Don't Lien on Me — Construction Law Issues in Bankruptcy

By: Joseph J. Wielebinski (Co-speaker)
Presented at the Advanced Business Bankruptcy Course, State Bar of Texas
May 17-18, 2001

I. INTRODUCTION
The advent of a new economic environment after ten years of sustained growth will certainly impact specific segments of the economy. One area of phenomenal growth over the past decade was real estate construction, both commercial and residential. Unfortunately, the construction arena may be particularly hard hit by the "new economy" due to a number of factors, including reduced capital expenditure by businesses, the stock market's rapid decline and its impact on the so called "wealth effect" and the historic tendency of owners and developers toward overbuilding in the real estate sector. Coupled with these factors are more traditional problems that can exacerbate the likelihood of financial distress: negligence or mismanagement, fraud, lender or creditor pressures, price increases, etc. When these factors combine together, the end result is typically a bankruptcy filing.

Construction law issues are often complicated and perplexing. The statutory scheme in Texas and most other states to protect subcontractors and materialmen and the resulting case law are such that strict compliance is essential but may be the difference between prompt payment and non-payment. Construction law problems, from disputed change orders to improper installation, are usually factually intensive. When these characteristic problems are introduced into a bankruptcy scenario, the number of competing and often conflicting interests can be overwhelming. An understanding of how these two, sometimes conflicting, statutory frameworks interrelate, can often spell the difference between disaster and success.

This Article will not attempt to address the myriad issues that may arise within the context of real estate bankruptcies, in general, or construction bankruptcies, in particular, but rather, it will highlight some of the more common issues a bankruptcy practitioner might expect to encounter and attempt to address some of the more common pitfalls when advising a client faced with construction law issues in bankruptcy. Since Texas bankruptcy practitioners will likely encounter local construction bankruptcies, particular emphasis is placed on the relevant Texas statutes. However, each state will have its own statutes and unique case law, which is beyond the scope of this Article.

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