In Part 1, we briefly discussed the Detroit Bankruptcy and the need to review how contractors were getting paid. In Part 2, we are discussing what effect a direct payment from a failing municipality has on a contractor.
These effects start at the general contractor level. The bankruptcy filing affects the payment obligations to the general contractor. However, they general contractor is not the only one to suffer. As they say, it flows downhill. So, the subcontractors and suppliers will also get the squeeze (this is when a good review of a payment bond will come in handy). There are several ways that this can occur, such as how the bankruptcy filing affects the general contractor. For example, if your contract contains a clause that you will be paid within 15 days of the general contractor getting paid – ouch.
So, you need to know which category the general will be under in the bankruptcy case.
- The general contractor has completed the contract and received payment prior to the filing of the case. Because this is generally a payment “for value” it is rare to get this overturned. There is an exception called a “preference,” but let’s not worry about that now.
- The general contractor has completed the contract, but has not been paid the full amount. Unfortunately, they will fall within the context of a “general creditor” along with other creditors, including such things as credit cards. Unfortunately, this is a long, expensive, horrible, long and expensive process. Did I mention that it can be long? And expensive. You’ll really get to know your lawyer well.
- The general contractor has unfinished contracts with the bankrupt municipality. Then, you will have to wait and see if the municipality rejects or assumes the contract. That is, the debtor (municipality) gets the choice to continue with the contract.
What’s your action plan? First, take immediate action by reviewing all the contractual language regarding payments. Second, if there’s a chance of non-payment or delayed payment, come up with some options. Third, start communicating in writing with the general contractor or municipality. Finally, check out any insurance or surety bond policies to see if there’s any protection.
Finally, in Part III we'll discuss the impact on surety bond rates.