Service Area: Notice and Mechanic’s Lien Services

Key Collection Questions & Important Documentation

Posted on July 22, 2019 by - Credit Risk Management

Prep to Collect: Key Collection Questions & Important Documentation

You’ve gone around and around with your debtor for weeks, maybe even months, but still haven’t received past-due payments. You decide you need collection assistance and think about hiring an attorney. These four collection questions can help determine the best debt recovery plan for your business and better assist in communicating with and demanding payment from your customer.

Four Questions to Consider When Placing Your Collection with an Attorney

How Much Am I Owed?

The amount of money you’re owed can greatly impact how you proceed with the collection process. If it’s a larger past-due payment and/or from a high-risk account, you may want to bypass an in-house placement and send your case right to an experienced attorney for review.

How Past-Due Is the Payment?

It’s important to know exactly how long your receivable has gone unpaid. There could be a pertinent underlying reason for late payments, such as your debtor experiencing financial distress, or maybe there are payment issues higher up the ladder of supply. It’s critical to get out in front on the collection process because the longer an amount goes unpaid, the harder it is to collect. Some studies indicate that after six months the collectability of a past-due amount can be reduced by as much as 52%.

Am I Involved In an Ongoing Dispute with the Debtor?

If you’re involved in an ongoing dispute with the debtor, over issues such as invoice discrepancies or quality-of-work, it could result in late payments. Therefore, we recommend placing your collection with an attorney who will work quickly to resolve dispute(s) and ultimately get you paid.

Is It a Secured Amount?

If you have security in place, such as a UCC filing, mechanic’s lien or bond claim, we recommend attorney involvement to best leverage your security. For example, if you have a lien on an unpaid project, an attorney can assist in resolving the balance owed, including, if necessary, foreclosing on that lien. Similarly, if there is a UCC in place, an attorney can proceed with replevin action or repossession through the courts.

Importance of Documentation in the Collection Process

Why Do I Need Supporting Documentation?

Any collection professional needs thorough, up-to-date information to best demand payment from your debtor. Providing the proper documentation at the start of the collection process will allow an attorney to efficiently and effectively handle your claim – putting you in the best position for receiving payment.

What Type of Documents Do I Need?

Supporting documentation? The more the merrier! Every collection attorney requires basic information such as the debtor’s full name, physical address and the amount owed. However, we recommend you also provide any additional paperwork that supports your claim. This could include signed invoices, written contracts or agreements, proofs of delivery and/or bills of lading. With access to proper backup documentation, the collector can speak more intelligently regarding your claim and even speed-up the collection process.

Important Documents to Include

  • Contract or Agreement
  • Credit Application
  • Invoices and Statement of Account: this should include copies of returned / NSF checks
  • Purchase Orders
  • Proof of Deliveries
  • Personal Guarantee
  • Trade References
  • Correspondence & Notes: this could include emails, letters (demand letters, payment requests & notices) and documented phone conversations
  • Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  • Credit Report

Unfortunately, there’s no sure way of determining the collectability of a past-due account. Therefore, it’s best to weigh the costs against the potential debt recovery and be proactive in your efforts – start taking steps to secure future receivables today.

Are you caught up in past-due payments and need some collection expertise? Let our national network of attorneys, specializing in secured and unsecured commercial collections, help get you paid!        

Iowa Lien Attached to Building, Not Lessor’s Property

Posted on July 12, 2019 by - In Other Commercial Credit News

Who Is Responsible for The Costs Associated with The Construction of The Facility, The Lessor, Lessee or Both?

In Iowa, the Lien Attached to the Building, Not the Lessor’s Property

A lessor owns the real property, signs a 50-year lease with the lessee and the lessee builds a facility on the leased property. Who is responsible for the costs associated with the construction of the facility, the lessor, lessee or both? According to the Iowa Supreme Court, the costs are the responsibility of the lessee, which means the liens can only attach to the lessee’s building and not the real property.

The Case Before the Iowa Supreme Court

Cargill, Incorporated (Cargill) signed a 50-year lease with HF Chlor-Alkali, LLC (HF). Cargill owned the land and the lease was established to permit HF to build a manufacturing facility on the property. HF hired general contractors, who in turn hired multiple subcontractors and suppliers to build the facility. All construction contracts were made with HF – no one contracted with Cargill – and HF owned the building.

What happens next is no surprise: parties in the ladder of supply weren’t paid for the construction of the facility. Mechanic’s liens were filed, and the lien claimants pursued foreclosure actions.

Cargill objected to the foreclosure of the liens against its property and argued the liens could only attach to the building owned by HF and not the property owned by Cargill. Cargill’s argument relied on the 2007 and 2012 statute changes.

The Iowa Supreme Court agreed with Cargill.

Iowa’s 2007 & 2012 Statute Changes Made the Difference

Iowa modified its mechanic’s lien laws in 2007 & again in 2012. These legislative updates included a refined definition of “owner.” Here’s a quick recap from R. Zachary Torres-Fowler in his recent article, The Lessor of Two Evils: Iowa Supreme Court Holds That Mechanic’s Liens Will Not Attach to the Property of a Lessor for Work Authorized by a Lessee.

“…in 2007, the Iowa legislature removed contracts with ‘the owner’s agent’ as a basis for permitting a mechanic’s lien to attach to the owner’s property.  In 2012, the Iowa legislature further revised the mechanic’s lien statute to narrow the definition of ‘owner’ to exclude persons ‘for whose use or benefit any . . . improvement is made.’”

Iowa statute dictates a lien is available “Every person who furnishes…by virtue of any contract with the owner, owner-builder, general contractor, or subcontractor shall have a lien upon such building or improvement…” So, what does that mean for Cargill? The contracts weren’t with Cargill; thus, Cargill’s property is not subject to the lien. Because HF contracted for and owns the building, the lien can only attach to the building.

What Does this Mean for You?

This should be a warning to those furnishing to potential lessor/lessee situations. Don’t assume mechanic’s lien rights will extend to the property; rights may only be available on the leasehold interest, or as in this case, the building on the property.

Each state handles these situations differently and sometimes statute defers to the language within the contract between the lessor/lessee. You may recall a New York case we reviewed in April, in which the property owner was liable for the construction costs, because the lease specifically required the tenant to make the electrical improvements.

Review your contracts, review property ownership, review the lease whenever possible, and always seek a legal opinion.

Lien Dissolution Bond and Suit-To-Enforce Action

Posted on June 14, 2019 by - In Other Commercial Credit News

A Quick Story about a Lien Dissolution Bond and Its Trusty Suit-To-Enforce Action

A “lien dissolution bond,” which can be filed to remove mechanic’s liens from a property, is one of many names or phrases given to bonds of this type. Some other names or phrases you may recognize include: bonded off lien, discharge bond, bonding around/over lien, lien prevention bond, transfer bond, and a new one to me, a target lien bond. (Much to my dismay, “target lien bond” has nothing to do with shopping at the infamous Target.)

While today’s post has little to do with my shopping obsessions, it does focus on what happened in one Massachusetts case when the lien claimant took steps to foreclose on the lien dissolution bond.

Massachusetts Statute Allows for Liens to be Dissolved by Filing a Bond

We’ll get the technical aspect out of the way first. Section 14 of G.L. c. 254 (i.e. Massachusetts mechanic’s lien statute) provides that a lien dissolution bond can be filed with the Registry of Deeds to remove a mechanic’s lien filed against a property.

“Any person in interest may dissolve a lien under this chapter by recording or causing to be recorded in the registry of deeds in the county or district where the land lies, a bond of a surety company authorized to do business in Massachusetts and in a penal sum equal to the amount of the lien sought to be dissolved conditioned for the payment of any sum which the claimant may recover on his claim for labor or labor and materials. Upon the recording of the bond, the lien shall be dissolved…”

Section 14 also explains that a notice of the recorded bond and copy of the bond should be provided to the lien claimant whose lien has been dissolved. And, statute states “The claimant may enforce the bond by a civil action commenced within ninety days after the later of the filing of the statement required by section 8 or receipt of notice of recording of the bond, but such bond shall not create any rights which the claimant would not have had, or impair any defense which the obligors would have had, in an action to enforce a lien.”

Section 14 is referring to the deadlines laid out under section 8 for mechanic’s liens. Here are the mechanic’s lien deadlines from The National Lien Digest –

  • File a Statement of Account no later than the earliest of:
    • 90 days from the recording of a Notice of Substantial Completion,
    • 120 days from the recording of a Notice of Termination, or
    • 120 days from the last furnishing of materials or services by the prime contractor or the subcontractor.
  • File suit to enforce the lien within 90 days from filing the Statement of Account.

In other words, a claimant can proceed with suit to enforce the lien dissolution bond within the same deadlines as they would for a mechanic’s lien: 90 days from the date the lien was filed.

Yikes, That’s A Lot of Technical. What about the Case?

I know – the downside to some of these cases is the crazy technicalities that need to be explained prior to getting to the good stuff. So, on to the good stuff!

The question before the court was “if a claimant proceeds with suit against the bond, are they required to record an attested copy of their complaint?” Because the mechanic’s lien statute states an “attested copy” of the suit action must be recorded with the Registry of Deeds.

The short answer? Nope.

According to an article by Kevin Mortimer and Samuel Tony Starr, the surety is the party that contested the court’s decision.

“…when the supplier/lienholder filed a timely enforcement action against the subcontractor and bond surety, the surety moved for summary judgment—arguing that the lienholder had failed to comply with the strict requirements of Section 14 by failing to record an attested to copy of its complaint with the Registry of Deeds.”

And the lower court sided with the surety. But, what good is a case that isn’t appealed?

Upon appeal, the Supreme Judicial Court overturned the earlier decision, because the language within statute does not state there is a requirement for recordation of an attested copy. In fact, the court compared the lack of language in section 14 to the inclusion of language in section 12.

Essentially: if the statute wanted an attested copy to be recorded, it would have said so.

But wait, there’s more. The surety argued that an attested copy should be recorded to notify other parties of the suit, even if they are non-parties to the action.

“…the Court acknowledged the surety’s valid concern that many entities, including the general contractor and other subcontractors, may have an interest in knowing about a lien dissolution bond’s enforcement action. The surety asserted that since such entities are not named as parties to the action, they would not receive service, and therefore would not have knowledge of it.”

Perhaps We Will See New Legislation?

Well, it’s certainly possible. When the court acknowledged the surety’s concern about notifying interested parties of the suit action, it made a footnote comment that may be fortuitous “Any resolution of this issue, however, is for the Legislature.” So, it’s possible that new legislation may develop from this case.

You can read the court opinion here: City Electric Supply Co. v. Arch Insurance Co.

Check Out Our Top 10 Lien Waiver Questions

Posted on June 10, 2019 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

NCS Top 10 List: Lien Waiver Questions

Lien waivers are one of the most popular documents within construction credit. We’ve compiled a list of the top 10 lien waiver questions.

Let’s Dig In!

1. What Is a Lien Waiver?

A lien waiver is a signed document in which the would-be lien claimant agrees to waive rights to its claim based on payment received.

2. What Information Should Appear within the Waiver?

Every lien waiver should clearly identify the property name & project location, the debtor’s name (your customer), the invoice or purchase order number, the payment amount and the disputed claim amount. If the lien waiver is for partial payment, you should also include the payment period or a through date.

3. Is a Lien Waiver the Same as a Release of Lien?

No, and this is a common misconception. A lien waiver acknowledges receipt of payment whereas a release of lien releases a previously recorded document.

4. Are Lien Waivers the Same in All States?

Most states do not require a specific lien waiver format. However, there are about a dozen states that do have specific lien waiver requirements, including Arizona, California, Colorado, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri (residential projects), Nevada, Texas, Utah, and Wyoming.

Important Note: GA & MS allow for an Affidavit of Non-Payment to be recorded if a waiver has been executed and payment has not been received.  Watch the statutory time requirements!

5. Are There Different Types of Lien Waivers?

Yes! Lien waivers are either conditional or unconditional as well as partial or final.

  • Conditional: subject to requirements made or granted on certain terms
  • Unconditional: not subject to requirements; absolute
  • Partial: existing only in part; incomplete
  • Final: the last; end; termination or conclusion

  • Partial Conditional Lien Waiver: waives rights to a claim for a dollar amount or through a specified date, conditioned upon receipt and clearance of the partial payment.
  • Partial Unconditional Lien Waiver: waives rights to a claim for a dollar amount or through a specified date. The waiver is not conditioned upon clearance of a payment.  If the check is not received, or does not clear, the contractor/subcontractor/supplier will have waived their rights to that partial payment.
  • Final Conditional Lien Waiver: waives rights to a claim, conditioned upon receipt and clearance of a final payment. If the contractor/subcontractor/supplier does not get the final payment, or the payment does not clear, the waiver does not waive their rights.
  • Final Unconditional Lien Waiver: waives all rights to a claim. The waiver is not conditioned upon clearance of a final payment.  The contractor’s/subcontractor’s/supplier’s rights will be waived whether payment is received or cleared.

6. Can a Conditional Lien Waiver be an Unconditional Lien Waiver?

Yes, an unconditional lien waiver may be masquerading as a conditional lien waiver. It’s critical to review the entire document (don’t rely on the document title).

We frequently see two phrases within the “consideration clause” of the waiver, which indicate the waiver is unconditional and not conditional:

  • “the receipt whereof hereby acknowledged” and
  • “the receipt and sufficiency of which are hereby acknowledged”

These two phrases are legalese for “I have received the payment and the payment cleared.”

7. Which Waiver is Preferred?

Conditional lien waivers are preferred over unconditional lien waivers, because the “conditions” provide the creditor with leverage, in the event payment is not received or does not clear.

8. I Signed an Unconditional Waiver and the Check Didn’t Clear. Do I Lose My Lien Rights?

Yes, it is likely you would lose your lien rights if the waiver was a final unconditional lien waiver. However, depending on the circumstances in which the waiver was given there could be new causes of action in addition to receipt of bad check.

If you waived your rights and payment didn’t clear, seek legal guidance ASAP!

9. Does a Lien Waiver Waive My Right to Cause of Action for Lost Profits or Disputed Change Orders?

It is likely your right to cause of action will be waived, because frequently waivers will include language such as “all possible causes of action.” That said, it will depend on the specific language within the waiver you signed. You should have an attorney review the waiver and confirm.

Note: If the waiver provides for carve outs, it is recommended you enter the amounts remaining due in this section.

10. Can Payment (Legally) Be Withheld if a Lien Waiver Is Not Signed?

Yes, if a party is requiring an executed waiver in exchange for payment, the payment can be withheld until the signed waiver is received. You may be reluctant to sign a waiver without cleared payment, and I would be too!

In situations such as this, many of our clients will hire an attorney to facilitate the exchange of waiver for payment.  When you hire an attorney to facilitate the exchange, the attorney will hold both the funds and the signed document.

Essentially, the funds are held in escrow until payment has cleared. Once the payment has cleared, the attorney would remit funds to you and provide the signed waiver to the other party. If the funds do not clear, or payment is not made, the attorney will not release the signed waiver to the other party.

Any Other Waiver-Words-of-Wisdom?

Before you sign a waiver you should confirm the dollar amounts match (what you are waiving & the amount received), double check to ensure the document is properly dated and signed, carefully review the waiver language so you don’t inadvertently waive too much, and honestly, there is a lot at risk when executing lien waivers: seek a legal opinion.

Fiber Optic Networks: Can I File a Mechanic’s Lien?

Posted on June 7, 2019 by - In Other Commercial Credit News

Fiber Optic Networks: Can I File a Mechanic’s Lien?

Lienability. One of the many questions we are asked is “Can I file a mechanic’s lien on that?” Or, if we must relay the unfortunate news that an improvement isn’t lienable, we are then asked, “Why can’t I lien that?” Determining what is or isn’t lienable might be the only task that can be just as confusing as the lien laws themselves.

In early 2017 we discussed an Illinois case that left a subcontractor unpaid to the tune of $3M and without the remedy of a mechanic’s lien. In that case it was the construction of a wind turbine, which the court deemed as a trade fixture. and declared mechanic’s liens filed on the property as invalid.

Wind and solar farms are often questionable when it comes to rights under mechanic’s lien statutes, but they aren’t alone. Some electrical work, excavation for pipelines, and even installation of fiber optic technology, also face a questionable fate under mechanic’s lien statutes.

Fiber Optic Technology and Mechanic’s Liens (in Ohio)

Technology shows no sign of slowing down, in fact it will likely increase at the speed of fiber optic technology…

[Do you hear the echoes, see the lightning strikes, and me sporting dark sunglasses in a snappy black suit?!]

OK, so my humor is a bit lame, but, it’s an entertaining way to segue to whether the installation of fiber optic networks is lienable.

First, what do we know about the typical fiber optics network? They can be massive. Much like wind farms, solar farms, and pipelines, fiber optic networks cover multiple parcels – sometimes within multiple counties or even states.

“An optical network—a data communication network built with fiber optic technology—uses a series of optical fiber cables, placed on properties typically owned by someone other than the network provider and spread out over a large geographic area. An operator connects and operates this network from real property known as an exchange, which the provider typically owns or leases.” Nick Pieczonka, author of Mechanics’ Lien Law and Work Performed on Optical Networks

In his article, Pieczonka goes on to answer two critical questions: “Can a lien attach to the property owned or leased by the network provider, even though the contractor performed no physical labor at the property?” and “How are work orders treated and what impact does that have?” The second question is interesting, but I want to focus on the first: can a lien attach to the property.

According to Pieczonka, the answer is yes. Yes, a lien can attach to the property, because the work benefits the entire network. Here’s his answer:

“The end user, not the optical network provider, generally performs work on optical networks on property it owns. So can a lien attach to the optical network provider’s real property—which houses the network’s exchange—even though no work took place on that property? The answer appears to be yes. For example, Ohio’s Revised Code §1311.08 provides, in pertinent part:

[W]here work or labor has been performed or material has been furnished for improvements which are located on separate tracts or parcels of land but operated as an entire plant or concern, and erected under one general contract, the lien for the labor or work performed or material furnished attaches to all such improvements, together with the land upon, around, or in front of which such labor or work is performed or material is furnished…

As a result, because the contractor’s work benefits the entire network and the provider operates the network at an exchange it owns or leases, the lien may attach to the entire improvement, including the exchange itself…  Indeed, the network provider’s lease, ownership documents, or master contract with the contractor may describe the network and the land being improved (i.e., the entire network or the exchange), which would also support the proposition that the lien can attach to the network provider’s exchange…”

It’s important to note, Pieczonka is referring to Ohio statute – as we know, each state’s law is different. But wow – this is huge!

Fiber Optic? Take Note!

There are a few things to keep in mind, if you are providing services similar to those described above:

  • Be prepared for expensive title work (you may have to identify each parcel & the owner of each parcel)
  • Multiple liens may be required
  • You may encounter easements, which could lead to a question of lien priority
  • The lien may be limited to the leasehold interest (depending on the state statute)

Let’s Talk About Commercial Bankruptcy

Posted on June 3, 2019 by - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

Let’s Talk About Commercial Bankruptcy: The More You Know, the Greater Your Chance at Preserving Your Rights as a Secured Creditor

The more you understand about commercial bankruptcy and the bankruptcy process, the greater chance of preserving your rights as a secured creditor and ultimately receiving payment.

Refresher: What’s a Secured Creditor?

A secured creditor has a security interest over some or all of the assets of its debtor. This status can be achieved and maintained through a variety of credit tools such as Mechanic’s Liens, Bond Claims and UCC filings.

In the event of the debtor’s bankruptcy or default, secured creditors have payment priority over their unsecured counterparts, significantly improving the likelihood of getting paid.

The Breakdown: Chapter 7 vs. Chapter 11

In Chapter 7 bankruptcy, the debtor ceases operations, its assets are liquidated by an appointed Trustee, and the funds are used to pay the outstanding debt.

In Chapter 11 Bankruptcy, the debtor wants to continue operating. The debtor will undergo significant structural changes and arrange to pay its creditors over a set period of time.

The Bankruptcy Proof of Claim

As a creditor, it’s important you take the proper steps to protect your interest. Depending on the type of commercial bankruptcy your customer has filed, you may be required to file a Proof of Claim with the bankruptcy court by the specified date, also known as the bar date.

As per the United States Bankruptcy Court, a Proof of Claim is “a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money.” This document is critical because it provides proof to the court that your claim amount is valid and owed, as well as what class to associate your claim with.

Generally, this document will include:

  • Debtor name
  • Case number
  • Creditor information, including mailing address
  • Claim amount
  • Basis for the claim
  • Type of claim (secured or unsecured)
  • Supporting documentation

In the event of Chapter 7 bankruptcy, you must file a timely proof of claim in order to share in any distribution of funds. The bar date refers to a date, established by the bankruptcy court and based on a variety of factors, by which the proof of claim must be filed. Often, creditors fail to submit the document in time and suffer the consequence of an invalid claim. Whether your claim amount is secured or unsecured, be sure to meet the stated deadline to preserve your rights and maximize any potential distribution.

In a Chapter 11 proceeding, it’s typically unnecessary for a creditor to file a Proof of Claim. This is because the debtor is required to file a Schedule of Assets and Liabilities, which formally lists its creditors’ claim amounts. However, filing a Proof of Claim is recommended if:

  • The claim amount is listed incorrectly on the Schedule of Assets & Liabilities or,
  • The claim amount is defined as designated, unliquidated or contingent

In these cases, if a Proof of Claim is not filed, the bankruptcy court will deem the information on the Schedule of Assets & Liabilities as correct and distribute the funds accordingly.

If your debtor has recently filed for bankruptcy, it’s critical to act quickly and take the necessary steps to validate your claim amount. Immediately determine the type of bankruptcy preceding you’re dealing with and whether you should complete a Proof of Claim form. If filing, be sure the document is accurate and ON TIME.

We Can Help

Don’t risk an invalid claim and losing out on payment distribution. Let NCS assist in preparing, filing and monitoring your bankruptcy Proof of Claim today. Contact us for more information!

Arizona Preliminary Notice Changes Coming December 2019!

Posted on May 24, 2019 by - In Other Commercial Credit News, Preliminary Notices & Construction Credit

Arizona Preliminary Notice Changes Coming December 2019!

We are often asked, “Do I have to serve an amended notice if my contract amount increases?” and, “If so, how much does my contract have to increase to warrant another notice?” Generally, we recommend serving an amended notice when your contract amount increases by 20% or more. This recommendation is based on case law, attorney recommendations, and specific statute, e.g., Arizona.

In fact, Arizona’s current statute specifically states a claimant only needs to serve one preliminary notice, unless its contract amount increases by 20% or more, then the claimant should amend its notice.

“A person required by this section to give notice…need give only one notice…unless the actual estimated total price for the labor, professional services, materials, machinery, fixtures or tools furnished or to be furnished exceeds by twenty per cent or more the total price in any prior original or subsequent preliminary notice…”

Soon “30″ Will Be the New “20″ in Arizona!

Earlier this month the Governor of Arizona signed HB1304 which updates the requirement for when an amended notice is required. For any projects where first furnishing occurs on or after 12/31/19, an amended notice will only be required if the contract amount increases by 30% or more.

“Effective for any projects where furnishings are first commenced to be furnished from and after 12-31-19, an additional notice will be required if the estimated total price for the furnishings exceeds by 30% or more the total price in a prior notice under the same contract.” – Legislative Update from The National Lien Digest

What Does This Mean for You?

Currently, under Arizona statute, if your original contract amount is $100,000 and a change order is issued increasing your contract to $120,000 (increased by 20%), you are required to serve an amended preliminary notice.

Here’s what it will look like at the end of December:

Arizona statute as of 12/31/19

Once the new statute is in effect, you may notice a decrease in the number of required amended notices; saving you time & money.

Bond Claim Nitty-Gritties: The 5 W’s and 1 H

Posted on May 13, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Bond Claim Nitty-Gritties: the Who, What, Where, When, Why, and How of Bond Claims

Ahh, payment bonds and bond claims; a payment security often available for those furnishing to public and federal projects and even the occasional private construction projects. Before you can exercise your bond claim rights, you need to be familiar with the 5 W’s of bond claims.

I know the 5 W’s usually go in a certain order: who, what, when, where and why. I also know there is 1 H: how. But let’s shake it up and tackle the 5 W’s (and 1 H) in a different order: what, why, who, when, where, with some how’s throughout.

WHAT is a Payment Bond?

Before we head to bond claims, we need to understand payment bonds. After all, without a payment bond, a bond claim doesn’t exist.

Generally, public and federal construction projects require general contractors to obtain a payment bond. The payment bond is issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.

WHO is a party to the Payment Bond?

There are three primary parties tied to a payment bond:

  1. Obligee: The party protected by a bond, the one who requires the bond to be furnished.
  2. Obligor aka Principal: An entity that has an obligation to pay a debt/the party required to furnish a payment bond.

Example: where the obligee is the owner, the principal is the prime contractor; where the obligee is the prime contractor, the principal is the subcontractor.

  1. Surety: One who agrees to answer for the debt or default of another, usually an insurance company that is compensated for the risk by charging a premium.

Wait, HOW do I know if a Payment Bond has been issued?

You may find it easiest to contact the project owner to confirm whether a payment bond was required and if one was required, ask to be provided with a copy. My advice? Make this request at the beginning of the project when everyone is happy — don’t wait until there are payment issues, because folks are less inclined to share.

How: As a best practice, include language requesting a copy of a payment bond within your preliminary notice. Here’s some sample wording

To Whom It May Concern:

We are writing to you in connection with the above project, where we have contracted with ABC Company to furnish materials (pieces, parts and thingamajigs). We ask that you please forward a copy of any payment bond(s) for this project to the undersigned. Thank you for your assistance.

Sincerely,

Me

WHAT are Payment Bond variations?

Each state has its own statute requiring payment bonds on public projects and the Miller Act applies to payment bonds required on federal construction projects. Some statutes may require the general contractor obtain a payment bond on every construction project, and other statutes may only require a payment bond when the total value of the construction project exceeds a certain threshold.

For federal projects, generally if the construction contract is less than $100,000 but more than $25,000, the contracting officer and prime contractor must agree to a payment protection of:

  • A payment bond
  • An irrevocable letter of credit
  • A tripartite escrow agreement (a federally insured financial institution distributes payments); or
  • A certificate of deposit

However, be aware these requirements may be waived on certain federal projects.

WHAT is a Bond Claim?

A Bond Claim is a written notice that the claimant (e.g. subcontractor, supplier or materialman) looks to the recipient for payment.

WHY serve a Bond Claim?

Why? Because it’s your right to be paid! There are laws (aka statutes) in place to protect your payment rights. Carefully comply with statute and serve a bond claim to recover your claim.

WHO should receive the Bond Claim?

Based on state statute, typically the bond claim must be served upon the general contractor and the surety, however, it is recommended to serve a copy of the bond claim on all parties involved. The more people that know you have not been paid, the more pressure these people will put on the appropriate party to encourage payment.

WHEN to serve a Bond Claim?

Frequently, a bond claim notice must be served within 90 days from last furnishing materials or services (e.g. Arizona). However, some state statutes, such as in Colorado, refer the claimant to the terms of the payment bond. (i.e. “Serve the bond claim notice in accordance with the terms and conditions of the payment bond.”)  Non-Statutory Bonds, such as those obtained by a subcontractor, also look to the terms of the payment bond.

HOW to serve the Bond Claim?

Check the statutory requirements to be certain. Typically, bond claims can be served via certified mail and as a best practice, request the return receipt. In cases where you are close to the deadline, consider also serving the claim via overnight service or personal server.

HOW about some best practice tips?

  • If a there is a payment bond on the project, attempt to obtain a copy of the bond at the time of contract.
  • Confirm the surety is on the Department of the Treasury’s Listing of Approved Sureties.
  • Review the payment bond, along with statute, to ensure you are covered as a potential claimant.
  • Serve applicable preliminary notices in accordance with statute.
  • If you remain unpaid, serve a copy of the bond claim upon all parties.
  • Keep all project documentation in a central location (e.g. invoices, delivery tickets, statement of account etc.)

Need more info on payment bonds or bond claims? Contact us!