Alexandria, Va. – (RealEstateRama) — As construction contractors can be exposed to preference actions in a municipal bankruptcy, an article in the September ABI Journal explores potential defense strategies for contractors and why a legislative fix might be required to complete necessary infrastructure projects in financially distressed cities. “Municipalities need the expertise of the construction industry to repair their infrastructures, but the Detroit bankruptcy was a rude awakening for the construction industry,” Lisa S. Gretchko and Mark A. Bogdanowicz of Howard & Howard Attorneys PLLC (Royal Oak, Mich.) write in their article “Fixing Our Infrastructure May Require Fixing the Bankruptcy Code.”
“To ensure that the Bankruptcy Code does not contain a disincentive that dissuades the construction industry from fixing the infrastructures of debt-burdened municipalities, Congress may need to fix the Bankruptcy Code itself.”
Gretchko and Bogdanowicz write that contractors may have access to cost-effective defense strategies against a municipality’s preference claims. “In a preference case, the municipality must prove each element of 11 U.S.C. § 547(b) and therefore must demonstrate that the transfer at issue was a transfer of the municipality’s property,” they write. “The very nature of municipal financing raises a serious question as to whether the transfer at issue was property of the debtor as opposed to separate funds raised by issuing a revenue bond to fund a municipal construction project.”
Contractors in Detroit’s chapter 9 case, especially those with contracts on the assumed contract list, believed that they were protected from preference exposure in the city’s bankruptcy, according to Gretchko and Bogdanowicz. However, Detroit filed 185 preference cases, including claims against construction contractors for alleged preferences. “Detroit’s pursuit of preference cases against its construction contractors highlights this important question: How will debt-burdened municipalities fix their infrastructures if construction contractors (or the subcontractors or suppliers) ‘shy away’ from public projects for fear of preference exposure if the municipality files for bankruptcy?”
So that construction contractors do not shy away out of fear of preference exposure, Gretchko and Bogdanowicz suggest that chapter 9 of the Bankruptcy Code should be amended to prevent municipalities from pursuing preference actions against any persons and entities involved in any municipal construction project. “Because municipal projects require both goods and services (e.g., engineering services), any such Bankruptcy Code amendment should be broad enough to protect providers of both goods and services.”
To obtain a copy of “Fixing Our Infrastructure May Require Fixing the Bankruptcy Code” from the September edition of the ABI Journal, please click here.
Learn more about issues surrounding preference litigation in bankruptcy with ABI’s Preference Handbook, Second Edition, available in the ABI Bookstore.
ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/education-events.