Construction Company Subchapter V Bankruptcy in Florida: Bonded Projects, Liens, and Retainage
- Melissa A. Youngman
- 10 hours ago
- 8 min read
Melissa Youngman, PA d/b/a Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.
A Central Florida general contractor carrying a backlog of bonded projects, unpaid retainage from several jobs, and a subcontractor payment dispute that has slowed cash flow on its largest active contract faces a set of insolvency problems that general reorganization doctrine handles only loosely. Florida's construction lien machinery and surety obligations do not disappear at the courthouse door. Understanding how they interact with Subchapter V is the starting point for any contractor or subcontractor weighing a reorganization filing.
Subchapter V, codified at 11 U.S.C. §§ 1181 through 1195, is available to a construction company that meets the § 1182(1)(A) eligibility requirements. The current debt cap is $3,424,000.00. For a residential contractor, a specialty subcontractor, or a small commercial general contractor operating in Orange, Seminole, Lake, or Brevard County, that ceiling covers a significant share of businesses in distress. The structure of Subchapter V, a trustee-facilitated reorganization without a creditors' committee as a default feature, a 90-day plan deadline under § 1189, and equity retention through § 1191(b)'s nonconsensual confirmation mechanism, makes it a workable tool for a contractor that needs to restructure its balance sheet while completing outstanding projects.
This post addresses four issues specific to construction company bankruptcies filed in the Middle District of Florida: Florida's construction lien law and how it interacts with the automatic stay, executory subcontracts under § 365, the treatment of retainage, and the consequences of bonded projects and surety relationships.
Florida Construction Liens and the Automatic Stay
Section 362(a) of the Bankruptcy Code imposes the automatic stay the moment a petition is filed, halting most enforcement actions, including the perfection of mechanic's liens under Chapter 713, Florida Statutes. The stay is broad, but it has a boundary that matters for construction creditors.
Section 546(b) of the Bankruptcy Code preserves the ability of a lienholder to perfect or maintain a lien under applicable nonbankruptcy law, to the extent that law would permit perfection against a bona fide purchaser that acquired an interest in the property on the petition date without actual notice. In practical terms, a subcontractor or supplier whose lien rights under Florida Chapter 713 were already perfected, or who was entitled to perfect them as of the petition date and does so within the statutory window, retains a secured position in the case.
The implication for a contractor in Subchapter V is direct. Every filed or perfectable mechanic's lien against a project the debtor has worked on is a secured claim against the property owner's interest in that project. As the general contractor or prime contractor, the debtor may also hold its own lien rights on projects where it has not been paid. Those lien rights are property of the estate under § 541 and need to be identified, valued, and protected in pre-petition preparation.
Florida's lien notice requirements, including the Notice to Owner under § 713.06, Florida Statutes, are strictly enforced. A supplier or sub-subcontractor that failed to timely serve its Notice to Owner has no lien right regardless of what the bankruptcy court might otherwise allow. Before filing, counsel should audit the debtor's active projects for lien exposure from all tiers of subcontractors and suppliers, and for the debtor's own lien positions on contracts where payment is outstanding.
Executory Subcontracts Under Section 365
Section 365 of the Bankruptcy Code gives the debtor-in-possession the right to assume or reject executory contracts, including ongoing subcontract agreements. A construction subcontract with material performance obligations remaining on both sides is an executory contract for § 365 purposes.
The assume-or-reject election must be made early in a Subchapter V case. The 90-day plan deadline under § 1189 means the debtor's contract posture needs to be largely resolved before the plan is filed. A subcontract on a profitable ongoing project is worth assuming. A subcontract on a money-losing job, or one where the counterparty has materially defaulted, may be worth rejecting.
Assumption under § 365(b)(1) requires curing all existing monetary defaults. For a contractor that has fallen behind on subcontractor payments, the cure obligation can be substantial. Every dollar of unpaid progress payments owed to a subcontractor on a contract the debtor intends to assume is a cure cost that must be funded, either at assumption or through the plan with adequate assurance of prompt cure. Counsel needs to quantify the cure exposure on each contract before the election is made, because that figure directly affects the plan's feasibility projections.
Rejection under § 365 converts the counterparty's claim into a general unsecured pre-petition breach-of-contract claim, treated through the plan. That outcome removes the ongoing obligation but may leave a project incomplete. For bonded projects, rejection of a subcontract can trigger completion obligations under the performance bond that create new complications with the surety.
In the Middle District of Florida, the United States Trustee typically appoints an unsecured creditors' committee only in larger, more complex Chapter 11 cases with a sizable creditor class. Most construction company Subchapter V cases in this district proceed without a committee being formed. Subcontractors and suppliers act individually, each evaluating their own contract and claim posture. The contractor must engage key subcontractors directly rather than waiting for a committee process that will not materialize in the ordinary case.
Retainage: Claims on Both Sides of the Balance Sheet
Retainage, typically 5 to 10 percent of each progress payment held until substantial completion or a defined milestone, appears on both sides of a construction company's balance sheet at the time of filing.
On the asset side, the contractor likely holds receivable retainage from project owners on completed or ongoing work. That unpaid retainage is a pre-petition contract claim, collectible through the ordinary course of the case. It is property of the estate and should be included in the debtor's schedule of assets at realistic collection value.
On the liability side, the contractor has likely withheld retainage from its subcontractors. Pre-petition unpaid retainage owed to subcontractors is a claim against the debtor. Its character, as a trust fund obligation or a simple contract claim, depends on what funds have been received from above and how those funds were handled. That question runs directly into Florida § 713.3345.
The Florida Construction Trust Fund Statute
Section 713.3345 of the Florida Statutes imposes a statutory trust obligation on funds received by a contractor or subcontractor for the purpose of paying for the improvement of real property. A licensed contractor that receives payment from a project owner is obligated to hold those funds in trust for the subcontractors, sub-subcontractors, and suppliers who performed work or furnished materials on that improvement. Willful misapplication of trust funds is a felony under Florida law.
In a Subchapter V case, the trust-fund obligation introduces a layer of analysis absent from most other industries. If the debtor received payment from a project owner and applied those funds to operating expenses, overhead, or debt service rather than paying subcontractors, those payments may be characterized as a breach of the statutory trust. A subcontractor asserting a § 713.3345 trust claim argues that the funds were never property of the debtor's estate. If that argument is accepted, the trust assets are removed from the pool available to all creditors and may support a nondischargeability claim under § 523(a)(4) for breach of fiduciary duty. See BenShot, LLC v. 2 Monkey Trading, LLC, No. 23-12342 (11th Cir. July 9, 2025). (The panel held 2-1 that § 1192(2)'s cross-reference to "the kind" of debt "specified in section 523(a)" applies to both individual and corporate debtors, meaning a corporate Subchapter V debtor confirming a nonconsensual (cramdown) plan cannot discharge any of the twenty-one categories of debt listed in § 523(a)).
Every contractor entering Subchapter V should have a project-by-project accounting prepared before the petition is filed, identifying all funds received and how those funds were applied. That accounting shapes both the asset-and-liability schedule and the exposure to trust-fund claims that could affect the plan's confirmation analysis.
Surety Bonds and Bonding Capacity in Subchapter V
Many Central Florida construction contracts, particularly public contracts subject to Florida § 255.05 (the Little Miller Act) and federal contracts subject to the federal Miller Act, require a performance bond and a payment bond. A bankruptcy filing by the bonded contractor creates immediate concerns for the surety, the project owner, and the subcontractors who hold payment-bond rights.
Under the performance bond, the surety is obligated to complete the project or pay the owner's completion costs if the principal defaults. A bankruptcy filing is typically a declared default under the bond's terms. The surety will evaluate whether to complete the project using the debtor or a replacement contractor, or to tender payment of the owner's completion damages. The surety's indemnification rights against the debtor are typically preserved by broad contractual indemnification clauses that survive the filing.
Under the payment bond, unpaid subcontractors and suppliers have a direct claim against the surety. On public projects, where government property is immune from Chapter 713 liens, payment bond claims are often the subcontractor's only recovery vehicle. Those claims proceed against the surety regardless of the debtor's bankruptcy. The automatic stay applies to claims against the debtor itself, not to independent payment bond claims against the surety.
For the Subchapter V debtor, the surety indemnification exposure is a significant contingent liability that must be scheduled and addressed in the plan. A contractor that intends to continue bidding and bonding new work after filing must address the bonding relationship proactively. Sureties are not obligated to continue issuing bonds for a company in bankruptcy, and a filing that damages the bonding relationship can impair the company's ability to generate post-petition revenue, which in turn affects the projected disposable income model under § 1191(b) and (c). Counsel should open the surety conversation before the petition is filed.
Central Florida Construction Bankruptcies: Filing in the MDFL
The Central Florida construction market in Orange, Seminole, Lake, Osceola, and Brevard counties has sustained active residential and commercial development through cycles of supply-chain disruption, labor cost volatility, and project-level cash flow stress. General contractors, mechanical and electrical subcontractors, concrete and framing contractors, and roofing and specialty trade contractors in these markets have each encountered the combination of a profitable backlog and an unsustainable pre-petition debt load that Subchapter V is designed to address.
Venue for a construction company with its principal place of business in Orange, Seminole, Osceola, or Lake County lies in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. Pre-petition preparation that accounts for the MDFL's procedural norms, including first-day motions for cash collateral and critical vendor relief, the 90-day plan deadline, and the Subchapter V trustee's role in facilitating a consensual plan, is the foundation of a successful reorganization for a Central Florida contractor.
Melissa Youngman, PA represents businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For more on Subchapter V eligibility, the debt cap, and how the process works for construction companies and other Central Florida businesses, see our cornerstone guide on Subchapter V bankruptcy in Central Florida.
Disclaimer. The information on this blog is provided by Melissa Youngman and Winter Park Estate Plans & ReOrgs for general informational and educational purposes only. It is not legal advice, is not intended to create an attorney-client relationship, and should not be relied on as a substitute for consultation with a qualified bankruptcy attorney licensed in your jurisdiction. Reading this post, contacting the firm through its website, or sending an unsolicited email does not create an attorney-client relationship. An attorney-client relationship with Melissa Youngman and Winter Park Estate Plans & ReOrgs is formed only after a written engagement agreement is signed by both the client and the firm.
Melissa Youngman is licensed to practice law in the State of Florida and regularly represents debtors, creditors, and other parties in interest in the United States Bankruptcy Court for the Middle District of Florida. This blog addresses issues under federal bankruptcy law and Florida state law; the outcome of any specific matter depends on its particular facts and on statutes, rules, and case law that may have changed after the date of publication.
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