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In recovery

Asuccession of builder bankruptcies in California, Arizona, Wisconsin, Utah and other parts of the country have sent a chill through the LBM distribution channel. Suppliers wonder if they’ll soon find themselves standing in a group of unsecured creditors—and if they should even bother getting in line. Commercial bankruptcy attorneys say it all depends—they’re lawyers, after all—but suggest a few simple things that pro dealers can do to minimize their losses.

Home Channel News reached out to legal experts as well as building product distributors on the front lines of the issue to compile the following how-to advice for the LBM industry.

File a “proof of claim” as soon as possible. This is a simple form, available from the Web site of any federal bankruptcy court, that explains what a debtor owes you, and why. “Don’t wait to figure out what the deadline is,” advised Annie Catmull, a bankruptcy attorney with Walker Wilcox Matousek in Houston. Vendors of a “recently supplied product”—delivered in the 20 days preceding the bankruptcy—may be eligible for full payment under an “administrative priority claim.” “It is much better than a general claim, but the [parameters] are very specific,” said Catmull, who advises legal help for this route.

Don’t ignore demands for payment. Under the law, a bankruptcy trustee can demand that you return payments received from a debtor during a 90-day period prior to the bankruptcy filing. This look-back period is particularly galling when you’re already owed thousands of dollars. Refusing to respond to this letter will result in a lawsuit, which can be served by first class mail. These demands can be challenged, but in a timely fashion, lest the bankruptcy court’s “rocket docket” enters a default judgment against you.

Join the committee of unsecured creditors. This is one way that vendors can exert considerable influence over how a company’s assets are distributed, or what kind of reorganization plan the court accepts. Peter Davidson, managing partner of Moldo Davidson Fraioli Seror & Sestanovich in Los Angeles, points out that the unsecured creditors committee is represented by its own attorney, paid for by the debtor. “It involves a time commitment,” Davidson warned. In the beginning of the case there can be weekly meetings, usually via conference calls. Also, prepare for a ton of paperwork. “You get a lot of inside information on how the company can be turned around and made profitable,” Davidson added. “But your fiduciary duty is to get the best deal for all the creditors.”

Do some of the legwork. Diana Perenza, vp-Florence Building Materials in Huntington, N.Y., has seen her share of bankruptcy cases over the years as both a paralegal and a credit manager. She always attends the initial meeting of the creditors—called a “341 meeting”—and doesn’t hesitate to ask questions. Then she orders a copy of the file and a court transcript, all of which helps her determine whether to turn the case over to a bankruptcy attorney. Perenza recently passed on a bad debt of $ 11,000. After looking over the contractor’s assets, liabilities and drug rehab history, “I realized there was nothing to go after,” she said. “But it would have cost us $2,000 [in legal fees] to find that out.”

Negotiate outside the courts. Dean Rallis, a partner with Alston + Bird in Los Angeles, favors negotiated “workouts” that keep everyone out of court. “Once you go down that [bankruptcy] road, things change and it gets expensive,” Rallis said. “I’ve found that the players are often willing to engage in a discussion where everybody gives up a little.” In one multi-family residential project in Southern California, Rallis represented a builder who was tottering on the edge of bankruptcy—until everyone agreed to work together to complete the project. “The suppliers didn’t get 100 cents on the dollar but more than they would have gotten in bankruptcy court,” Rallis recalls. “The bank got a little bit of a haircut, too.”

Check your mechanic’s liens. Provided they were filed properly, a mechanic’s lien can bump you ahead of unsecured creditors—and put you in a good bargaining position. Evan Smiley, a Costa Mesa, Calif., commercial bankruptcy attorney, says a lot of bankers “learned their lessons in the ’90s—it’s better to work it out than take over a partially built project.” Smiley, who devotes 75 percent of his practice to floundering real estate developments, finds that lenders are often willing to extend payments to suppliers to get the job done. “The banks don’t want mechanics’ liens on a project because it mucks it up,” he explained.