Construction and Bankruptcy: Avoiding Clawback; Preserving Defenses When a Project Partner Goes Bankrupt

This CLE webinar will describe preference demands in bankruptcy and the financial effects these demands made by bankrupt construction project participants may have on their non-bankrupt project partners. The panel will discuss Section 547(c) defenses for preference demand recipients as well as noteworthy state law defenses with unique considerations for the construction industry. The panel will also provide best practices for assisting clients in preparing for and responding to preference demands.

In an unstable commercial real estate market, construction project participants may be faced with one of their project partners filing for bankruptcy. One project participant's bankruptcy has rippling effects that can be detrimental to the whole project.

Once a party files for bankruptcy (the debtor), an automatic stay prohibits creditors--including those with whom the debtor is involved in a project--from seeking further payments. However, the debtor also has the ability to "clawback" or demand the return of all payments made by the debtor to their creditors during the 90-day period leading up to the bankruptcy filing (preference demands). This means that non-bankrupt project participants may suffer the financial consequences of not only possibly forfeiting future payments but also returning past payments unless they have a viable defense.

Bankruptcy Code Section 547(c) provides defenses to preference demands that can reduce or eliminate liability for non-bankrupt project participants. State laws provide additional defenses. Construction counsel should be aware of these defenses and how to advise their clients to prepare for and respond to preference demands.

Listen as our expert panel discusses the effects of preference demands on non-bankrupt construction project participants. The panel will describe federal defenses to these demands, including those in Section 547(c), and notable state law defenses. The panel will also provide best practices for assisting clients to prepare for and respond to preference demands.