Protecting Your Company's Rights to Performance and Payment in the Bankruptcy Context

AuthorBy David J. Theising, Marilyn Klinger, and Robert J. Berens
14 Volume 42 Issue 3
Published in
The Construction Lawyer
, Volume 42, Number 3. © 2023 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Protecting Your Company’s Rights
to Performance and Payment in the
Bankruptcy Context
By David J. Theising, Marilyn Klinger, and Robert J. Berens
This article provides the basic
concepts regarding bankruptcy
and obtaining performance and
payment on construction proj-
ects where bankruptcy is an issue.
Once understood on a basic level,
any party to a construction
project can direct its attention,
through competent counsel, to
achieving performance and pay-
ment notwithstanding that one
of the parties to the construction
project has gone into bankruptcy.
Key Concepts to
Understanding Rights and
Remedies When a Company
on a Construction Project Files
Those four key concepts regard-
ing the ling of bankruptcy are
(i) creation of a bankruptcy
estate, vested with certain rights
and powers; (ii) the automatic
stay; (iii) ratable distribution;
and (iv) discharge of debt. This
article addresses the rst two of
these concepts because it is at
those stages that the parties to a construction project must
set the stage to complete construction and receive payments,
notwithstanding the bankruptcy ling.
Creation of the Bankruptcy Estate—Property of the
A bankruptcy case begins when the debtor les a voluntary
petition for relief or when creditors le an involuntary peti-
tion against the debtor (although involuntary petitions are
relatively infrequent in the construction arena).1 The ling
of a bankruptcy petition creates an “estate” composed of
“all legal or equitable interests of the debtor in property
as of the commencement of the case.”2 The “bankruptcy
estate” is created by law to be administered under the pro-
tection and general supervision of the bankruptcy court.3
This estate is vested with special rights and powers, includ-
ing the right to (i) compel third parties to pay debts owed
to the debtor and return property of the estate in their
possession;4 (ii) avoid certain pre-petition transfers, includ-
ing preferential and fraudulent transfers,5 and recover the
property transferred or its value from the transferee;6 (iii)
sell, lease, or otherwise use property of the estate, even if
the property has valid pre-petition liens or encumbrances
or is subject to third-party adverse claims;7 and (iv) cure
defaults under, and reinstate the terms of, executory con-
tracts, notwithstanding defaults and provisions in those
agreements that otherwise would permit termination
because of the debtor’s bankruptcy or insolvency.8
By operation of law, an automatic stay becomes effective
immediately to protect the debtor, its estate, and the prop-
erty of the bankruptcy estate from virtually all forms of
litigation, debt collection, lien creation, and lien and judg-
ment enforcement.
This prohibition includes commencing
or continuing a lawsuit, entering or enforcing a judgment,
exercising a right of setoff, terminating a contract, or tak-
ing any other action to enforce a contractual obligation.
The ling date of a bankruptcy petition is signicant.
For example, the bankruptcy process treats all claims and
obligations that arose pre-petition—whether liquidated or
unliquidated, xed or contingent, disputed or undisputed—
as claims against the bankruptcy estate. Unsecured claims
will generally cease bearing interest. Secured claims that
might otherwise be entitled to interest can be “valued” by
determining the value of the collateral as of the petition
date. In other words, the claim will be secured to the extent
of the value of the collateral securing it. If that collateral
is worth less than the amount of the claim, the creditor
will only have a secured claim to the extent of the value
(and will not be entitled to interest on that secured claim)
and will have an unsecured claim for the deciency.10 If the
value of the collateral exceeds the amount of the debt, the
creditor will be entitled to interest, fees, and costs, to the
extent permitted by contract or applicable law up to the
value of the collateral.11
Claims that arise subsequent to the petition date are
often entitled to administrative expense status and have
a higher priority than general unsecured pre-petition
claims.12 One purpose of this higher priority is to encour-
age parties to do business with the debtor and facilitate its
The Different Chapters of the Bankruptcy Code—
Chapters 7, 13, 11, and New Subchapter V of Chapter 11
Depending on a particular debtor’s circumstances, a debtor
David J. Thei sing
Marilyn Klinger
Robert J. Berens
14 14 7/18/2023 1:52:06 PM7/18/2023 1:52:06 PM

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