Transcript Construction Project Bankruptcy Strategic Considerations

Construction Project Bankruptcy
Strategic Considerations for Owners, General
Contractors and Construction Managers
December 16, 2008
Presenters
Charles A. Dale, Boston
office, focuses his practice
on matters of bankruptcy
and insolvency with
extensive experience in
the construction industry.
Joseph B.C. Kluttz, Charlotte
office, focuses on the
structuring and restructuring of
large financial transactions
within construction and other
industries to avoid and manage
insolvency risk.
Brian R. Davidson,
Pittsburgh office, focuses in
the area of complex
commercial litigation with an
emphasis on construction
industry litigation.
Andrew L. Swope, Harrisburg
office, focuses in the area of
complex commercial litigation
with an emphasis in
commercial, construction and
bankruptcy law.
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State of the Industry
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“McGraw-Hill Construction (of which ENR is part) is forecasting a 7.4% decline
in construction starts in 2009, following declines of 12.4% this year and 8.0%
in 2007.” — All Sectors Go Negative Next Year As A Real Recession Rattles
Markets, by Tim Grogan and Steve Setzer, ENR.com, 11/12/08
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“Litigation is cropping up across the country over … building developments
that unraveled as U.S. financing tightened … , leaving financiers, developers
and contractors to fight over who should pay for the failed deals.” — As
Building Projects Collapse, Suits Pile Up, by Lynne Marek, The National Law
Journal, 11/3/08
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“The U.K.'s 82 billion-pound building industry, accounting for about 5% of the
economy, has ground to a halt, with little work being booked because of
faltering demand and a credit freeze.” — Builders Hold $1.7 Billion Payments
in Recession Sign, by Tim Barwell, Bloomberg.com, 10/17/08
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Basic Facts
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200 Million Dollar Ethanol Plant
Project Specific Owner
EPC Contractor
Major Subcontractors / Suppliers
Project Partially Financed – Remaining Financing to be Obtained
During Construction
Fast Track to Meet Peak Season Demand
Performance / Payment Bonds
Owner Letters of Credit
Parental Guarantee from Owner
Various Forms of Insurance
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Scenario 1
 Owner Learns About Problems on the Project
 Two Major Subcontractors Have Not Been Paid for Two Months and
are Threatening to File Liens
 One Major Equipment Supplier Behind Schedule and Unwilling to
Complete Fabrication Absent Substantial Advance Payment Due to
Cash Flow Problems Unrelated to the Project
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Scenario 1 – The Issues
 What Can the Owner Do to Protect Its Interest:
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Direct Payment
Joint Payment Arrangements
Set Off
Lien on Equipment
Passage of Title
 What Can the EPC Contractor Do to Protect Its Interest:
 Mechanic’s Lien Waivers
 Performance Bonds
 Liens
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Scenario 2
 Major Equipment Supplier Goes Bankrupt
 Absent Delivery of the Equipment, the Project Will be Substantially
Delayed
 EPC Contractor Claims that the Automatic Stay Constitutes a Force
Majeure Event
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Scenario 2 – The Issues
 What Can the Owner/EPC Contractor Do to Protect
Their Interests:
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Passage of Title
Executory Contracts
Termination of Subcontract Due to Bankruptcy Filing
Right of EPC Contractor/Owner to Equipment
Force Majeure Issue
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Scenario 3
 Corn and Gas Prices Skyrocket – Increases Costs of Production
and Decreases Demand for Ethanol
 Financial System Meltdown Makes Financing Very Difficult to
Obtain
 Owner Unable to Obtain Financing to Complete the Project and
Falls Behind on Invoices
 Owner Asks EPC Contractor to Continue Performing
 EPC Contractor Has Procured $50 Million of Services, Equipment
and Materials From Subcontractors and Suppliers That Has Not
Been Paid For
 EPC Contractor Falls Behind on Invoices from Subcontractors and
Begins Receiving Demands for Payment
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Scenario 3 – The Issues
 What Can the EPC Contractor Do to Protect Its
Interests:
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Limited NTP with Guaranteed Funding
Bonds
Letter of Credit
Securing Payments
Escrow Accounts
Parental Guarantees
 Can Market Forces Excuse Performance of a Contract
 Force Majeure
 Commercial Impracticability
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Scenario 4
 Owner Files For Bankruptcy Protection
 Owner Threatens To Reject The EPC Contract In Bankruptcy
 Subcontractors and Suppliers Assert Claims Against EPC
Contractor in Court and Arbitration
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Scenario 4 – The Issues
 How Will the Bankruptcy Filing Impact the EPC Contract
 Treatment of Executory Contracts
 Impact of Assumption
 Can the EPC Contractor Continue to Push for Payment
 Automatic Stay
 What About Pre-Petition Payments from the Owner
 Preference Issues
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Scenario 5
 Owner Rejects EPC Contract
 EPC Contractor Asserts Claims Against Owner in Bankruptcy
Court
 Multiple Subcontractors and Suppliers Commence Separate
Arbitrations and Lawsuits Against EPC Contractor in Various
Forums
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Scenario 5 – The Issues
 What Happens as a Result of Rejecting the EPC Contract
 Rejection v. Termination
 How Can the EPC Contractor Obtain Payment
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Letter of Credit
Payment Bonds
Parental Guarantee
Bankruptcy Claim Process
Mechanic’s Liens
Preference Issues
 EPC Contractor Options - Forum for Resolving Claims
 Arbitration Provisions in EPC Contract
 Extension of Automatic Stay to Other Actions
 Removal of Actions to Bankruptcy Court
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Scenario 6
 Project is Partially Destroyed by Fire
 Cause of Fire Is Traced to Equipment Provided by Bankrupt
Supplier
 Owner Receives Substantial Settlement From Casualty Insurer
 Owner Seeks to Assert Claim Against Supplier and Its Insurer in the
Supplier’s Bankruptcy Case
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Scenario 6 – The Issues
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Right to Casualty Insurance Proceeds
Lien Issues
Right to Assert a Claim Against Supplier
Claims Covered by Insurance Proceeds and the Automatic Stay
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Construction Project Bankruptcy
Strategic Considerations for Owners, General
Contractors and Construction Managers
December 16, 2008
Contact Information
To contact Charles A. Dale:
[email protected]
617.261.3112
To contact Joseph B.C. Kluttz:
[email protected]
704.331.7485
To contact Brian R. Davidson:
[email protected]
412.355.6267
To contact Andrew L. Swope:
[email protected]
717.231.4512
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