Construction Law Blog
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A bill that would extend a key tax break to tens of thousands of short sale sellers who sold their homes in 2014 for less than they owed on their mortgages was passed by the House and the Senate in late December, 2012. The last-minute one-year extension of the Mortgage Debt Forgiveness Act, which expired December 31, 2013, was included in the Tax Increase Prevention Act of 2014 that was signed into law by President Obama on December 16, 2014. Short sale advocates and real estate groups have been lobbying hard all year to help homeowners who sold their home through a short sale avoid a devastating tax bill, which they likely could not afford.
This is Part II of a two part blog on Construction Bankruptcy issues. For Part I, click here.
The Bankruptcy Code is Federal law. Bankruptcy courts are part of the federal (not state) judiciary system. Lien and bond claim law, however, can involve federal or state law. Federal bankruptcy intersects state lien and bond law when a participant in a construction project goes broke. As with anything else, there are winners and losers when someone on a construction project goes bankrupt. The goal is to take the available action to protect yourself. The winners are the ones who get out of the project before the bankruptcy occurs, obtain a security interest for their claims, or swiftly assert their available rights once the bankruptcy petition is filed. The losers are generally the ones who become unsecured creditors in the bankruptcy estate. Unsecured creditors share in whatever meager assets remain in the bankruptcy estate after secured creditors and administrative fees are paid.
Bankruptcy on Your Construction Project: What Should You do When the Property Owner Files for Bankruptcy?
This will be the first in the series of blog postings that will explore what you can do to protect your rights when a bankruptcy occurs on your construction project. This posting addresses what a contractor performing work on a private project can do when the owner of the property where the work is being performed files for bankruptcy.
One of the primary benefits of filing for bankruptcy is that the bankruptcy filing itself stops all legal actions against the person or entity that has filed for bankruptcy. This is known as an "automatic stay" in bankruptcy vernacular. Essentially, this means that the party is precluded from taking any legal action or enforcing any legal rights against the person or entity, or their property, if they have filed for bankruptcy. If a party believes they are nonetheless entitled to proceed with legal action against the person or entity that filed for bankruptcy, they need to hire an attorney to file a motion with the bankruptcy court to obtain relief from the automatic stay. This can be an expensive and time-consuming process.
The automatic stay provisions of the bankruptcy code can be particularly problematic for a contractor who has not been paid for work performed on property owned by the person or entity that filed for bankruptcy. This is because the automatic stay provisions of the bankruptcy code would prohibit a contractor from perfecting its lien rights, i.e., providing pre-lien notices and recording a claim of lien. Fortunately for contractors, there is an exception to the automatic stay provision in 11 U.S.C. §546(b) that exempts "act[s] to perfect an interest in property." The effect of 546(b) is to allow contractors to perform any acts necessary to perfect its lien rights, including providing pre-lien notices and recording of a claim of lien after a person or entity files bankruptcy.
Although the bankruptcy code provides an exception for acts by the contractor to perfect its lien rights, the statute does not allow a contractor to file a lawsuit to enforce its lien rights after the property owner has filed for bankruptcy. Contractors have eight (8) months after recording their claim of lien to file a lawsuit to foreclose the lien. The automatic stay provision of the bankruptcy code prohibits a party from filing suit to foreclose its lien without obtaining relief from the automatic stay. Therefore, contractors are strongly recommended to contact an attorney well before the expiration of the eight (8) month period after recording their lien if the property owner has filed for bankruptcy.
Topic next week: What can you do when your up-stream contractor files for bankruptcy?