They Filed Chapter 11, You Need to Complete Your Project: Surviving Contractor Bankruptcy as the Owner

Your general contractor filed for bankruptcy before getting your project across the finish line. You and your project margins are in a tight spot. But not all hope is lost: with good legal guidance, a project team that is willing to work, and (unfortunately) more money, your project can move forward. Last week, I covered steps contractors should consider in the event of owner bankruptcies, drawing lessons from the several construction bankruptcies I have worked on during my career. This week, I’m flipping the script—focusing on how owners can respond if their general contractor files for bankruptcy.

The strategies I list below assume your top priority is finishing the project on time, or as close to it as possible. They also assume your project is not bonded (things will be a little smoother if you have bonds in place). Not all of these options make sense if your goal is spending the least amount of money. But if your endgame is project completion, here is where to start:

1) Negotiate a Project Completion Agreement

Negotiating a project completion agreement with the Debtor (i.e., the bankrupt general contractor) can lead to quick project resumption. Through these agreements, Owners typically fund the costs of the Debtor to complete the project through the bankruptcy, often on a pass-through, no mark-up basis. These deals may involve:

• DIP funding (debtor-in-possession financing) earmarked for your project;

• Direct payment or pass-through payment for critical subcontractors and/or the Debtors’ employment costs for necessary project personnel;

• Owner-paid performance and/or retention incentives to dissuade the Debtors’ employees from jumping ship (e.g., Key Employee Incentive Plans (KEIPs) and Key Employee Retention Plans (KERPs)); and/or

• Establishing a project trust to pay project funds, insulating the funds from other estate creditors.

These arrangements can be complex and expensive and they require court approval. But if time is money, they may save you both in the long run.

2) Negotiate a Replacement Path

If a project completion agreement doesn’t make economic sense—or the Debtor doesn’t want to finish your project—consider negotiating a replacement path. This might involve:

• Allowing the Debtor to reject the contract in exchange for your waiver of some or all claims against the Debtor; and/or

• Seeking court approval for a new GC to step in, with or without formal assumption/assignment, and taking on the Debtors’ costs to transition the project from the Debtor to the new GC.

This can be a win-win: the Debtor walks away from a project it doesn’t cannot or does not want to perform, and you avoid prolonged limbo. Like a project completion agreement, a replacement agreement will require court approval.

3) Push for Assumption or Rejection of the General Contract

Bankruptcy allows debtors to assume or reject executory contracts, and mid-project construction contracts usually qualify. But debtors do not have to assume or reject a contract right away, and that limbo can stall your project. If you cannot make headway negotiating a project completion agreement or a replacement path, it may be time to ask for a court ruling that forces the Debtor to assume or reject your contract. A court is unlikely to force the Debtor to assume or reject a contract in the first few weeks of the Debtor’s bankruptcy. But courts are more likely to deal with assumption and rejection early if:

• The project is active and time-sensitive, and bankruptcy is jeopardizing safety, occupancy deadlines, or third-party obligations (like lease-up deadlines, tax incentives, or lender milestones);

• The Debtor’s post-petition performance is inadequate and whether the Debtor will assume the contract is uncertain;

• The project is unique and highly specialized and/or it would take significant time to re-procure or replace the general contractor;

• The Debtor is strategically using delay as leverage for better deal terms.

If the contract is assumed, the Debtor must cure past defaults (which would include, under most contracts, getting caught up on its schedule, paying subs, and clearing liens) and continue performing. If the contract is rejected, you can replace the Debtor and file an unsecured claim for breach of contract.

4) Secure Key Subcontractors and Materials (Carefully)

If your GC files for bankruptcy, critical subs and suppliers may walk off the job unless they receive payment assurances. But you should not unilaterally take over their contracts or redirect materials—that would likely violate the automatic stay under 11 U.S.C. § 362. Instead, consider:

• Seeking court approval for direct agreements between yourself and a sub/supplier (with the Debtor’s consent, if you can get it);

• Negotiating a three-party agreement between you, the GC, and the sub/supplier, with payment protection and defined scopes; and/or

• Asking the court to approve an assignment of critical subcontracts, especially if your GC is no longer managing them.

Even if the GC includes step-in and assumption rights, you need court approval to enforce these rights once a bankruptcy is filed.

* * *

If your contractor files for Chapter 11, don’t panic. But don’t wait either. Even though the automatic stay limits your options, with the court’s blessing and the right strategy, you can minimizing downtime and keep your project moving.

Do you need help crafting a strategy that fits your project? I’ve worked on several contractor and owner bankruptcies—let’s talk.

If you found this post helpful, check out my other post on Surviving Owner Bankruptcy as the Contractor.