Construction Law Insights

A contractor, subcontractor, or supplier may receive a payment only to have the payor shortly thereafter file for bankruptcy. In that case, the trustee for the estate of the bankrupt payor will look at payments made by the payor during the 90 days prior to its bankruptcy filing and may require the return of those payments to the estate. This is known as a preference claim.

An unfair side effect of a preference claim occurs when the deadline for a recipient’s assertion of a mechanic’s lien or payment bond claim expires during the period between receiving the funds and the trustee’s assertion of a preference claim, which results in the recipient losing its ability to protect its claim.

This occurred in Gold v. Myers Controlled Power, LLC (In re Truland Grp., Inc.), 2018 Bankr. LEXIS 42 (E.D. Va. Bankr. Jan. 8, 2018), where a material supplier received a $2.2 million dollar joint check and, therefore, did not assert the bond claim it was preparing. After the subcontractor filed for bankruptcy, the trustee demanded that the supplier return the payment.

The supplier argued that it should not have to return the money because (i) the supplier did not assert its payment bond claim in exchange for the joint check and (ii) the time for filing a payment bond claim had since passed. The Court disagreed, finding that nothing was actually released in exchange for the joint check payment because the supplier did not actually assert a payment bond claim, it only threatened a payment bond claim.

Be aware of this risk when payment is offered by a payor who is a bankruptcy threat. There are various legal, contractual, and practical measures that you can undertake to improve your argument that you are entitled to keep the payment and your defenses to a trustees assertion of a preference claim. For additional information on what measures you can take and defenses you can assert, please contact PLDR at (434) 846-2768.

PLDR Law Andrew P Pearson 1

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