Portland homebuilder Randall Palazzo, who carved out a profitable niche building in-fill bungalows in the city's urban neighborhoods, has filed personal bankruptcy.



Palazzo's homes, generally designed in keeping with the architectural flavor of the local neighborhood, struck a chord with customers. But he also drew the ire of large swaths of the construction community, which claimed his company did not pay its bills. In the last two years, suppliers and subcontractors filed more than 1,000 construction liens against Palazzo's company, according to filings at the Multnomah County Recorder's office.



Palazzo filed Chapter 7 bankruptcy on Oct. 11. He listed total assets of between $100,001 and $500,000 and total liabilities of between $1 million and $10 million. Most of his debts are business debts, Palazzo confirmed in the filing.



Palazzo could not be reached Monday for comment. Al Kennedy, his Portland bankruptcy attorney, said Palazzo had personally guaranteed payment of certain obligations "that he simply cannot pay."



It's unclear what impact, if any, the bankruptcy filing will have on his company, Palazzo Custom Homes. Kennedy said Palazzo's ownership stake in the company becomes an asset of the bankruptcy estate. A court-appointed bankruptcy trustee will have a choice of trying to sell it, possibly back to Palazzo or to a third party, or abandoning it.



Palazzo Custom Homes sold 73 homes in 2008 worth a total of $13.8 million, making it the 7th largest in the metro area, according to annual rankings compiled by the Portland Business Journal.



Virtually all Portland homebuilders have been hit hard by the recession, forcing some of the largest into bankruptcy.



"The continued softness of the housing market and the overhang of the debt (his company assumed) from the overbuilding that occurred in 2006-2008," posed obstacles that Palazzo could not overcome, Kennedy said.



"You had to have some level of optimism to assume that he was going to be able to turn it around," Kennedy said. "He worked very hard to do that. He gave it a good shot and it didn't work."



Palazzo lasted longer than some larger homebuilders. But some argue that he did so on the backs of dozens of drywallers, landscapers and excavators.



As the economy soured, a growing throng of subcontractors and suppliers filed construction liens against Palazzo's company alleging that they'd not been paid.



Liens are not uncommon in the homebuilding industry, a business full of relatively small operators prone to cash-flow shortages. But in Palazzo's case, the liens piled up in volumes that stunned local construction lawyers.



"The extent of it was breathtaking," said Dan Gragg, a Portland attorney who represented some of those suppliers and subcontractors.



"I can't recall ever seeing as many construction liens filed against a contractor," said Alan Mitchell, another Portland construction attorney.



Kennedy said Palazzo managed to pay off many of those liens. Some subcontractors got legal judgements against Palazzo's company, he said. It was Palazzo's guarantee to pay some of these claims that forced the personal bankruptcy, he added.



The lien claims could make Palazzo's bankruptcy an interesting dogfight.



A construction lien is a powerful tool under Oregon law. A subcontractor with a valid lien gets the first priority right to the property on which he or she worked. In other words, some of these unpaid framers and painters could foreclose on the Palazzo properties that they worked on and are in a legal position to get paid even before Palazzo's lenders.



But according to local lawyers familiar with the case, many of these subcontractors and suppliers released their lien rights and cut deals with Palazzo's company to be paid over time. Those companies could end up getting their debts discharged in the bankruptcy.



"I understand that many parties reached settlement agreements with Palazzo Custom Homes," Mitchell said. "This bankruptcy will effect those agreements."



A meeting of Palazzo creditors has been scheduled for 9:30 a.m. on Nov. 9 at the U.S. Trustee's office in downtown Portland.



-- Jeff Manning