Photo Credit: John Gress

Andrew Maletich says hedoesn’t trust builders anymore. His company, Bolingbroke, Ill.–based flooring contractor RiteWay Tile & Carpet, got stiffed for $120,000 when Burnside Construction went bankrupt a year ago. RiteWay is also one of seven companies on the unsecured creditors committee in the Neumann Homes Chapter 11 case and had $850,000 in mechanics’ liens filed against 80 to 90 of Neumann’s homes his company helped build.

As 2008 began, Maletich’s mistrust spilled into his relationships with other builders, two of which owed RiteWay $240,000 and $98,000, respectively. “They’re all in trouble, and they’re all on the same string with me,” meaning he will file a lien against any builder that doesn’t pay RiteWay within 75 days of its being billed. (In Illinois, contractors have 90 days to file a lien after submitting an invoice.)

Months after Neumann Homes petitioned for bankruptcy protection on Oct. 26, the repercussions of its collapse were still being felt in Chicago’s soft housing market. Many wonder how severe the ripple effect might be. “Consumers might be more worried about a builder or the community they are thinking of buying in,” observes Tom Hodgson, vice president of operations for Aurora, Ill.–based Alexander Lumber Co. Bob Dolezal, credit manager for Oak Lawn, Ill.–based Beatty Lumber, adds that the bankruptcy was like “an earthquake reverberating from its epicenter.” Beatty, like other suppliers in Chicago, has cinched its credit because of general market conditions. “But we’ve had to work with some customers because they’re stuck in the Neumann situation,” says Dolezal.

A delinquent past

Photo Credit: John Gress

Neumann Homes had been struggling financially well before it filed for bankruptcy. “We knew they were having trouble [because] they weren’t paying their bills, which unfortunately was ­normal from year to year with them,” says Jim Hoffman, who owns J & E Nursery, a landscaping contractor in Libertyville, Ill., which had worked with Neumann since 1999 and was owed $45,818 when the builder went bankrupt.

Contractors filed a torrent of mechanics’ liens against Neumann’s properties in February 2007, according to Merritt Credit Bureau, a Chicago-based research firm that prepares ­mechanics’ lien notices and claims. (A mechanic’s lien is a lien on property that secures the payment of debts ­related to materials and labor. Construction on that property cannot continue until liens are resolved.) By the time it entered Chapter 11 eight months later, Neumann had $12 million in lien-­related claims to contend with (out of $151 million in secured claims), to say nothing of $134 million in unsecured claims, some of that owed to contractors, too. As of late January 2008, 75 companies in eight Chicago-area counties alone had filed 2,214 mechanics’ liens naming Neumann as first defendant, and another 130 where the builder is named second defendant. “I’ve never seen anything like this,” says Merritt’s owner Janet Berman about the sheer number of claims.

Among Neumann’s trade creditors with significant exposure were companies that provided material and labor, such as Stock Building Supply and Republic Windows & Doors. (Neither would comment for this article, but Berman notes that some of Stock’s liens had been released, implying the pro dealer had accepted a settlement.) Few product suppliers are creditors in this case because Neumann required contractors to sign material waivers before starting any work. Sometimes, Neumann itself was the supplier: Avenue Incorporated, a carpentry contractor based in Orland Park, Ill., was owed $3.1 million, of which $650,000 was lien-related debt that included back charges and advances Avenue had made to Precision Framing Systems, a Neumann-owned component plant, which the builder sold for $1 million to an affiliate of Denver-based Oakwood Homes.

The mechanics’ liens are complicated by the fact that several were filed against homes Neumann had sold prior to filing Chapter 11. Others were filed against unfinished or unsold homes on properties that five of Neumann’s eight bank lenders took back in exchange for debt relief. (In mid-March, for example, Neumann turned over six developments to Residential Funding, its largest lender, which agreed to reduce Neumann’s $90 million debt to $13.6 million.) The banks themselves must now resolve these lien obligations before construction can resume on those properties, if they decide to continue building on the land they took back.

Hilco Trading Co., a financial services provider, was hired to assess Neumann’s real estate to gauge its liquidation value. “The land evaluation is a big determinant of [creditors’] rights,” explains Mark Fisher, an attorney with Schiff Hardin, a Chicago firm that represented several trade creditors, because it provides insight about which properties might be sellable and at what price. “Hopefully we’ll get something, but the process has been very slow,” said Avenue’s corporate counsel John Cooney in early February.

A cautious future

Several of Neumann’s 22 communities were unfinished when it filed for Chapter 11. The builder was active in two subdivisions in Antioch, Ill., where about half of the proposed 1,400 homes had been completed and another 50 were under construction. Jim Keim, the village’s acting administrator, said in early February that infrastructure, such as street lighting, and amenities, such as clubhouses and pools, hadn’t been installed. Performance bonds ensure that this infrastructure gets built, said Keim, “and we’ve had talks with bond agencies about forcing the start of that construction by the spring.” On Feb. 27, a bankruptcy court judge approved a deal between Neumann and lender Cole Taylor to liquidate Antioch’s unfinished Clublands development through an auction scheduled for May 14. A new company, called Newco, was formed to separate these assets from Neumann’s other properties. Cole Taylor expects to recoup $14.4 million from this liquidation.

Some of Neumann’s trade creditors told Builder they’d be willing to take on construction work or finish uncompleted homes, as well as any new homes the banks decide to place on the properties they’ve retrieved. Contractors are ­reluctant to turn down business in a bad market, but they are more careful about which builders they’ll work with. “What’s important is communication between our clients and ourselves,” says Steve Schwarz Jr., vice president of operations for Chicago-based SS Schwarz Construction, one of Neumann’s secured trade creditors. “What we’re saying to builders is that if someone sells a house, we’re ready to jump in and build it.”

But Hoffman thinks the “toughest question” contractors are asking themselves is, “When do you draw the line and tell a client you don’t want to work with them?” If market conditions don’t improve soon, the answer could become moot. “Even before Neumann, we’d recommend that contractors give customers a 60-day window,” says Cooney of Avenue Incorporated, who serves as outside counsel for other contractors. “That’s when I’d start sending letters demanding payment. Since Neumann, people are taking heed of that advice.”



Other stories in Field Report 2008: