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Are You Subject To A Bankruptcy Preferential Payment Claim For Your Last Progress Payment

Are You Subject To A Bankruptcy Preferential Payment

Claim for Your Last Progress Payment


William C. Last, Jr., Attorney At Law

Since the economy has weakened there has been an increase in the number of businesses that are seeking bankruptcy protection. It is not uncommon for the trustee of a bankrupt company to demand that a contractor return the last progress payment that the debtor made to the contractor. In essence, even though you performed the work and were entitled to be paid the bankruptcy trustee will demand that you return the amount you received.

This article will first focus on some very basic bankruptcy concepts and will then discuss preferential payments and what you can do to avoid such a claim.

This article is intended to alert contractors to the issues that can arise when a party to a construction project files bankruptcy. Since bankruptcy laws are complex and their application will vary based on factual issues, you should not rely on statements contained in this article to guide you if a party to a project files bankruptcy. If you are confronted with bankruptcy you should seek the advice of a competent bankruptcy attorney.

A Overview of Bankruptcy Concepts

The two primary goals of the federal bankruptcy statutes are: (1) providing an orderly manner for converting the assets of the debtor into cash so that the creditors can be paid in accordance statutory priorities; (2) providing a fresh start to the debtor by relieving the debt and allowing the debtor to keep certain assets that are exempt from the bankruptcy. In addition, if the debtor can reorganize or develop a plan to pay its creditors, there are bankruptcy proceedings that will allow such a plan to be formulated and implemented.

There are two basic types of bankruptcy proceedings. One proceeding, commonly referred as a Chapter 7 proceeding, provides for the orderly liquidation and distribution of the debtor’s assets. The other proceeding, commonly referred to as a Chapter 11, allows a debtor to continue ongoing business operations while a reorganization plan is developed. An individual debtor who has a regular source of income can file a Chapter 13 proceeding.

A bankruptcy is commenced by the filing of a bankruptcy petition. The bankruptcy can be either voluntary or involuntary. The petition includes information concerning the debtor’s name and address. The petition also lists the debts, the debtor’s principal assets and request for relief under the appropriate chapter.

Under a Chapter 7 proceeding, a trustee is appointed to oversee the process. The trustee is responsible for gathering the assets, liquidating the assets and then distributing the proceeds. The distribution is, generally, in accordance with specific classes of claims.

If a Chapter 11 is elected the debtor can remain in possession of the bankruptcy estate or alternatively the court can appoint a trustee. Within a fixed period after the filing of the Chapter 11 petition, the debtor is required to file and serve a written disclosure statement and a plan of reorganization. The plan includes a classification of the claims and specifies how each classification will be treated under the plan. The creditors are then allowed to vote on accepting or rejecting the plan.

Once a bankruptcy is filed there is an automatic stay on all collections matters, legal proceedings, and judgment enforcement activities. The objectives of the automatic stay include maintaining the status quo, protecting the estate against a multiplicity of lawsuits in various forums, and preserving the relative priorities of creditors, pending distribution of estate assets.

If any action is undertaken in violation of the stay the party who violates the stay can be sanctioned by the court.

If there are assets in the bankruptcy estate, the court will set a deadline for filing a claim. The claim is filed on a form that is available from the bankruptcy court. If a creditor fails to file a timely claim they can be barred from receiving any distribution from the bankruptcy estate.

Generally, once the reorganization plan is approved, any pre-bankruptcy claims are discharged and the debtor is obligated to fulfill its obligations under the plan. After the bankruptcy estate is fully administered a final decree closing the case is issued.

What Is A Preferential Payment


As previously stated, this discussion of bankruptcy law is only a brief overview of the issues that can arise. If you are involved in a project where a party files for bankruptcy protection you should discuss your obligations with a competent bankruptcy attorney.

If you are involved in a construction project where one party appears headed toward a bankruptcy filing you should seek guidance as to the best means to protect your financial interests before the third party files bankruptcy. Once the bankruptcy is filed, you should consider suspending payments to the bankrupt party and any lien claimants that had claims against the bankrupt party, until you obtain proper legal guidance through the maze of bankruptcy laws.

This article, 8 2003, was written by William C. Last, Jr. The quoted text and other parts of the article are from SB 800. Parts of the article are from the Civil Code section 1375. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at or by e-mail at [email protected] He has other articles on his website: This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney