When Bankruptcy Beckons
In recent years, little attention has been devoted to the
relationship between the Registrar of Contractor's Recovery Fund
and bankruptcy because the booming construction industry ensured
that even mediocre contractors would be profitable. The recent
downturn in real estate, followed by a downturn in the construction
industry requires new attention to the interplay between bankruptcy
and the ROC.
II. The Customer's Options
First of all, even before that customer receives formal notice
of a bankruptcy filing, if you have received word informally, you
need to immediately confirm whether the bankruptcy has been filed.
You need to do so because the law is extremely clear that if
someone sits on their rights because of a belief that they are
immune from the impact of bankruptcy because that person had not
received formal notice, that individual will be barred from further
recourse. With the advent of the Internet and electronic noticing,
it is relatively easy to confirm whether a contractor has filed for
bankruptcy relief. If a person is not sure, they can always speak
to a lawyer to ascertain whether the contractor has filed. The next
step is to ascertain the legal form of the contractor's business,
be it a sole proprietorship, Limited Liability Company.,
corporation, or partnership. It is crucial to quickly ascertain the
character of the contractor's business since it may make a
difference in potential recourse down the road. Finally, determine
whether the filing is a Chapter 7, 11, or 13, and the contractor's
intentions regarding your particular contract. In many instances,
the contractor may be attempting to reorganize and the contractor's
avowed intention of completing the contract will impact on your
client's options regarding that contract and ability to ultimately
seek recourse from the Recovery Fund.
III. Chasing the Recovery Fund
The Recovery Fund is limited to $200,000.00 for any licensed
contractor, with a cap of $30,000.00 per claim. However, in some
cases the availability of the statutory bonds may provide enough
money to provide a recovery for additional claimants.
A. Seek Stay Relief
Immediately seek stay relief since without stay relief, you
cannot proceed against the Recovery Fund. You are in a virtual race
to try to obtain stay relief as quickly as possible in hopes of
getting in early enough to seize some of the Recovery Fund money.
Though in some instances, a mad race may not ensue, if the
contractor is large and has more than a few customers, you need to
anticipate that only the first few will be fully compensated.
You or your counsel should speak with debtor's counsel right
away. Such a conversation could prevent a pro forma objection to
the stay lift motion which could delay the process by weeks if not
months. You may receive an objection if the debtor is really
attempting to reorganize and does not want your client to seek
recourse from the Recovery Fund.
B. Move Quickly
There are two ways an aggrieved party seek recovery from the
Registrar of Contractors' Recovery Fund. An individual can proceed
administratively before the Registrar of Contractors or file a
complaint in Superior Court serving a copy upon the Registrar and
then, upon obtaining a judgment, file an application for payment
from the Recovery Fund. Once the order is signed, a certified copy
must be presented to the Recovery Fund.
You need to name the contractor's bonding companies in your
Superior Court lawsuit because the Recovery Fund will not honor
your request unless you demonstrate that all bonds have been
Normally the mere presence of a bankruptcy should be sufficient
to prove to the Recovery Fund the insolvency of your contractor,
but the statute which requires the claimant to otherwise try to
collect from the contractor does not specifically mandate that the
presence of a bankruptcy is sufficient to carry the burden.
Therefore, be prepared to carry your required burden of
demonstrating that the contractor is insolvent and your only
realistic chance of recovery is through the Recovery Fund.