The Lien Claim That Arrived After the Distribution
Cedar Ridge Construction Ltd. is bankrupt. The trustee has realized $2.4 million from holdback funds and accounts receivable. The secured lender claims $1.9 million. Preferred claims are $150,000. Unsecured creditors have filed $1.1 million of proofs of claim. Three disputes have emerged. A subcontractor registered a construction lien after the bankruptcy, within the provincial lien period, but had not registered before the bankruptcy. A second subcontractor filed a $480,000 proof of claim, including $120,000 for equipment rental and a $60,000 back charge that the owner disputes. A supplier delivered $85,000 of specialty fittings 12 days before the bankruptcy; the fittings are still in the warehouse, unused. The supplier has demanded repossession under the 30-day goods rule. One unsecured creditor filed its proof of claim one day after the bar date, explaining that its controller was hospitalized. The trustee must decide whether to accept the late claim, how to treat the lien claimant, and whether the supplier can take back the fittings.
1. Analyze the late-filed construction lien and the late proof of claim. What should the trustee do, and what principles guide the exercise of discretion?
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The construction lien requires provincial lien advice; it is not a BIA recall question. The key fact is that the lien was not registered before bankruptcy. In many provinces, a lien claimant must register within a short period after the last supply, and a lien that is unperfected at bankruptcy may be treated as an unsecured claim, but the provincial lien period may still be open. The trustee should not distribute the holdback until the lien period expires or the claim is resolved. The trustee should notify the secured lender and the lien claimant, hold back a reserve, and seek court directions if the claim is disputed. On the late proof of claim, the trustee has discretion to accept a claim filed after the bar date if there is no prejudice to the estate, the delay is excused, and the claim is bona fide. One day late, with a hospitalized controller, and no distribution yet, points toward acceptance; the trustee should require a sworn statement and supporting documents. If the estate had already declared a dividend, the analysis would change. The trustee should also consider whether the claim is subject to set-off or is a duplicate. The guiding principles are fairness to creditors, finality of the bar date, and the trustee's duty to administer the estate efficiently.
2. Determine the treatment of the equipment rental, the disputed back charge, and the 30-day goods supplier. Outline the distribution of the $2.4 million among the competing claims.
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Equipment rental: the trustee must determine whether the $120,000 is a true lease or a rental charge for equipment used by the contractor. If the subcontractor owns identifiable equipment and the contract is a lease, the equipment may not be estate property and the subcontractor can reclaim it; the rental arrears are an unsecured claim. If the equipment was consumed or incorporated, the claim is unsecured. Back charge: the owner's $60,000 dispute is a claim against the contractor, not automatically a reduction of the subcontractor's claim. The trustee should require the owner to prove the back charge and should hold back the disputed amount until it is resolved. The 30-day goods supplier: under BIA s. 81.1, a supplier may repossess goods delivered within 30 days before bankruptcy if the goods are identifiable, in the trustee's possession, unused, and a timely written demand is made. The $85,000 of fittings appears to qualify, so the trustee should verify the demand and allow repossession, which reduces the unsecured claim. Distribution: $2.4M less $1.9M secured = $500,000. Pay $150,000 preferred = $350,000 for unsecured. If the lien claimant is unsecured, the $350,000 is shared pro rata among $1.1M of unsecured claims plus any allowed late claim; that is about 32 cents. If the lien is valid and secured against the holdback, it may rank ahead of the secured lender to the extent of the holdback, so the trustee must resolve that first. The trustee should not finalize the distribution until the lien and the late claim are determined.