When American West Development and 14 affiliated entities filed for court protection from their creditors last March 1, its president and bankruptcy attorney were confident that the builder’s Chapter 11 proceedings would be relatively quick, especially since many of the details concerning American West’s debt restructuring had been resolved prior to its filing.

More than six months later, however, the Las Vegas–based builder’s emergence from bankruptcy is still snagged on some technicalities. A U.S. bankruptcy court judge has kicked back the builder’s reorganization plan after U.S. Trustee August Landis raised several objections that focus on how American West would compensate owners of 215 houses who filed construction defect claims against the builder, as well as how American West would handle any future defect claims.

Mostly, the Trustee wanted more detailed explanations from the builder. According to court documents, the Trustee was not “clear” on how the compensation plan would be “serviceable.” He also stated “there is uncertainty surrounding the future assets of the Trust” that the plan establishes to pay out on defect claims.

The Trustee noted that, based on the plan’s definition of a construction defect claim, it was attempting “to treat potential administration expenses as pre-petition [i.e., pre-bankruptcy filing] claims,” which “raises concerns regarding Debtor’s ability to meet the requirements of … and the plan’s feasibility” under existing bankruptcy codes.

The Trustee also pointed out that American West was in violation of codes by “impermissibly” seeking to discharge dates post-dating confirmation of the plan, and by seeking to release third-party non-debtor entities, including the builder’s owner Lawrence Canarelli, from liability.

(American West Development serves as the general contractor for the homes it builds on land it develops. It sells those completed homes to limited liability entities that market its products. American West gets paid when the homes are sold to buyers.)

Robert Evans, American West’s president, was quoted by the Las Vegas Review-Journal as saying he was “pleased” that the court has provided his company with a “clear direction” about how to resolve any lingering roadblocks to its coming out of Chapter 11. The company’s bankruptcy attorney, Brett Axelrod of the firm Fox Rothchild, was also quoted as stating that the company expects to emerge from Chapter 11 by the end of 2012.

Axelrod told the Review-Journal that 86% of the builder’s homeowners voted in favor of its reorganization plan, which estimates that defect claims would ultimately cost less than $20 million.

In financial projections prepared on September 12 and filed with the bankruptcy court, American West estimates it will come out of bankruptcy with $54 million in total assets and $49.6 million in total liabilities. That liabilities figure reflects the estimated value of its secured debt with seven banks that agreed to reduce the balance of the builder’s term loan from $177.5 million.

For fiscal 2012, American West projects $19 million in revenue from its operating entity and net income of $108.6 million, which would include $144.4 million in debt forgiveness.

American West projects steady sales growth and positive earnings over the proceeding four years, to where revenue in 2016 would be $37.6 million, and net income $7.1 million, with total liabilities reduced to $29 million.

American West also owns Colorado-based Oakwood Homes, which is not included in the corporation’s bankruptcy. Ironically, Oakwood recently benefited from the October 2010 bankruptcy of a local landowner, which opened the door for Oakwood to acquire the 2,600-acre northern portion of the 21,500-acre Banning Lewis Ranch in Colorado Springs.

Pat Hamill, Oakwood’s CEO, told the Gazette of Colorado Springs that his company intended to develop this land for the construction of 9,000 homes over the next 15 to 20 years.

John Caulfield is senior editor for Builder magazine.

Learn more about markets featured in this article: Las Vegas, NV, Colorado Springs, CO.