- by Caryn Tijsseling & S. Paul Edwards
Construction-related bankruptcy filings continue to increase in these troubled economic times. In fact, there seems to be no end in sight. It is critical in today’s economic environment for contractors, subcontractors and suppliers to understand basic bankruptcy principles so they can protect their potential claims against projects that enter bankruptcy.
This blog series will address those basic principles so that you are prepared when your construction-related business is suddenly owed money by an insolvent and bankrupt project.
The first bankruptcy concept to understand is the difference between Chapter 11 versus a Chapter 7 bankruptcy filing. Federal law governs all bankruptcy proceedings. The United States Bankruptcy Code’s goal is to provide an insolvent entity the opportunity to reorganize its operations, or to liquidate its assets, while treating all of its similarly situated creditors equally. The initial notice of bankruptcy will indicate the Chapter under which the bankruptcy is being filed. There are several types of bankruptcy, but a construction project is most likely to file for protection—become a “debtor”—under either Chapter 11 or Chapter 7 of the Code.
A Chapter 11 bankruptcy allows the debtor to reorganize its financial affairs and, hopefully, return to economic viability. Under Chapter 11 bankruptcy protection, the business generally continues to operate while attempting to return to profitability. If you are owed money from a debtor that has filed a Chapter 11, there is a good chance you can recover at least a portion of what is owed.
The goal of a Chapter 7 bankruptcy is significantly different. In a Chapter 7 bankruptcy, the business comes to an end. The bankruptcy trustee marshals the debtor’s assets, sells them to pay the business’ creditors to the extent possible, and the business closes its doors. If the debtor files for Chapter 7 protection, it is less likely that there will be any recovery.
Understanding these basic differences is important in order to determine the likelihood of recovery and the appropriate actions to take in order to maximize any potential recovery.
Ms. Tijsseling is a partner in the Lewis and Roca LLP Litigation group. She focuses primarily on construction, bankruptcy and creditors’ rights, and employment matters.
Mr. Edwards is a senior associate in the firm's Litigation and Bankruptcy Practice Groups. His practice focuses primarily on complex commercial litigation in federal and state courts throughout Nevada.
