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Retaining Assets: How to Get Paid in a Bankruptcy
By Marc E. Albert, Alisa C. Lacey, Katherine M. Sutcliffe Becker and Tracey M. Ohm
The second in a series about the steps business owners can take to survive the housing downturn.
 Riding through a down market is all about conserving and protecting money. The goal is to be able to bear the expense of holding your assets until the market improves.
In this article, we present tips to assist you in protecting your ability to collect from others who have sought bankruptcy protection.
Purchase Money Security Interests and Mechanics’ Liens — Record Lien Notices
Section 546(b) of the United States Bankruptcy Code states that the rights and powers of a bankruptcy trustee under §544 (strong arm powers), §545 (avoidance of statutory liens) and §549 (avoidance of post-petition transfers) are subject to any generally applicable law that:
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Permits perfection of an interest in property to be effective against an entity that acquires rights in the property before the date of perfection (§ 546(b)(1)(A)), or
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Provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in the property before the date on which action is taken to effect maintenance or continuation. (§546(b)(1)(B)).
For example, suppose that you sell goods or inventory to the debtor and the debtor agreed to grant you a security interest in, or proceeds from, the goods you sold. Then assume that the debtor surprises you by filing a bankruptcy within days of receiving your delivery ― before you have recorded your lien notice.
Do you lose your lien?
If the time for perfection of your security interest under state law — usually within 20 days of delivery under §9-317(e) of the Uniform Commercial Code — has not expired by the time the debtor files the bankruptcy, you won’t lose you lien, even if another creditor filed an intervening lien notice on the same goods.
If your lien notice is recorded in a timely manner under generally applicable law, then your lien relates back in time to the date the debtor took delivery. Timely recording of your lien notice does not violate bankruptcy’s automatic stay.
The bankruptcy code similarly protects your ability under applicable state law to perform post-bankruptcy actions that are necessary to maintain or continue a mechanics’ lien if the generally applicable law (usually state law) provides that the rights of a contractor or supplier “relate back” in time and becomes superior to the rights of intervening lien creditors.
For example, suppose you begin work on a site. The debtor files a bankruptcy within weeks of when your materials arrive. Can you still record your lien?
Yes you can, provided that there is a timely filing of a preliminary lien notice under generally applicable (non-bankruptcy) law in relation to when services or goods are provided to the debtor and relate back to the original date of when the work was begun or the material was delivered.
Again, timely recording of your notice does not violate the automatic stay.
Warehouseman’s Liens ― Newly Protected
Section 546(i)(l) now limits a bankruptcy trustee’s ability to avoid a warehouseman’s lien for storage, transportation or other costs incidental to the storage and handling of goods, notwithstanding the provisions of §545 governing a trustee’s ability to avoid statutory liens.
If you are owed money by a debtor in a bankruptcy case, you should file a proof of claim immediately.
It is very common for judges to set claims bar dates in Chapter 11 cases. There are exceptions, but generally if you received notice of the bar date and do not file a timely proof of claim, your claim could be disallowed.
A timely filing of your proof of claim is even more vital in a Chapter 7 case. Bankruptcy rule 3002(c) generally requires the filing of a claim within 90 days of the first date set for a §341 meeting of creditors. All creditors should receive notice of this date, and often this notice will contain the claim filing deadline (depending on the practice in your area).
If you miss the claim filing deadline, chances are high that the court will disallow the late-filed claim.
A good business practice is to prepare and file your proof of claim immediately (within 10 days) upon receiving your very first notice in the case.
However, if you have pending litigation or a material risk of litigation with the debtor and your company is located in a different geographic area than the debtor, you should always consult counsel before you file a proof of claim. Filing of a proof of claim will be deemed your agreement to the jurisdiction of the bankruptcy court where the debtor’s case is pending.
Alternate Sources of Payment ‘Outside’ of Bankruptcy
There are at least two instances where you or your attorney should inquire about getting paid when the source of the funds to pay you may be “outside” of the bankruptcy case — not an asset controlled by the debtor. These include:
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The job is bonded.
If the job is bonded, generally a “performance” or “completion” bond, then you should immediately submit your claim to the bonding company for payment. Upon payment, the bonding company subrogates your claim against the debtor. That allows you to get paid and leaves the bonding company to try to collect against the debtor. The bond is not an asset of the bankruptcy estate and the bankruptcy has no effect on the bonding company’s obligation to pay you.
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Funding comes from a bank line of credit or construction financing designated for the job you are working on.
If the job is financed through a construction loan or line of credit that is keyed to that particular job, there are recent cases that have determined that the financing proceeds are “held in trust” for the benefit of the contractors on that job.
That means that the debtor cannot draw the line and then use the proceeds for any unauthorized purpose. As funds “in trust” the financing might be considered outside of the bankruptcy estate and not available to pay items not related to the job — like the debtor’s attorneys’ fees.
Retaining Assets Is Crucial to Weathering the Downturn
In a down market, it is almost inevitable that you will end up as a creditor in a bankruptcy case at some point.
Following the preceding tips can assist you in making the right moves to protect your assets and your ability to collect on the debts owed to your company. The more assets you retain, the better your chances to successfully weather the down market conditions.
The authors are attorneys at Stinson Morrison Hecker LLP, which employs more than 360 attorneys in nine offices and five states, has experience in more than 45 practice areas and represents clients in a full range of corporate, transaction and litigation matters. For more information, visit stinson.com.
This article is solely for informational purposes. The views and opinions of the authors expressed do not necessarily state or reflect those of the National Association of Home Builders. NAHB and the authors expressly disclaim any responsibility for any damages arising from the use, application or reliance on any information contained in this article. The ideas presented in the article are not a substitute for considered professional advice. If specific legal advice or professional assistance is required, the reader should seek the services of a qualified professional.
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