Construction Lienholder Group Wins in Bankruptcy!
If ever there were a time in construction litigation for folks to put on their rally hats, it would be in the case of M & G USA Corp, where the Construction Lienholder Group took grass roots action to ensure their lien rights were protected in a bankruptcy.
Man, Who Doesn’t Love A Good Underdog Story?
This week I read an article by Daniel Lowenthal, Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors, which recapped a Delaware Bankruptcy Court decision in the M & G USA Corp case.
Here are the events leading up to the decision:
– In 2013, the debtor began construction of an industrial plant in Texas (anticipated completion was 2015)
– In 2017, the construction was incomplete, costs and delays were out of control, plus there were “hundreds of millions of dollars in mechanic’s liens being filed.” The debtor filed for bankruptcy protection.
– After the bankruptcy was filed, a group of mechanic’s lien creditors formed an ad hoc creditor committee: Construction Lienholder Group (CLG). In the words of Lowenthal “They made it known right away that they would be heard in the case.”
I’m starting to rally! I picture mechanic’s lien filers in superhero capes standing atop an unfinished industrial plant in Texas, preparing to fight.
CLG asked the judge to appoint an official lienholder committee, but the judge denied the request. “He said they hadn’t satisfied the ‘heavy burden imposed by 11 U.S.C. § 1102(a)’ and he doubted the ‘propriety or wisdom” of allowing’ a group of putatively secured creditors” to have an official committee in the case,” according to Lowenthal. If an official committee had been recognized, the CLG would have been able to recover professional fees. Despite the judge’s denial of official committee recognition, CLG forged ahead knowing they would be responsible for their own fees.
As the bankruptcy case progressed, CLG retained legal representation, then actively participated in the 363 sale, objected to the debtor’s bankruptcy plan, and even negotiated $32M in DIP financing which allowed the debtors to sell the industrial plant with a clear title.
Once the bankruptcy plan had been confirmed, CLG filed a motion arguing it had made a substantial contribution to the bankruptcy case and should be reimbursed for administrative expenses.
Picture them on the steps of the courthouse, stating the facts of their case, and standing their ground… waiting patiently for the judge to decide.
Of Course, How Would We Know Our Superheroes Are Heroes If There Isn’t A Villain?
The bankruptcy trustee swooped in and, according to Lowenthal, counter-argued that “…the lien creditors were likely to receive full payment on their claims, that an award of $1.6 million would amount to a “windfall,” that their actions in the case were motivated to protect their own interests, that the motion practice they undertook was costly, and that their ultimate compromise was not necessary for the plan to confirm.”
What Will the Judge Say?
With immense disappointment the crowd falls quiet, heads down, shoulders slumped. Then the murmurs started… here comes the judge. A hopeful hush falls over the crowd as the judge speaks.
“…substantial contribution is a high bar to satisfy. Parties-in-interest are presumed to be ‘self-interested unless they establish that their actions are designed to benefit others who would foreseeably be interested in the estate’…The Bankruptcy Code doesn’t define ‘substantial contribution’ but the contribution must provide ‘tangible, clearly demonstrable benefits to the estate.’”
So, did it? Did CLG provide “tangible, clearly demonstrable benefits to the estate?”
The judge cited two actions CLG took which positively impacted the case. The first? CLG “negotiated for an additional $32 million DIP cushion in the DIP Facility’s lienholder reserve.” These funds allowed the debtor to sell the plant with a clear title, as I mentioned above. If CLG hadn’t negotiated these funds, it is likely the mechanic’s liens would have discouraged potential buyers. Plus, the judge declared CLG played a meaningful role in negotiating the bankruptcy plan.
(They) “facilitated and encouraged the negotiations that led to a settlement between the mechanic’s lienholders and other economic stakeholders…”
But wait, there’s more!
Aside from the additional funds and the significant negotiations, the judge also noted the exceptional group for having:
“… identified and contacted all of the lien claimants, something Judge Shannon described as an ‘arduous task.’ And he further emphasized that the CLG did its work in the case ‘without expectation of compensation.’”
Let’s start that slow clap people!
The judge determined CLG would be compensated under the administrative claims. “…Based on time, the nature, the extent, and the value… of the services provided.”
The Takeaway? Don’t Just Sit There!
I am inspired by the Construction Lienholder Group! They took on the bankruptcy court and they won. They played an active and substantial role in this bankruptcy; they didn’t simply submit a proof of claim form and hope for the best. This should be a reminder to all of us that we shouldn’t be complacent with the rules. It’s OK to buck the system – in a safe way of course – because sometimes you gotta fight for your rights… your mechanic’s lien rights.
Are reducing your DSO, mitigating risk and improving working capital not enough reasons to file UCCs? Well, here are 5 more reasons why UCCs are the way to go!
- August 13: Keeping Your Money: A Creditor’s Guide to Defending Preference Actions
- August 20: Lien Foreclosure
- August 27: Secured Transactions in The U.S. and Canada
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