ILLUSTRATION OF HOW BANKRUPTCY CAN IMPACT CONTRACTOR – SUBCONTRACTOR DISPUTE

UnknownThe case of Ground Improvement Techniques, Inc. v. U.S., 2015 WL 4603693 (Fed.Cir. 2015) is an interesting case that highlights the impact of a contractor filing for bankruptcy during a construction dispute

 

In this case, a subcontractor was terminated for default on a federal project.  The subcontractor sued the prime contractor for wrongful termination and during the course of the litigation filed for Chapter 11 bankruptcy. Once the subcontractor filed for bankruptcy, its claims against the prime contractor became an asset of the bankruptcy estate.  The subcontractor’s Reorganization Plan in the bankruptcy stated it will assign its rights and claims in its litigation against the prime contractor to certain secured creditors.  The subcontractor’s secured creditors then continued the litigation against the prime contractor, obtained a judgment, but then the prime contractor filed for bankruptcy. During the administration of the prime contractor’s bankruptcy estate, the subcontractor was ordered to submit a certified claim in the name of the prime contractor to the contracting officer (per the Contract Disputes Act).  The subcontractor received no response (to its pass-through claim) and filed a lawsuit against the federal government in its name.

 

There were two issues raised in this action against the federal government.

 

First, the subcontractor was no longer the real party interest that possessed claims relating to the project by virtue of its bankruptcy.  Such rights and claims had been assigned to its secured creditors that became the real parties in interest. When the subcontractor filed for bankruptcy, its assets, inclusive of its claims, became part of the bankruptcy estate.  The subcontractor’s Reorganization Plan stated it will assign such rights and claims to its secured creditors; thus, the Reorganization Plan clearly transferred the subcontractor’s claims to its secured creditors meaning the subcontractor no longer owned the very claims it asserted against the federal government.

 

Second, and unrelated to the bankruptcy, the subcontractor could not sue the federal government because it was not in privity of contract with the government. “Because a subcontractor ordinarily lacks privity with the government, the Court of Federal Claims generally lacks jurisdiction over claims brought by a subcontractor against the government….”   Ground Improvement Techniques, supra, at *7.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

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