Service Area: Collection Services

How to Handle Suit When Mechanic’s Liens Expire

Posted on April 16, 2018 by - Mechanic's Liens & Bond Claims

You Should Understand Suit to Enforce Your Claim, Because Mechanic’s Liens Don’t Live Forever

What happens after a mechanic’s lien has been filed? The mechanic’s lien will remain in place forever, right? Does a mechanic’s lien have an expiration date? If the mechanic’s lien expires, do I have to file a release of lien, or can I just ignore it?

Often, the filing of a valid mechanic’s lien will prompt payment. In fact, when a notice and a lien are filed as part of a complete process, the claimant will be paid 99% of the time. A lien claim that has been satisfied (paid in full or settled) should always be released. But what happens to the liens on the 1% of projects that aren’t paid?

There’s a Step 3? Proceed with Suit

Generally, the first step to protecting your lien rights is to serve a preliminary notice.  Step two is to file, and possibly serve, the lien.  Many folks don’t realize the third step, if payment has not been received, is to file suit by the state’s prescribed deadline.

What is Suit?

A suit, or lawsuit, is an action in a court of law to enforce a claim. Is this the same as foreclosure? Foreclosure is a legal action to enforce a lien against real property with the purpose of having the property sold to satisfy the lien.

Suit may lead to foreclosure. During litigation, it may come to light that debts can only be paid if the property is sold & the proceeds are then used to square up the debts. Please understand, it has been our experience that suit does not usually result in foreclosure/sale of the property; more often, during the suit phase, settlement agreements are reached without the need for sale of the property.

When is the Suit Deadline?

The suit deadline is dictated by state statute. Yes, each state is different, but most states calculate the deadline:  1. From the date of the lien filing (this is the most common) 2. From the date of last furnishing 3. From the date the debt became due (typically defined as last furnishing) or 4. From completion of the project.  In certain states, the service of a demand to commence suit/notice of contest may shorten the deadline to file suit.  Also be aware, in some states, if a surety bond is obtained to take the place of a lien, the suit deadline may change.

As an example, in California, the suit deadline is within 90 days from the recording of the lien.

8460.(a) The claimant shall commence an action to enforce a lien within 90 days after recordation of the claim of lien. If the claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable. ARTICLE 6. Enforcement of Lien [8460 – 8470]

Whereas, in Illinois, claimants should file suit to enforce the lien within 2 years from last furnishing materials or services, but within 30 days from receipt of a demand to commence suit.

“Such suit shall be commenced or counterclaim filed within two years after the completion of the contract, or completion of the extra or additional work, or furnishing of extra or additional material thereunder.” – 770 ILCS 60/9, from Ch. 82, par. 9

“Upon written demand of the owner, lienor, or any person interested in the real estate… requiring suit to be commenced to enforce the lien… suit shall be commenced or answer filed within 30 days thereafter, or the lien shall be forfeited.” – 770 ILCS 60/34, from Ch. 82, par. 34

Many states provide the owners with the opportunity to serve a notice to commence suit (sometimes called a notice of contest) to force lien claimants to either take action within a short time period or to go away.  This provision allows owners to more quickly weed out invalid claims or claims that will not be pursued through suits to foreclose.

If the Mechanic’s Lien Has Expired, is a Release of Lien Necessary?

As a best practice, a mechanic’s lien that has “expired” or is no longer enforceable should be released.

When a lien is filed, it becomes public record and encumbers the property. Unless a release of lien is filed, the public record will continue to reflect the lien and it will appear as an encumbrance, even if the lien is invalid, expired or unenforceable.

Can an Unreleased, Expired Lien, Be Used as Leverage?

Although I am in the camp that would recommend invalid/expired/unenforceable liens be released, there is another camp that believes the lien can still be leveraged.

I recently read an article, “Didn’t Foreclose on Your Mechanic’s Lien? What Should You Do Now?,” by Kelly M. Davis Esq. Davis explained that an unreleased, invalid lien was used as leverage or “bargaining power” because the title company discovered the lien in the public record & wanted the lien released.

“If you fail to foreclose, your lien is oftentimes considered “invalid.” … So, where does this leave you?  Many times, it leaves you with some bargaining power down the line… I will have a title company contact me asking for a payoff amount for a lien I filed years before. In this situation, there is rarely an argument as to whether the lien is still valid just how much my client will accept to release its lien… “

Again, I’m of the camp that believes a lien, whether satisfied or invalid, should always be released. But, know the options available to you, and weigh those options carefully before proceeding.

In the End, it’s Suit or Release

Once a lien has been recorded, you will need to carefully track the suit deadline. As the deadline approaches, decide whether you want to pursue legal action. If you decide not to enforce your lien, or if you miss the deadline to enforce your lien, take steps to have the lien released. As always, before you make any decisions that could impact your right to get paid, seek guidance.

Top 3 Mistakes Collectors Make According to IACC

Posted on April 6, 2018 by - In Other Commercial Credit News

According to IACC, Here Are the Top 3 Mistakes Collectors Make

What are the top 3 mistakes made when calling on past due accounts? Poor or out of date supporting documentation of the claim, waiting too long to involve a 3rd party collection agency & failing to adequately communicate with the debtor, according to a recent article from International Association of Commercial Collectors, Inc. (IACC).

It should come as no surprise that a well-organized paper trail, including pertinent customer information, will ensure a smooth collection process. Which leads us to the mistake identified in IACC’s article, Top 3 Mistakes Internal Collectors Make with Customers When Attempting to Collect on Delinquent Accounts: failing to keep complete & current documentation. What is the most important document? A well-crafted credit application.

“According to IACC President Greg Cohen… the most important document is a properly constructed and complete credit application that will ensure that the customer understands your terms and that you have the proper legal name of the entity and its corporate address, as well as the names of the principles and officers, and the correct email addresses and phone numbers. The credit application should also be reviewed and updated on a regular basis, particularly with larger and higher risk customers.”

Number 2 on the list is a topic we discuss often – don’t wait to turn the past-due account over to a collection agency. It is a well-known fact, and long studied trend, that the longer an account remains past due, the harder it becomes to collect. Some reports indicate the collectability of an account drops to around 50% after six months and drops below 10% after a year.

Rounding out IACC’s list is communication. “Silence is golden,” said no collector ever. Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. How can you combat the silence? IACC recommends finding the communication style that suits your customer & sticking with it.

“It’s important to have a clear understanding of what type of communication your customer best responds to, whether it’s blunt language and a professional but terse reminder of the consequences of not paying on a delinquent account, or whether a softer approach is called for. Also, you need to communicate often and respond to communications quickly in order to express the gravity of the situation.”

How Can You Make the Collection of Past Due Accounts Easier?

This NCS list pops up now & then and never gets old, so I’m going to share it with you once again:

  • Monitor open invoices: Routinely review open invoices and as soon as an invoice is past due (e.g. If you bill on 30-day terms, day 31) contact your customer and inquire on the invoice.
  • Try multiple mediums: Use phone calls, emails, demand letters, etc. & make sure you keep track of your communications – good record keeping is important!
  • Pay attention to cues: Social cues & non-verbal cues are frequently early warning signs that an invoice (or customer) is going to be an issue. When people stop communicating, they are sending a clear signal “I can’t/won’t pay the invoice, and maybe if I ignore you, you will go away.”
  • Check status: Note changes with your customer’s business, such as a disconnected phone number, undeliverable mail or email, and changes in their corporate status with the Secretary of State.
  • Review credit: Credit reports can provide a wealth of information, especially for payment history, DBT changes, recent collection placements or judgments.
  • Cut them off: If you have invoices that a customer isn’t paying, stop extending them additional credit. Debt is like a beast and if you continue to feed it, it will gobble up every last bit and give you nothing in return.
  • Know when to let it go: Don’t immediately toss the invoice into the bad-debt-write-off-pile. “Let it go” from your desk and move it to the desk of a specialized collection agency. Collection agencies are trained and experienced, not to mention, a third party is sometimes more effective simply because they are a third party – removed from the situation.

Are you struggling with slow-paying customers? Do you need assistance with collection efforts? NCS can help ~ contact us today!

Massachusetts Mechanic’s Lien in a Bankruptcy

Posted on March 16, 2018 by - In Other Commercial Credit News

What Happens to Your Massachusetts Mechanic’s Lien in a Bankruptcy?

This week we shared an article that focused on the impact of bankruptcy on mechanic’s lien claimants for projects in Massachusetts. In How Bankruptcy Affects Mechanic’s Lien Rights, authors Gregory M. Boucher and Steven Reingold, explain what happens under the automatic stay, the importance of complying with the bankruptcy code, and the key element of when a lien “relates back.”

What Happens Under the Automatic Stay?

Once a bankruptcy petition is filed, the automatic stay prevents creditors from further pursuing the collection of debts. This injunction occurs the moment a party files for bankruptcy protection, hence the “automatic” of automatic stay.

If you are furnishing to a construction project and the project owner files for bankruptcy protection, you can still perfect or file your mechanic’s lien without violating the automatic stay. However, you must comply with section 362(b)(3) of the bankruptcy code and should you need to file suit to enforce your mechanic’s lien, you would have to seek relief from the automatic stay.

It’s a bit trickier when another party in the ladder of supply, such as the general contractor, files for bankruptcy protection. According to Boucher & Reingold “…when a general contractor files for bankruptcy, a subcontractor or supplier might violate the automatic stay by taking action to assert or perfect a mechanic’s lien, even if the owner is not in bankruptcy.”

Might is the keyword here. Boucher & Reingold referenced a NJ case where the GC filed for bankruptcy protection and the court determined payments owed from the owner to the GC were property of the bankruptcy estate. And, as with all things in the mechanic’s lien world, whether a lien filing violates an automatic stay may be state-specific and could be based on attachment.

When the Lien Relates Back or Attaches

Authors Boucher & Reingold use the phrase “relates back,” however, you may have also heard it referred to as attachment. When does a lien attach to the property? In the state of Minnesota, liens attach from the time of first furnishing materials or services. In Ohio, liens are “…effective from the date the first visible work or labor is performed or the first materials are furnished by the first original contractor, subcontractor, material supplier, or laborer to work, labor on, or provide materials to the improvement.

Boucher & Reingold cite Massachusetts and Pennsylvania as additional examples of states where the lien attaches or relates back to the date of first furnishing, and the state of Florida, where the lien attaches to the date of the recording of the Notice of Commencement.

“…in Florida, such rights “relate back” to the date of the recording of a Notice of Commencement in the public records concerning the real property improvements, which typically precedes that start of the work. In those states, where the first date of labor or materials, or the recording of a Notice of Commencement, precedes a bankruptcy petition, a claimant may still proceed with asserting and perfecting its mechanic’s lien rights.”

Claimants should be cautious in states where statute doesn’t allow lien rights to relate back, warns Boucher & Reingold. “However, in those states whose mechanic’s lien laws do not provide for a claimant’s rights to “relate back,” such as New Jersey and New York, a claimant has no ability to assert or perfect its mechanic’s lien rights once a party files for bankruptcy protection without first seeking relief from the automatic stay.”

Know Before You Go

Become familiar with the dates lien attach in the various states, so that you are aware of potential problems. If a party within the ladder of supply files for bankruptcy, ensure your potential or existing mechanic’s lien filing is not in violation of the bankruptcy code.

Proactively, you may want to consider monitoring all parties with a service such as bankruptcy monitoring, which will alert you of a party’s bankruptcy filing. Time is of the essence when a party files for bankruptcy protection, and the sooner you know the faster you can act.

Carefully Review Settlement Agreements

Posted on March 12, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Carefully Review the Settlement Agreement & Be Prepared to Accept the Terms of the Agreement

In Degraw Const. Group, Inc. v. McGowan Bldrs., Inc., 2017 NY Slip Op 32080 – NY: Supreme Court 2017, parties executed a settlement agreement, which in addition to a payment settlement, required the parties to release one another from further claims. Despite the agreement, the subcontractor filed mechanic’s liens and attempted to proceed with suit. Much to the subcontractor’s dismay, the court upheld the terms of the settlement. The subcontractor’s liens were void and the subcontractor had to pay damages to the general contractor.

Some Background

McGowan Builders, Inc. (McGowan) was the general contractor for two projects: YMCA of Greater New York (YMCA Project) and Nan Shan Development of CPC Queens Senior Center/Day Care Center (Nan Shan Project). For both projects, McGowan hired subcontractor Degraw Construction Group, Inc. (Degraw) to construct concrete foundations, walls and floors.

As with many construction projects, disputes arose. To resolve the disputes, McGowan and Degraw executed a settlement agreement, “Agreement for Termination for Mutual Convenience and Mutual Release.” The settlement agreement dictated that McGowan would pay $150,000 in installments to Degraw, and that both parties agreed to a “mutual release.”

According to the court opinion, the mutual release specified that “[McGowan] and Degraw agree that upon full performance of their obligations hereunder, any and all claims that could have been asserted under the YMCA Subcontractor Purchase Order and the Nan Shan Subcontractor Purchase Order shall forever be released…”

Essentially, the parties agreed the $150,000 would settle debts and the parties agreed they would forfeit further mechanic’s lien actions.

In a Tennis Match of Correspondence

In what can be best described as a tennis match of correspondence, the parties served up letters & responses.

First up, McGowan notified Degraw it would not remit further payment, as McGowan had discovered defects on the YMCA Project. (Until this time, McGowan had paid $100,000 of the $150,000 settlement.) The terms of the settlement agreement had a clause for ‘latent defect claims’:

“[R]elease each other from all potential claims against each other on the YMCA and Nan Shan projects except for claims arising from latent workmanship defects and claims arising from Degraw’s indemnification obligations…”

Unsurprisingly, Degraw then sent a demand for payment & advised it would pursue all remedies, including a mechanic’s lien against the projects, if McGowan did not remit payment.

McGowan served back, reminding Degraw of the terms of the settlement agreement: “The lien claims that you are threatening to file on these projects are contrary to the express terms of the Settlement Agreement. Any sum that may be claimed to be due in a lien filed on either project will be completely arbitrary because the Settlement Agreement does not allocate the principal amount of the settlement and/or the current unpaid balance of $50,000 between the YMCA and the NAN Shan Projects.”

And, of course, McGowan’s correspondence wouldn’t be complete without a subtle jab “As previously advised, if you are foolish enough to file a lien on either the Nan Shan or the YMCA project swift action will be taken to obtain a Court Order for the discharge of such lien(s)…”

Degraw Serves Up Liens, McGowan Counters with Discharge Bonds

Despite the terms of the settlement agreement, Degraw filed two mechanic’s liens. The lien on the YMCA Project was filed for $214,590.46 and the lien on the Nan Shan Project was filed for $87,096.01.

McGowan, in turn, obtained discharge bonds for both liens.

Degraw proceeded with suit to enforce its liens, and McGowan filed a motion to have the liens declared as barred per the settlement agreement, to have the lien amounts declared as willfully exaggerated, to recover damages and to have Degraw’s suit dismissed.

The Court’s Findings

  • Liens Barred Based on Settlement Agreement: The terms of the settlement agreement were clear. When the parties executed the agreement, they waived the right to proceed with further claims. Therefore, Degraw’s liens were unenforceable.
  • Liens Willfully Exaggerated: Simple math confirms the liens were exaggerated. The agreement was for $150,000, of which $50,000 was unpaid. The liens were filed for a total of $301,686.47.
  • McGowan Recovers Damages: Because the liens were in violation of the settlement agreement and willfully exaggerated, McGowan was the prevailing party & was awarded $25,645 in damages.
  • Degraw’s Suit Dismissed: If there was still any question regarding the validity of Degraw’s liens, let the court’s final finding end it – the liens and suit were dismissed.

The Takeaway

Settlement agreements are not uncommon in the construction industry. We often assist with exchanges of release of lien for payment. But, it’s imperative for parties that execute an agreement to understand that the agreement may be enforceable, just as with any other contract. Review the terms of all agreements, and as a best practice, seek legal guidance before signing anything!

Is “Final Payment” Written on the Check?

Posted on March 9, 2018 by - In Other Commercial Credit News

Is “Final Payment” Written on the Check? Consider it Final and Paid.

In a recent Mississippi case, one general contractor argued that a payment it received from the owner did not satisfy the total claim amount. The check the general contractor received and subsequently deposited included the phrase “Final Payment.”

The general contractor attempted to recover the remaining balance owed and ultimately, the general contractor proceeded with suit to recover unpaid monies. Amidst litigation of additional issues, the court had to determine whether “Final Payment” written on the check operated as an accord-and-satisfaction of the claim.

Unfortunately for the general contractor, by depositing the “Final Payment” check, they accepted that payment as payment in full and were barred from further recovery.

What is Accord & Satisfaction?

Essentially, accord and satisfaction is synonymous with paid in full. According to the court opinion, Mississippi statute dictates that accord and satisfaction exists if:

  • Something of value is offered “in full satisfaction of a demand” – i.e. the check
  • The offer is “accompanied by acts and declarations [that] amount to a condition that if the thing is accepted, it is accepted in satisfaction” – i.e. the phrase “Final Payment” on the check
  • “The party offered the thing of value” must “understand that if he takes it, he takes subject to such conditions” –  i.e. understand the meaning of “Final Payment”
  • The party accepts the item and/or offer –  i.e. depositing the check

Based on the four parameters, as you can see, the court determined the payment the general contractor received, did qualify as accord and satisfaction.

“However, Mississippi law is clear that, despite whatever contentions a party may make to the contrary, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment.”

But, But, But…Final Doesn’t Really Mean Final

This case was recently reviewed by attorney, Matthew Devries in “Paid in Full” Wives’ Tale True? When Endorsing A Check, Yes Ma’am!. In his review, Devries states “The contractor conceded that it cashed the check but argued that it repeatedly asserted to the owner…that it did not consider the “final payment” to be final and that it would continue seeking the remainder of what it was owed.”

For whatever reason, it reminds me of the cliché, “You can’t have your cake and eat it too.” The contractor can’t cash a check, marked as final payment, and then continue collection efforts. Perhaps it’s that pesky word “final” that was getting in the way.

Be Careful!

Checks are monetary agreements and should be treated with care. As a former bank employee, I can tell you there are guidelines for accepting & depositing checks (albeit, they may not always be enforced or followed).

For example, the payee line on the check must match the deposit account name, if you write “for deposit only” on the check you can’t get cash back from the deposit (must be a separate transaction), and post-dated checks can’t be tendered until the specified date.

If you receive payment, and there are conditions or terms within the payment, seek a legal opinion before accepting the payment.

Properly Perfected UCC and Repossession

Posted on December 18, 2017 by - UCC Financing Statements

Can a Properly Perfected UCC Really Give Me the Right to Repossess?

Yes, a properly perfected security interest and proof of debtor default may afford you the right to repossess the collateral. Today’s post reviews a recent case that demonstrates the power of a properly perfected UCC.

In CNH INDUSTRIAL CAPITAL, AMERICA, LLC v. T & P FARMS, LLC, Dist. Court, ND Mississippi 2017, the court granted the Secured Party the right to repossess its equipment because it had 1.) proven the debtor defaulted on the contract and 2.) properly perfected a security interest through UCC Financing Statements.

Background: The Contract, The UCC-1s & The Replevin

In 2015, the debtor, T & P Farms, LLC (T & P) purchased over $1M in farming equipment from Medlin Equipment Company of Mississippi County (Medlin).

According to the court opinion, there were 4 pieces of equipment sold, and each sale was “…evidenced by a Retail Installment Sale Contract and Security Agreement.” (3 of the 4 sales were addressed in the replevin action.)

Included in the contract, aside from the security language and terms of the sale, was a clause regarding debtor default: “the seller has the right to ‘take possession of all Collateral, without notice or hearing…’” and Medlin assigned its interest in the equipment to CNH Industrial Capital America, LLC (CNH). Subsequently, a PMSI filing was properly perfected, by CNH, for each sale/contract.

By the end of 2016, the debtor had stopped making the agreed upon monthly payments and in May 2017, CNH filed a replevin action.

What is Replevin Action?

Wex Legal Dictionary defines replevin as the action used by creditors to repossess collateral from debtors in default. “A writ authorizing the retaking of property by its rightful owner (i.e., the remedy sought by replevin actions).”

The rules of replevin may vary by jurisdiction and this case looks to Mississippi statute (Section 11-37-101 of the Mississippi Code). According to the court opinion, a replevin action requires a declaration under oath to include:

(a) A description of any personal property;

(b) The value thereof, giving the value of each separate article and the value of the total of all articles;

(c) The plaintiff is entitled to the immediate possession thereof, setting forth all facts and circumstances upon which the plaintiff relies for his claim, and exhibiting all contracts and documents evidencing his claim;

(d) That the property is in the possession of the defendant; and

(e) That the defendant wrongfully took and detains or wrongfully detains the same

The Secured Party Prevailed

When a replevin action is filed, the party filing the action needs to prove their right to repossess the collateral. In this case, the Secured Party filed the action, then the Secured Party proved its properly perfected security interest as well as the default of its debtor.

“A plaintiff in a replevin action establishes the right to immediate possession by demonstrating a default on a purchase contract and a perfected security interest in the collateral.”

The debtor is afforded an opportunity to defend against the repossession. The debtor asked the court to consider equitable defense (a defense based on fairness, not law), based on the debtor’s need for the equipment to maintain his business and support his family.  The debtor further added he should not have to pay for the equipment, because the equipment was faulty.  Unfortunately, the debtor’s defense wasn’t persuasive enough.

“While a rule of equity may play some role in this determination, such as where a party claims an equitable lien in the subject of the action, T & P has not cited, and this Court has not found, any authority which supports the proposition that a possessory interest in collateral may be equitably created by either the condition of collateral unrelated to the existence of a default or the need for continued possession.”

CNH properly perfected its security interest and successfully established the debtor’s default, therefore, the court granted CNH the right to repossess the equipment.

UCC for the win!

Despite Disputes, Release Retainage

Posted on September 29, 2017 by - In Other Commercial Credit News

In Tennessee, Retainage Must Be Released within 90 Days, Despite Disputes

Retainage is a familiar term in the construction industry: Retainage is an agreed amount of a contract price that is retained by one party from another, with an assurance that the party will be paid once the job is completed.

Retainage is common in construction contracts and is generally between 5%-10%.

For example, the owner may withhold 5% of the contract amount, then, once the project has been completed/accepted, the owner will release that 5% to the general contractor. Retainage is sometimes viewed as a bit of an insurance policy, or more aptly, it is leverage.

“…[T]he sole purpose of withholding retainage is to protect the project, so that if there is a dispute with the contractor, whether it is defective/incomplete work, or the project is late—assessment of delay or liquidated damages—retainage can and will be withheld from the contractor, used as leverage.” – David Taylor, author of What Lenders Need to Know

Many state statutes specifically address retainage. For example, Texas statute states the owner should withhold 10% retainage.

Sec. 53.101.  Required Retainage

(a)  During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:

(1)  10 percent of the contract price of the work to the owner; or

(2)  10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.

In Tennessee, according to What Lenders Need to Know, retainage cannot exceed 5%, with a deadline provided for the release of the retainage. Per Taylor, retainage must be released within 90 days from substantial completion.

Taylor reviewed and addressed a specific Court of Appeals case which bucked the status quo on the release of retainage.

I admit, I would have assumed that releasing retainage would be conditioned on acceptance. Essentially, if the owner isn’t happy or if there is a dispute, the retainage would continue to be withheld until all issues are resolved.

Well, you know what happens when you assume…

Taylor states “The Court of Appeals ruled that, regardless of what the contract says about an owner withholding retainage, even if there is serious defective work which far exceeds the retainage amount, retainage must be released to the contractor within the 90-day period.”

Wait, does this mean what I think it means? Yes, Taylor warns “[B]e aware that even if there is a failed project, caused by the contractor, withheld retainage may have to be paid to that contractor.”

Now, this is based on a case in Tennessee, and, as you know, all states are different. But let it serve as a reminder to ensure familiarity with statutes for the states in which you furnish & if you are ever in doubt, seek a legal opinion.

NCS can help – contact us today!

Timely Amend Your Proof of Claim

Posted on August 11, 2017 by - In Other Commercial Credit News

Need to Amend the Proof of Claim? Here’s a Tip, Don’t Wait 7 Years

We’ve discussed bankruptcy proof of claims before, but today we are reminded just how vital accuracy is when filing a proof of claim.

In Delaware Court Shuts Down Creditor’s ‘Unreasonable’ Motion to Amend its Proof of Claim, author Aditi Kulkarni-Knight discusses a recent bankruptcy decision.

Here’s a quick breakdown (oversimplification) of the decision. The debtor filed for bankruptcy protection in January 2009 and the court set the bar date for September 30, 2009. The creditor filed their initial proof of claim timely, in the amount of $21,281. Then, in November 2016, the creditor filed a motion to amend its claim to add a co-claimant and to increase its claim amount to $81 million.

(The increase in claim amount was because the creditor wanted to “convert its claim for contractual royalties to a claim for more than $81 million of alleged copyright infringement damages.”)

The Claim Amount Increased by 363,438%. Whoa!

Unsurprisingly and as you can imagine, the court denied the creditor’s request. Asking to amend your claim 7 years after the bar date & increasing your claim amount by 363,438% seems unreasonable to me too!

I read a lot of case law. While it’s usually fact based with rare anecdotal bits, occasionally a judge tells it like it is – this is one of those cases.

“the court stated, ‘the law is clear: ignorance is not a sufficient reason to permit amendment’ Additionally SNMPR was represented by counsel when it filed the Claim, and ‘lawyers are charged with knowing the law.’”

(I admit it, when I read it, I absolutely chuckled “Ooooh, burn!” at my desk.)

It’s True, It’s Ridiculous

The judge is right, of course, improperly completing a proof of claim and wanting to fix it 7 years later is ridiculous. The creditor had months to properly review their claim and complete the document.

As a best practice, Kulkarni-Knight recommends due diligence.

“The case serves as a warning to creditors and creditors’ counsel alike when filing proofs of claim. Courts may be unwilling to allow amendments to proofs of claim when (1) a considerable amount of time has passed since the bar date, (2) the amended amount of the claim far exceeds the original amount of the claim, or (3) the amendment changes the substantive nature of the claim. Creditors and their counsel must ensure that proofs of claim include as much detail as possible at the time they are filed, that the amount sought is accurate and supported by appropriate documentation, and that all legal bases for the claim are asserted. While a motion to amend may be necessary in light of newly-discovered evidence, creditors and their counsel can avoid such motions by doing their due diligence and legal analysis before they file their proof of claim.”

Contact NCS with questions!