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real property is a beneficiary of any trust funds paid or received in connection with the improvements. In Texas, the construction trust fund is self-executing. Therefore, in a hypothetical chapter 7, NA Flash, under Texas law, would be required to hold the amounts received from the property owners in trust for its subcontractors on those projects, including Palmetco, or face criminal liability for misuse of trust funds. Therefore, in the hypothetical bankruptcy proceeding, where the court is to presume everyone will act reasonably, NA Flash would have held any payments it received in trust for Palmetco. The trust funds would have given Palmetco a priority claim to the funds in the subsequent bankruptcy.
Therefore, because the law of construction trust funds would provide Palmetco with a full recovery in a hypothetical Chapter 7 proceeding, the Trustee failed to meet its burden that the transfers were preferential under 547(b). See also, In re Arnold, 908 F.2d 52 (6th Cir. 1990)(construction funds held in trust and not estate property); In re IT Group, 326 B.R. 270 )(Bankr. D. Del. 2005)(same); Contra, In re Sierra Steel, Inc., 96 B.R. 271 (BAP 9th Cir. 1989)(construction funds not trust funds).
It is important to remember these action points when dealing with construction case:
Understand State law rights and remedies of contractors and suppliers. Understand flow of cash/transfers.
P. "Ten Practical Tips in Defending an Avoidance Action" by Timothy M. Lupinacci Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. ABI Journal (October 2003) (Updated)
In good or bad economic times, the concept of a preference or fraudulent conveyance lawsuit makes little sense to honest hard working American business owners. Yet the proliferation of corporate bankruptcy filings in the past several years has heightened the angst of defendant companies searching to understand why they have to return money to a company that already stuck them with a large write-off. While much theoretical analysis exists on defending a preference suit, today's economy dictates practical, straight-forward approaches to resolving threatened avoidance action. This article sets forth ten practical steps to assist in the efficient, cost-effective resolution of threatened avoidance litigation.
It is critical at the outset to properly evaluate the case against your client. It is surprising how little time some counsel spend understanding the facts underlying the transactions at issue in the avoidance action. You should assume that the plaintiff's lawyers and accountants have fully analyzed the transfers in the case. In properly defending the
