Service Area: Collection Services

Progress Payments Have Stopped, Now What?

Posted on August 31, 2018 by wpengine - In Other Commercial Credit News

Progress Payments Have Stopped, Now What Should You Do?

Progress payments are payments made as work progresses under a contract, upon the basis of costs incurred, percentage of completion accomplished, or a specific stage of completion. Progress payments may be made from the owner to the general contractor, the general contractor to its subcontractors/suppliers, the subcontractor to its suppliers, etc.

Progress payments have positive potential, as they can eliminate the need for various parties to finance a project. Unfortunately, if the progress payments stop, progress on the project may stop.

No Payment, Now What?

Julie Weller of Faegre Baker Daniels advises a contractor has two choices when an owner stops making payments: “It can either continue to perform the work or cease the work…” As you’d imagine, neither of these options is appealing for a multitude of reasons.

Weller’s article, Progress Payments: What to Do When the Money Stops Trickling In, focuses on the owner/general contractor dynamic. Ordinarily, NCS would recommend moving forward with a mechanic’s lien or bond claim, but Weller recommends carefully reviewing the contract and determining whether payment is “clearly due and owing.”

What’s in the Contract?

Contract terms can be tricky. Hidden among long legal sentences and paragraphs of tiny font you may find provisions regarding payment, suspension and termination.

Weller recommends carefully reviewing these provisions, as they may include notice requirements, and if ignored, the general contractor could be in breach of its contract.

“If the contract expressly states that the contractor must give notice of intention to stop work, the contractor must do so or it will be in breach of contract. Many contracts require the contractor to continue performance despite any ongoing dispute, even those that relate to payment. The contractor should consider the consequences if it does not make payment to its subcontractors – its failure to pay its subcontractors, despite not being paid by the owner, could be a breach of its contract with the owner and its contract with the subcontractors.”

Many of our clients, typically subcontractors and suppliers, come to us with the same story, “The GC says the owner isn’t paying him, so he can’t pay us.” This inevitably leads to the review of contracts for contingent payment clauses, and to mechanic’s lien filings or enforcement of arbitration clauses. If I could plead a case to general contractors, I would beg you to continue paying parties you have hired!

Next Up: “Clearly Due & Owing”

Yikes, very few things are “clear” in construction, unless we consider mud to be clear. In her article, Weller states that an owner will not be held in breach of contract if the payment is not “clearly due and owing.” Further, in the long run on sentences & tiny font of the contract, there may be provisions allowing the owner to withhold money.

Weller provides the following situations which may permit the owner to withhold payment:

Defective work not remedied
Claims filed by a third-party
Failure of the contractor to pay its subcontractors
Reasonable evidence that the work cannot be completed for the remainder of the contract sum
Damage to the owner or another contractor
Reasonable evidence that the work will not be completed within the contract time, and the unpaid balance is not enough to cover damages for the anticipated delay
Persistent failure to carry out the work in accordance with the contract

It’s worth noting, the owner should only withhold the amount that corresponds to the circumstance. This means, if the owner is withholding payment because the contractor hasn’t paid its subcontractor, the owner can only withhold the amount of the subcontractor’s claim. Another example is if the contractor has successfully completed the foundation, but has failed to complete the piping, the owner can only withhold money for the incomplete piping.

A Demand to Commence Suit May Shorten Your Deadline

Posted on August 27, 2018 by wpengine - Credit Risk Management, Mechanic's Liens & Bond Claims

Did You Receive a Notice to Commence Suit? Your Suit Deadline May Be Shorter Than You Think

The mechanic’s lien and bond claim processes follow the same basic three steps: serve preliminary notice > file/serve mechanic’s lien/bond claim > file suit to enforce the mechanic’s lien/bond claim. You, the creditor, initiate the preliminary notice and lien/bond claim actions & you may initiate suit. However, you aren’t the only party that may initiate suit.

Notice to Commence Suit

In many states, the statute provides a remedy for an owner to shorten the deadline for a lien claimant to file suit: the owner can file a Notice to Commence Suit. When properly notified by an owner or the court, any lien claimant who receives a Notice to Commence Suit must proceed with suit by the deadline stated, or they will lose their lien rights. This process allows the owner to “thin out” those who may not have a valid claim.

Ohio Example

Although each statute may vary, here is an example of the Notice to Commence Suit in Ohio. Ohio has one of the longest periods in which a claimant can commence suit: 6 years from filing the lien, unless, the claimant has been served with a Notice to Commence Suit. A claimant has 60 days from being served with a Notice to Commence Suit to proceed with suit. If the claimant fails to proceed with suit, the lien is void.

If the lienholder fails to commence suit upon the lien within sixty days after completion of service upon him of the notice to commence suit, or if the action is commenced but dismissed with prejudice before adjudication, the lien is void and the property wholly discharged from the lien. When a lien is void by reason of failure to commence suit within sixty days after service of the notice to commence suit, the claim upon which the lien was founded is not prejudiced by the failure, except for the loss of the lien as security for the claim. – 1311.11 Notifying Lienholder to Commence Suit

Ohio ties with South Dakota, which also provides claimants 6 years from last furnishing materials or services to file suit. But, in South Dakota, if the claimant receives a demand to commence suit, the claimant must file suit within 30 days from receipt of the notice.

44-9-26. Forfeiture of lien for failure to commence suit upon demand–Cancellation by register of deeds. Upon written demand by the owner, the owner’s agent, or contractor, served on any person holding a lien, requiring the person to commence suit to enforce the lien, the person shall commence suit within thirty days after such service or the lien is forfeited. The register of deeds shall cancel the lien of record, if the owner, the owner’s agent, or contractor files no sooner than the fortieth day following service of the written demand:

(1) An affidavit stating that the person holding the lien has not commenced suit to enforce the lien within thirty days after the service of the written demand;

(2) A copy of the written demand that was served on the person holding the lien; and

(3) Proof of service on the person holding the lien.

Florida & Georgia Examples

Generally, for private projects in Florida, a lien claimant should file suit to enforce its lien within 1 year from the filing of the lien. However, the property owner can shorten that 1-year period to 60 days, if it files a Notice of Contest of Lien. (You can find the following in FL’s statute, section 713.22 Duration of Lien)

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

You are notified that the undersigned contests the claim of lien filed by you on , (year) , and recorded in Book , Page , of the public records of County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This day of , (year) .

Signed: (Owner or Attorney)

The lien of any lienor upon whom such notice is served and who fails to institute a suit to enforce his or her lien within 60 days after service of such notice shall be extinguished automatically. The clerk shall serve, in accordance with s. 713.18, a copy of the notice of contest to the lien claimant at the address shown in the claim of lien or most recent amendment thereto and shall certify to such service and the date of service on the face of the notice and record the notice.

Georgia is quite like Florida. In fact, the suit period in Georgia is also shortened to 60 days, with the filing of a Notice of Contest of Lien. What’s the difference? Well, the verbiage for the Georgia Notice of Content of Lien is slightly different than Florida’s. Florida statute says to file suit within 1 year from filing the lien and Georgia statute says to file suit within 365 days from filing the lien – note the difference – it is more than semantics!

You can access Georgia’s statute on the Notice of Contest of Lien here: O.C.G.A. § 44-14-368

Summons & Complaint, Answer & Cross Claim

Another action that can change your suit deadline is when another claimant files suit to foreclose on the property. When filing suit, the plaintiff must notify all other parties with an interest in the property that an action to foreclose is being filed. This filed document is often referred to as a Summons and Complaint.

At first glance, the Summons and Complaint may cause the unwary to believe they are being sued. The Summons and Complaint is a legal action which requires all lien claimants to join in the foreclosure action within a specific time frame, by submitting an Answer and Cross Claim.

Frequently an Answer and Cross Claim is required in as little as 20 days from receipt of the Summons and Complaint. If a lien claimant does not respond by the deadline, lien rights may be lost.

Litigation: Mapped Out

Litigation can get quite confusing, here’s a mapped view of an average litigation.

*This chart is for demonstration purposes only and is in no way a guarantee of any particular outcome. NCS does not engage in rendering legal advice. All options should be reviewed by your corporate counsel.

Seek Legal Guidance!

When a Notice to Commence Suit or a Summons and Complaint is received by your office, in response to a lien that was filed on your behalf, we recommend taking immediate steps to retain the services of an attorney to protect your rights.

Retail Bankruptcy and the Impact on the Landlord

Posted on August 24, 2018 by wpengine - Credit Risk Management, In Other Commercial Credit News

Bankruptcy, Bankruptcy Everywhere. Landlord, Landlord Have No Fear

Landlords are impacted by retail bankruptcy, too! The hot topic continues to be retail bankruptcies – with no signs of slowing down. We’ve previously discussed what retail bankruptcies mean for creditors who supply inventory, but what about the landlord? Most brick and mortar stores are leased by the retail entity; very few retailers own the building in which they are located.

Read on to learn more about what landlords can do to protect themselves in commercial bankruptcies.

Look Out for the Automatic Stay

The automatic stay is an injunction that stops any and all collection activity against the bankrupt entity and the automatic stay goes in to effect as soon as the bankruptcy petition is filed. The automatic stay impacts ALL creditors, whether supplying an inventory of board games or leasing the property to the bankrupt entity.

However, a landlord may have some remedies available, so long as the landlord seeks bankruptcy court approval first.

In an excellent article by Lars Fuller, Unique Challenges for Commercial Landlords Posed by Large-Scale Retailer Bankruptcies, Fuller explains the actions for which the landlord will need court approval:

Changing the locks on the premises or engaging in other self-help remedies.
Commencing or continuing to prosecute an action to evict the debtor.
Sending notices to the debtor to terminate the lease or revoke a right of lease renewal (even if the lease allows the landlord to take that action).
Demanding payment of past due rent.

Know the adage “easier to ask for forgiveness than permission?” Yeah, that doesn’t apply to this situation. If you fail to obtain court approval, prior to taking any of the above actions, you may be subject to fines, damages or even held in contempt of court, according to Fuller.

What about the Cash?

We recently discussed DIP financing, and Fuller recommends “Landlords should also review budgets because they often provide the first signal regarding the debtor’s intentions for the Chapter 11 case, including whether it will be maintaining or closing stores and on what timetable.”

And, while you are reviewing those budgets, check to see whether the budget allows for rent payments under administrative claims.

Accept or Reject?

Section 365 of the Bankruptcy Code is specific to the treatment of leases in a bankruptcy. Fuller provides four key issues for landlords regarding the treatment of their leases in bankruptcy:

Ensuring payment of post-petition rent and other lease charges, including stub rent.
The effect on the landlord of an assumption of the lease versus a rejection of the lease.
The circumstances under which the debtor can assign the lease, including the conditions particular to assigning shopping center leases.
Timing and other strategic considerations.

Ultimately, the bankrupt entity has an opportunity to review its leases and decide whether it is a lease they want to maintain (i.e. reject or accept). The debtor has up to 210 days to make decisions on their leases; decisions should be made within 120 days of the bankruptcy filing, but an extension may be granted for an additional 90 days.

Obviously, money is a driving factor for bankruptcy – if a debtor has some leases that are costlier or more restrictive than others, they will take this as a chance to reject or renegotiate those costly leases. A more favorable lease, such as one that is in a great location & likely seen as appealing to prospective buyers, will likely be assumed or accepted by the debtor. It should come as no surprise, landlords benefit from leases that are assumed or accepted versus those that are rejected.

Pro Advice

Fuller recommends landlords carefully review the bankrupt entity’s pleadings to “discern its intentions for its leases and then evaluate the benefit of joining forces with other landlords or pursuing rights individually.” My recommendation: Make sure you have legal representation! Don’t take on the challenge of legal documentation on your own.

DIP Financing: What Is It? Who Provides It?

Posted on August 17, 2018 by wpengine - Credit Risk Management, In Other Commercial Credit News

DIP Financing: What Is It? Who Provides It? What If You Filed a UCC?

DIP stands for Debtor in Possession. When a business files for chapter 11 bankruptcy protection, the existing management or ownership maintains possession and control of its business. However, the bankrupt entity needs financing to keep its business operational throughout the bankruptcy process. One way for a bankrupt entity to obtain cash is through DIP Financing.

Unfortunately, if a business is on the brink of bankruptcy, lenders aren’t usually eager to extend a loan to the business. To be fair, a lender’s hesitation to lend to a bankrupt entity is not unlike my hesitation to touch a hot stove – you know the risk and you know the consequences.

Given the risks of lending to bankrupt businesses, the Bankruptcy Code affords would-be lenders various perks, often including the benefit of a priority security interest.

In his article, DIP Financing: How Chapter 11’s Bankruptcy Loan Rules Can Be U sed To Help A Business Access Liquidity, Bob Eisenbach mentions the perk of a priority security interest:

“When the debtor company has lined up a lender, it files a motion seeking Bankruptcy Court approval of the DIP financing. Typical DIP financing terms include a first priority security interest, a market or even premium interest rate, an approved budget, and other lender protections.”

The concept of priority over subsequent creditors may be referred to as a priming lien. Marshall S. Huebner, in Debtor-in-Possession Financing, further advises lenders may “insist on a first-priority priming lien on the debtor’s inventory, receivables, and cash (whether or not previously encumbered), a second lien on any other encumbered property, and a first-priority lien on all of the debtor’s unencumbered property.”

Who Provides DIP Financing?

Does this financing come from a random bank? Not necessarily. In fact, DIP financing often comes from prepetition lenders. According to Market Trends, Recent Deal Terms in Retail DIP Financing, author Jordan Myers refers to this as “defensive” financing.

“Prepetition lenders, rather than new third-party lenders, are a frequent source of DIP financing to retail debtors. They do so, in part, to protect their position against possible priming liens—a practice known as “defensive” DIP financing. “

What About Creditors with a Properly Perfected Security Interest: UCCs?

The American Bankruptcy Institute states a creditor with a properly perfected security interest has priority over DIP.

“…[I]f a secured creditor is perfected as of the petition date, its security interest trumps the DIP, and the estate benefits from the secured creditor’s collateral only after the secured creditor is repaid. However, if the secured creditor is not perfected as of the petition date, then the DIP prevails and the secured creditor shares pro rata with other unsecured creditors.”

Confused? ABI has a bubbly example!

“Consider this hypothetical: Donald the debtor owns a case of fine champagne. Your client, Cartman Corp., just won a lawsuit against Donald. You send out the sheriff to pick up the champagne to satisfy the claim. Under California law, once the sheriff lays his hands on the champagne, you’ve got a lien; other states may date the lien from the time you send your order to the sheriff, or perhaps even from the time you win your lawsuit. To recap: If some secured creditor is perfected before Cartman Corp. gets its lien, then that secured creditor gets first dibs in the champagne. Otherwise, first dibs go to the Cartman Corp.”

Takeaway? While DIP Financing holds significant benefits for the lender, a properly perfected security interest is certainly in a better position than an unsecured creditor. File UCCs!

Serving a PA Mechanic’s Lien: Sheriff or Public Posting

Posted on July 30, 2018 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Be Sure to Serve the Mechanic’s Lien via Sheriff or Publicly Post It

In Pennsylvania, statute dictates a mechanic’s lien be served by a sheriff. If the sheriff is unable to serve the lien, the lien claimant has an opportunity to meet statutory requirements by posting the lien “upon a conspicuous public part of the improvement.” The Superior Court of Pennsylvania says claimants must strictly adhere to statutory requirements.

Mechanic’s Liens in Pennsylvania

Pennsylvania rolled out statute changes the end of 2016. While there were significant overall changes, the statute dictating the service of the mechanic’s lien remained the same.

1502. Filing and notice of filing of claim

(c) Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous public part of the improvement.

“Adult in the same manner as a writ of summons in assumpsit” means sheriff. If the sheriff is unable to successfully serve the mechanic’s lien, the claimant can still meet statutory requirements, by posting a copy of the document on the jobsite.

There are several states whose statute can be quite confusing or convoluted. But, all in all, Pennsylvania’s statute is quite clear: serve the lien via sheriff or post it at the jobsite. Unfortunately, it appears this statutory requirement is frequently managed incorrectly by claimants. In fact, in May, the Superior Court of Pennsylvania heard the appeal of one subcontractor and confirmed the subcontractor failed to comply with statute.

The Cost of Failing to Properly Serve the Lien

$581,840.39 = the cost of failing to properly serve the lien.

In Forbes Excavating, LP v. Weitsman New Castle Realty, LLC, Pa: Superior Court 2018, lien claimant, Forbes Excavating, LP (Forbes) filed a lien on 10/28/2016 for a claim of $581,840.39. According to statute, Forbes need to serve the notice of filing upon the owner within 1 month from filing the lien, which would have been by 11/28/2016.

On 11/15/2016, the sheriff attempted service of Forbes’ notice upon Weitsman New Castle Realty, LLC (Weitsman). The sheriff was unable to complete service, because the individual at the address advised it was not the correct address for Weitsman.

This is a portion of text from the sheriff’s affidavit:

[Sheriff Sigler] made a diligent search and inquiry for the within named Defendant [Weitsman Realty] … but was unable to locate them… nor to ascertain the Defendant[‘s] present whereabouts, and I do therefore return the within Mechanics Lien, NOT FOUND.

Reason:

The above address is Ben Weitsman of New Castle, per Ron Saley, general manager there. [Weitsman Realty] is not known there[.]

Once service failed, Forbes could have attempted service again, or it could have posted a copy of the document on the premises in plain view.

On 1/10/2017, service was attempted again, to the same address as before, and was successfully delivered to the office manager at the address.

The Battle of Complaints Ensues

As with most legal situations, there was back & forth between parties. Forbes filed suit to enforce its mechanic’s lien and in response, Weitsman contested, stating Forbes failed to comply with statute. Weitsman argued that Forbes failed to serve a copy of the lien timely and once the document was successfully served, it was given to an “individual who was not authorized to accept service” – the office manager.

Weitsman didn’t need its second argument regarding the office manager, because its first argument was more than enough for the court. However, this was not before Forbes lodged an argument that when the sheriff originally attempted service, the person at the address lied to the sheriff when stating Weitsman wasn’t located at that address.

Forbes claimed “…that Weitsman Realty’s ‘refusal to accept service on November 15, 2016 constituted valid service under Pennsylvania law’ and, thus, it properly served Weitsman Realty with timely notice of the Claim on November 15, 2016.” Forbes further argued that Weitsman was “constructively served;” however, if Forbes had wanted that argument to work, it should have filed an affidavit of service within 20 days from the attempted service of the document. At least, that was what the court said.

“This claim immediately fails because, even if the Mechanics’ Lien Law permitted the type of constructive service [Forbes] advocates, [Forbes] did not file “an affidavit of service of notice, or the acceptance of service” within 20 days of November 15, 2016.”

There are additional technicalities at play, such as when service failed, the sheriff indicated the party was “not found,” not that “service was refused,” indicating there is no way to prove the person at the address lied to or refused to avoid receiving the document. But, technicalities like this were nothing more than another proverbial nail in Forbes’ coffin.

Despite the drama with service by sheriff, Forbes did have another option: Post. Document. At. Jobsite. Forbes wasn’t without options when original service was unsuccessful, Forbes just failed to execute the options.

The Court’s Parting Advice

Statute is to be strictly interpreted & failing to follow the law means failing to secure a mechanic’s lien. Must be a painful $581,840.39 lesson.

“…this Court specifically held… the service requirements under the Mechanics’ Lien Law are not subject to the doctrine of substantial compliance — and that they must be strictly construed. Appellant’s claim to the contrary is thus meritless…”

Mechanic’s Liens and Bond Claims are a Right

Posted on July 27, 2018 by wpengine - In Other Commercial Credit News

Mechanic’s Liens & Bond Claims are a Right, Not a Blanket

If you have supplied materials or labor to a construction project, you have a right to be paid. If you have complied with the state’s statute, you have a right to file a mechanic’s lien. You can’t see my face, but right now I am fired up!

Fired up over a right to lien? Not exactly.

Truth is, I read a great article this week, but the title of the article initially bothered me: “Lien and Bond Claims: A Subcontractor’s Security Blanket.”

The title bothered you? Yes, and I think it’s because I immediately pictured Linus, famous Peanuts’ character, helplessly clinging to his blanket for solace. That’s not what mechanic’s liens and bond claims are. They aren’t a weakness we cling to, hoping for payment!

Mechanic’s liens and bond claims are built on a firm foundation of law and the law is representative of strength, and if used properly, you will protect your Right. To. Be. Paid!

Pardon me as I step off my soapbox.

A Little Dramatic, I Know

Before my little soapbox moment, I did say “I read a great article this week.” And that is the truth. In his article, Marc J. Felezzola Esq., of Babst Calland, discusses the common mistakes made by subcontractors when trying to secure mechanic’s lien/bond claim rights.

Before he dives into the pitfalls, the attorney provides an overview of the rights afforded to those furnishing to private and public construction projects. As I read further, breezing through the general information on liens and bonds, I see it.

Security.

And then I realize, Felezzola isn’t using the term “security” in a weak manner. Rather, he reminds me that “security” is protection, safety or, as Google puts it, “the state of being free from danger or threat.”

“Thus, generally speaking a subcontractor or material supplier (collectively, a “subcontractor”) always should have security for the work it performs. For a private project, that security comes in the form of a mechanic’s lien. For a public project, the security generally comes in the form of a payment bond.”

Felezzola’s Warnings

Felezzola warns would-be claimants of the importance of complying with preliminary notice requirements and subsequent lien and bond claim requirements, and, he further cautions about waiving claim rights within a contract:

“Blanket lien waivers are enforceable in approximately 20 states, and in those states, signing a subcontract with a blanket lien waiver will automatically deprive a subcontractor of mechanic’s lien rights all of its work. Thus, in states where blanket lien waivers are valid, subcontractors who sign contracts containing them will have no payment security for their work unless the project is bonded.”

Another piece of advice? Don’t assume a payment bond has been issued on a public project. Yes, in most states, there are statutory requirements for contractors to obtain proper payment bonds. However, as Felezzola points out, there aren’t always consequences for folks that fail to obtain a bond.

“…[A]lthough all states have some law requiring prime contractors to post payment bonds as security for subcontractor work, not all of those laws provide consequences in the event the prime contractor does not actually post a payment bond. For example, although Pennsylvania law requires payment bonds for all public projects, the law provides no penalty in the event the prime contractor simply fails to post the requisite payment bond, and Pennsylvania courts have held a subcontractor has no redress against the government for failing to ensure the required bond was posted. Thus, at least in Pennsylvania, a subcontractor working on a public project may find itself working without payment security despite laws requiring payment bonds.”

As a best practice, always obtain a copy of the payment bond BEFORE furnishing or at the time you sign the contract.

A Security Blanket It Is

Felezzola is right. Liens and bond claims are a security blanket for those furnishing to a construction project. Just be careful; the security blanket only exists if you take the proper steps to secure your rights. If you fail to take the proper steps, that strong security blanket will quickly become a useless wet blanket.

Waiving Bond Claim Rights Under The Miller Act

Posted on July 20, 2018 by wpengine - In Other Commercial Credit News

Are You Waiving Your Bond Claim Rights Under The Miller Act?

If you furnish to a federal construction project, and your contract includes a provision for claim resolution outside of the Miller Act, are you prohibited from pursing a claim under the Miller Act? Are you waiving your rights? Short answer: No. Unless…

Miller Act Statute

The statute for federal projects is relatively straightforward and applies to all states; meaning unlike state statutes which vary, federal statute is the same across the board. U.S. Federal projects in foreign lands may also fall under the protection of the Miller Act. Those furnishing to a federal project are not required to serve a preliminary notice, but a bond claim should be served with 90 days after the date of last furnishing, and suit should be commenced within one year after the date of last furnishing.

Typically, the general contractor is required to obtain a payment bond if the construction contract exceeds $100,000. And, would-be claimants can request a certified copy of the payment bond from the contracting agency.

3133. Rights of persons furnishing labor or material

(a) Right of Person Furnishing Labor or Material to Copy of Bond. – The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond…

Waiving Rights in a Contract

If your contract calls for alternative dispute resolution or waives rights in lieu of action under the Miller Act, does this mean you have lost your rights under the Miller Act?

This is a hot topic in construction: waiving rights to mechanic’s liens and bond claims. Some statutes clearly define whether rights are waived or if the waiver of rights is enforceable, while others are clear as mud. Fortunately, for federal projects, it’s not overly complicated. Yes, rights can be waived; however, the waiver must be in writing and it can’t be executed until after the claimant has completed furnishing.

3133. Rights of persons furnishing labor or material

(c) Waiver of Right to Civil Action. – A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is-

(1) in writing;

(2) signed by the person whose right is waived; and

(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.

Earlier I said that federal statute is the same in all states, and while this is true, the courts hearing federal cases may not make the same decisions. So, when I say “Yes, rights can be waived” I’m taking statute at its word – no gray area. But, as you know, in construction credit, there is a LOT of gray area.

Christopher M. Horton, associate with Smith Currie, recently wrote an article, Does the Miller Act Trump Subcontract Dispute Provisions? In his article, Horton discusses a few examples of different states and their stance on whether a contract can prevent someone from pursuing a Miller Act claim.

“…[C]ourts have considered whether subcontract provisions requiring exhaustion of dispute procedures prior to initiating a Miller Act suit conflicts with the waiver provisions of the Miller Act. Only a few federal courts have addressed this issue… (D.C., Maryland, Nebraska, New Jersey, Pennsylvania, Virginia), have found that such provisions are unenforceable and do not require dismissal or stay of a Miller Action lawsuit.

A minority of courts (Louisiana, California, and Hawaii) have upheld dispute exhaustion provisions and entered dismissals or stays of Miller Act. Contrary to the decisions referenced above, the courts rendering these decisions based their rulings upon the fact that the provisions at issue included express language that required a stay for Miller Act claims pending exhaustion of the dispute procedures…. The subcontractor’s Miller Act remedies remained intact pending exhaustion of the contractual dispute procedures.”

OK, so, perhaps my statement about federal statute being clear was a tiny bit inaccurate — turns out, it can get quite muddy. Though, it seems, at least based on Horton’s article, that courts may allow claimants to pursue a Miller Act claim even if alternative dispute options are identified in the contract.

Best advice? Before you sign the contract, carefully review it with legal counsel. Do not blindly sign a contract, assuming it will all pan out.

Unsecured Creditors in Retail Bankruptcy Lose Out

Posted on July 16, 2018 by Kiwi - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

The Importance of Being a Secured Creditor in Today’s Retail Climate

In today’s highly credit-based economy, the looming threat of debtor bankruptcy is more prominent than ever. A number of well-known retailers, such as Bon Ton, Toys R Us, Nine West and Winn Dixie, have recently succumbed to insolvency, leaving their creditors in a vulnerable position.

As a creditor, it is important to ask yourself “In what ways can our company mitigate risk in today’s volatile credit environment?” To answer this, let’s tackle two key questions:

What is the difference between a secured & an unsecured creditor?
Do secured creditors actually get paid more in the event of customer bankruptcy?

Secured vs Unsecured

It’s essential to start by understanding the fundamentals; specifically, the difference between a secured and unsecured creditor.

A secured creditor has a security interest over some or all the assets of its debtor. A security interest can be obtained through prominent credit tools such as Mechanic’s Liens, Bond Claims and UCCs (just to highlight a few). In the event of the debtor’s bankruptcy or default, secured creditors:

Have payment priority over their unsecured counterparts
Are in the best possible position for getting paid

An unsecured creditor is a party who extends credit without a collateral security. If the debtor files for bankruptcy, it’s only after the claims of secured creditors are satisfied that the unsecured creditor will receive payment. Oftentimes, those who fall under the unsecured creditor group collect very little money, if any, from the distribution of assets.

While the bankruptcy code is fairly complex, and insolvencies vary case by case, here is payout priority in its simplest form:

Payout Priority in Chapter 11 Bankruptcy

Secured Creditors (e. creditors who have a perfected security interest)
Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
Unsecured Creditors (e. creditors without a security interest)

Secured Creditor Success Stories!

In recent bankruptcy news, Rue21, inc. ET AL., a specialty fashion retailer of girls’ and boys’ apparel, filed for protection under Chapter 11 of the U.S. Bankruptcy code. This was largely attributed to a challenging commerce environment characterized by increased pressure from competitors, changing consumer tastes, and an under-performing online presence.

When Rue21 filed for bankruptcy protection on May 15, 2017, it had just over $300,000,000 in assets, and nearly $700,000,000 in liabilities. Obviously, there were not enough funds to pay all creditors their owed amounts, however, in this case and many others, the secured creditors were first to get paid. With this particular example, under the Rue21’s reorganization plan, secured creditors recovered 100 percent of the allowed claims while the unsecured creditors only recovered about 3 percent.

We see a similar scenario play out with Katy Industries, a leading manufacturer, importer, and distributor of commercial cleaning and consumer storage products, who filed for bankruptcy on May 14, 2017. The company was unable to meet the obligations of its creditors, with nearly $56 million of debt! In this case, secured creditors recovered the total amount of allowed claims (100 percent) while unsecured creditors faced a recovery rate of only 9.6 percent.

As with many other things in life, when it comes to debtor bankruptcy, not much is guaranteed. However, case after case we see secured creditors having payment priority and receiving greater funds than unsecured creditors. Simply speaking, the bankruptcy laws require that secured creditors are paid first; take the steps needed to secure your rights!