New Jersey New Home Warranty

It is typical in the industry of building homes that homebuilders offer their buyers guarantees to replace or repair defects or other components in new housing units. However, with increasing numbers of home builders to go bankrupt, an urgent question is: what happens to these guarantees if the manufacturer subsequently files for bankruptcy?

General unsecured claims

Generally, claims by purchasers under these guarantees are treated as pre-petition general unsecured claims in bankruptcy. That is, they are at the bottom of the cascade of cash, since the product post-petition sales of assets and liquidation would go first to the senior secured lenders and suppliers with lien. Recovery of general unsecured claims are generally low (or near 0%), especially if the builder has finished in the Chapter 7 liquidation.

Product Assurance Guarantee

There are larger homebuilders like Dunmore Homes has provided buyers with guarantees provided by its own captive insurance company and third party providers. Recoveries on claims of security are most viable in these cases, for example, Dunmore homes has indicated in his disclosure statement that the complainants, although considered to unsecured creditors in the classification of claims, would receive a payment equal to amount of insurance proceeds received by the guarantee trustee in liquidation.

Builder reorganization, liquidation or sale?

Another important issue that should apply to home buyers in monitoring developments in the bankruptcy of a manufacturer: the manufacturer may be reorganized and emerge from bankruptcy? Or, is the builder will be liquidated or sold to another company?

Why is this important?

One thing that may go bankrupt builders in bankruptcy is to file a motion asking the court permission to honor warranty claims and other obligations of the customer pre-petition. A typical motion of this kind requires a judicial authorization for the case, but the flexibility for the designer while still in its "sole discretion".

From our review of case 2007-8, the motion is seldom presented by manufacturers in liquidation. These manufacturers tend to focus their attention on the response to banks and other lenders to file motions for relief from stay to pursue foreclosure.

On the other hand, sales of bankruptcy today are generally made free and clear of all liens, encumbrances and interests. Known as the Section 363 "sale of substantially all assets of the manufacturer, the buyer is not obligated under contracts of guarantee, unless the latter falls under agreement" permitted encumbrances ". An example of this is PFP Holdings (Trend Homes) where the new entity, T2 LLC is not responsible for any claim.

In the third scenario, a builder who plans to reorganize and continue to sell homes is more likely to make special arrangements to pay the guarantee applicants, such as WCI Communities, Woodside Group, Renaissance Custom Homes, Homes Denmark, etc. For example, heritage Highgate said he would honor warranties and warranty costs included in its application of the cash budget position submitted to the Court.

Note, however, that this does not necessarily mean that the manufacturer would in fact emerge from bankruptcy as a reorganized entity. For example, Kimball Hill has been authorized to honor warranties pre-petition, with the intention of the restructuring. However, as the turmoil in the housing market worsened, Kimball Hill has made.