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Construction Defects: Did Your Negligent Developer File Bankruptcy?

It is a common misconception that there are no remedies available for construction defects when contractors file for bankruptcy.  In fact, a claimant may still pursue compensation through the contractor’s liability insurance or the subcontracting companies after seeking leave from the bankruptcy court. When the contractor has liability insurance, a claimant can ask for the bankruptcy to be set aside to allow for the collection of a settlement or judgment from the contractor’s insurance carrier. Similarly, subcontractors that worked on the project and contributed to the alleged defects may also have liability insurance to pay for a portion of the damages. A final option is for the homeowners to pursue creditor claims through the bankruptcy case.

Effect of Bankruptcy on Construction Defect Claims

When a company files for bankruptcy protection, the court generally issues an automatic stay ordering the creditors to cease enforcement actions to collect the judgments and settlements secured against the business. The effect of the automatic stay on construction defect claims and judgments is that they will immediately be halted while the bankruptcy case is pending. While creditors can file claims with the bankruptcy court to be included in a Chapter 11 reorganization plan or a Chapter 7 liquidation plan to receive a portion of the proceeds of the bankruptcy estate, this will likely leave a homeowner with construction defects and only a very small percentage for recovery of damages. This is because of the business’s other creditors, including those with secured loans that will likely be in front of the homeowner for purposes of recovery in the bankruptcy action. Homeowners who hear that negligent contractors are considering filing for bankruptcy protection might want to weigh whether or not to seek a quick settlement before the petition is filed. Homeowners may also consider whether or not the claim is worth pursuing through the bankruptcy case and if insurance proceeds are available.

Availability of Liability Insurance

When a contractor has liability insurance and files for bankruptcy protection, a claimant may have more options. The claimant can file a request to have the bankruptcy case set aside so that he or she can pursue a claim against the contractor’s liability insurance carrier. The insurance company should pay any judgment or settlement that is obtained by the claimant. Subcontractors that worked on the project may also have contributed to the alleged construction defects and might have liability insurance to go after.  By identifying all of the potentially liable parties, a construction attorney may help the claimant to find more sources of recovery to recoup losses that were caused by the defective construction. 

If you are a homeowner dealing with a contractor who is out of business, contact a construction attorney to find out your rights.  There may be hope for recovery even if the contractor filed for bankruptcy. 

What Our Clients Say

My family and I are thankful to Maddox, Segerblom and Canepa for their assistance during a three year case regarding construction defects to our home. We are truly appreciative of their knowledge, determination and assistance during this process. They were always courteous, and available to answer any and all of our concerns and questions. Thank you for the wonderful resolution. Many thanks to you and your staff.

Frances Castelli

We used Maddox, Segerblom & Canepa to represent us in a legal suit re problems in construction on new properties that we purchased from a developer.

We were very pleased with the representation provided by this law firm. They were fully communicative, responsive to our questions and were very knowledgeable about the issues that required resolution. Even after we reached a resolution, they have been responsive in making sure to point us in the right direction for help with repairs that are required.

We would recommend them to others with similar issues that require legal help.

Atam & Margo Lalchandani

Maddox, Segerblom & Canepa did a FANTASTIC job in our construction defects case. I interacted with several people from their office throughout our 2 year litigation. Their staff is friendly, knowledgeable and always prompt about getting back to you when you have questions/comments/concerns. I especially enjoyed working with Darcy, Ardea, Eva, and Sandra. Being part of a lawsuit is no fun for anyone, but if you have to be a part of one, I can’t say enough positive things about this firm!

Victoria Fox

The law firm of Maddox, Segerblom, and Canepa were amazing to work with. They were thorough and always available for any questions we had. We worked a lot with Sandy who was always professional, friendly, always on time for appointments and just a great person to represent this firm. We have never been involved in a law suit before and they made it comfortable for us. We appreciate the hard work the lawyers and people who work for the firm did and would recommend them.

Becky Loudenburg
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