Service Area: Notice and Mechanic’s Lien Services

Adjudication and Ontario’s Construction Lien Act

Posted on June 22, 2018 by - In Other Commercial Credit News

Adjudication and Ontario’s Construction Lien Act

As you are likely aware, the first wave of amendments to Ontario’s Construction Lien Act go into effect in July 2018 and the second wave debut October 2019. We’ve released several blog posts and a whitepaper on the amendments, which can be read here, and in today’s post we are going to continue the discussion on adjudication.

What is Adjudication? Like Arbitration… Only Different

Alike, yet different. Adjudication and arbitration are similar, in that the disputing parties agree to seek resolution from an impartial third party. But, there are some differences.

One difference? Time. Arbitration can go on for quite some time, but adjudication has strict time provisions.

According to an article by Sahil Shoor and Neil S. Abbott of Gowling WLG, the adjudicator has 30 days from receipt of necessary documentation to render a decision. If, after 30 days, the adjudicator needs more time, an additional 14 days can be granted to the adjudicator by the Authority.

“Within five days of the selection of the adjudicator the party who started the adjudication must provide a copy of the contract in question, and any documents the party intends to rely on to the adjudicator. The adjudicator must release his/her written decision within 30 days of receiving the documents. The adjudicator can request up to 14 additional days, but the adjudicator’s request can be refused by either party.”

Not only are the timing provisions strict, the decision made through adjudication is enforceable by the courts. If adjudication has been requested, it will extend the lien deadline to whichever is later, the standard lien filing period or 45 days from the date the required documentation is provided to the adjudicator.

The Powers that Be

In an earlier post we reviewed who can be an adjudicator but didn’t go into much detail on the powers held by the adjudicator. In their article, Shoor and Abbott, provide a healthy list of powers, though last on the list pretty much sums it up:

  • Make directions respecting the conduct of the adjudication.
  • Take the initiative in ascertaining the relevant facts and law.
  • Draw inferences based on the conduct of the parties to adjudication.
  • Conduct an onsite inspection.
  • Obtain the assistance of a merchant accountant, actuary, building contractor, architect, engineer, or other person in such a way as the adjudicator considers fit to enable him or her to determine better any matter of fact in question. The adjudicator may fix the remuneration of the expert and who will pay it.
  • Make a determination of the adjudication.
  • Any other power that may be prescribed.

What Can be Adjudicated?

The legislation defines the matters that may be adjudicated as the valuation of services or materials provided under the contract, payment under the contract including proposed change order(s), disputes that are the subject of a notice of non-payment, retainage/holdback, and any other matter that the parties to the adjudication agree to or that may be prescribed.

It’s important to note, only one issue can be adjudicated at a time. However, if a party wishes to consolidate two or more issues under one adjudication, the party can submit the consolidation request via notification to all parties involved, including the adjudicator.

Commence Adjudication

Much like the mechanic’s lien process, there are steps to commencing adjudication. Shoor and Abbott advise adjudication can only take place between parties within direct contract of one another, adjudication must start prior to contract completion, and the party requesting adjudication must provide notice to other parties.

What should be included in the notice? According to Shoor and Abbott, the notice should include: “names and addresses of the parties; nature and a brief description of the dispute, including details respecting when and how it arose; nature of the redress sought; and name of a proposed adjudicator to conduct the adjudication.”

In addition to notifying other parties, the requesting party should also “provide a copy of the notice in electronic format to the Authority.” – Adjudications Under Part II.1 of the Act, O Reg 306/18

Can You Say Adjudication Three Times Fast?

Shew — I don’t know that I’ve used so many variations of “adjudicate” in one post! But, it’s necessary because adjudication is an important aspect of the amendments to Ontario’s Construction Lien Act. Adjudication will be an option for contracts entered on or after October 1, 2019.

If all goes to plan, adjudication should prove to be a quick, beneficial dispute resolution process!

Promises Won’t Bring Massachusetts Lien Back

Posted on June 15, 2018 by - Mechanic's Liens & Bond Claims

Promises Won’t Bring Massachusetts Mechanic’s Lien Rights Back

In Massachusetts, a project owner promised to pay its subcontractor, so the subcontractor allowed its suit deadline to expire. Unfortunately for the subcontractor, the owner’s promise to pay was void, much like the subcontractor’s ability to recover $196,500 under the Massachusetts mechanic’s lien laws.

Massachusetts Mechanic’s Lien Law

In Massachusetts, securing lien rights often begins with serving a Notice of Identification upon the prime contractor within 30 days from first furnishing. Serving the notice obligates the prime contractor to provide a copy of the Notice of Substantial Completion or Notice of Termination if one is filed.

The lien itself is a two step process: Notice of Contract and Statement of Account.

Notice of Contract:

File a Notice of Contract as early as possible after the execution of your written contract, but no later than the earliest of:

60 days from the recording of a Notice of Substantial Completion,

90 days from the recording of a Notice of Termination, or

90 days from the last furnishing of materials or services by the prime contractor or the subcontractor.

Material suppliers and subcontractors:

Serve a copy of the Notice of Contract upon the owner.

Statement of Account:

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.

In the event a claimant isn’t paid, suit to enforce the mechanic’s lien should be filed within 90 days from the filing of the Statement of Account.

The Case of the Promise and the Unpaid Subcontractor

D5 Iron Works, Inc. vs. Danvers Fish & Game Club, Inc. was heard before a Massachusetts Appeals Court. According to the legal decision, D5 Iron Works, Inc. (D5) was hired by Patriot Range Technologies, Inc. (Patriot) to furnish materials and labor to a rifle range owned by Danvers Fish & Game Club, Inc. (Danvers).

D5 filed its Notice of Contract in accordance with statute, for its initial furnishing. D5 then amended the Notice of Contract to include an approved change order, which increased the contract amount. Danvers promised to pay D5, though D5 secured its mechanic’s lien “in case things didn’t pan out.”

D5 filed its initial Statement of Account timely but allowed its suit deadline to pass (90 days from the filing of Statement of Account), based on additional promises from Danvers.

D5 filed a second Statement of Account several months later. According to Stan Martin, author of A Promise to Pay Doesn’t Extend Lien Deadlines, D5 argued the second Statement of Account extended its deadlines.

“When no payment was made, the sub tried to resurrect its lien rights by taking steps 1 and 2 again, but by now the deadline for those steps had passed under the lien law. The sub argued that the lien law deadlines should be equitably extended, but the trial court, and then the Appeals Court, disagreed. The sub’s lien rights had lapsed when the deadlines passed, regardless of any promises of payment that may have been made.”

Parting Thought from The Court Decision

The court referenced a statement from BloomSouth Flooring Corp. v. Boys’ & Girls’ Club of Taunton, Inc., 440 Mass. 618, 624 (2003), within its decision, and it’s worth sharing: “[R]eluctance to ruffle anyone’s feathers by early notification, however understandable or common in the industry, does not change the plain meaning of the statute.”

Your right to secure payment is only your right if you adhere to statute. You should be paid for materials & services provided. If you aren’t paid, secure and enforce your mechanic’s lien. Promises don’t pay the bills.

Value of Salvaged Materials Increased Contract Amount

Posted on June 8, 2018 by - In Other Commercial Credit News

Project Contract Amount Increased, Based on the Value of Salvaged Materials

Can the resale value of salvaged materials from a demolition site be included in the total contract amount and subsequently be lienable? According to one legal decision, yes.

New Jersey Construction Liens & Salvaged Material

New Jersey is an unpaid balance lien state, which means the construction lien is generally limited to the unpaid portion of the general contract. Here’s a statute snippet:

N.J. 2A :44A-9 Amount of lien claim.

a. The amount of a lien claim shall not exceed the unpaid portion of the contract price of the claimant’s contract for the work, services, material or equipment provided.

And the lien fund shall not exceed:

(1) in the case of a first tier lien claimant or second tier lien claimant, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim;

For example, if the general contract is for $100,000 and the owner has paid the general contractor $25,000, the lienable balance is $75,000. Or, if the general contract is for $100,000 and the owner has paid the GC in full, there are no lienable funds.

But, what happens to potential lien claimants when the terms of the contract include the general contractor paying the owner for the opportunity to demolish a generating station? The GC paid the owner (I know, it seems a little backwards; generally it’s the owner paying the GC). Do lienable funds exist? If lienable funds exist, where do they come from?

In Salvaged Materials to Pay Lien Claimants, author Patrick Johnson reviewed a New Jersey Appellate Court case, where the general contractor agreed to pay the owner $250,000 to demolish a generating station and, in return, the general contractor would have rights to the salvaged materials, which it could resell for a profit.

The general contractor hired a subcontractor & the subcontractor hired two sub-subcontractors. Unfortunately, the subcontractor failed to pay two of its sub-subcontractors and the sub-subcontractors filed liens for over $300,000 each.

The owner didn’t exactly “owe” the general contractor any money… which means, no lienable funds, right?

Enter the Value of Salvaged Material

The owner & general contractor argued the contract had been paid in full, leaving no lienable funds. Although, there was an allegedly unapproved change order for $52,000 outstanding.

Of course, the subcontractor argued the outstanding change order for $52,000 counted as lienable funds and should be used to satisfy the two $300,000+ liens filed by the sub-subcontractors.

Then, the sub-subcontractors argued the value of the material removed from the site should be considered as part of the overall contract.

What is the value of that removed material?

Apparently, the subcontractor removed material valued at over $2,000,000 from the demolition site. And, according to Johnson, the court held that the removal of this material increased the value of the property, thus becoming a part of the contract.

“The appellate court resolved the issue in the subcontractor’s favor holding that the salvage value did make up part of the contract price.  The transfer of title by NRG constituted a prepayment to Werner and was thus excluded from reducing the lien fund.  Instead of transferring title to the salvaged material upfront, the Court reasoned that NRG could have transferred title to Werner incrementally as the project progressed.  The court found the legislative intent was to prevent an owner from enjoying the benefit of labor and materials without paying for them.  The Court held the salvaged materials increased the value of the property and, therefore, they were an essential component of the “payment” under the NRG-Werner contract, even though it was non-monetary consideration.”

Essentially, the original contract amount of $250,000 + the value of the removed materials of $2,000,000 = the lienable funds.

What This Means for Contractors Involved in Site Demos

Johnson recommends “all parties involved in a demolition project should use caution when structuring payment terms under a contract to take into account non-monetary consideration that could be constructed to be part of the lien fund.”

Keep this in mind as we enter the unfortunate tropical storm season and demolition work becomes more prevalent.

New Regulations under Ontario’s Construction Lien Act

Posted on June 4, 2018 by - Legislative Updates & News Alerts, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

New Regulations under Ontario’s Construction Lien Act

Ontario’s Construction Lien Act is set for its first wave of statutory changes which go into effect July 1, 2018. Ahead of these changes, Ontario’s legislature has released new regulations to help clarify the statutory changes.

Adjudication: Who? How?

Up first is Ontario Regulation 306/18, Adjudications under Part II.1 of The Act (O Reg 306/18). As we’ve previously discussed, adjudication is a “rapid construction dispute interim resolution process to avoid payment issues that may otherwise result in project delay.”

Adjudication may be an excellent solution for parties facing clashes over a change in contract valuation, payment issues including change orders, and holdback/retainage disputes. But, who will be the adjudicators? Will the adjudicators understand the construction industry?  Who will manage the adjudication process?

O Reg 306/18, states a person interested in adjudicating, must meet the following requirements:

  1. The individual has, in the Authority’s view, at least 10 years of relevant working experience in the construction industry.
  2. The individual has successfully completed the training programs provided under clause 8 (a), subject to subsection (4) of this section.
  3. The individual is not an undischarged bankrupt.
  4. The individual has not been convicted of an indictable offence in Canada or of a comparable offence outside Canada.
  5. The individual pays to the Authority any applicable fees for training and qualification as an adjudicator listed in the schedule of fees under section 9.
  6. The individual agrees in writing to abide by the requirements for holders of certificates set out in section 4.

According to New Regulations Add Detail to the Construction Lien Amendment Act from McMillan LLP, relevant work experience, may include “… accountants, architects, engineers, quantity surveyors, project managers, arbitrators and lawyers.” And, further adds it will be up to the Authority to determine that “…other types of construction industry experience would be sufficient to qualify as an adjudicator.”

There were concerns that adjudicators would not be ready to preside over disputes by the October 2019 release of the statute amendments, based on the training requirement outlined under O Reg 306/18. However, McMillan LLP, indicates the Authority may waive the training requirement for those with sufficient work experience, which would mean some folks can adjudicate right away.

In general, the Authority (the “Authorized Nominating Authority,” which has yet to be determined), will have seemingly broad control over adjudicators. O Reg 306/18 indicates the Authority will be able to issue and revoke a person’s certificate to adjudicate, create & maintain an adjudicator registry and create/maintain training programs, amongst several other responsibilities.

Forms: Which is Which?

Ontario Regulation 303/18 is fairly straightforward. It is simply a cross reference of the various forms and the corresponding statute. For example, “A notice to a contractor under section 18 of the Act may be in Form 2.” You can view the list of respective forms here.

Who Does What When?

Ontario Regulation 302/18 Procedures for Actions provides further detail on the procedure for lien claims. Details cover the statement of claim, joinder actions, third party claims as well as the process for consolidating legal actions and trial or settlement meetings.

Surety Bonds, Prompt Payment and Holdbacks

Ontario Regulation 304/18 General (O Reg 304/18) offers additional clarity on bonds, prompt payment and retention. O Reg 304/18 states the minimum surety bond coverage is 50% of the contract price, if the contract is under $100,000,000 and $50,000,000 if the contract is over $100,000,000. O Reg 304/18 also clarifies that  public contracts under $500,000 are exempt from the bonding requirements.

Holdback is defined as 10% of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment.  The new legislation calls for a mandatory holdback release (subject to specific set-off notices) and provides for annual, phased or segmented releases of holdback on lengthy projects.  O Reg 304/18 clarifies that a contract must be $10,000,000 or more to qualify for the annual or phased holdbacks.

Additionally, O Reg 304/18 states the owner must publish a notice of non-payment of the holdback and within three days of that notice publication, the owner must notify the contractor. The same requirements would apply to a general contractor if it is withholding funds from its subcontractors/suppliers.

From McMillan LP –

“CLAA section 27.1 provides that an owner may refuse to pay some or all of the holdback owing to a contractor in certain circumstances. The owner must, among other things, publish a notice of non-payment in a manner set out in the regulations and notify the contractor in accordance with the regulations. The General Regulation provides that the notice of non-payment must be published in a trade newspaper and that the contractor must be notified of the publication within three days of the publication.”

Publishing this information via a “trade newspaper” doesn’t apply solely to non-payment of holdback. This will also apply to the notice of contract termination, the certificate of substantial performance or declaration of substantial performance, and the notice of intention to register condominium. What is a trade newspaper?

O Reg 304/18 defines a construction trade newspaper as a newspaper:

(a) that is published either in paper format with circulation generally throughout Ontario or in electronic format in Ontario,

(b) that is published at least daily on all days other than Saturdays and holidays,

(c) in which calls for tender on construction contracts are customarily published, and

(d) that is primarily devoted to the publication of matters of concern to the construction industry.

Perhaps a future enhancement will be a registry like Utah & Pennsylvania? Time will tell!

When Will Amendments & Regulations Go into Effect?

While some housekeeping changes took place on December 12, 2017, the substantive amendments will become effective as follows:

  • July 1, 2018*:
    • Modernization of the Statute
    • Updates to the Holdback Rules
  • October 1, 2019:
    • Prompt Payment
    • Adjudication, Regulations and Forms
    • Liens Against Municipalities

According to Final Construction Act Regulations Issued, published by Gowling WLG, the effective dates will coincide with the implementation of the statute changes.

“…existing rules under the existing legislation (i.e. prior to the amendments) will apply to an improvement if:

    • a contract for the improvement is entered into before the date the amendments come into effect (regardless of when any subcontract under the contract is entered into);
    • a procurement process for the improvement (including a request for qualifications, a request for proposals, or a call for tenders) is commenced by the owner of the premises before the date the amendments come into effect; or
    • the premises is subject to a leasehold interest, and the lease is first entered into before the date the amendments come into effect.

The amended legislation will apply to contracts entered into and procurement processes commenced on, or after, the date the applicable amendments come into effects.”

Still, It’s Just the Beginning

As you may have guessed, implementing changes is rarely easy. We will see further clarification and slight changes as this process moves along. Stay tuned!

Convenience of Prevenient Arrangements and a Text Message

Posted on May 25, 2018 by - In Other Commercial Credit News

What Is a Prevenient Arrangement and What Does It Have To Do With a Text Message?

A prevenient arrangement occurs when parties enter “…into an ongoing relationship for the supply of services or materials over time, often at multiple locations.” This is according to Catriona Otto-Johnston, author of When Calculating Lien Periods, it’s Convenient to be Prevenient.

As an example, let’s say I own 5 separate properties and I hire ABC Contracting for improvements at each of these properties. ABC Contracting and I have an ongoing agreement of sorts. Generally, in the US, we would treat the improvement to each property as an individual project. Thus, there would be 5 first furnishing dates and 5 last furnishing dates (one for each project). However, in Alberta, under a prevenient arrangement, these 5 projects would be consolidated into one; meaning one first furnishing date and once all properties have been improved, one last furnishing date.

Clear as mud?

A Real-Life Example May Offer Clarity

In a case before the Alberta Queen’s Bench, Picturesque Landscaping Inc v Moderno Homes Inc, 2018 ABQB 5, Moderno Homes, Inc. (Moderno) hired Picturesque Landscaping Inc. (Picturesque) for landscaping services, apparently to multiple properties.

Picturesque registered a lien February 12, 2016. Obviously Moderno contested the lien and argued Picturesque failed to register its lien timely. The legal opinion indicates the “critical date” is December 27, 2015 — 45 days prior to the date of the lien filing.

Did Picturesque furnish on or after December 27? As you can imagine, Picturesque said it did furnish after December 27, whereas Moderno said Picturesque didn’t do any furnishing that late in December.

Picturesque stated its last furnishing date was January 4, 2016, when it had to do site cleanup. However, as you know, site cleanup doesn’t generally constitute as a substantial last furnishing (think punch list or warranty work).

So, if Picturesque’s last furnishing date of January 4, 2016, wasn’t substantial, why didn’t the judge invalidate Picturesque’s lien?

Because of a text message.

A Text Message Changed a Legal Decision?

Well, the text message didn’t turn the entire case upside down, but it certainly helped Picturesque. According to the court opinion, although work may not have been done at the property against which the lien was registered, Picturesque was still furnishing to a separate property owned by Moderno.

“Moderno says…no work was done at 1118 Premier Way that late in December. But the parties do not dispute that on December 29 Kory Scott of Moderno and Sansalone of Picturesque exchanged text messages about Picturesque finishing the backfilling at a different Moderno property.”

The text message revealed there was additional work performed by Picturesque, for Moderno, beyond the key date of December 27. Back to the legal opinion:

“The parties referred to it as “16A”. It appears that work was done after December 27, 2015, by Picturesque for Moderno at 16A. That work at 16A may be enough to render the lien valid in respect of 1118 Premier Way if there was the alleged Broader Arrangement. The work done on one property subject to a prevenient contract may operate to extend the time for registering a lien or liens against all such properties subject to that Broader Arrangement, and potentially by a single lien for all.”

This text, regarding additional work at a different property, indicates there may have been a continuous or ongoing contract between Picturesque and Moderno. And, in Alberta, that can extend the lien filing period.

Though, in her article, Otto-Johnston notes the judge didn’t specifically say whether a prevenient arrangement existed.

“While the Court did not ultimately decide whether a prevenient arrangement was in place, its decision shows that such an arrangement can have a significant impact on validity of a lien and the limitation period to register a lien.”

Based on the judge upholding Picturesque’s lien, it seems the judge did believe such agreement existed.

Are Prevenient Arrangements Only Applicable in Canada?

While I can’t say this with complete certainty, it appears prevenient arrangements are available in most of the provinces. Also, in my research, I can see parallels between prevenient arrangements and service contracts. (The lienability of service contracts and/or maintenance agreements is a forthcoming topic!)

Do you think you are furnishing under a prevenient arrangement? Obtain a legal opinion and, as Otto-Johnston states, know that it may require a trial to prove the existence of the arrangement.

“As this case shows, a prevenient arrangement can extend the time to register a lien against all properties, where work was completed or materials furnished at different times or locations.  However, if there is a dispute as to whether your contract is in fact a prevenient arrangement, this case indicates that a full trial may be required in order to prove the nature of your agreement and validity of your lien.”

Pass-Through Claims and The Severin Doctrine

Posted on May 18, 2018 by - In Other Commercial Credit News

Pass-Through Claims, The Severin Doctrine & Why You Should Be “in the Know”

In construction, a pass-through claim is when one party makes a claim on a second party’s behalf. In Subcontractor Pass-Through Claims Are Vulnerable to the Severin Doctrine, authors Eric Frechtel and Amy Elizabeth Garber (Authors) define a pass-through claim as:

“A pass-through claim is a subcontractor claim against the government that a prime contractor (who is in privity of contract with the government) brings on behalf of a subcontractor.”

And what is a Severin Doctrine? Attorney Matthew Devries states the Severin Doctrine “[P]rovides that a general contractor cannot sue an owner on behalf of one of its subcontractors to recover monies due to the subcontractor unless the general contractor is itself liable to the subcontractor.”

OK, so What’s the Fuss?

Recently, two conflicting decisions on whether a general contractor could bring a claim on behalf of their subcontractor were released. According to Authors, one decision was handled down from the U.S. Civilian Board of Contract Appeals and the other from the U.S. Court of Federal Claims.

The U.S. Civilian Board of Contract Appeals provided a decision in a case between Turner Construction and the Smithsonian. The subcontractor was owed several million in dispute/delay claims which were passed through via the GC (Turner Construction) and were permitted based on the language within the progress payment releases.

“…that the subcontractor: ‘represents and warrants that there are no outstanding claims by the [subcontractor]… through the date of Application for Payment No. __ except for any retention, pending modifications and changes, or disputed claims for extra work as stated herein’”

Authors explained “The relevant progress payment releases did not list the pass-through delay and disruption claims under No. 1. The board held that even though the progress payment releases did not carve out the pass-through claims, the Severin doctrine did not bar them mainly because the releases were “clearly tied” to each progress payment.”

And in the Case of the Court?

Unlike the Turner case where the releases had language regarding disputes, the releases in the MW Builders, Inc. v. United States case had no such language. In fact, the subcontractor unconditionally waived and released its claims!

“The progress payment releases in question were from one subcontractor, Bergelectric, which stated in relevant part: “[Bergelectric] irrevocably and unconditionally releases and waives … any other claims whatsoever in connection with this Contract … through the end of the period covered by this Application ….” These releases covered the entire period of Bergelectric’s delay claim.”

According to Authors, “…based on the broad language in the releases and the fact that the releases did not expressly reserve Bergelectric’s delay claim, the court determined that the releases barred all claims by the subcontractor.”

The Trap & The Takeaway

This further supports the critical need to carefully review ALL documents before executing them. As a best practice, I would recommend having all contractual documentation reviewed by an experienced attorney.

And, as Authors remind us, recognize that sometimes it’s simply unpredictable.

“…these cases demonstrate the unpredictability of whether a judge will construe broad language in progress payment releases as a bar to subcontractor pass-through claims”

UCCs and Liens Make Your Company a Payment Priority

Posted on May 14, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

Use UCC Filings and Mechanic’s Liens to Make Your Company a Payment Priority

Businesses prioritize how, when and which vendors are paid and often pay secured creditors ahead of unsecured creditors. But why? In this article, we will review how you, as a trade creditor, can use secured transactions to ensure you are a payment priority for your customers and how you can avail yourself of legal protections, should your customer default or file for bankruptcy protection.

How Does Your Debtor Prioritize Payments?

If your debtor decides to pay 3 of its 10 creditors this month, how or why does the debtor choose which three they are going pay?

Perhaps it’s because the creditor provides a product or service that is vital to the day-to-day operation of the debtor’s business. It could be the debtor has a longstanding relationship with the creditor, so the debtor ensures they are always paid timely. Or, maybe it is because the creditor has security, either through the filing of a UCC or the service of a preliminary notice to protect mechanic’s lien rights.

Why does security make a creditor a priority? Debtors tend to pay secured creditors first, because failing to pay may result in significant consequences.

For example, if a creditor has properly perfected a security interest through a UCC filing, the creditor could leverage the UCC to repossess the goods or collect money directly from third parties. And, the service of a preliminary notice or filing of a mechanic’s lien alerts all parties involved that there is a payment issue. Once the issue is known, it’s hard to hide from it.

Payment Priority | The Leverage of UCC Filings

Article 9 of the Uniform Commercial Code was created to promote commerce. UCCs provide trade creditors the opportunity to secure goods and/or accounts receivable by using the debtor’s personal property/assets as collateral. To create a security interest, you must have a signed security agreement, record the Financing Statement to make the security interest public record and notify the prior secured creditors to establish priority in inventory.

There are two primary types of UCC filings: Blanket and Purchase Money Security Interest (PMSI).

A Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

A PMSI filing provides the same benefits as the blanket filing, with the addition of the priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.

In the event the debtor defaults on payment or files for bankruptcy protection, the type of UCC filing in place dictates the next steps available to the creditor.

For example, if you filed a PMSI, you would first determine whether you would like your equipment/inventory back. If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets. If you want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace. If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

In addition to the security of the UCC filing, the Security Agreement can be used as leverage for breach of contract. Payment terms are written into every Security Agreement. Therefore, if your customer defaults, they are breaching the terms of a signed agreement.

It’s also worth mentioning that a UCC filing program has widespread benefits. Not only will a sound UCC filing program make you a payment priority, it will also minimize financial risk, reduce DSO, improve cash flow and increase sales. UCCs aren’t solely used for reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines.

Payment Priority | Using the Mechanic’s Lien Process

Payment cycles in the construction industry are painfully slow. It’s all too common to see invoices age 60-90 days, and still be considered “average payment terms.” Fortunately, in construction, creditors can leverage the mechanic’s lien process to reduce DSO. More specifically, NCS clients with a sound preliminary notice program have experienced an average of a 25% reduction in DSO, with some clients experiencing reductions as high as 50%.

Much like Article 9, mechanic’s lien laws were created to promote commerce and provide creditors, who furnish to the improvement of real property, credit security. However, unlike Article 9, there is very little that is uniform about mechanic’s lien laws, as each state has its own statute.

Become familiar with the mechanics lien statute for the state in which your project is located. It’s important to know the deadlines for each action in advance, to allow ample time to follow the state’s requirements & to take advantage of every opportunity to protect your receivables.

Implementing a mechanic’s lien process is one of the greatest securities available to the construction credit professional. To leverage your position as a secured creditor, you must have a solid foundation for your mechanic’s lien process, which may include a properly drafted, executed & served preliminary notice.

A preliminary notice is a low-cost, proactive alternative to the high-cost & high-stress, reactive remedy of a collections placement. Serving preliminary notices regularly reduces the need to file a mechanic’s lien or proceed with suit actions.

— 97.3% of the time, serving a notice will get you paid.

— 99% of the time a notice and mechanic’s lien will get you paid.

— Only 1% of the time will a project go to suit.

A 97.3% success rate is HUGE and the primary driver behind that success is that everyone within the contractual chain knows you are supplying to the project and taking steps to secure your rights as a creditor – there is transparency.

Don’t be afraid! Too often, companies are led to believe that by protecting their rights to get paid, they will jeopardize projects and relationships. UCC Article 9 and Mechanic’s Lien and Bond Claim laws are there to protect creditors.

Be a payment priority; implement secured transactions.

Substantial Completion, Completion and Acceptance

Posted on May 11, 2018 by - In Other Commercial Credit News

Substantial Completion, Completion and Acceptance Are Not the Same

The Court of Appeals in Georgia recently deemed a supplier’s suit action was untimely, because the supplier failed to comply with filing suit within one year from substantial completion of the project.

Ah, What’s in a Date?

Dates are imperative in accurately determining mechanic’s lien and bond claim rights and the deadlines associated with securing those rights.

What dates? No, not your plans for Saturday night or the peculiar fruit often found in fruit cake.

Dates as in calendar dates, or significant events. Dates may include first & last furnishing dates, date of project completion and the date of final acceptance.

Completion is the date of fulfillment of the prime contract for the work of improvement. Acceptance is an official act where entry is made in the government records that a public work under a contract is completed and accepted.

Then there’s that word: substantial. As if tracking lien and bond claim deadlines weren’t tricky enough, there is this added caveat of “substantial.”

While it seems the definition of substantial may end up in a judge’s hands to determine, generally items such as punch list work, warranty work, remediation and small shipments don’t qualify as substantial.

Georgia, on My Mind & in the Courts

If you are furnishing to a public project in Georgia, you should serve the bond claim within 90 days from last furnishing and file suit to enforce the bond claim after 90 days from last furnishing, but within one year from completion and acceptance of the project.

In this case, the claimant filed its suit action nearly four years after the project was deemed substantially complete, arguing that its maintenance and repair obligations extended the date of project completion.

Jane Fox Lehman reviewed the recent court decision in her article Eleventh Circuit Holds That the Statute of Limitations on Payment Bond Claim Under Georgia Law Commences at Substantial Completion Rather Than Final Acceptance. 

According to Lehman’s review, the owner deemed the project substantially complete in 2010, the punch list work was completed, and final acceptance occurred in 2011. In 2014, the claimant discovered the owner was closing out the project and the claimant brought the suit action against the payment bond. Regardless of whether calculating from substantial completion or final acceptance, the claimant was far beyond the one year mark.

But, getting back to completion vs. acceptance “The Court of Appeals noted that Georgia’s statute of limitations on payment bond claims commenced at the “completion of the actual construction work and acceptance thereof by the public authority,” and that Georgia courts had construed the term “completion” to mean not just total completion, but also substantial completion with only punch list items remaining.”

When its arguments on completion date(s) were lost, the supplier tried to argue the statute of limitations had not expired, because the payment bond remained active.

“Finally, the Court rejected Strickland’s argument that the statute of limitations had not run because the payment bond remained in “full force and effect” until all suppliers were paid, and Strickland had not been paid. Strickland’s interpretation would render the statute meaningless because the limitations period would never begin where a supplier or subcontractor had not been paid.”

What’s a Supplier to do?

For starters, pay attention! If I look at the sheer amount of time that passed where the supplier wasn’t paid, I can’t help but think “Why are you waiting years to pursue payment?!” Suppliers need to carefully monitor deadlines and act accordingly. The laws are there to protect you, but you must take steps to closely adhere to the requirements.

In this case, Georgia’s statute is quite clear on time limits:

“No action can be instituted on the payment bonds or security deposits after one year from the completion of the contract and the acceptance of the public works construction by the proper public authorities.” – O.C.G.A. § 36-91-95