In latest edition of The Wright Toolbox:

• What to do When a Customer Files for Bankruptcy – read now

What to do When a Customer Files for Bankruptcy

By Doug Seitz

An envelope from the United States Bankruptcy Court lands on your desk.  You ignore it for a while –there are more important things you need to worry about.  Eventually, you open it and see that it is a notice from a Bankruptcy Court somewhere in the United States advising you that one of your customers has filed bankruptcy.  Your first question may be: “Does this customer owe us money?”  If your answer is yes, then you should be asking many more questions.  Your next question should be: “How can we get paid despite this bankruptcy?”  Your third question should be: “Where is the bookkeeper?” Your fourth: “Do we have any work in progress for this customer?”

But first, should you even care?  That is, does it make sense to spend time and effort (and dollars) trying to get paid once your customer has taken this drastic step? Many businesses, when they receive a bankruptcy notice, throw in the towel, believing that any attempt to recover the monies they are owed is a complete waste of time. While this approach may be appropriate for other industries, construction businesses in Maryland should not give in so easily, and should carefully evaluate the situation.  A company doing construction-related business in the State of Maryland has a few extra arrows in its quiver to help it in its fight to get paid and to avoid writing off the balances owed.  Here are some more questions you should ask when evaluating a bankruptcy claim:

• Do you hold a personal guarantee on this customer? If you do (hey, it happens every once and awhile), then you may pursue the guarantor and stay outside of the bankruptcy.
• Is the job on which your company is owed money either a private job or a State job in Maryland? If the answer is yes, then check to see if your customer has been paid for the work you performed, or the materials supplied by your company on the project? If so, then under Maryland’s Construction Trust Fund law the customer’s owners, officers or principals may have personal liability to your company for permitting the customer to use your monies for some other purpose.
• Does your company have a bond claim on the project? If so, has your company issued any required notices? If the answer to these two questions is in the affirmative, then the filing of the bankruptcy should not impede the prosecution of the bond claim.
• Does your company hold a Mechanic’s Lien claim on the work/materials it supplied to the project in which you are owed the money? Have you issued the Notice of Intent to the owner of the land? If so, unless it is the owner of the land that filed for bankruptcy, your company should be able to pursue your claim in spite of your customer’s bankruptcy.
• If the customer filed a Chapter 11 then be sure to file a Proof of Claim.
• Does your company provide something unique to the customer that it may need going forward (if the bankrupt is going to attempt to continue doing business)? If so you may be entitled to negotiate additional protections, be entitled to priority standing, etc.

As you can see, there are a lot of options you may have as the holder of a claim against a bankrupt. The options are best for you, will be dictated by the facts relating to your claim and the type of bankruptcy that is filed.

Below are some of the things you should do when a bankruptcy rears its ugly head.

Checklist for When Bankruptcy Hits:

• 1. Cease all collection activities – because the “Automatic Stay” will be in place.
  2. Get your accounting and sales departments to give you reports on any projects for this customer.
  3. Is there a personal guarantee?
  4. Who are the customer’s owners and officers?
  5. Examine each job for potential bond/mechanic’s lien claims.
  6. Is there potential preference exposure?
  7. Has the customer been paid for work your company did for which your company has not been paid?
  8. Do you have rental equipment on any project being rented from you by the bankrupt?
  9. File a Proof of Claim (get date-stamped copy back from the Bankruptcy Court after it is filed) TIME IS OF THE ESSENCE ON THIS ITEM.
  10. Hire a construction-oriented bankruptcy attorney if you have potential bond/mechanic’s lien claims or Construction Trust Fund issues.
  11. Review the electronic bankruptcy docket of your customer and obtain a copy of the bankruptcy schedules.
  12. Have a representative attend the Meeting of Creditors. Consider becoming a member of the Unsecured Creditor’s Committee if your company’s claim is large and the customer filed a Chapter 11 bankruptcy. These committees are often formed immediately after the Chapter 11 Meeting of Creditors.

Being proactive with your bankruptcy accounts will not guarantee that your company will be paid in full, but it will most certainly increase your odds of being paid more than if you did nothing. If you have questions, you can send them to dseitz@wcslaw.com.