Selected Issues in Commercial Construction Bankruptcies

BANKRUPTCY Selected Issues in Commercial Construction Bankruptcies By Jason R. Kennedy The filing of a bankruptcy can have a substantial impact on parties to a construction project, particularly if the bankruptcy is filed while the project is still in progress. It can put the project schedule and funding in jeopardy. A party whose customer has filed bankruptcy is often put in a particularly tough spot, and faces the possibility of having to continue to Jason R. Kennedy perform under the contract while not being paid. This article addresses many of the most significant bankruptcy issues that construction companies face, including considerations in continuing to do business with a debtor postpetition, the effects of the automatic stay and when relief is appropriate, executory contracts, trust fund claims on a debtor s accounts receivable, and the impact of section 363 sales and Chapter 11 plans on mechanic s liens. Automatic Stay Nature and Purpose The filing of a bankruptcy petition creates an estate resembling a trust, which is vested with all legal or equitable interests of the debtor in property as of the commencement of the case. 1 Property rights in a bankruptcy estate s assets are determined generally by state law. 2 The debtor and the property of the debtor s estate are protected by the automatic stay from any actions, collection efforts, attempted seizures, etc., upon the commencement of a bankruptcy under any chapter of the Code. The automatic stay becomes immediately effective, without the necessity of a court order. 3 The purpose of the automatic stay is threefold: (1) to provide the debtor with breathing room from creditor action; (2) to achieve an equality of distribution of the estate assets among claimants; and (3) to promote an orderly administration of the case. 4 The stay remains in effect until the trustee abandons the property (stay terminates only as to that property), the bankruptcy is dismissed, a discharge is granted, relief from the stay is granted by the court, or a Chapter 11 bankruptcy plan is confirmed. Claimants should take note that even though the stay terminates when a Chapter 11 plan is confirmed and goes into effect, Jason R. Kennedy is a partner at Thomas, Feldman and Wilshusen, LLP, in Dallas, Texas. His practice focuses on both construction law and bankruptcy law. it is usually replaced by an injunction in the plan enjoining lawsuits, barring suits that could have been brought prepetition. Therefore, any order granting relief from the automatic stay to pursue a lawsuit against the debtor should also grant relief from any future Chapter 11 plan injunction as well. Further, once the plan is filed, the claimant should make sure the plan incorporates the exception to the injunction for claimant s suit, and file an objection to the plan if necessary. Acts Prohibited The automatic stay generally prevents any attempts to collect a claim against the bankruptcy estate that arose prepetition, as well as any acts that create, perfect, or enforce any lien against the property of a debtor s estate (except as noted below with respect to mechanic s liens). 5 Section 362 of the Code specifically stays: (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; 6 thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 1

With limited exceptions, the stay generally protects only the debtor, not related nondebtor entities such as corporate affiliates, partners, or codefendants in pending litigation. 7 One of those exceptions is the codebtor stay in Chapter 13 cases. However, because only individual sole proprietorships can file under Chapter 13, most construction projects are unlikely to be affected by the codebtor stay. In addition, the bankruptcy court can order that the automatic stay be applied to a codefendant of the debtor when the claims against the codefendant are inextricably interwoven with the debtor. 8 Finally, under section 105 of the Code, the court may also extend the stay to nondebtors if it determines that the debtor would otherwise suffer some cognizable prejudice. 9 Such circumstances are rare. With limited exceptions, the stay generally protects only the debtor, not related nondebtor entities such as corporate affiliates, partners, or codefendants in pending litigation. Consequences of Violation The stay is effective regardless of actual notice. 10 Actions taken in violation of the stay are void or may be avoided, depending on the case law in the particular federal district. An individual debtor injured by a willful violation of the stay may recover actual damages, attorneys fees and costs, and punitive damages. 11 Although nonindividual debtors are not expressly included within the scope of damages allowed by section 362(k), damages for violation of the stay in corporate cases can be awarded under section 105. 12 Relief From the Automatic Stay The bankruptcy court s authority to grant relief from the automatic stay derives from section 362(d), which states in relevant part: (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; (2) with respect to a stay of an act against property under subsection (a) of this section, if (A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization[.] 13 Subsection (d)(1) As mentioned above, the automatic stay does not protect nondebtor parties. However, when the debtor is a party (or is required to be a party) to a suit against a payment or performance bond surety, the debtor s insurer, or an owner to enforce a mechanic s lien, it may be necessary to seek relief from the automatic stay under 362(d)(1). For example, where the general contractor is in bankruptcy, the surety or the owner whose property is subject to a mechanic s lien are not protected and claims against them may proceed. In a case where the lien claimant has already filed suit at the time of the bankruptcy, then the best course of action is simply to sever the action against the debtor into a separate action. If the court denies the request to sever, however, the claimant should consider seeking relief from the automatic stay for cause under subsection (d)(1) in order to continue the lawsuit safely and without fear of violating the stay. Further, some states require the general contractor to be a party in any suit against the surety on the bond or against the owner on a lien claim. In such states, where the general contractor is in bankruptcy, a lien or bond claim holder claimant will also have to seek relief from the stay under subsection (d) (1) in order to proceed with suit. In addition, when claims are covered by an insurance policy of a bankruptcy debtor, the claimant may similarly need to avail itself of subsection (d)(1). In such cases, even though the debtor is in bankruptcy, the debtor is still the insured, not the claimant, and the claimant cannot pursue an action directly against the insurer until it obtains a judgment against the debtor/insured. To maintain such an action against the debtor, the claimant must obtain relief from the automatic stay for cause under subsection (d)(1). Cause, as used in section 362(d)(1), has no clear definition and is determined on a case-by-case basis. 14 Cause is an intentionally broad and flexible concept that permits a bankruptcy court, as a court of equity, to respond to inherently fact-sensitive situations. 15 Allowing a matter to proceed in another court can constitute cause for modifying the automatic stay. 16 When there is no great prejudice to the bankruptcy estate, it may often be more appropriate to permit proceedings to continue in their place of origin in order to leave the parties to their chosen forum and to relieve the bankruptcy court from duties that may be handled elsewhere. 17 Most bankruptcy courts consider what are commonly known as the Curtis factors in determining whether to lift the automatic stay to allow litigation against a debtor to proceed in another forum: (1) whether the relief will result in a partial or complete resolution of the issues; thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 2

(2) the lack of any connection with or interference with the bankruptcy case; (3) whether the other proceeding involves debtor as a fiduciary; (4) whether a specialized tribunal has been established to hear the particular cause of action; (5) whether the debtor s insurer has assumed full responsibility; (6) whether the action primarily involves third parties; (7) whether litigation in the other forum would prejudice the interests of other creditors; (8) whether the judgment claim arising from the other action is subject to equitable subordination; (9) whether movant s success would result in a judicial lien avoidable by the debtor; (10) the interests of judicial economy and the expeditious and economical resolution of litigation; (11) whether the proceedings have progressed to the point that parties are ready for trial; and (12) the impact of the stay on the parties and the balance of harm. 18 In the scenarios described above, all the claimant seeks is a declaration of liability that can serve as a predicate for a recovery against a third party with no (or very little) monetary consequences for the debtor, and neither the debtor nor other creditors will be prejudiced. As such, numerous courts have specifically held that a claimant is entitled to relief from the automatic stay where a plaintiff seeks only a declaration of liability against a debtor/ insured for the purpose of recovering funds from a thirdparty insurer. 19 The reasoning of those cases should support relief from the automatic stay to pursue lien and bond claims as well, because the focus of their analysis is on the fact that the claimant seeks to recover from a third-party insurer, not the debtor. The bankruptcy claims process is not the best venue to resolve complicated construction disputes. If the debtor files an objection to the proof of claim, the validity and extent of the claim will then be determined by the judge at an evidentiary hearing, not a trial. The length of the hearing will depend on the judge, but in the vast majority of cases the hearing will be at most several hours, not the multiple days and weeks the claimant would have to try the case to a jury. In addition, discovery will be limited. Nevertheless, in cases where the claimant has only a claim against the bankruptcy debtor, and no avenue for recovery from a nondebtor third party, it usually does not make financial sense to seek relief from the automatic stay to institute or maintain suit again the debtor (since, in most bankruptcies, unsecured claims receive only pennies on the dollar). Rather, under such circumstances the claimant is probably better off just filing a proof of claim and allowing the claim to be determined in the bankruptcy claims process. However, if there is a good chance of substantial recovery on the creditor s claim, it might be worthwhile to spend the time and money litigating a dispute to liquidate the claim, though it can be very difficult to obtain relief from the automatic stay in that scenario. There will be many fewer Curtis factors in the creditor s favor than where the creditor is pursuing payment from a third party, and how close the suit is to trial (factor 11) may be the determining factor in many cases. Subsection (d)(2) Subsection (d)(2) is of the most utility to the construction lender seeking relief from the automatic stay to foreclose its mortgage or deed of trust on the project. If it is established that there is no equity in the property and the debtor is either liquidating or does not need the property to reorganize, the construction lender will be able to lift the automatic stay and foreclose. Thus, mechanic s lien claimants should pay close attention to any motion to lift stay filed by a lender, and join with the debtor in opposing it if, for instance, the claimant believes there is equity in the property. Theoretically, a mechanic s lienholder could also request relief from the automatic stay under subsection (d)(2) to foreclose its mechanic s lien, but if there is a senior lienholder in the form of the construction lender, and there usually is, little is gained as the mechanic s lien would still be subject to the lender s senior lien. Cause is an intentionally broad and flexible concept that permits a bankruptcy court, as a court of equity, to respond to inherently fact-sensitive situations. Extension of Statutes of Limitation Because the automatic stay prevents new lawsuits from being filed against the debtor (unless relief is granted), statutes of limitation obviously become a concern for the plaintiff. The Code does not toll statutes of limitation (see exception below), but does extend it in certain situations. Per section 108(c) of the Code, when a cause of action is stayed by the automatic stay, the statute of limitations runs on the later of (1) the end of [the limitations] period, including any suspension of such period occurring on or after the commencement of the case; or (2) 30 days after notice of the termination or expiration of the stay. 20 Ordinarily, section 108(c) will not in any way affect any statute of limitation that (1) expires before a bankruptcy is filed or (2) expires more than 30 days after the automatic stay terminates. However, if another federal or state statute expressly provides that statutes of limitation are suspended when bankruptcy stays the initiation of an action, then section 108(c) does incorporate that suspension. 21 A plaintiff must remain diligent and watch the bankruptcy closely, as the stay can terminate any number of ways, including when the trustee abandons the property (stay terminates only as to that property), the bankruptcy is dismissed, a discharge is granted, relief from the stay is thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 3

granted by the court, or a chapter 11 bankruptcy plan is confirmed. Any creditor of the debtor and any attorneys who have appeared in the case should receive notice of any such events, but bankruptcy notices, particularly those to creditors (attorneys should receive the notice electronically through the court s ECF system), can be unreliable. Working on Project With Debtor Postpetition Administrative Claim for Postpetition Work If the owner has filed bankruptcy, the most important thing to note is that no liens can be filed for postpetition work. 22 If a lien is filed postpetition, not only is it void (or voidable), but whoever filed it can be liable for contempt for violating the automatic stay, and for damages, discussed previously. There is some protection for those performing postpetition work, however, in the form of an administrative claim under section 503(b). An administrative claim is not a secured claim, but it ranks much higher on the payment priority list than a general unsecured claim. As long as the bankruptcy is not dismissed or the estate becomes administratively insolvent, administrative claims should be paid. If the owner has filed bankruptcy, the most important thing to note is that no liens can be filed for postpetition work. The Code does not set a deadline for either the filing or payment of administrative claims (though deadlines could be set by the court). However, there is no reason to delay filing the claim, and it should be filed by the confirmation hearing at the very latest. The time for payment of administrative claims is within the discretion of the court, and when they are paid depends upon the nature of the claim, the solvency of the estate, and other factors. However, there is no authority preventing a claimant from asking the court for the claim to be paid sooner rather than later, and there is usually no harm in doing so. Critical Vendor Status Debtors use critical vendor motions to seek authority from the court to make early payments to select unsecured creditors who otherwise would not receive payment until confirmation of a plan or distribution of funds upon liquidation, if at all. Such payments may include not only compensation for postpetition work, but also for prepetition work, which is normally forbidden by the Code. Critical vendor motions are based on the idea that the continuation of the delivery of goods and services by certain creditors is essential to the continued operation of the debtor. There is no express authority in the Code authorizing the critical vendor system. Nevertheless, courts have long authorized preferential treatment of critical vendors in special circumstances. 23 The courts have based their authority to grant critical vendor motions on the bankruptcy court s general powers under section 105 to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of Title 11 and the doctrine of necessity, derived from the duty of the debtor-in-possession to protect the going-concern value of the debtor. In the last few years, the use of critical vendor motions appears to have been broadly accepted. In addition, the practice has begun to expand in scope in ways that may not be beneficial to the critical vendor. In a recent case, the critical vendor agreement called for the vendor to agree to: 1. [ ] continue to supply goods and services to the Debtor based on terms defined by the debtor as those most favorable to the debtor in effect prior to the petition; 2. waive the remainder of its prepetition claim; 3. waive its right to demand cure payments with respect to the assumption of any executory contract in effect between the parties; 4. provide a new postpetition credit line; 5. allow a payout over time of administrative expenses after confirmation of the plan; 6. waive its reclamation claims; and 7. consent to recovery of the funds if the Critical Vendor Payment Program or the critical vendor s participation terminated, or the critical vendor later refused to continue to supply goods to the Company on Customary Trade. Because the chance to get paid some or their entire prepetition claims is so tempting, most critical vendors accept such terms. However, such agreements should be carefully reviewed and understood, as the critical vendor may be better off declining the opportunity. Assumption, Rejection, and Assignment of Executory Contracts When a party to a construction contract files for bankruptcy before the contract is complete, the nondebtor party to the contract can find itself in a very difficult position. The outcome for the nondebtor party will depend on whether the debtor seeks to assume and complete the contract, assign the contract, or reject it. In some instances, the Code grants a debtor more contract rights than the debtor had before the bankruptcy petition was filed. Section 365, which governs executory contracts, is one such instance. Section 365 authorizes a trustee or debtor in possession to assume, assign, or reject executory contracts and unexpired leases if approved by the court. Section 365 is intended to further one of the Code s essential purposes: to allow debtors, if they desire, thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 4

to reorganize and continue in business. The debtor is permitted to evaluate its contracts, assume favorable contracts to generate money to pay creditors claims, and reject burdensome contracts to lessen the loss from continuing to perform. 24 Assumption, rejection, and assignment of an executory contract are governed by section 365 of the Code and Bankruptcy Rule 6006. The debtor may either file a motion seeking action on the executory contract under Bankruptcy Rules 6006 and 9014 (the general rule governing contested matters) or incorporate action on the contract into its plan of reorganization. 25 Contracts Subject to Assumption and Assignment The Code does not define the term executory contract. However, the majority of courts use a definition known as the Countryman test: a contract is executory if, at the time the bankruptcy was filed, the obligations of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. 26 A contract is no longer executory when the only obligation one party has is an obligation to pay money. 27 The status of the contract is largely determined as of the filing date of the petition. 28 Thus, a contract terminated prior to the filing of a bankruptcy petition is not subject to assumption under section 365. 29 In addition, because the debtor s interest in an executory contract does not vest until it assumes the contract, 30 a contract that expires or otherwise terminates by its own terms during the period between the filing of the case and the assumption also cannot be assumed. 31 Notwithstanding, contractual provisions providing that a contract is terminated (or is subject to termination) solely because of the debtor s insolvency or bankruptcy filing, commonly called ipso facto clauses, are not enforceable in bankruptcy court. 32 Timing of Assumption In a Chapter 11 case, section 365(d)(4) provides that if the project owner is only the owner of the leasehold interest, rather than the fee simple interest, then the lease must be assumed within 120 days of the bankruptcy filing date, though it can be extended another 90 days if the court so permits, and then after that only if the other party to the lease consents. 33 Section 365(d)(4) applies only to unexpired leases of nonresidential real property. For all other types of construction contracts and leases (such as equipment leases) in a Chapter 11 bankruptcy, the Code does not require the debtor to either assume or reject until plan confirmation. 34 In a Chapter 7 liquidation, a contract or lease is deemed rejected if it is not assumed within 60 days, or within such additional time as the court may fix. 35 Pursuant to section 365(d)(2), the nondebtor may request that the court shorten the time within which the debtor must assume or reject the contract, and the court may order the [debtor or trustee] to determine within a specified period of time whether to assume or reject such contract or lease. 36 However, section 365(d)(2) does not provide any standards to guide the court s decision. Some courts have held that requiring a decision within two months of the filing of the petition in a complex case is unreasonable. Most courts applying section 365(d)(2) have followed a balancing test for the appropriate limitation on the deadline for the debtor to make its determination. The factors considered include, but are not limited to, (1) the nature of the interests at stake, (2) the balance of harm to the respective parties and the creditors as a whole, (3) the good to be achieved, (4) the safeguards afforded to the parties, (5) the damages that the nondebtor will suffer beyond the compensation available under the Code, and (6) the importance of the contract to the debtor s business and reorganization. 37 When a party to a construction contract files for bankruptcy before the contract is complete, the nondebtor party to the contract can find itself in a very difficult position. Status of Contract While Decision to Assume or Reject Is Pending Again, the Code provides different rules for executory real property leases than for all other executory construction contracts. If the owner holds a leasehold interest, the debtor (whether the owner or the lessor) is required under section 365(d)(3) to continue performing all postpetition lease obligations (including the obligation to make payment) until the lease is assumed or rejected. On the other hand, with regard to all other project parties, the Code is silent as to what their rights and obligations are during the period between the filing of the petition and the time of assumption or rejection. 38 In the absence of statutory guidance, courts have generally held that an executory contract remains in effect pending assumption or rejection by a debtor, and the nondebtor party must continue to perform all of its obligations under the contract even if the debtor is not performing. 39 In fact, in some cases the debtor has sought, and obtained, injunctive relief compelling the nondebtor party to continue its performance under the contract. 40 Application and Standards of Section 365(b)(1) The right to decide whether to assume or reject an thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 5

executory contract or unexpired lease lies completely with the debtor, subject to court approval and certain conditions set forth in section 365(b)(1) being met: the debtor must (1) cure all defaults or provide adequate assurance that defaults will be cured promptly (though there are certain exceptions for leases see section 365(b)(1)(A)); (2) compensate, or provide adequate assurance that it will promptly compensate, the nondebtor party for all pecuniary loss resulting from the default; and (3) provide adequate assurance of future performance under the contract or lease. 41 The cure obligation also includes most nonmonetary defaults. 42 In addition, [w]here the debtor assumes an executory contract, it must assume the entire contract, cum onere the debtor accepts both the obligations and the benefits of the executory contract. 43 The cure obligation also includes most nonmonetary defaults. Even when the conditions of section 365(b)(1) have been met, the debtor s decision to assume remains subject to court approval. The language requiring court approval was added to insure that the [debtor or trustee s assumption of the contract] gives the other contracting party the full benefit of his bargain. 44 The bankruptcy court reviews the debtor s business judgment with respect to the proposed assumption to determine if it would be beneficial or burdensome to assume the executory contract by evaluating whether assumption would serve the reorganization or whether it would take away funds available to other creditors. 45 Assignment Pursuant to section 365(f)(2)(B), once the debtor obtains the court s approval to assume a contract, then it may be assigned to a third party, but only if adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease. 46 After a contract or lease is assumed and assigned, the debtor has no further liability for any default occurring after the assignment, regardless of what the contract or lease states. 47 Most construction contracts contain antiassignment clauses. Nonetheless, section 365(f)(1) provides that a contract may be assigned notwithstanding the existence of any such clause, and the clause is of no force or effect in bankruptcy. Section 365(c)(1) does provide that the debtor or trustee may not assume or assign a contract if applicable law excuses [the nondebtor party] to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, and the nondebtor does not consent to the assumption or assignment. The key to section 365(c) (1) is determining what applicable law (i.e., nonbankruptcy law) excuses the nondebtor party from accepting performance from a party other than the debtor. As a general proposition, contract rights and duties are assignable. 48 There is generally no exception to that rule for construction contracts, and, as discussed above, the antiassignment clauses on most contracts are unenforceable. As such, in most cases in bankruptcy court construction contracts can be assumed and assigned if the requirements of section 365 have been met. Section 365(c)(1) is commonly used to prevent the assumption and assignment of personal services contracts, which are generally not assignable under most states laws without consent of all parties to the contract. A construction contract will rarely qualify as a personal services contract, but it is worth researching the law of the state governing the particular contract to see if any argument can be made. If it can, then under section 365(c) (1) the assignment, and perhaps even an assumption alone without an assignment, can be thwarted. 49 Rejection The traditional business judgment standard is applied by the courts to authorize a debtor s rejection of an executory contract. 50 Under that standard, it is enough, if, as a matter of business judgment, rejection of the burdensome contract may benefit the estate. 51 The burden or hardship which rejection would impose on other parties to such a contract is not a factor to be weighed by the bankruptcy court in ruling upon the debtor s application. 52 Rejection of an executory contract is deemed to be a breach occurring immediately before the bankruptcy petition date. 53 In other words, the nondebtor party may file a proof of claim as an unsecured creditor (not an administrative claim) for the damages resulting from the debtor s breach. Damages for rejection of an unexpired lease of real property are governed by section 365(h) (1). The assumption of a contract does not mean that a debtor cannot later reject it. However, if a contract is assumed and then later rejected by the debtor, the rejection is deemed to have occurred at the time of the rejection, rather than prior to the bankruptcy petition date. 54 As such, the nondebtor party may file an administrative claim for the damages resulting from such breach. 55 Options for the Nondebtor Party In the context of a construction project, assumption by itself (without an assignment) may be a good thing in many cases. The debtor will be required to promptly cure all defaults and complete the project. The nondebtor party to the contract can file an administrative claim if any postpetition payments are not made, though if the debtor is the owner, claimants will not have the right to thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 6

file a mechanic s lien for postpetition work. However, a nondebtor party may not consider it to be a positive that it must continue in contract with a bankrupt entity on a construction project. Assignment brings with it a different set of concerns. If the debtor is upstream, the nondebtor may welcome the assignment of the contract to a financially sound party that will assume all contract obligations, including payment to the nondebtor for its work. If the debtor is downstream, however, it is more complex. The nondebtor will have no control over who the debtor assigns the contract to, aside from filing an objection and raising its concerns at any hearing on the assignment. Companies in the construction industry typically receive numerous bids and carefully consider which bidder to award the contract to. It certainly is not fair for a new contract partner to be forced on the nondebtor party via section 365. Notwithstanding, it may beat the alternative rejection of the contract. Rejection of a construction contract is almost never a positive. If the debtor is upstream, the nondebtor can find itself with no project to finish and no one to pay it for its work. Moreover, the rejection of the contract with the debtor does not relieve the nondebtor of the payment obligations on its downstream contracts with its subcontractors or suppliers (unless, of course, it has enforceable contingent payment or termination for convenience clauses in its downstream contracts). On the other side of the coin, if the debtor is downstream, the nondebtor will have to bear the costs of replacing the debtor or else be in breach of its upstream contract. Finally, there is the problem of the period of uncertainty while waiting for the contract to be assumed or rejected. As discussed above, the nondebtor must generally continue performing under the contract. The nondebtor party would likely be able to make an administrative claim for the value of materials or services provided postpetition, but the time for payment of any such claim is within the discretion of the court. As is also discussed above, under section 365(d)(2) the nondebtor may ask the court to order the debtor to assume or reject by a specified deadline. Furthermore, becoming a critical vendor (as discussed above) may be one possible solution. In addition to providing for payment of prepetition debt, critical vendor agreements generally also incorporate a duty to stay current on postpetition obligations as well. There is one other possible option, though it is a risky one. In In re Lucre Inc., the bankruptcy court for the Western District of Michigan held that if the debtor materially breaches the contract before the bankruptcy is filed, the nondebtor party is excused from continuing performance postpetition. 56 Nonetheless, any party considering such action should compare In re Lucre Inc. with the numerous cases that take the opposite view (see below). Further, the nondebtor party should consider that refusing to perform could simply be an invitation to an injunction hearing in the bankruptcy court, where it may find the court more concerned with the potential harm to the debtor and its reorganization efforts than the nondebtor s concerns. Lastly, the nondebtor party may want to consider compromising on its prepetition claim if that will convince the debtor to assume the contract, particularly if the nondebtor received substantial payments in the 90-day preference period that the debtor or trustee may later seek to recover as preferences. The reason is that a number of courts have held that assumption of a contract forecloses any effort to recover preferential transfers, since the prepetition debt would have to have been paid anyway to cure all defaults as required by section 365(b)(1). 57 Assignment brings with it a different set of concerns. Contract Balances Due Debtor, but Not Yet Paid When an upstream party files bankruptcy, a claimant should immediately conduct an investigation as to whether the debtor has any unpaid accounts receivable on projects with the debtor where the claimant is owed money, as the claimant may have a right to the funds either through a trust fund claim or through a mechanic s lien statute. The claimant should act quickly because early in the case, sometimes in the first few days, the court, unaware of the creditor s rights, may grant lenders or other parties priming, equal, or replacement liens in the funds, and the claimant s rights may be lost. Another reason to act quickly is that the bankruptcy does not prevent upstream parties from paying sums owed to the debtor, and once the funds are paid to the debtor and commingled with other funds, the claimant s chances of exercising rights to the funds diminish significantly (and perhaps completely). Though federal law determines whether a debtor s interest in property is property of the estate, state law determines the nature and existence of the debtor s interest in property. 58 As mentioned above, state trust fund acts are one possible tool that can be used to assert rights against a debtor s account receivable. Many states have enacted them. However, there are several different types, and they are all not treated the same in bankruptcy. Whether the trust fund statute creates a trust for bankruptcy purposes will depend upon the language of the statute and the interpretation of same by the courts of the relevant district. The critical distinction appears to be whether under state law the trust is created before or at the time the funds are paid to an upstream party or whether the trust obligations arise only when the funds are misapplied. For example, in Vulcan Materials Co. v. Jack Raus, Inc. (In re HLW Enterprises of Texas, Inc.), 59 the general contractor was holding money owed to his subcontractor, who thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 7

was a debtor in bankruptcy. Both the IRS and one of the debtor s suppliers asserted rights to the funds. The court, interpreting the Texas trust fund statute, found that once the owner made the payment to the general contractor, the payment gave rise to a trust for all parties in the subcontract chain. The court then held that such funds were not property of the subcontractor/debtor s estate, the IRS lien could therefore not attach to them, and the supplier was entitled to the funds. In Universal Bonding Insurance Co. v. Gittens and Sprinkle Enterprises, Inc., 60 the general contractor (debtor) filed bankruptcy and then sought to collect its outstanding accounts receivable from owners (various government agencies) of the projects on which it was working. The debtor/general contractor s surety objected, alleging that the funds constituted statutory or equitable trusts for the benefit of unpaid subcontractors and suppliers. 61 The court held that under the New Jersey Trust Fund Act, money still held by the owners was not subject to a trust and therefore agreed with the lower court rulings that the funds must be paid over to the debtor. 62 Though federal law determines whether a debtor s interest in property is property of the estate, state law determines the nature and existence of the debtor s interest in property. However, the Gittens court further held that once the debtor received the funds, the trust was imposed and funds had to be held for the benefit of subcontractors and suppliers. 63 [P]roperty in which the debtor holds only legal title, and does not hold an equitable interest, such as trust funds, is included in the bankrupt s estate only to the extent of the debtor s legal title to the property and not to the extent of any interest in the property that the debtor does not hold. 64 [The debtor s] bankrupt estate may retain legal title over the trust, but the beneficiaries of the trust, (namely, the laborers, materialmen and the surety after satisfying the claims of laborers and materialmen), may reclaim their equitable interests in the trust fund so created through bankruptcy court proceedings. 65 In addition to the New Jersey Trust Fund Act, Gittens held that the funds, once paid to the debtor, were also subject to an equitable trust for the benefit of subcontractors and suppliers pursuant to the Supreme Court s opinion in Pearlman v. Reliance Insurance Co. 66 The majority of other courts agree. 67 Some courts go even further and hold that because the debtor failed to pay its subcontractors and suppliers, it breached its contract with its customer, and the debtor does not have even legal title to the funds. 68 Such courts hold the funds are not property of the estate, are not subject to any bank liens, and cannot be ordered paid into the debtor estate. Most of the cases involve the efforts of the holder of the funds or the surety to protect the funds from the debtor so that subcontractors and suppliers can be paid. However, it is clear that the subcontractors and suppliers themselves can obtain the withheld funds by direct action (except where prevented by sovereign immunity on public projects). 69 Furthermore, creditors may be able to assert rights to money withheld from the debtor under state lien law. Of course, this will depend on the wording of the particular lien statute, but some do provide that by filing a lien the creditor obtains a lien on the funds held in addition to, or in the alternative to, a lien on the owner s real property. For example, Texas lien law imposes a lien on funds held by the owner, and therefore a lien claimant is entitled to recover those funds directly from the owner despite any liens on accounts receivable. 70 In Exchanger Contractors Inc. v. Comerica Bank-Texas (In re Waterpoint International LLC), the Fifth Circuit held that the Texas construction trust fund act does not apply to lenders, and the lender was therefore entitled to funds withheld from the general contractor by the owner over the unpaid subcontractor s objections. However, it is clear from the opinion that if the subcontractor had trapped the funds with a properly filed mechanic s lien, he would have been entitled to the funds despite the lender s lien on accounts receivable. Finally, if a party in an upstream contract with the debtor is holding unpaid contract funds payable the debtor, and also has claims against the debtor, then the party may be able to exercise rights of setoff or recoupment. In such case, the party may be able to keep the unpaid contract funds. A detailed discussion of setoff and recoupment is beyond the scope of this article. 71 Section 363 Sales When the owner of a construction project files for bankruptcy, claimants with mechanic s liens on the property where the project was located should watch the bankruptcy carefully for any notice of a sale of the property under section 363. Section 363 is used by the debtor or bankruptcy trustee to sell property of the estate (when the sale is outside of the ordinary course of the debtor s business). Traditionally, Chapter 11 debtors sought confirmation of either a plan of reorganization or a liquidating plan. However, the Chapter 11 plan confirmation process is a lengthy and complicated one. Section 363 sales offer the distinct advantages of speed and relative simplicity, and have to a great degree replaced the traditional Chapter 11 reorganization plan. In addition, and most importantly for mechanic s lien holders, section thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 8

363(f) provides that the property may be sold free and clear of all liens, claims, and encumbrances if one of five conditions is satisfied, with any such liens attaching to the proceeds of the sale. It is not likely for unsecured creditors to be affected by a section 363 sale, because the sales rarely secure a purchase price that exceeds the secured debt on the property. Section 363(f) Section 363(f) provides that a sale of property may occur free and clear of liens, claims, and encumbrances if one of the following five conditions is satisfied: (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) the entity holding the lien consents; (3) the interest at issue is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) the interest at issue is in bona fide dispute; or (5) the entity holding the lien could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. Conditions 3 and 5 are usually the ones in dispute, and will be discussed in detail below. Section 363(f)(3) Because property sold pursuant to section 363 is transferred to the buyer free and clear of liens, with such liens attaching to the sale proceeds, the price paid is key to whether a mechanic s lienholder will receive any compensation for the lien. However, there is a sharp divide among the courts on the question of whether the proposed sale price under a section 363 sale must be in an amount greater than the face amount of the liens or only the value of the collateral securing the liens. 72 Which line of cases the pertinent bankruptcy district court follows may determine whether a mechanic s lien gets paid or not. In bankruptcy districts where precedent holds that the sale price must exceed the face amount of all liens on the property, the lien holder will have significant leverage. If the liens are great enough in amount that no purchaser is willing to pay the price, then a lien claimant may still have to compromise his claims if he desires for the sale to be consummated. However, in bankruptcy districts where precedent holds that the sale price need only exceed the value of the collateral, the mechanic s lien claimant has no leverage. In such situations, the lien claimant is dependent upon competitive bidding driving up the price, and that is often not enough (especially in a down economy) to achieve a sufficient price to pay junior liens on the property. Section 363(f)(5) Pursuant to section 363(f)(5), a sale may be approved if the mechanic s lien claimants could be compelled in a hypothetical legal or equitable proceeding to accept, as satisfaction for their mechanic s lien, less than the value of their claim secured by the lien. 73 Said another way, section 363(f)(5) requires that there be, or that there be the possibility of, some proceeding, either at law or at equity, in which the nondebtor could be forced to accept money [of less than claim amount] in satisfaction of its interest. 74 Although it is possible that some states may have such a proceeding, usually the debtor and trustee are forced to rely on bankruptcy law to supply a qualifying proceeding, namely, the cramdown procedure in section 1129(b) (2). Section 1129(b)(2) is used in the context of the Chapter 11 plan confirmation process in situations where the value of the collateral is less than the face amount of the claims secured by the collateral. It can be used to compel ( cramdown ) a secured creditor to accept an amount equal to the value of the collateral, rather than the amount of its claim. Most courts that have considered the question have agreed that the cramdown procedure under section 1129(b)(2) qualifies as a hypothetical legal or equitable proceeding under section 363(f)(5). 75 However, at least one court, Clear Channel Outdoors v. Knupfer, has disagreed. 76 The general contractor and surety moved to dismiss or transfer the Georgia action for improper venue. In Clear Channel Outdoors v. Knupfer, the Bankruptcy Appellate Board for the Ninth Circuit stated: We disagree with the reasoning of these courts. As a leading treatise recognizes, use of the cramdown mechanism to allow a sale free and clear under 363(f)(5) uses circular reasoning it sanctions the effect of cramdown without requiring any of 1129(b) s substantive and procedural protections. 3 Collier on Bankruptcy, supra, at P 363.06[6]. If the proceeding authorizing the satisfaction was found elsewhere in the Bankruptcy Code, then an estate would not need 363(f)(5) at all; it could simply use the other Code provision. In addition, this reasoning undercuts the required showing of a separate proceeding. For example, it is correct that 1129(b)(2) permits a cramdown of a lien to the value of the collateral, but it does so only in the context of plan confirmation. To isolate and separate the cramdown from the checks and balances inherent in the plan process undermines the entire confirmation process, and courts have been leery of using 363(b) to gut plan confirmation or render it superfluous. We thus hold that Congress did not intend under 363(f)(5) that nonconsensual thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 9

confirmation be a type of legal or equitable proceeding to which that paragraph refers. As a result, the availability of cramdown under 1129(b)(2) is not a legal or equitable proceeding to which 363(f) (5) is applicable. 77 Notwithstanding, the Clear Channel reasoning and holding have not taken root in other circuits, and the decision has come under increasing criticism. Still, if the law in the pertinent bankruptcy district is unsettled on the question, and the mechanic s lien claiming is opposing the section 363 sale, the claimant should make a strong argument for the application of Clear Channel. Otherwise, since a mechanic s lien is more often than not subject to cramdown under section 1129(b)(2), the sale will likely be approved under section 363(f)(5). Interestingly, the court found the many cases holding to the contrary as representing the minority view. Chapter 11 Plans Of course, when a Chapter 11 plan is filed, the creditor should review it to assure that its claim is treated properly and accurately. However, the key issue for construction industry creditors is usually section 1129(b) of the Code, which sets forth the cramdown provisions wherein a plan of reorganization may be confirmed despite the objecting vote of a class of creditors. In a typical troubled real estate transaction, any liens on the property are restructured so that the principal amount of the outstanding loans will be reduced to the value of the underlying collateral. Further, the payment terms may be extended. In such case, the value of the collateral becomes the central issue. Valuation Section 506(a) states that the value of the asset is to be determined in light of the purpose of the valuation and of the proposed disposition or use of such property. 78 Generally, the value of collateral ordinarily will be the fair market value as opposed to a liquidation value. 79 Valuation is often a disputed issue at many points of a bankruptcy case, not just in the context of section 1129(b). In many cases, secured creditors will seek a low valuation at the beginning of the case so that such creditors can be deemed not adequately protected and may receive adequate protection payments. Conversely, at confirmation secured creditors may seek to argue that the value of the underlying collateral has increased significantly, thereby increasing the secured claim of the creditor. Courts may value collateral at different times and in different amounts according to different purposes. 80 For cramdown purposes, collateral should be valued as of the effective date of confirmation. 81 Interest Rate Section 1129(b) requires that a debtor pay its secured creditors deferred cash payments that have a value, as of the effective date of the plan, of at least the value of such holder s interest. 82 If the plan requires deferred payments to the secured creditor, the debtor must pay interest to the secured creditor to compensate the secured creditor for the time value of money. 83 There is no consensus in the courts as to the proper method of determining interest rates for a Chapter 11 plan, and at least four different methods are used: the market approach, the risk-free approach, the coerced loan, and the formula approach. 84 Section 1111(b)(2) Election Although section 506(a) of the Code bifurcates a creditor s claims into an allowed secured and unsecured claim, section 1111(b)(2) provides that a creditor may elect to have its allowed secured claim treated as being equal to the full amount of the outstanding claim amount. An undersecured creditor who chooses to make a section 1111(b) (2) election has its claim treated as a fully secured claim in a Chapter 11 case, thereby retaining a lien for the full amount of the claim and entitling it to payments under the plan equal to the present value of the claim. However, the creditor relinquishes its rights to vote on the plan as an unsecured creditor and to share in the distribution to unsecured creditors. 85 In addition, the creditor waives a number of issues that can be potent arguments to oppose and block a Chapter 11 plan, including the classification of claims and possible unfair discrimination against its unsecured claims. Because it is no longer unsecured or undersecured, the creditor also loses the right to enforce the Absolute Priority Rule, which provides that a plan cannot be confirmed over the objection of an unsecured claim class that is not being paid in full if junior creditors (or equity owners) receive or retain anything of value under the plan. On the other hand, the creditor receives, in addition to a higher secured claim amount, a potential blocking position without being required to proceed through a hotly contested confirmation hearing. If the election is made and the payments do not add up as required, the plan process stops. Whether the creditor makes the section 1111(b)(2) election usually depends on the size of its unsecured claim relative to its total claim and relative to the total unsecured claims in the case. If the creditor s unsecured claim is small relative to its total claim, then it may have little (if anything) to gain. Because its secured claim will likely be paid out over time with interest, the total paid, including interest, may in the end equal or exceed its total claim amount. In such case, making the election gains the creditor nothing, and in the process the creditor has waived its unsecured claim and its leverage to oppose the plan. If the creditor has a larger unsecured claim, then it becomes a closer question, as it might thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 10

significantly increase its plan payments by making the election. However, if the creditor has a large enough unsecured claim to control the outcome of voting for the unsecured class, that is not a power that should be given up lightly. The creditor should bear in mind that once the section 1111(b)(2) election is made, the creditor cannot withdraw its election unless the plan is materially changed. 86 And the section 1111(b)(2) election cannot be made in cases where the creditor s lien is of inconsequential value (i.e., the secured portion of the claim is small relative to the total claim), 87 or where there is a sale, abandonment, or foreclosure of the underlying collateral. 88 Finally, the election must be made no later than the conclusion of the hearing on the debtor s disclosure statement, or by such other time as the court may order. 89 Endnotes 1. 11 U.S.C. 541(a)(1). 2. Foothill Capital Corp. v. Clare s Food Mkt., Inc., 113 F.3d 1091, 1099 (9th Cir. 1997). 3. 11 U.S.C. 362(a); see In re Tom Powell & Son, Inc., 22 B.R. 657, 661 (Bankr. W.D. Mo. 1982) (citing In re Norton, 15 B.R. 623, 626 (Bankr. E.D. Pa. 1981)). 4. H.R. Rep. No. 95-595, at 340 (Sept. 8, 1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296 97. 5. 11 U.S.C. 362(a). 6. Id. 7. Kreisler v. Goldberg, 478 F.3d 209 (4th Cir. 2007). 8. Fed. Life Ins. Co. v. First Fin. of Tex., 3 B.R. 375 (S.D. Tex. 1980). 9. In re Bidermann Indus. U.S.A., Inc., 200 B.R. 779, 782 (Bankr. S.D.N.Y. 1996); In re All Seasons Resorts, Inc., 79 B.R. 901, 903 04 (Bankr. C.D. Cal. 1987). 10. In re Waters, 22 B.R. 387 (Bankr. N.D. Tex. 1982); In re Miller, 22 B.R. 479 (D.C. Md. 1982); In re Sandmar Corp., 12 B.R. 910 (Bankr. D.N.M. 1981). 11. 11 U.S.C. 362(k). 12. See In re Spookyworld, Inc., 346 F.3d 1 (1st Cir. 2003). 13. 11 U.S.C. 362(d). 14. In re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 1990). 15. In re Texas State Optical, Inc., 188 B.R. 552 (E.D. Tex. 1995). 16. See Murray Indus., Inc. v. Aristech Chem. Corp., 121 B.R. 635, 636 (Bankr. M.D. Fla. 1990). 17. In re Wiley, 288 B.R. 818, 822 (B.A.P. 8th Cir. 2003). 18. See In re Curtis, 40 B.R. 795 (Bankr. D. Utah 1984). 19. See In re Fernstrom Storage & Van Co., 938 F.2d 731 (7th Cir. 1991); In re Turner, 55 B.R. 498 (Bankr. N.D. Ohio 1985); In re Holtkamp, 669 F.2d 505, 508 09 (7th Cir. 1982) (the court lifted the stay reasoning that allowing a personal injury action against the debtor to proceed did not harm the debtor where the debtor s insurance company had assumed full financial responsibility for defending that litigation ); Foust v. Munson S.S. Lines, 229 U.S. 77, 87, 57 S. Ct. 90, 95 (1936) (allowed a wrongful death action against bankrupt defendant to proceed despite stay; plaintiff was entitled to maintain an action against the insurer for the amount of his judgment but not exceeding the amount of insurer s liability to the debtor under the policy ). 20. 11 U.S.C. 108(c). 21. See In re Danzig, 233 B.R. 85 (B.A.P. 8th Cir. 1999), aff d, 217 F.3d 620 (8th Cir. 2000); Simon v. Navon, 116 F.3d 1, 38 (1st Cir. 1997). 22. The subject of the perfection of mechanic s liens is treated in greater detail in Seitter, Puryear & Theising, supra note 1. 23. See Dudley v. Mealey, 147 F.2d 268, 271 (2d Cir. 1945). 24. See In re Chateaugay Corp., 10 F.3d 944, 954 55 (2d Cir. 1993). 25. See 11 U.S.C. 1123(b)(2). 26. See, e.g., Lewis Bros. Bakeries v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 690 F.3d 1069, 1073 (8th Cir. 2012) (quoting Nw. Airlines, Inc. v. Klinger (In re Knutson), 563 F.2d 916, 917 (8th Cir. 1977)); Phoenix Exploration v. Yaquinto (In re Murexco Petroleum, Inc.), 15 F.3d 60, 62 63 (5th Cir. 1994) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n.6 (1984)). The test was developed by a Harvard law professor named Vern Countryman. See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). 27. See Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985); Pace v. Computer Utilization, Inc. (In re Computer Utilization, Inc.), 508 F.2d 673 (5th Cir. 1975). 28. COR Route 5 Co., LLC v. Penn Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373, 381 (2d Cir. 2008). 29. See Schokbeton Indus., Inc. v. Schokbeton Prods. Corp., 466 F.2d 171 (5th Cir. 1972). 302. See Turner v. Avery, 947 F.2d 772 (5th Cir. 1991); In re Tonry, 724 F.2d 467 (5th Cir. 1984). 31. See, e.g., Hazen First State Bank v. Speight, 888 F.2d 574 (8th Cir. 1989); Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.); In re Beverages Int l Ltd., 61 B.R. 966, 972 (Bankr. D. Mass. 1986); In re Heaven Sent Ltd., 37 B.R. 597, 597 98 (Bankr. E.D. Penn. 1984). 32. See 11 U.S.C. 365(e)(1). 33. Id. 365(d)(4). 34. Id. 365(d)(2). 35. Id. 365(d)(1). 36. Id. 37. In re Adelphia Commc ns Corp., 291 B.R. 283, 293 (Bankr. S.D.N.Y. 2003). 38. See In re Nat l Steel Corp., 316 B.R. 287, 305 (Bankr. N.D. Ill. 2004). 39. See In re Pub. Serv. Co. of N.H., 884 F.2d 11, 14 (1st Cir. 1989); In re Rhodes Inc., 321 B.R. 80, 91 (Bankr. N.D. Ga. 2005); In re Nat l Steel Corp., 316 B.R. 287; Interstate Gas Supply v. Wheeling Pittsburgh Steel Corp. (In re Pittsburgh Canfield Corp.), 283 B.R. 231, 238 (Bankr. N.D. Ohio 2002); In re Travelot Co., 286 B.R. 462, 466 (Bankr. N.D. Ga. 2002); In re El Paso Refinery LP, 196 B.R. 58, 72 (Bankr. W.D. Tex. 1996); In re Pac. Gas & Elec. Co., 2004 U.S. Dist. LEXIS 22023 (S.D. Cal. 2004). 40. In re Nat l Steel Corp., 316 B.R. at 305; In re Pittsburgh Canfield Corp., 283 B.R. at 238. 41. 11 U.S.C. 365(b)(1). 42. See In re Empire Equities Capital Corp., 405 B.R. 687 (Bankr. S.D.N.Y. 2009). 43. Century Indem. Co. v. Nat l Gypsum Co. Settlement Trust (In re Nat l Gypsum Co.), 208 F.3d 498 (5th Cir. 2000); see also In re Gardinier, Inc., 831 F.2d 974, 976 (11th Cir. 1987). 44. In re Superior Toy & Mfg. Co., 78 F.3d 1169, 1174 (7th Cir. 1996) (quoting S. Rep. No. 95-989, at 59 (1978); H.R. Rep. No. 95-595, at 348 (1978)). 45. See ReGen Capital I, Inc. v. UAL Corp. (In re UAL Corp.), 635 F.3d 312, 319 (7th Cir. Ill. 2011); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993). 46. 11 U.S.C. 365(f)(2)(B). 47. Id. 365(k). 48. Dennard v. Freeport Minerals Co., 250 Ga. 330, 297 S.E.2d 222, 226 (Ga. 1982) (citing Restatement (Second) of Contracts 317 (1979)). 49. See In re Taylor, 913 F.2d 102 (3d Cir. N.J. 1990) (personal services contract is not assignable pursuant to section 365(c)(1)); In re Footstar, Inc., 323 B.R. 566 (Bankr. S.D.N.Y. thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 11

2005) (discussing applicability of section 365(c)(1) to assumption only without an assignment). 50. See In re Prime Motor Inns, 124 B.R. 378 (Bankr. S.D. Fla. 1991) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984)). 51. In re Minges, 602 F.2d 38 (2d Cir. 1979). 52. In re Mammoth Mart, 536 F.2d 950, 954 (1st Cir. 1975). 53. 11 U.S.C. 365(g)(1). 54. Id. 365(g)(2). 55. Id. 56. 339 B.R. 648 (Bankr. W.D. Mich. 2006). 57. Kimmelman v. Port Auth. of N.Y. & N.J. (In re Kiwi Int l Airlines, Inc.), 344 F.3d 311, 314 (3d Cir. 2003); In re Teligent Inc., 306 B.R. 752, 756 (Bankr. S.D. N.Y. 2004); Philips Servs. Corp. v. Luntz (In re Philip Servs., Inc.), 284 B.R. 541, 553 (Bankr. D. Del. 2002). 58. See, e.g., In re Baquet, 61 B.R. 495 (Bankr. D. Mont. 1986). 59. 157 B.R. 592 (Bankr. W.D. Tex. 1993). 60. 960 F.2d 366 (3d Cir. 1992). 61. Id. at 367. 62. Id. at 371. 63. Id. 64. Id. 65. Id. at 372. 66. Id.; Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135 36, 9 L. Ed. 2d 190, 83 S. Ct. 232 (1962). 67. See Halstead Contractors v. C & C Excavating (In re C & C Excavating, Inc.), 288 B.R. 251 (Bankr. N.D. Ala. 2002); First Indem. of Am. Ins. Co. v. Modular Structures (In re Modular Structures), 27 F.3d 72 (3d Cir. N.J. 1994); In re Pac. Marine Dredging & Constr., 79 B.R. 924 (Bankr. D. Or. 1987); In re Ward Land Clearing & Drainage, Inc., 73 B.R. 313 (Bankr. N.D. Fla. 1987); Mendelsohn v. Dormitory Auth. (In re QC Piping Installations), 225 B.R. 553 (Bankr. E.D.N.Y. 1998); In re RAH Dev. Co., 184 B.R. 525 (Bankr. W.D. Mich. 1995). 68. See, e.g., Halstead, 288 B.R. 251; Modular Structures, 27 F.3d 72. 69. See In re RAH Dev. Co., 184 B.R. 525; Gittens, 960 F.2d 366. 70. See Exchanger Contrs. Inc. v. Comerica Bank-Tex. (In re Waterpoint Int l LLC), 330 F.3d 339, 348 49 (5th Cir. Tex. 2003). 71. For more detailed analysis of these issues, see Seitter, Puryear & Theising, supra note 1. 72. See In re Levitt & Sons, LLC, 384 B.R. 630 (Bankr. S.D. Fla. 2008) (identifying the split in the courts). For cases holding that section 363(f)(3) sales can only occur if the sale price exceeds the aggregate amount of liens, see the following cases: In re Riverside Investment P ship, 674 F.2d 634, 640 (7th Cir. 1982); In re Heine, 141 B.R. 185, 189 (Bankr. D.S.D. 1992); In re Stroud Wholesale, Inc., 47 B.R. 999, 1002 (E.D.N.C. 1992); In re PW, LLC (Clear Channel Outdoors, Inc. v. Knupfer), 391 B.R. 25, 40 41 (B.A.P. 9th Cir. 2008); Scherer v. Fed. Nat l Mortgage Ass n (In re Terrace Chalet Apartments, Ltd.), 159 B.R. 821 (N.D. Ill. 1993); In re Julien Co., 117 B.R. 910 (Bankr. W.D. Tenn. 1990); In re Feinstein Family P ship, 247 B.R. 502 (Bankr. M.D. Fla. 2000). For cases holding that section 363 sales can occur only if the sales price exceeds the value of the underlying collateral, see the following cases: In re Beker Indust. Corp., 63 B.R. 474, 477 (S.D.N.Y. 1986); In re Milford Grp., Inc., 150 B.R. 904, 906 (Bankr. M.D. Pa. 1992); In re WPRV-TV, Inc., 143 B.R. 315, 320 (D.P.R. 1991); In re Collins, 180 B.R. 447 (Bankr. E.D. Va. 1995); In re Terrace Gardens Park P ship, 96 B.R. 707, 712 (Bankr. W.D. Tex. 1989). For more detailed analysis of section 363(f)(3), see Jordi Guso & Paul A. Avron, Defining Value in 11 U.S.C. 363(f)(3): Is Face Amount of the Claim Secured by the Lien or the Economic Value of the Lien?, 23 Am. Bankr. Inst. J., no. 9, Nov. 1, 2004, at 36. 73. See In re PW., LLC (Clear Channel Outdoors v. Knupfer), 391 B.R. 25 (B.A.P. 9th Cir. 2008); In re Gulf States Steel, Inc. of Ala., 285 B.R. 497, 508 (Bankr. N.D. Ala. 2002); In re Terrace Chalet Apts., 159 B.R. at 829; In re Stroud Wholesale, Inc., 47 B.R. at 1002; WBQ P ship v. Va. Dep t of Med. Assistance Servs. (In re WBQ P ship), 189 B.R. 97, 107 (Bankr. E.D. Va. 1995). 74. Clear Channel Outdoors, 391 B.R. at 45. 75. See, e.g., In re Gulf States Steel, 285 B.R. at 508; In re Grand Slam USA, Inc., 178 B.R. 460, 462 (E.D. Mich. 1995); In re Healthco Int l, Inc., 174 B.R. 174 (Bankr. D. Mass. 1994); In re Terrace Chalet Apartments, Ltd., 159 B.R. 821. 76. Clear Channel Outdoors, 391 B.R. at 45. 77. Id. at 46. 78. In re Toy King Distribs., Inc., 256 B.R. 1 (Bankr. M.D. Fla. 2000); In re Argiannis, 156 B.R. 683 (Bankr. M.D. Fla. 1993). 79. See In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991); In re Microwave Prods. of Am., Inc., 118 B.R. 566 (Bankr. W.D. Tenn. 1990); In re Brinson, 153 B.R. 952 (Bankr. M.D. Fla. 1992); In re SM 104 Ltd., 160 B.R. 202 (Bankr. S.D. Fla. 1993). 80. See In re Addison Prop. Ltd. P ship, 185 B.R. 766, 784 (Bankr. N.D. Ill. 1995). 81. See In re Landing Assocs., 122 B.R. 288 (Bankr. W.D. Tex. 1990); In re Stanley, 185 B.R. 417 (Bankr. D. Conn. 1995); In re Crompton, 68 B.R. 831 (Bankr. E.D. Pa. 1987). 82. 11 U.S.C. 129(b)(2)(A)(i) (ii). 83. In re Ivey, 147 B.R. 109, 112 (Bankr. M.D.N.C. 1992); In re Computer Optics, Inc., 126 B.R. 664, 671 (Bankr. D.N.H. 1991). 84. See, e.g., In re Ivey, 147 B.R. at 113 (listing various methods for calculating interest rates); Till v. SCS Credit Corp., 124 S. Ct. 1951 (2004). 85. Wade v. Bradford, 39 F.3d 1126 (10th Cir. 1994); In re 680 Fifth Ave. Ass ns, 29 F.3d 95 (2d Cir. 1994) (section 1111(b) election is available to lienholders, whether or not privity of contract exists between the lienholder and the debtor). 86. In re Keller, 47 B.R. 725 (Bankr. N.D. Iowa 1985). 87. In re Stanley, 185 B.R. 417 (Bankr. D. Conn. 1995). 88. In re Union Meeting Partners, 160 B.R. 757, 770 (Bankr. E.D. Pa. 1993). 89. Fed. R. Bankr. P. 3014. thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 12