Bankruptcy Basics and Considerations for Construction Projects

While the reality and speed of economic improvement in the construction industry is debatable, few would argue with the fact that the specter of bankruptcy is more apparent now than ever. As any contractor or construction attorney would agree, bankruptcy raises several unique issues in the construction context and, at times, can seem perilous. While one article cannot cover every bankruptcy issue relevant to the construction industry, there are a few fundamental items to understand. Below, we will discuss what happens to an ongoing contractual relationship, when it is appropriate to seek relief from the automatic stay, proofs of claim and set-off issues. The interplay between bankruptcy and state construction lien law must be understood. The focus of this article is often on general contractors, but in many respects the issues raised are also faced by owners and subcontractors.

Business bankruptcies are either liquidations under Chapter 7 of the Bankruptcy Code or reorganizations under Chapter 11 of the code. In a Chapter 7, a third-party trustee is appointed to manage the affairs of the debtor and the debtor’s affairs wind down. In contrast, in a Chapter 11, the debtor acts as a “debtor in possession” and continues its operations pending confirmation of a reorganization plan.