Heritage Highgate to Honor Warranties
Heritage Highgate and Heritage Residential (both filed for Chapter 11 in Jan’09) stated that they have offered and continued to offer all home buyers warranties. They would fund all warranty items arising in the initial one year period following closing and, beyond that, a national warranty company steps in.
The warranty expense has also been included as a line item in the companies’ cash projections in the budget submitted to court. The companies stated that the estimated warranty expense is minimal on a monthly basis and, depending on the claim, the entire repair may be the responsibility of a subcontractor.
Most importantly, the companies stated that they would honor all valid pre-petition and post-petition claims arising under the warranty. This would be subject to court authorization. This is not that common in recent home builder bankruptcies, and it does indicate a confidence by the home builder that it would remain a going concern and could repay lenders in full. Perhaps this confidence is boosted by the fact that Heritage Building Group itself is not part of the bankruptcy filings.
Since home owners with claims under warranties are generally considered unsecured creditors, their priority to repayment by the bankrupt entities is low, compared to secured creditors. It should be noted, however, that the companies asserted that they had substantial equity in their properties which provide a healthy cushion for the banks. They also asserted that the warranty program was an integral part of selling and marketing the homes – while this was true, it did not necessarily mean (to banks and other lenders) that they should honor warranty claims which arose prior to bankruptcy as this might deplete cash which should be earmarked for repayment of secured debt.
