How bankruptcy affects a subcontractor’s unpaid claims

On Behalf of | May 15, 2021 | Construction Law |

A 2017 decision by the Third Circuit resulted in a significant increase in risk for subcontractors seeking payment from construction contractors who have filed for bankruptcy. In this decision, the court found that a subcontractor executing a construction lien after the contractor’s bankruptcy filing violates the automatic stay afforded to the contractor. This decision made it significantly more difficult for subcontractors to collect payment for supplies and services furnished to contractors who later filed bankruptcy before paying their debt.

A recent appellate decision provides some hope for subcontractors facing this challenge.

New Jersey Prompt Pay Act

Owners must pay contractors within 30 days of receiving an approved and certified invoice per the Prompt Payment Act. An owner approves and certifies an invoice when the owner does not provide a written objection by 20 days from the receipt of the invoice.  Contractors must then pay subcontractors for all work that owners have accepted and paid for within 10 days.

Piercing the corporate veil

The appellate court applied the Prompt Payment Act, along with a fraudulent inducement claim to pierce the corporate veil and hold a contractor directly liable for debts owed to a subcontractor that the contractor had sought to discharge through bankruptcy. The court found that the contractor’s actions fraudulently induced the subcontractor to enter into a contract and that the Prompt Payment Act made the principals involved personally liable for the debt owed to the subcontractor.

This decision offers some hope for subcontractors who believe contractors have fraudulently attempted to use bankruptcy protection to avoid paying subcontractors for approved work.

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