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One look at the morning paper (or your favorite news app, more likely) will reveal a sad truth in business today. The coronavirus is causing companies to go bankrupt, disrupting construction projects. If you’re back on the job site, you may start to get the feeling that your construction company is the last one standing. You’re probably beginning to see bankruptcies occur up and down the job site chain. When one company goes bankrupt, it can affect everyone on the jobsite. Here’s how to handle a bankruptcy on the jobsite when your money is on the line.
Related: Why construction companies fail
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Bankruptcy is on the rise
Companies that were once giants in their industries are filing for bankruptcy protection. This includes retail stores like JC Penney, car rental companies like Hertz, gyms like 24 Hour Fitness, and smaller local businesses.
The lack of cashflow is causing these companies to shut their doors. The Wall Street Journal reported a 48% increase in bankruptcy filings during May 2020.
The construction industry is no different, and it’s certainly not insulated from the same pains the rest of the economy experiences. The COVID19 pandemic shut almost every project down in one way or another. Projects that reopen are less profitable due to new safety measures and social distancing. Manpower is running thin, and lenders are becoming more apprehensive about loans.
When the Owner or GC Goes Bankrupt
If you’re on a job where the owner or General Contractor falls flat, you can be in a very scary position. Either of these bankruptcy scenarios can cause major issues across the board.
When an owner files for bankruptcy, the job site will most likely come to a complete stop. All of the owner’s assets, including the project property, will be part of the bankruptcy trust and are thereby protected by the automatic stay. Cash flow, the lifeblood by which all projects thrive, comes to a complete stop.
There’s a chance that a surety company may breathe a little life into the site if there was a surety bond in place. However, the job won’t move forward at the same rate it did before the bankruptcy.
When a General Contractor files for bankruptcy, there can be a lot of confusion. The GC will most likely disappear from the picture altogether. This leaves subcontractors scrambling to find traction. The GC’s absence can create an ineffective job site, with contractors looking for payment while the GC’s protected by the automatic stay.
In this case, it’s possible to file a mechanics lien against the property owner. If this were an issue of plain non-payment, the mechanics lien would solve the problem entirely. Since our case involves a bankruptcy, it’s not so cut and dry. Filing a lien claim during a bankruptcy depends on the state in which the contractor files the claim.
In this New Jersey lien case, the companies filing the lien came out empty-handed. The court found the filing companies were attempting to recover funds from the bankrupt contractor, not the owner.
If you’re smart, you’ll avoid biting off more than you can chew throughout the pandemic. Other contractors and subs might not take the same slow-start approach. Taking on more than you can handle is like flirting with disaster. You can spread your resources too thin and too quickly. The result might be closing your doors before you can turn a profit.
When a company on the site files for bankruptcy protection, their portion of the job freezes. This includes any assets (equipment, property, etc.), accounts (both receivable and payable, as well as credit), and their part in any contracts they’re a party to.
Working around a bankrupt contractor’s portion of a job can be nearly impossible. Consider how an electrical or plumbing contractor’s bankruptcy can disrupt a job site. You can’t simply work around those trades. The entire job site might freeze at their stage of the project.
The CARES Act Boost in the Bankruptcy Debt Limit
The CARES Act has made a temporary change to one of the stipulations of a bankruptcy filing. A small business debtor can now file for bankruptcy with a maximum debt of $7.5 million. The previous limit was $2.7 million. This makes bankruptcy a far more appealing option for some struggling contractors and owners.
This debt limit increase makes it easier to obtain bankruptcy protection for small businesses. This includes many of the owners, GCs, and subcontractors on any job you’re currently on.
Mechanics liens vs. Bankruptcy Proceedings
COVID-19 has caused a significant increase in the number of mechanics liens filed by contractors. Unfortunately, the industry required a pandemic to wake up and realize that mechanics liens speed up payment. What’s fortunate, however, is that you can still file a mechanics lien in most bankruptcy cases.
When the General Contractor Goes Bankrupt
If the General Contractor on the project you’re working on files for bankruptcy, you can file a mechanics lien for the money they owe you. The automatic stay does not protect the money owed to a subcontractor. In this case, the lien can be perfected before the bankruptcy proceedings finish.
When the Property Owner Goes Bankrupt
If you’ve filed your lien before the owner of the job site files for bankruptcy, you may find yourself waiting for the perfection of the mechanics lien. The lien attaches to the owner’s property, and the automatic stay protects that property.
You may be able to petition the bankruptcy court for leave to pursue the lien. In this case, the court grants your company the ability to pursue and perfect the lien before the bankruptcy proceeding ends.
The Bankruptcy Code does allow claimants to file a lien preservation notice with the bankruptcy court. This may be the best route to go for protecting your cash when the bankruptcy court doesn’t grant the claimant leave of the court.
When Other Construction Companies Go Bankrupt on the Job Site
Things are different when it’s an unrelated subcontractor’s bankruptcy causing cashflow issues on the job site. In this instance, you have the grounds to recover payment for your work on the project. When this is the case, the automatic stay does not protect the owner or General Contractor.
Sending notices & filing a mechanics lien
If you start experiencing payment issues, it’s best to be proactive. When someone goes bankrupt on a construction project, it’s critical to protect your payment. If you’ve protected your payment with a preliminary notice, the next step is to send a notice of intent to lien. This should help kickstart the conversation regarding the money owed to you.
Should that conversation not go well, you have the right to file a mechanics lien. A mechanics lien is the best way to protect the money owed to you on a job site facing bankruptcy complications.