Legal Column

CONTRACTORS BEWARE! Protecting Yourself in this Economy

By Kaaran Thomas

With the current sluggish economy causing some developers to go under, make sure to protect your firm from the risks of bankruptcies.

Everyone knows the economy is in trouble - especially the market for new developments.  What contractors might not know is how to minimize risks to doing business.  Here are some things to watch out for:

WATCH for Bankruptcy Filings

A Bankruptcy creates an “automatic” stay of actions to collect on your claims, including filing lien notices and taking other steps required to perfect your lien. You may not know a company has filed bankruptcy and they might not file in the place you do business. The Pacer system is a national registry of all cases filed. For a fee you can subscribe to https://pacer.login.uscourts.gov.

If time is expiring to take actions required to perfect your lien, you MUST contact an attorney immediately to file a “Notice of Perfection” for you in the bankruptcy case. Filing in the usual place will be VOID and you may lose your lien unless you file the Notice of Perfection within the required time.

DON’T Automatically File A Proof of Claim

Sometimes filing a proof of claim is not necessary and sometimes it is a bad idea. If the bankruptcy is a Chapter 11 and your claim is scheduled as undisputed and in the right amount you don’t need to file anything. If the case is listed as “No Asset” you don’t file a claim.

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If the Bankrupt disputes your claim filing a claim may not be a good idea. Filing a claim “subjects” you to bankruptcy court jurisdiction for all counterclaims even if there is already a lawsuit on your claims. This means that you have just lost your right to have a trial on the Bankrupt’s case against you in your home court. You have also waived your right to a jury trial. You will find yourself a defendant in a federal bankruptcy court in the place where the bankruptcy is filed - Delaware, New York, California... If you feel comfortable being in the court where the bankruptcy is filed, you know the bankruptcy estate has lots of money to pay your claim and you think you have a great defense against the Bankrupt’s claims, go ahead and file your claim. If you are concerned discuss the issues with a lawyer and do some investigation about the Bankrupt’s case.

PROTECT Your Lien’s Value and Priority

Filing a claim is not always necessary to protect your mechanic’s lien. But if you have a lien on property you will need to learn what the Bankrupt proposes to do with the property and whether there are other liens that are ahead of you. Bankruptcy have special rights under certain circumstances to obtain “Superpriority” liens that “prime” (are placed ahead of) your lien. If you learn the Bankrupt is trying to do this you will need a lawyer to advise you on how best to protect yourself.

EXERCISE Reclamation Rights

If you have delivered identifiable goods on credit in the ordinary course of business and the buyer files bankruptcy, you may be able to “reclaim” the goods. You must send a demand in writing not later than 45 days after the day the bankrupt received the goods or not later than 20 days after the case was filed if the 45-day period expires after the case is filed.

BE Careful Settling Claims

A bankruptcy estate can avoid payments made on “previously existing” debts (including settlement payments) within the 90 days before the bankruptcy is filed. If the creditor and debtor are related, the “avoidance” period is extended to one year. Creditors can take precautions against these avoidance powers. First, the settlement should delay releasing any claims or rights until the avoidance period has passed and no bankruptcy is filed. The avoidance period begins after the settlement is received. “Receipt” means the settlement payment is in the bank or is in your possession in cash. Any releases of guarantors, dismissal of litigation or release of liens should be delayed if possible until the avoidance period expires and conditioned upon no bankruptcy being filed by or against the debtor. That way, if a bankruptcy is filed you still have all of your rights to bargain with when the Bankrupt asks for the settlement back.

Kaaran Thomas is a partner at McDonald Carano Wilson LLP and is one of two practicing attorneys in Nevada who are fellows of the American College of Bankruptcy, the national honorary society for specialists in bankruptcy and business reorganizations.

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