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What Subcontractors Need to Know When a Construction Contractor Files Bankruptcy
What Subcontractors Need to Know When a Construction Contractor Files Bankruptcy

With the recent bankruptcy filing by Hollister Construction Company, subcontractors and suppliers are faced with questions regarding the filing of construction liens. Many believe that the filing or foreclosure of a construction lien is not impacted by a general contractor’s bankruptcy because the construction lien attaches to the property of the owner, not the general contractor. Unfortunately, these people would be wrong.

No too long ago, the Third Circuit Court of Appeals addressed the question of whether a supplier can file a construction lien under New Jersey law when the contractor has filed a petition for bankruptcy, which automatically stays any act to create or perfect any lien against the contractor's property. The suppliers had argued that the construction liens did not attach to the contractor's accounts receivable but rather they attached to the interests of the owners of the properties being developed; thus, creating the liens was not an act against the property of the bankruptcy estate. On the other hand, the contractor contended that the creation of the liens was intended to collect the portion of the amounts owed by the properties’ owners to the contractor, so that the creation of the liens was an act against the property of the bankruptcy estate. Ultimately, the court determined that where a lien will be paid by transferring part or all of an asset from the bankrupt estate to the lienholder, the lien is against the property of the bankrupt estate and therefore violates the bankruptcy court’s automatic stay.

With this is mind, the scary truth is that because a bankruptcy filing stays the filing and foreclosure of construction liens, subcontractors and suppliers are left in a difficult position. Unless the construction lien is filed in advance of the bankruptcy filing, such subcontractors and suppliers may be left with little chance of recovery except through the bankruptcy process as an unsecured creditor. Even with a timely filed lien, foreclosing upon that lien is also a violation of the bankruptcy court’s automatic stay. For a subcontractor to successfully navigate this maze and be in the best position possible requires an understanding of both construction lien and bankruptcy issues.

If you have questions or concerns about a construction lien claim or other related matters, please contact Mitchell Taraschi at mtaraschi@connellfoley.com.

  • Mitchell W. Taraschi
    Partner

    As chair of Connell Foley’s Product Liability and Tort Law Practice Group, Mitchell Taraschi delivers successful outcomes related to product liability, construction litigation and complex commercial litigation across a ...

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