Construction Project Bankruptcy Strategic Considerations for Owners, General Contractors and Construction Managers

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Construction Project Bankruptcy Strategic
Considerations for Owners, General Contractors
and Construction Managers

• December 16, 2008

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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

• 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
• 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
• 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

• 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
• Direct Payment
• Joint Payment Arrangements
• Set Off
• Lien on Equipment
• Passage of Title
• What Can the EPC Contractor Do to Protect Its
  Interest
• Mechanics 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
• 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
• 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
• Letter of Credit
• Payment Bonds
• Parental Guarantee
• Bankruptcy Claim Process
• Mechanics 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 Suppliers Bankruptcy Case

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Scenario 6 The Issues

• 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

19
Contact Information

• To contact Charles A. Dale
• chad.dale_at_klgates.com
• 617.261.3112

• To contact Joseph B.C. Kluttz
• joe.kluttz_at_klgates.com
• 704.331.7485

To contact Brian R. Davidson brian.davidson_at_klga
tes.com 412.355.6267
To contact Andrew L. Swope andrew.swope_at_klgates.c
om 717.231.4512