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

Construction Project Bankruptcy Strategic Considerations for Owners, General Contractors and Construction Managers . December 16, 2008. Charles A. Dale , Boston office, focuses his practice on matters of bankruptcy and insolvency with extensive experience in the construction industry. .

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

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  1. Construction Project Bankruptcy Strategic Considerations for Owners, General Contractors and Construction Managers December 16, 2008

  2. 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. Presenters 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.

  3. 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

  4. 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

  5. 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

  6. 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: • Mechanic’s Lien Waivers • Performance Bonds • Liens

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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 • Mechanic’s 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

  15. 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 Supplier’s Bankruptcy Case

  16. 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

  17. Construction Project Bankruptcy Strategic Considerations for Owners, General Contractors and Construction Managers December 16, 2008

  18. To contact Charles A. Dale: chad.dale@klgates.com 617.261.3112 To contact Joseph B.C. Kluttz: joe.kluttz@klgates.com 704.331.7485 Contact Information To contact Brian R. Davidson: brian.davidson@klgates.com 412.355.6267 To contact Andrew L. Swope: andrew.swope@klgates.com 717.231.4512

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