This blog is from a webinar that was presented by SunRay Construction Solutions, featuring Jordan L. Rappaport from Rappaport Osborne & Rappaport, PLLC. In this blog we will discuss how you can secure your right to be paid and to collect money especially if you are owed only a few thousand dollars.
Bankruptcy a lot of times is not a choice. When a bankruptcy is filed and you get notice of it, you are in it. It is federally mandated that anyone who is part of a bankruptcy action has to obey the automatic stay. That means that when a project, homeowner or business files bankruptcy, all of its assets and all its creditors are contained within the bankruptcy case. And all actions, especially collection actions are stopped in their tracks.
Even if someone or a company files for bankruptcy and wants to pay you after they file, legally they cannot. Whether they like it or not, you are involved. The instant you are aware of a bankruptcy, you need to carefully and constructively look at what you are doing, how you are doing it, and consult a professional who is experienced with bankruptcy matters.
Because if you do not obey the rules of bankruptcy, whether or not you are aware of them, you could find yourself in hot water. More importantly, if you do know how things work or can get advice on how things work, it is easier for you to get paid. That is what the goal is – for you to be paid the money that is owed to you.
So, let us talk about what that means. What does it mean when you are owed money from a company that is in bankruptcy?
The best example we can give is that of a real estate developer who is developing between 15 and 25 properties in the South Florida area. They became overextended, their lenders were threatening to foreclose and were on the verge of foreclosing and taking back their properties. This real estate developer chose to file a bankruptcy proceeding to stop the foreclosures and hopefully reorganize the business.
At the same time, all of the material suppliers, contractors and subcontractors who work on these properties were all then intertwined in the bankruptcy whether they liked it or not. It is important for creditors to understand what they can and cannot do. More importantly, it is important to understand whether you should even continue doing business with an entity or business that is in bankruptcy.
There are pros and cons, and we are going to go over some of them right now.
Most importantly if you are supplying materials on a project, you need to make sure that when legally available, you file those liens. That is one of the services that we at SunRay Construction solutions offers. When the liens are filed, if you are entitled to file those liens, do it as soon as possible. The reason is because if a bankruptcy is filed, it will put you in a better position.
What does that mean? When you are dealing with bankruptcy, there are two types of debts.
Two Types of Debt
There is contractual debt and loan money, but most importantly there is secured and unsecured. It is always better to be secured. That means that when you provide materials or do work on a particular project and you file that mechanics lien, it put you in front of the general unsecured creditors.
That means you take a priority position and if and when the property is sold, you will be paid first. It is better to be first in line than last in line when it is time to get paid. So let us talk about the two types of debt.
a. General Debt
i. Contractual debt
The contractual debt is when a contractor does work or sells supplies, installs windows and doors, or supply concrete. For example, if there is a concrete supplier on a bridge job, maybe one time the bridge actually ends up falling and there are a lot of lawsuits. Ultimately, the concrete provider chooses not to file a lien, and therefore they did not get paid as much as the suppliers who did file liens.
Filing a mechanic’s lien is of utmost importance. Whether you are able to file a mechanics lien, whether you are licensed, whether Florida law allows it are issues we will not go into here, but the extent that you have a professional or company such as SunRay who is going to assist you with the filing of the liens, you need to do so as soon as possible.
ii. Loaned money
In some cases, maybe you are a hard money lender, maybe you have loaned money on a piece of property, you need to record those mortgages and do not bend over backwards for the people you are loaning money to.
For example, if someone takes out a $250,000 mortgage on a piece of property, with equity and the homeowner decides to or convinces the lender not to record the mortgage because they are trying to keep their credit at a certain level. And in the few months after taking out the loan, they borrow money from another party, thus putting them in front of the client.
So the lender who did not exercise their legal right to record that mortgage, immediately upon dispersing funds ended up third in line instead of second in line. And that was definitely a large mistake.
When bankruptcy is filed, it differentiates between those secured and unsecured debts. In some cases, it can actually provide you with what is called an administrative priority.
b. Secured Debt
A secured debt is a debt that is secured by collateral to reduce the risk associated with lending.
Bankruptcy Differentiates Debts
a. If ongoing, maybe be entitled to administrative expenses
This means that in some cases the bankruptcy that is filed is what is called a Chapter 11. That is a reorganization which means that the business is still operating, and it has not shut down. They may need you to continue to supply materials, they may need you to continue fix up or do repairs on the property, or there may be ongoing projects where you are either a contractor or subcontractor.
i. Post-petition assumption of executory contract or lease
If in fact, you are going to continue to do those post-filing jobs, it is imperative that you communicate with the attorneys for the bankruptcy company so that you can continue to get paid. There is a large distinction in many cases between pre- and post-petition, and it would be a shame if you continued to do work day after day after the case is filed and not make arrangements to get paid.
We have seen that happen too.
ii. Sale of asset with lien
Now what happens if you filed your mechanics lien, you are no longer doing work, you are waiting to get paid, and the bankruptcy is filed? You need to pay attention to what is going on because that piece of property or that project which you may have a valid lien on may be disposed of within the bankruptcy proceeding.
Sale free and clear under BK Code 363
There is a method within bankruptcy called a Code 363 sales wherein a property can be sold free and clear or liens, and if you are the last lien on the property and there is not enough equity to reach you, you may find yourself going from a lien holder to just another unsecured claimant who may get pennies on the dollar.
You may be able to object to the sale of that property within the bankruptcy. You be able to have a voice in that case. It is important that you pay attention to that and to the extent that you need to, hire a professional to explain to you what is going on and if in fact there is the ability, to hold up that sale. So that you can get paid if not all, maybe a portion of it.
Click here to know how to Save your Business through bankruptcy
When Do I Get Paid?
Now how do you get paid when bankruptcy happens? Well, it depends on a few things.
a. Sold Assets
If any property of the bankruptcy estate will be sold, such a sale is usually referred to as a ‘bankruptcy sale,’ an ‘asset sale.’ Below are some ways that you can get paid and how to do so.
If your construction lien is valid under equity in a property, once those assets are sold you can be paid. You can be paid at closing.
ii. No equity
But if there is no equity, you may find yourself having to deal with what is called a ‘plan reorganization’ in a Chapter 11, or in a Chapter 7 case, you may just get pennies, or nothing. It depends on how much money is brought into the bankruptcy estate.
These are things that you need to review and go over once you find out about the bankruptcy. We are repeating ourselves, but it is of the utmost importance that once you are aware of the bankruptcy, you do not sit on your hands.
For example, let us say there is a hard money lender who lends money on two refurbished home projects. He has a first mortgage on two pieces of property. The property owner files a Chapter 13 proceeding where they are trying to strip off the mortgages. What does this mean? The lender is saying that the properties are of so little value that the money loaned on it is partially secured and partially unsecured. So let us talk about this with real numbers.
Let us assume that you are either a lienholder standing behind a mortgage on a piece of property or you loaned $500,000 on a home that is being refurbished. What if the homeowner files bankruptcy, says that this is an investment property, and the property is worth only $250,000?
Well, they could file a motion within a bankruptcy that would change your position to holding a mortgage of $500,000 to holding a mortgage of $250,000 and classify your other $250,000 as ensured. So you will go from Day 1 having a mortgage for $500,000 to Day 2 having a mortgage of $250,000.
You need to pay attention to that. This happens very fast and some attorneys who do this sort of thing, and they will go through bankruptcy. Things will happen fast and if you get notice of this, sit on your hands, and just wait for things to happen, you may find yourself on the short end of the stick. You need to be aware of that and pay attention because bankruptcy has very powerful equitable powers which can change your lien rights, and in some extreme cases even change your mortgage rights.
Learn more about how to get paid: Personal Guaranties and Other Ways to Get Paid
In all reorganizations, especially Chapter 11s, it is required to file a Plan and Disclosure. That is the goal of a Chapter 11. This Plan and Disclosure will list down how you are to be paid if you are to be paid and when you are to be paid. You may have voting rights; you may have a large say as to whether this bankrupt company or bankrupt project is able to go through bankruptcy easily. Or you can make it difficult for them.
You need to pay attention to what they are trying to do, be aware of it, and understand how it affects you. There is a process and pattern in every Chapter 11 proceeding, and it can be filed along by an attorney, it can be filed along by you with advice from your attorney. You can look at the plan that was filed and see how you are being treated. If you do not like how you are being treated, you can object to it. You can go to a judge.
You need to enforce your rights, and you need to be aware of what is going on. These could be either very big cases or very small cases.
For example, there was once a supplier who worked on driveways. He supplied bricks for various driveways and in one case he supplied $3,000 to $4,000 worth of bricks, and on another project he did not file a lien. Both homeowners ironically enough, filed bankruptcy within a month of each other.
The one where he did not file a construction lien, he ended up getting two cents to the dollar. The one where he filed the mechanics lien, he ended up getting paid in full plus interest over a period of three years. Now mind you, you would rather have all your money up front, but if you get paid in full plus interest over three years, at least you are getting paid.
There are a couple different types of bankruptcies, 7s, 11s, and 13s, it is important to understand that different bankruptcies treat the money owed to you, differently. Once you are aware of those differences, and once a professional explains them to you, you can then act accordingly on the debts that are owed to you.
Remember that you do not have to know anything about bankruptcy to understand if you are affected by bankruptcy. You may not understand how your car engine works, but you understand that it is important. And if it breaks down, you are going to go see somebody who can help you with it.
When a project goes belly up and files bankruptcy or when somebody you are doing business with files bankruptcy, you need to pay attention to it. Because whether you like it or not, whether you try to ignore it, you are affected by it. And you need to enforce your rights.
Most bankruptcy attorneys will sit down and talk to you. But they can tell you pretty quickly whether it even makes sense to hire an attorney or not. For the more complex cases and for the larger debts, hiring an attorney can help you recoup some money, and in some cases maybe all the money that you are owed. This is especially true for when projects get sold and you have customized windows, doors, or other materials that were specifically ordered for specific properties.
Remember, if you have specialized windows, doors, roofing, or tiles, for a specific property, they may be worth only something only to that property owner and not that much on the open market. These things you have to notice and look into when you get notice of a bankruptcy.
There is an old saying that an ounce of prevention is worth a pound effort. The lien rights that you have, the ones you can file and file accurately through SunRay Construction Solutions will at least provide you with some protection if in fact bankruptcy happens.
And bankruptcy will happen more and more as the economy continues to recover, and businesses overextend themselves, Lenders are not going to be patient as we go forward, and we are seeing an uptick in construction bankruptcies as construction continues to increase as builders continue to expand and as people continue to refurnish their homes and do other projects at home.
The small business owner such as yourself, the one who fixes roofs, the one who fixes up pools or adds improvements to a home, you need to be careful of this trap. And when it is sprung, speak to the appropriate professional.
SunRay Construction Solutions Intelligent Dashboard
a. Waivers and releases for free
The SunRay system has waivers and releases for free. If you use our system, you do not need to fill out a Word document or PDF. All of the information is there for you to just click on and within a matter of 60 seconds or less, you can create your partial releases, final releases, and conditional releases for your releases of liens. Additionally, you can store them so that if you have to go back to see your partial releases, you can see them all online.
b. Robust API
For our larger customers who do at least 50 notices a month, we have an incredible API system which is basically a bridge from your system to our system that eliminates data entry. It is very user friendly, but we would need IT support from your company.
c. Excel upload
If you do not have an IT department that can help you, we also have an incredible Excel spreadsheet where if you have the ability to export data like your first day on the job and your job address, you can put it into your system.
You can track all of your certified mail online, and it is very simple to use. You can see if it has been accepted, if it has been delivered, and the signatures.
And we now have a wonderful system where we can assist you in e-Recording your documents. Some states require a Notice of Commencement and Notice of Termination, and we can assist you with e-Recording in most counties.