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After the Dance: Substantial Completion and Beyond

2. ?Capitalism without bankruptcy is like Christianity without hell."Frank Borman. 3. PROJECT DUE DILIGENCE. Reputation.Bond.UCC Filings.. ?Prosperity is the best protector of principle."Mark Twain. 4. Should The Client File for Chapter 11 Relief? . Short term cash flow problem leading to possi

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After the Dance: Substantial Completion and Beyond

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    1. 1

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    4. 4 Should The Client File for Chapter 11 Relief? Short term cash flow problem leading to possible foreclosure/repossession or termination of valuable contract Overextended business that can be downsized (e.g., multi-project developer being hurt by one bad project)

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    7. 7 Filing for Chapter 11 The Benefits: Ability to assume profitable executory contracts and unexpired leases and reject the unprofitable ones Ability to sell assets for going concern value free of liens and claims Home Court for litigating most of suits

    8. 8 Filing for Chapter 11 The Detriments: Expenses Professionals Burden of court administration Attendance at meetings, examinations, and court hearings Life in a fishbowl Damage to business reputation

    9. 9

    10. 10 Getting Ready Cash is king (or, you cant eat an equity cushion) Is there a source of cash to meet at least current expenses? Rent Undisbursed loan proceeds New loans (debtor-in-possession financing) Capital infusion Meet with your new business partners Secured lender Surety Key creditors

    11. 11 After the Filing Use of cash collateral Adequate protection Assumption and rejection of executory contracts and unexposed leases Working with the Creditors Committee Proposing a plan of reorganization

    12. 12 SUBCONTRACTOR VIEWPOINT ON INSOLVENCY ISSUES

    13. 13 Capitalism without bankruptcy is like Christianity without hell. Frank Borman

    14. 14 PROJECT DUE DILIGENCE Reputation. Bond. UCC Filings.

    15. 15 SUBCONTRACT AWARENESS Incorporation By Reference. Pay When/Pay If Paid. Termination By Subcontractor.

    16. 16 MANAGEMENT OF THE PROJECT TO COMPLETION OR CATASTROPHE Mechanics Lien Laws. First Work Notice Perfection vs. Enforcement Property or Money Earned by GC? Terminating The Subcontract.

    17. 17 BANKRUPTCY

    18. 18 BANKRUPTCY (contd) Chapter 7 or 11. The Automatic Stay. Claims In Bankruptcy Court. Claims Against Bond.

    19. 19 BANKRUPTCY (contd) Mechanics Liens. Exception to Automatic Stay: 11 USC 362 (b)(3). Automatic Stay does not apply to an act to perfect maintain, or continue the perfection subject to perfection under 11 USC 546(b).

    20. 20 Mechanics Liens (contd). Post Petition Perfection: 11 USC 546(b)(1) State law permits perfection where rights are acquired before the date of perfection; or provides for maintenance or continuation of perfection to be effective where rights are acquired before the date maintenance or continuation. BANKRUPTCY (contd)

    21. 21 Mechanics Liens (contd). Tolling: 11 USC 108 (c) If time did not expire pre-petition, then time does not expire until the later of the end of such period, or 30 days after end of the automatic stay. BANKRUPTCY (contd)

    22. 22 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM

    23. 23 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    24. 24 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    25. 25 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    26. 26 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    27. 27 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    28. 28 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    29. 29 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    30. 30 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    31. 31 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    32. 32 POSTPETITION FLOW CHART FOR A SUBCONTRACTORS MECHANICS LIEN CLAIM (contd)

    33. 33

    34. 34

    35. 35 The Executory Contract. Preferences. 11 USC 547 (b) Any transfer of property of the debtor for the benefit of a creditor; on account of an antecedent debt; made while debtor was insolvent; & made within 90 days of bankruptcy. BANKRUPTCY (contd)

    36. 36 Mechanics Liens & Preferences. 11 USC 547(c)(6). Trustee may not avoid any transfer that is the fixing of a statutory lien. 11 USC 101 (53) statutory lien includes most mechanics liens. BANKRUPTCY (contd)

    37. 37 Contemporaneous Exchange. 11 USC 547 (c)(1) Intended to be a contemporaneous exchange for new value given to the debtor; and In fact a substantially contemporaneous exchange. BANKRUPTCY (contd)

    38. 38 Ordinary Course. 11 USC 547 (c)(2) payment of a debt incurred by the debtor in the ordinary course of business; payment made in the ordinary course of business; and payment made according to ordinary business terms. BANKRUPTCY (contd)

    39. 39 Made in the ordinary course: subjective standard - did the parties consider the transaction ordinary? Made according to ordinary business terms: objective standard - would the relevant industry consider the payment made in accordance with ordinary business terms? BANKRUPTCY (contd)

    40. 40 New Value. 11 USC 547 (c)(4) Creditor gave new value not secured by a security interest; and on account of which new value the debtor did not make an otherwise unavoidable transfer. BANKRUPTCY (contd)

    41. 41 CONCLUSION The payment of debts is necessary for social order. The non-payment is quite equally necessary for social order. For centuries humanity has oscillated, serenely unaware, between those two contradictory necessities. Simone Weil, French philosopher. Its a dog eat dog world out there. Anonymous

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    43. 43 WHAT HAPPENS TO THE MONEY IN THE HANDS OF THE OWNER ? Lender vs. Subcontractors vs. General Unsecured Creditors Subcontractors usually get paid first Lender usually gets paid before General Unsecured Creditors

    44. 44 WHAT HAPPENS TO EXISTING CONTRACTS? Executory Contracts governed by Section 365 of the Bankruptcy Code Definition A contract under which the obligation of both the debtor and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach

    45. 45 ASSUME OR REJECT Debtors option To assume where there has been a default, debtor must: Cure default or provide adequate assurance that default will be cured Compensate other party for actual pecuniary loss resulting from default Provide adequate assurance of future performance

    46. 46 IMPACT OF REJECTION Rejection of an executory contract constitutes a breach Damages for breach of contract will most likely constitute a general unsecured claim

    47. 47 TIMING In a Chapter 11 case, the debtor may move to assume or reject at any time before confirmation of plan Court can order the debtor to make an election within a shorter time

    48. 48 HOW WILL THE BANKRUPTCY EFFECT THE OWNERS OF THE COMPANY? No automatic stay of claims against owners Court can extend stay where protection is essential to the debtors reorganization effort

    49. 49 ABSOLUTE PRIORITY RULE Unsecured creditors must be paid in full before equity holders can retain their ownership interests Only applies in a cram down

    50. 50 New Value Exception Permits equity holders to retain ownership interests without payment in full to unsecured creditors, if they make : A substantial, new contribution In money or moneys worth That is reasonably equivalent to the value of the equity interest That is necessary to the debtors reorganization

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