- The type of bankruptcy
- How much money you are owed;
- How much time a claim may take;
- If and how much it will cost to hire an attorney to pursue your claim.
- Chapter 7 – If the customer is a corporation or partnership, the entity will be dissolved. A trustee will sell any assets and distribute the proceeds to the creditors in a preferential manner – as described below.
- Chapter 11 – This is reorganization bankruptcy for businesses. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In this situation, the business still operates but certain debts are restructured, reduced, or forgiven. Other debts are repaid in the preferential manner described below.
- Chapter 13 – This a usually reserved for individuals who need bankruptcy reorganizations. Debts are not completely forgiven; instead payments are repaid in the preferential manner described below.
- Chapter 12 – This is the family farmer reorganization. This type of bankruptcy is rarely seen in construction law.
- Secured creditors. These are creditors who have legally tied their extended credit to a particular item or group of items. For example, lenders of mortgages have security in the real property. Automobile lenders have a priority claim in the vehicle. Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than their claim, then the claim is bifurcated into a secured claim covered by the collateral and an unsecured claim for the remaining portion. The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.
- Unsecured creditors. An unsecured creditor is any entity owed anything unsecured by a real or tangible item, such as real property. Section 726 of the Bankruptcy Code lists six classes of unsecured claims, and each class must be paid in full before the next lower class is paid anything. These classes are:
- FIRST: Claims in the priority as set forth in Section 507(a) of the Bankruptcy Code. They are:
- SECOND: Other claims except for those claims that are filed late or tardy, claims, or fines, penalty or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that they are not compensation for actual pecuniary loss suffered by claimant.
- THIRD: Allowed unsecured tardy or late claims.
- FOURTH: Allowed secured or unsecured claims for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that such claims are not compensation for actual pecuniary loss suffered by the claimant.
- FIFTH: Interest at the legal rate from the date of the filing of the petition on any allowed claims paid.
- SIXTH: To the Debtor.
- Recall any goods in transit;
- If you can, attempt to retrieve goods already at the customer’s location;
- Gather all documents including contracts, bills, and especially unpaid invoices.
- Review recent payments from the debtor, bills to the debtor, and any transaction that could be out of “the ordinary course of business.” In bankruptcy, payments without a certain amount of time of filing for bankruptcy may be classied as “preferential,” which means that the debtor preferred one creditor over the others. The remedy is rather harsh – the preferred creditor must cough up any monies received to be divided according to the claim priority. However, one of the defenses of potential preferential creditor status is when the transaction took place in the ordinary course of business.
- Examine the documents. Are you able to collect from co-debtors, such as spouses or business partners, or anyone who might have guaranteed your account?
- If necessary and prudent, get a lawyer.
- File a proof of claim. This form is usually attached to a bankrupcty notice. If you need a replacement, most bankruptcy courts have the form on their website.
- If the amount owed is large, attend a creditors’ meeting. Debtors are required to meet with their creditors in what is known as a 341 meeting, in which you can ask questions and identify courses of action. You aren’t required to attend, but doing so will give you a better understanding of your options.
- Collect on credit insurance, if applicable.
- Petitioning the bankruptcy court for relief from the automatic stay. This may encourage the debtor to make arrangements for paying you in an amount at least equal to the value of your collateral.
- Request permission from the bankruptcy court to continue with any lawsuit you’d already started at the time the bankruptcy was filed. A judgment creditor (someone who has a judgment against the debtor) may be repaid sooner than a general unsecured creditor.
- Petition to have the bankruptcy dismissed, if the debtor isn’t complying with the bankruptcy rules or the orders of the bankruptcy court.
- Petition the bankruptcy court to create or be a part of a creditors committee to oversee the operations of the bankruptcy debtor.
- Petition to have a bankruptcy trustee appointed if the debtor filed a Chapter 11 proceeding that generally doesn’t require that a trustee be appointed.
- Sue other creditors to try to force them to give money back to the bankruptcy proceeding if they were paid in “preference” to other creditors. As mentioned above, a “preference” is a preferential payment that a debtor makes on old debt within three months of filing bankruptcy (or within a year if the payment is made to a family member or some other insider who has a special relationship with the debtor).
- Petition the bankruptcy court to deny a discharge of the debt in whole or in part, if you think the debtor has acted fraudulently.
In the construction business, products, materials, and services from subcontractors or vendors are often purchased on a Net 30 account (meaning that payment is due 30 days after the product is shipped). To send out materials or providing services prior to payment, of course, represents a risk by the subcontractor or vendor.
For those of you unaware, a potential “perfect” game was destroyed by a horrendous call. With two outs in the 9th inning, the umpire called the batter “safe” at first. The only problem was that the runner was clearly out. By a full step.
[Ed.’s note: Many construction companies are some form of limited liability company, such as LLCs or LLPs. This post intends to briefly discuss how that liability shield can sometimes be removed. Please note that this is not Louisiana law-specific.]
The corporate structure of your business will provide shelter for your personal assets. There are several events that will cause a judge to disregard the corporate entity or “pierce the corporate veil.” There are several reasons why the corporate veil may be pierced. There are also several easy steps you can do to avoid the corporate veil from being pierced.
The corporate veil can be pierced if a party is tricked or misled into dealing with the corporation rather than an individual. Whenever the corporation does correspondence with a third party, the officers and directors of that company need to make it clear that they are acting on behalf of the corporation and not themselves individually. All the documents need to clearly be entered into on behalf of the corporation otherwise there may be a conflict that could arise that would pierce the corporate veil.
If the corporation is set up to never make a profit or always be insolvent it is considered too “thinly” capitalized. This could be when the corporation is formed without sufficient capital to meet potential liabilities and debts. This often occurs when an individual or group of people uses a corporation as a form of shield from liabilities instead of a legitimate business.
When the corporation fails to follow corporate formalities where the corporation is located, it can be pierced. A few of the corporate formalities are meetings, minutes, stock ledger. If the corporate entity fails to do some of these duties the judge can rule that it is not a proper corporation.
The biggest mistake small corporations usually make is not keeping separate accounts for the corporation. If an individual moves funds from their bank account into the corporate bank account, and vise versa then the court will disregard the corporate entity.
If the corporation is engaged in illegal enterprise where it is ruled that the corporation was setup as a sole means for those involved to partake in an illegal activity, the corporate veil can be pierced. For instance, a corporation will not be tried for murder. The individuals responsible will be tried for it. The same thing can be applied for all kinds of cases such as drug trafficking, etc.
While it is possible for the corporate veil to be pierced, if you take the proper precautions when setting up your corporation you will help to protect your own personal assets. A few of the steps to protecting your personal assets are quite simple and some are even common sense. The important thing is that you take care when operating a business, and you get sound legal advice before doing anything questionable.
Tyler Weaver is a writer for Lawyer Locater and has written many articles on the subject of corporations.
It is nearly impossible to compare the time and expense of arbitration with the duration and cost of litigation because the same dispute never goes through both processes. We can only guess what it might cost to either litigate or arbitration a particular construction dispute. It seems clear, however, that importing litigation techniques into arbitration is costly and takes time.
These changes require one to ask, “If the justification for incorporating an arbitration clause in a construction contract is to obtain a speedier resolution at less cost, why are so many lawyers trying to transform the arbitration process into litigation?”
The answer is a complex one. A number of commenters, most prominently Justin and Jonathan J. Sweet, feel that arbitration in construction contexts largely because of the arbitration clauses (which were mandatory until 2007) contained in AIA contracts.*
* Sweet, Justin and Sweet, Jonathan J., “Sweet on Construction Industry Contracts: Major AIA Documents.”Aspen Law & Business, New York, NY, 1999.
So should you insert an arbitration clause into your contracts?
Here is where we give the ubiquitous attorney answer: “It depends.”
It depends on the parties, the likely disputes, the size of the project, the arbitrator chosen, and on a number of other factors.
What we will say is this: if done properly, arbitration can be very successful and efficient as a way to deal with the disputes that inevitably come in the construction industry. But it is not the great panacea for all disputes that some make it out to be.
The truth is that, for a large number of disputes, standard arbitration clauses are not going to result in quicker or cheaper outcomes. We believe that the results will be fair due to the general good work that arbitrators perform. But companies and individuals who enter contracts with standard arbitration clauses shouldn’t think they are agreeing to a faster and cheaper dispute resolution system.
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