Jaburg Wilk

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When Bankruptcy Beckons

Categories: Construction

act fast when contractor goes bankrupt

I. Introduction

Little attention has been devoted to the relationship between the Registrar of Contractor's Recovery Fund and bankruptcy.  The recession required 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 exhausted.

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.


Founded in 1984, Jaburg Wilk offers extensive experience, diversity in practice areas and the ability to think like a business owner. We are an Arizona mid-sized AV rated law firm, the highest rating that a law firm can receive. Our attorneys, paralegals, and other support staff meet our clients' diverse legal needs and provide exceptional service through our 21 Fundamentals which comprise The JW Way.