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Construction Law Bankruptcy Considerations

9th Annual Construction Law Conference

February 8 & 9, 1996

Houston, Texas

Keith A. Langley
Kimberly K. Taylor

Langley & Branch, P.C.
Dallas, Texas

Table of Contents

I. Introduction 4

II. Proofs of Claim 5
    A. Bar Date 5
    B. Late Filed Claims and Excusable Neglect 5
    C. Jury Trials and Withdrawal of Reference 7

III. The Automatic Stay 8
    A. Generally 8
        1. Code Provisions 8
        2. First Things First: Are you really subject to the Automatic Stay? 9
            a. In re Simon .9
        3. Relief from the Automatic Stay 10
            a. Generally 10
            b. Debtor must prove adequate protection to keep the Stay in place 10
    B. Pre-petition Waiver 11

IV. Setoff/Recoupment 12
    A. Recoupment 12
    B. Caveat for Employment Taxes 13
    C. Post-petition Setoff 14
    D. Administrative Freezes 15
    E. Miller Act and Setoff/Recoupment 15

V. Executory Contracts 16
    A. Generally 16
        1. Defined 16
        2. The Code and Executory Contracts 18
    B. Time to assume or reject 18
    C. Contract - Divisible or Entire? 19

VI. Property of the Estate 19
    A. Generally 19
    B. Code Sections 20
    C. Superior Title in Another 21
        1. The Pearlman Doctrine 21
        2. Unearned Contract Balances Do Not Constitute Estate Property 21
        3. Unearned Escrow Funds Not Estate Property 22
        4. Texas Trust Fund Act Provides Additional Protection to Subs 23
            a. Private Cause of Action for Violation of Trust Fund Act 23


VII. Avoidance Powers 24
    A. Fraudulent Transfers 24
        1. Generally 24
        2. Code Section 548 24
    B. Preferences 25
        1. Section 547(b) of the Bankruptcy Code 25
        2. Application of Section 547 26

VIII. Mechanics' Liens 27

IX. Miscellaneous 27
    A. Lien Must be Dealt with in Plan 27
    B. Demise of Deprizio 28
    C. The Construction Lender 29
    D. Dischargeability 30
    E. Jurisdiction 30

Abstract

Since time immemorial, we have been builders. Today, construction is one of the largest industries in America. It is also risk-intensive and no stranger to the bankruptcy courts.

Not only are there a large number of projects under construction in America on any given day, but there are also a large number of actors involved in each project. Projects commonly have an owner, one or more general contractors, a myriad of subcontractors (providing labor and/or supplies), and design professionals-any one of which could end up in bankruptcy.

In addition to the large number of parties with competing rights, duties, and interests, there is a mixed bag of law governing the construction industry: state statutes, federal statutes, regulations, equitable principles, and common law contract principles ... and if a construction participant undergoes bankruptcy, add an additional layer of specialized bankruptcy laws.

This paper addresses some construction law bankruptcy considerations.

The discussion is organized around bankruptcy principles; in particular, proofs of claim, jury trials, the automatic stay, executory contracts, property of the estate, and avoidance powers.

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