Kara Homes, one of the largest builders of condominiums and single-family homes in New Jersey, filed for protection from creditors under a Chapter 11 bankruptcy on October 6, 2006. Under its Chapter 11 bankruptcy, Kara Homes will be allowed to remain in business while it comes up with a reorganization plan and tries to regain financial stability. Creditors’ claims for monies owed them by Kara are frozen by the bankruptcy’s “automatic stay” while the company continues to operate as it attempts to reorganize.

The affects of Kara’s bankruptcy are far-reaching as the filing lists thousands of creditors. The creditors affected by Kara’s bankruptcy are mostly financial lenders, and lumber, construction, plumbing, concrete and electrical businesses. Amboy National Bank tops the list of lenders and is owed over 60 million dollars on construction financing connected to several Kara projects. A company called A-1 Bracket, Inc. of Morrisville, Pa., tops the list of other businesses and is owed more than $1.85 million. The list of creditors, unfortunately, also includes thousands of individuals with claims for thousands of dollars each, including purchasers of homes not yet constructed or completed who paid Kara deposits.

The bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is ever going to complete the developments it currently has under construction so that it can make good on its debts connected to those projects and deliver completed homes to waiting purchasers. The news has left people who have houses in the pipeline with Kara Homes anxious and uncertain. Many homeowners feel they have been left in the lurch, as some developments have been left with unfinished clubhouses, swimming pools, roads and landscaping, while many home purchasers have paid deposits on homes that have not been started or are in various states of construction.

Although the main focus of concern over Kara’s bankruptcy appears to be the affect the company’s Chapter 11 reorganization will have on its uncompleted projects, the company’s recent financial woes should also raise concerns for condominium and home owners who purchased from Kara in the last ten years. Specifically, the following question for these condominium and home owners may linger – Since I purchased my home/condo from Kara Homes during the last ten years, who will I look to now that Kara Homes has filed bankruptcy if I discover that my home/condominium has construction defects or damages caused by the original construction?

It has been the experience of Stark & Stark’s Construction Litigation Department in representing homeowners and condominium owners throughout the tri-state area that often times builders or contractors file bankruptcy after completion of construction of a home or condominium complex, but before the discovery of defects or damages by the purchasers of the homes/condominiums. Once Stark & Stark files suit for its client in these types of cases, the bankrupt builder or contractor always takes the position that the client’s claims against it were discharged in the bankruptcy and there is no recovery to be had. Stark & Stark’s Construction Litigation Department, however, has, under certain circumstances, been able to obtain relief for its clients despite the bankruptcy proceeding.

If the General Contractor or Subcontractors who constructed the home or condominium in question had in force during the construction a commercial general liability policy, or any other policy of insurance that provided coverage for the construction activities, there may still be an avenue of recovery for construction defects or damages despite the protections given to builders and contractors in the bankruptcy courts. Stark & Stark’s Construction Litigation Department has in the past been able to, either by negotiation with the bankruptcy trustee or by way of motion, obtain relief from the automatic stay in the bankruptcy proceeding to pursue in a state court action recovery for our clients’ claims for construction defects and damages directly from the insurance polices that named the bankrupt builder or contractor as an insured, to the extent those policies provided coverage for the claims at issue. In our experience, bankruptcy courts have allowed state court actions seeking recover from a bankrupt builder’s insurance policies to proceed despite the stay in place from the bankruptcy because the insurance policies themselves are not considered assets of the debtor and are not subject to claims of all the debtor’s creditors. Stark & Stark’s Construction Litigation Department, in these situations, will seek relief from the automatic stay to pursue the bankrupt contractor’s insurance policies from the bankruptcy court while simultaneously seeking leave from the state court to serve the bankrupt contractor’s insurance company directly with the lawsuit in what is referred to as “substituted service” under the Court Rules.

If you are interested in more information on this topic or have any questions, please call John Randy Sawyer, Esq. at (609) 895-7349, or email him at jsawyer@stark-stark.com