanced or overwhelmed with problems on a project and seek bankruptcy protection; subcontractors and materialmen ranging from large conglomerates to Mom and Pop operations with limited financing experience difficulties and sureties standing by to ensure completion or performance may themselves suffer financial distress. A myriad of other possibilities exist. All of these situations create complex creditors' rights problems that require careful analysis of both bankruptcy and state law. This outline provides a brief overview of key Bankruptcy Code sections encountered in this area, the impact of bankruptcy on these various relationships, and a final section on recent developments.

Bankruptcy law has some trouble reconciling certain of its concepts to construction law. Uncertainty remains in how to evaluate retainages, progress and final payments. Complexities abound in the set-off area. Nonetheless, most bankruptcy concepts have ready application to the typical construction related bankruptcy.

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