Many residential contractors have filed or will file for bankruptcy protection as a result of the economic downturn of 2008-2009. With this in mind, I came across an excellent article on bankruptcy from the contractor’s perspective.

This article was written by my friend, attorney John McCants, who specializes in defending contractors on behalf of their General Liability insurance carrier as well as in bankruptcy law.

John’s article reviews bankruptcy under Chapter 7 (liquidation), Chapter 11 (reorganization), and Chapter 13 (reorganization). In addition, it address the following contractor related issues:

* The impact of bankruptcy filing on a contractors General Liability policy which is considered to be an asset of the bankruptcy estate. In some cases, a General Liability policy may be the most significant asset of a bankruptcy estate if a claim is pending. As a general rule, just because such a policy may be the property of the bankruptcy estate does not preclude the payment of a claim under such a policy to the claimant.

* The impact of bankruptcy filing on a performance or surety bond in the event of default. Here is the normal chain of events: contractor enters into a contract and procures a performance or surety bond; contractor does not finish the job; bond company steps in the shoes of contractor and completes job; bond company then subrogates against contractor for reimbursement. But……. how can the bond company subrogate against the contractor that has filed for bankruptcy protection? The courts usually rule that the bonding company has priority over bankruptcy creditors.

* The impact of Chapter 11 bankruptcy filing after a home owner or project owner has entered into a construction contract. In other words, can the home owner or project owner discontinue the contract? The answer is, that it depends on several factors which are outlined in the article!

* The impact of an arbitration clause in a construction contract where the contractor has filed for bankruptcy. Courts typically rule that an arbitration clause is enforceable under such circumstances.

For more information: John L. McCants, Ellis Lawhorne & Sims, P.A., Bankruptcy Law: Fundamentals For The Construction Law Practitioner,
John Sadler

Upper tier contractors such as general contractors commonly attempt to contractually transfer the risk of loss to lower tiered contractors such as subcontractors.

The most common contractual risk transfer tools are indemnification / hold harmless clauses, request of additional insured status, and request of waiver of subrogation.

These concepts can be difficult to understand and are further complicated by the fact that upper tier contractors frequently over reach and impose protections that are onerous and are not achievable by most lower tier subs in the current insurance market place.

I found an excellent article (see link below) that exposes the strong handed techniques by upper tier contractors. Presentation of this article to a general contractor can be persuasive in negotiations to lower some of these requirements.

I am all for contractual risk transfer to protect the legitimate needs of the general contractor; however, the contractual provisions must be fair and readily achievable in the insurance market place. If not, they result in a great deal of wasted administrative time on the part of both parties and they force the subcontractor into a breach of contract position.

Source: Insurance Journal, “Contractual Risk Transfer And Endorsements To The CGL”, June, 2009

Was it worth it? That is the question Daron Keith Stalvey, a Horry County contractor is probably asking himself after pleading guilty to hiring illegal immigrants and tax evasion. Stalvey Construction Company, Inc. and some other small businesses of his were used to conceal earned income. Stalvey billed jobs in the name of his other entities and then claimed Stalvey Construction expenses as tax deductions.

A search was done in May of 2007, where Company records showed that wages were reported for legal workers. However, nothing was reported for the illegal workers nor did Stalvey ask for or keep records of personal identification. This case was investigated by the IRS and Immigration and Customs Enforcement, which resulted in the arrest and deportation of 13 illegal immigrants.

Source: Myrtle Beach Sun News

Approximately 70 consumer and justice groups in SC object to the use of home owner warranty products alleging that they violate state law dealing with forced arbitration in insurance contracts. They have asked that state Attorney General Henry McMaster look into the legality of these contracts.

It is alleged that the home owner warranty contracts are represented as a gift to protect the home buyer but that they are actually a litigation control tool that benefits the home builder.

I disagree, if the prospective home owner does not like the terms of the warranty, they don’t have to buy the house. Also, just because a case goes to arbitration does not mean that the outcome will be more favorable for the builder.

 Source: Insurance Journal http://www.insurancejournal.com/news/southeast/2009/05/27/100839.htm