Bankruptcy
• Federal and state jurisdictions
• Case turned over to trustee when a company or
individual can no longer make debt payments
(simplified case)
• Company filing the bankruptcy is debtor (they
owe)
• Companies owed money are creditors
• Trustee marshals and/or liquidates non-exempt
assets to pay off creditors
Bankruptcy
• Types of bankruptcy
– Chapter 7- debt liquidation
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Unsecured debts discharged (creditor- no security)
Law is specific about what debts can be discharged
If business files Ch 7, debts are never discharged
Ch. 7 usually means the company is going out of
business
• Secured debts- underlying asset can be sold to make
good on the debt (or a portion thereof)
• Exempt assets ate listed in law (Appendix A)
• DCT example
Bankruptcy
• Chapter 11- business reorganization
– Create breathing room to allow company to get
back on its feet
– Debtor continues to operate as debtor-inpossession
– Can be forced into involuntary chapter 7 if they
fall behind reorganization plan for credit
– K-Mart example
Bankruptcy
• Chapter 13- individual reorganization
– Individual chooses to pay only a portion of
unsecured debts and discharge balance
– Complicated process for determination
– No adverse affect on credit rating & availability
– Credit card companies don’t like it
Bankruptcy
• Automatic stay- creditors cannot attempt to collect
or harm the debtor (refuse to sell)
• Failure to abide by a stay is contemptible act with
fines and imprisonment
• Mechanic’s liens- perfection of lien is allowed, but
not enforcement
• Executory contracts- parties continue to have
duties and obligations to each other in spite of
bankruptcy. Construction contracts are usually
considered executory
Bankruptcy
• Fraudulent transfer and preference- trustee can
nullify money transfers made up to one year prior
to filing
• Transfers off-shore or to family members can be
fraudulent
• Preferential payment can be nullified as well
• Payment for which additional value is not received
are deemed preferential (did not need to pay, or
paid earlier than necessary)
Bankruptcy
• Construction bankruptcy actions
– Forced return of payment if fraudulent or
preferential
– Liens may be filed
– Contract enforcement shifts to trustee of
creditor group, no longer dealing with owner
– Retainage becomes an asset of bankruptcycontractor must “stand-in-line” with other
creditors
Bankruptcy
• Involuntary bankruptcy- person or business
forced to declare chapter 7 or 11.
• Involuntary declaration in an attempt to
control debtor actions by creditors
• Usually used when assets are being moved
between companies
• DCT example
Dispute Resolution
• Staying out of court should be the ultimate goaluse alternative dispute resolution
• Avoidance- ignore the conflict, don’t talk to other
party; usually leads to bigger problem
• Intimidation- threaten the other party- don’t take
the bait (illegal in many situations)
• Negotiation- non-legal, or before a lawsuit ahs
been filed; interaction aimed at copmpromise or
win-win. Best Alternative to a Negotiated
Agreement is basis for judgement
Dispute Resolution
• Attorney assisted negotiation- legal rights and best
interests are different things; lawyer income based
on prolonging the dispute
• Mediation- 3rd party listens and facilitates
dialogue; Mediator does not decide; each side
tells its story
– Use I statements
– Don’t be defensive
– De-personalize the situation
Dispute Resolution
• Arbitration- both sides tell their story and
arbitrator decides. Arbitrators are privately
employed, 3rd party (impartial) judges.
Much faster and cheaper than litigation,
usually binding (no appeals)
• Litigation- use of government run court
system. Everything becomes public.
Dispute Resolution
• Negotiation/mediation
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Focus on issues, not positions
Have decision-makers in the room
Keep emotions out of the discussion
Listen well
Don’t change mind after agreeing to the deal
Keep overall agreement give-and-take in mind
Do you homework- know what is reasonable