Service Area: Notice and Mechanic’s Lien Services

Reduce the Need for Collections with Liens

Posted on September 14, 2015 by - Mechanic's Liens & Bond Claims

Filing Mechanic’s Liens Will Reduce the Need to Place Accounts for Collections

Every day, credit professionals across all industries review and assess risk. That’s what we do – we are “Risk Assessors” – like some kind of super hero, with special powers to mitigate risk, reduce DSO and improve cash flow!

OK, we don’t get a cape and we miss out on that whole “secret identity” thing, but we are super heroes. We are expected to do more with less, balance the demands of our sales people while protecting the financial assets of our companies, and at the end of the fiscal year, we need to demonstrate that we reduced company write-offs while improving sales.

But, How Do We Mitigate Risk?

We, credit professionals, are bombarded with statistics (you know, “Big Data”) and see balance sheets and credit aps in our sleep. We listen to industry experts and we take advantage of credit resources and tools.

We understand the true value of a write-off. The cost of write-offs to a company can be crippling. A write-off of $50,000 at a 30% margin means you would have to generate $166,666 in additional sales to recover that lost profit. If you operate at a 15% margin the additional sales mushrooms to $333,333.

We recognize that it may not be an issue when one customer is slow paying, but that it’s never just one customer; it is several customers and it can have a significant impact on our cash flow. If we have 10 accounts paying an average of 20 days late and each is invoicing at $50,000 we could have $500,000 + outstanding.

Uncertainty is always on our tail – even if we had a super hero cape, we wouldn’t be able to outfly uncertainty. 

We Take Advantage of Proactively Securing Our Receivables

Implementing a Mechanic’s Lien/Bond Claim Process is one of the greatest securities available to the construction credit professional. Leveraging your position as a secured creditor will have a positive impact by reducing DSO; in fact, NCS clients experience an average of 25% reduction in DSO, with some clients experiencing reductions as high as 50%.

Each state in the U.S., the U.S. Possessions and the Canadian provinces have laws in place to protect companies that supply materials/labor to the permanent improvement of a property. However, contractors and suppliers must strictly adhere to the rules set forth in the statute in order to perfect their security. Let’s think of the mechanic’s lien process as a three step process (albeit this is an over simplification): Notice > Mechanic’s Lien > Foreclosure.

Notice > Mechanic’s Lien > Foreclosure

Before sending a notice, you should gather project information – always. It is imperative for you, as a creditor, to know who lies between you and your money. Know the contractual chain (owner, general contractor, subcontractor, lender etc.), where the project is located and the project type. Make this a standard practice, much like securing credit references or running a credit report. It’s also important to become familiar with the mechanic’s lien statute for the state in which your project is located.

Pro Tip: Gather project information at the time of the contract; it is infinitely easier to gather project information at the onset of the project!

  • Serve a Preliminary Notice (aka Notice to Owner, Notice to Contractor, Pre-Lien Notice) on every project. It is a low cost way to ensure you are taking the proper steps to secure mechanic’s lien rights. If serving a notice on every project doesn’t fit within your model, then set a dollar threshold. Determine what you are willing to lose in the event of default and serve a notice on any order over that value – e.g. serve notices on all projects that have a contract of $10,000 or more.
    • If you intend to serve preliminary notices on your own (i.e. without the assistance of a preliminary notice expert), make sure the documents are aligned with the statute requirements. Too many companies have found themselves with an invalidated mechanic’s lien because of errors in their preliminary notice.
  • File a mechanic’s lien. If the preliminary notice and subsequent demand letter do not prompt payment, then it is time to proceed with a mechanic’s lien. It is recommended to have copies of invoices, bills of lading, the statement of account and copies of various communications, to support your claim. (Some states actually require the invoices be attached to a copy of the mechanic’s lien when sent for recording.)
  • Foreclose. In the event you remain unpaid, the final step is to proceed with suit to enforce the mechanic’s lien. Suit is typically a slow (and costly) process, due to the various facets of litigation.

Pro Tip: When enforcing a mechanic’s lien, it is best to utilize an attorney who is well versed in construction/mechanic’s lien laws and familiar with the project itself (including issues surrounding change orders, back charges, etc.).

Bear in mind, everyone has a specialty and that is what makes them great – would you ask your cardiologist to fix your car or ask your mechanic to fix your heart?

A preliminary notice is a low cost proactive alternative to the reactive high cost and high stress associated with collections. It pays to be proactive.

Navigating Preliminary Notices on Leased Property

Posted on September 8, 2015 by - Mechanic's Liens & Bond Claims

Furnishing to a Property that’s Leased? Serve the Owner & the Tenant

It sounds simple enough – serve the owner with a preliminary notice. If ABC Company owns property and they have contracted for an improvement to that property, ABC Company would have to be served with a preliminary notice. Easy.

What happens if ABC Company leases their property to XYZ Company, and XYZ Company contracts for an improvement to the property? That’s when the serving the owner becomes more complicated. Do you serve the fee owner (the entity that owns the property) or do you serve the owner of the leasehold interest (the entity that is leasing the property)?

Best practices dictate that if you are furnishing materials or services to a property that is being leased, both the fee owner and the owner of the leasehold interest (lessee/tenant) should be served with the notice.

While a lien on a leasehold interest can be a valuable collection tool, a lien on the property is always preferred.

By serving both owners with any notices, you provide yourself with the best opportunity for collection of your debt.  The hope is that you can proceed with a lien against the property, and if that is not possible, you will at least have a lien on the leasehold interest.

How do you know if the property is being leased?

The biggest flag is when the project is for a retail establishment: stores, restaurants, etc. Other projects where leases come into play are large office buildings, where a tenant may contract for an improvement to their leased space.

When reviewing the Job Information Sheets provided by your customer, if the name of the owner does not coincide with the name of the project, there may be a leasehold situation.

If you serve both the fee owner and the lessee, will you have a lien on the property and the leasehold interest?

It may depend on who contracted for the improvement. Typically, the fee owner will be responsible for the improvement only if they were aware of or they authorized the improvement.

In some states, a written agreement is required before you can hold the fee owner liable. In other states, a fee owner may record a Notice of Non-Responsibility, to prevent a lien for tenant improvements from attaching to their property.

Obtaining a copy of the lease is always helpful, as the lease may spell out who is responsible for specific improvements, or the length of the lease may determine whether a lien on a leasehold interest is available.

Lien Waiver Language: Unconditional

Posted on September 1, 2015 by - Mechanic's Liens & Bond Claims

Lien Waiver Language Part 2: Unconditional Lien Waivers

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. You can learn more about lien waivers in our earlier post 4 primary types of lien waivers.

In part 1 of this series, we covered the language within a conditional lien waiver, which means part 2 is dedicated to the language within unconditional lien waivers.

Unconditional Lien Waivers

Unconditional lien waivers can be dangerous if blindly signed, as the signor is waiving all rights to further remedy regardless of whether or not payment has cleared. As you will see, the language in an unconditional waiver is absolute:

The undersigned has been paid and has received a progress payment in the above referenced Payment Amount for all work, materials and equipment the undersigned furnished to his Customer for all above described Property and does hereby waive and release any notice of lien, any private bond right, any claim for payment and any rights under any similar ordinance, rule or statute related to payment rights that the undersigned has on the above described Property to the following extent:

An unconditional partial waiver will also include wording similar to the conditional partial waiver, with respect to the monies received: “…covers a progress payment for all work, materials and equipment furnished by…”

The unconditional final lien waiver is generally the “end,” meaning there is no turning back from an executed unconditional lien waiver – even if your debtor fails to pay or payment does not clear:

The undersigned has been paid in full for all work, materials and equipment the undersigned furnished to his Customer for the above described Property and does hereby waive and release any notice of lien, any private bond right, any claim for payment and any rights under any similar ordinance, rule or statute related to payment rights that the undersigned has on the above described Property, except for the payment of the Disputed Claims, if any, noted above.

Be extremely cautious when signing an unconditional final waiver!

When in doubt, seek a legal opinion – signing the “wrong” document could eliminate your mechanic’s lien and bond claim rights.

Lien Waiver Language: Conditional

Posted on August 4, 2015 by - Mechanic's Liens & Bond Claims

Lien Waiver Language Part 1: Conditional Lien Waivers

We’ve previously discussed the 4 primary types of lien waivers; today we’d like to discuss language specific to conditional lien waivers. Let’s take a look!

Conditional Lien Waivers

For conditional lien waivers, the “conditional” language typically appears prominently at the beginning of the document.

Upon receipt by the undersigned of a check in the above referenced Payment Amount payable to the undersigned, and when the check has been properly endorsed and has been paid by the bank on which it is drawn, without any bankruptcy filing by <<Name of Debtor>> within ninety days thereafter, this document becomes effective to release and the undersigned shall be deemed to waive any notice of lien, any private bond right, any claim for payment and any rights under any similar ordinance, rule or statute related to payment rights that the undersigned has on the above described Property to the following extent…

This waiver has clear conditions: it is only effective once the creditor receives payment, payment has cleared and if the debtor files bankruptcy within 90 days after remitted payment, the waiver becomes null & void.

In this example, the waiver happens to be a partial conditional waiver, based on the following language:

This release covers a progress payment for all work, materials or equipment furnished by the undersigned to the Property or to the Undersigned’s Customer, for only the Payment Amount or such portion of the Payment Amount as the undersigned is actually paid, and does not cover any retention withheld, any items, modifications or changes pending approval, disputed items and claims, or items furnished or invoiced after the Payment Period.  Before any recipient of this document relies on it, he should verify evidence of payment to the undersigned.

If the waiver was a final conditional waiver, instead of calling out that the waiver covers “…a progress payment for all work…” it may state “…covers the final payment to the undersigned for all work…”

This release covers the final payment to the undersigned for all work, materials or equipment furnished by the undersigned to the Property or the Undersigned’s Customer and does not cover payment for Disputed Claims, if any. Before any recipient of this document relies on it, he should verify evidence of payment to the undersigned.

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.

Key Features of a Lien 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.

Complying with the Michigan Notice of Commencement

Posted on July 13, 2015 by - Mechanic's Liens & Bond Claims

Did I Comply with the Michigan Notice of Commencement?

We have previously discussed “substantial compliance” with regard to mechanic’s lien and bond claim statutes. In states with Notices of Commencement, complying with the preliminary notice requirements can (not always, but can) be a bit easier. Typically, the Notice of Commencement contains the vital information necessary for inclusion into the preliminary notice.

The Contents of a Typical Notice of Commencement

Generally, you’ll find the following information within the Notice of Commencement:

  • Property description
  • Name & address of property owner
  • Name & address of the prime contractor
  • Name & address for the designee or contract manager
  • Name & address for surety, lender or other interested parties

Now, please don’t take this to the bank – because, although there are statutory guidelines to Notices of Commencement, they are not all the same. Some folks don’t complete them, others may include more or less information and others may have incorrect information.

That said; let’s take a look at an unpublished case brought before a court of appeals in Michigan.

Serve the Notice upon Required Parties

In Rogers Excavating, Inc. v. Mana Properties, L.L.C., the appeals court was tasked with determining whether or not Rogers Excavating substantially complied with Michigan statute with regard to the Notice of Furnishing.

Rogers Excavating was hired by a construction manager for excavation work on a property owned by Mana Properties, LLC. Rogers Excavating’s contract was direct with the owner, Mana Properties, and the construction manager (McQuillan) signed the contract as a witness. Rogers Excavating served their notice of furnishing upon the owner (Mana Properties) and the construction manager (McQuillan).

Later, after Rogers Excavating had already begun work, Mana Properties, LLC filed a Notice of Commencement and listed a title company (Fidelity) as their designee, not the construction manager.

When Rogers Excavating remained unpaid, they filed a lien and suit to enforce their lien. Mana Properties, LLC argued that the lien was unenforceable because Rogers Excavating did not serve the notice upon the designee, as listed on the Notice of Commencement.

The appeals court determined that Rogers Excavating, Inc. did, in fact, substantially comply with the statutory guidelines for the notice of furnishing, and permitted enforcement of the lien. (Not only was it determined that Rogers Excavating substantially complied with statute, but Rogers Excavating’s contract was direct with the owner – Mana Properties – and no notice was required.)

What the Court Says

“MCL 570.1109(1) provides, in part, that “[a] contractor is not required to provide a notice of furnishing to preserve lien rights arising from his or her contract directly with an owner or lessee.” Given our ruling that a valid and enforceable contract existed between Rogers and Mana, a notice of furnishing did not have to be served by Rogers…

… MCL 570.1109(1) requires delivery of a notice of furnishing to a designee and a general contractor. And a designee is simply a “person named by an owner or lessee to receive, on behalf of the owner or lessee, all notices or other instruments required to be furnished under” the CLA. MCL 570.1104(2). Considering the evidence that Carroll Rogers delivered the notice of furnishing to McQuillan and the owner itself, Mana, there was substantial compliance with MCL 570.1109’s notice-of-furnishing requirement. The trial court’s ruling to the contrary was error.”

Shew!

Fortunately in this case, the notice of furnishing was not required based on the contractual relationship, and the court upheld that the notice served was substantially compliant with Michigan statute. But this should still serve as a reminder that it’s important to follow statute and comply as indicated – doing it right the first time around could save you significant time & money.

Sometimes Substantial Compliance is Enough

Posted on July 7, 2015 by - Mechanic's Liens & Bond Claims

Turns Out, Sometimes Substantial Compliance with Mechanic’s Lien Law is Enough

At NCS, we constantly stress the importance of complying with each state’s mechanic’s lien and bond claim laws. In fact, we recommend conservative adherence to the statutes, as it is generally better to be early as opposed to late (generally – there are ALWAYS exceptions).

“Wait, what?”

For example, if a mechanic’s lien deadline is determined by the date of completion, NCS would recommend you calculate your lien deadline based on your last furnishing date, because you may not know the completion date – and if you are relying on a date you don’t know… well, hopefully I don’t have to complete that thought.

While it is imperative to follow a state’s laws, I was recently reminded that sometimes, “substantial compliance” is enough to protect your rights.

“I’m sorry, what? Substantial compliance?”

Yes, as I have previously mentioned, in the land of mechanic’s liens, the gray area is a minimum of 51 shades (get it, 51, like the states + DC? No, no, not the book).

Mistakes happen – best efforts are made, and an Indiana appeals court recently decided that best efforts were enough to recover through the mechanic’s lien process.

Indiana: Creditor’s Name on the Prelien Notice didn’t Match the Creditor’s Name on the Lien

In Von Tobel Corp. v. Chi-Tec Construction & Remodeling, Von Tobel Corp. supplied materials to Chi-Tec Construction & Remodeling. Von Tobel Corp. served a prelien notice and identified themselves as “Von Tobel Home Center, Inc.” then, when Von Tobel Corp remained unpaid, they filed a lien and identified themselves as “Von Tobel Corporation”

Chi-Tec Construction claimed that Von Tobel Corp.’s lien was invalid, because “Von Tobel Corp.” did not serve a prelien notice – “Von Tobel Home Center, Inc.” served a prelien notice. The appeals court sided with Von Tobel Corp. and granted the validity of their lien, because Chi-Tec was arguing based on a “hypertechnicality”.

From the Appeals Decision

“(We) reject[ed] the idea that our entire mechanics’ lien statute must be strictly construed with such hypertechnicality so as to frustrate the remedial purpose of the legislation…

The perfection and enforcement provisions of the statute should be fairly and reasonably construed and applied so as to afford materialmen and laborers the security intended upon substantial compliance with statutory requirements, keeping in mind the need to afford reasonable protection to the rights of other parties who may have acquired an interest in the party…

Here, the degree of non-compliance with the letter of the statute is minimal…

The variance between the name set out in the Pre-lien notice and that contained in the Lien Notice was minimal, did not undermine the statutory policy concerns regarding notice, and did not cause prejudice to the property owner or any third party.”

Ultimately, the owner knew that “Von Tobel Home Center, Inc.” and “Von Tobel Corporation” was the one and the same, and that “Von Tobel et al” provided materials for the improvement to their property, which means, Von Tobel et al should have been paid for their services.

Now, I must say, even though the appeals court sided with the creditor, the creditor could have eliminated the extra time & money of the appeal if they had correctly identified themselves in the notice from the start. Nonetheless, identifying themselves incorrectly was not a deal breaker – kudos!

NCS recommends conservative adherence to the statutes – what one judge in Indiana rules may be entirely different than a judge in another state!

Include a Proper Estimate in Preliminary Notice

Posted on June 30, 2015 by - Mechanic's Liens & Bond Claims

California Case Highlights the Importance of Including a Proper Estimate in Your Preliminary Notice

It’s likely you have read this (or heard this) more than once from NCS: “Statutory requirements for preliminary notices differ for each state and serving a preliminary notice may be the first step in securing mechanic’s lien rights.”  

We’ve previously discussed common mistakes with preliminary notices, and one of those common mistakes is leaving vital information off of the notice (i.e. neglecting to list the claim or contract amount, forgetting to include the material description, etc.).

Make Sure the Contact Amount Is a “Proper Estimate”

In Rental Equipment, Inc. v. McDaniel Builders, Inc., 91 Cal. App. 4th 445, 109 Cal. Rptr. 2d 922 (2001), the creditor remembered to include the contract amount, however, the amount listed was not a “proper estimate.”

In Rental Equipment, Inc. v. McDaniel Builders, Inc., the Second District Court of Appeal, Division 5, examined the requirement that a preliminary notice (in California) must include an estimate of the value of the materials or services provided.  The court looked to the meaning of the word “estimate.”

Rental Equipment, Inc. rented equipment to a subcontractor on a private project. Rental Equipment, Inc. sent out two preliminary notices, known as Preliminary 20-day Lien Notices, which both estimated the value of the rental equipment in the amount of $10,000.

The project was never completed, and the subcontractor did not pay Rental Equipment, Inc. Rental Equipment recorded a mechanic’s lien in the amount of $160,000, and later filed to foreclose on the lien.

The district court held the preliminary notices were fatally defective because the value of the lien was significantly higher than the estimate listed on the notice.

Then the Appeal

On appeal, the court upheld this decision for the following reasons: the estimate provided in a preliminary notice does not have to be exact; however, it cannot be based on merely a guess and the estimate must be derived by rational analysis.

Since the $10,000 estimates were not derived by “rational analysis”, the notices were fatally defective and the judgment in favor of McDaniel Builders, Inc. was affirmed.  Rental Equipment, Inc.’s failure to comply with California’s mechanic’s lien statutes caused its mechanic’s lien to be unenforceable.

Rental Equipment, Inc. should serve as an important learning lesson for all contractors, subcontractors, materialmen, and equipment providers: even a small mistake in a preliminary notice can greatly hinder your chances of recovery. If you are ever in doubt, seek a legal opinion.

Failure to Name True Owner Invalidates Lien

Posted on June 8, 2015 by - Mechanic's Liens & Bond Claims

Colorado Court Finds Failure to Name True Owner Invalidates Lien

The Colorado Court of Appeals, Division II, answered “When a party fails to name the true owner in the notice of intent to file a lien, what happens to the validity of the mechanic’s lien?” 

The Case

In the case of Moore Electric Company v. Ambassador Builder Corporation, plaintiff-appellant Moore Electric Company provided electrical work pursuant to a contract with Ambassador Builder Corp., defendant-appellee, also known as Ambassador Homes, Inc. Moore was not paid for its work and subsequently filed two mechanic’s liens encumbering multiple properties.

In the first mechanic’s lien, Moore listed Ambassador as the prime contractor as well as owner of eight properties identified in the lien.  The lien was mailed to Ambassador, as the owner or reputed owner of the properties.

In the second mechanic’s lien, Moore named Ambassador and Joe DeMarco, the sole shareholder of Ambassador, as the owner of the listed properties, which included DeMarco’s personal residence which Moore had performed work on.  The lien was again served on Ambassador.

When filing the liens did not prompt payment, Moore filed suit to foreclose its mechanic’s liens on a total of 10 properties, naming Ambassador and the record owners of the liened properties as defendants. Several of the liens were dismissed before trial and once at trial, a judgment of dismissal was entered as to all defendants except Ambassador.

The court found that Moore’s notices of intent to file mechanic’s liens were defective because the true owners of the properties were not named in the notices.

The Appeal

On appeal, the court addressed the sole issue of whether Moore complied with Colorado’s statute governing the notice of intent. Colorado’s statute provides that in order to preserve any lien for work provided or materials furnished, there must be a notice of intent to file a lien statement served upon the owner or reputed owner of the property at least ten days before filing the lien statement.

C.R.S. 38-22-109. Lien statement (3) In order to preserve any lien for work performed or laborers or materials furnished, there must be a notice of intent to file a lien statement served upon the owner or reputed owner of the property or the owner’s agent and the principal or prime contractor or his or her agent at least ten days before the time of filing the lien statement with the county clerk and recorder.

“Reputed owner” is defined as one who has to all appearances the title to, and possession of, the property.

Moore argued that Ambassador was the reputed owner because it paid the bills, supervised construction, and performed every task an owner would.  Therefore, according to Moore, notice of intent served upon Ambassador was proper.

The appellate court, however, disagreed.

The court found that Ambassador’s actions were consistent with that of a general contractor and did not, in and of itself, indicate ownership.

Further, Moore’s claims of Ambassador’s ownership are refuted by the record in which there are copies of recorded warranty deeds by which Ambassador transferred ownership to private owners prior to the filing of the notices of intent.  Accordingly, by the time Moore filed the notices, the true owners were readily ascertainable.

Since Moore failed to comply with the statutory requirements set out in § 38-22-109(3), C.R.S.1973 (1981 Cum. Supp.), it failed to meet its burden of proving its right to a mechanic’s lien. Moore’s fatal mistake cost it a mechanic’s lien that would have encompassed several properties.

Although Moore believed it was in compliance with statute when it served notice upon the entity it believed to be the owner (and which up until shortly before the filing of the notices was the owner) the Colorado court was unforgiving.

This case is hardly an anomaly.  Courts across the country generally impose stringent requirements on those seeking mechanic’s liens, holding liens unenforceable where even seemingly minor mistakes were made.

Takeaway

Carefully review statute, ensure proper parties are notified in the proper format and if all else fails, seek legal guidance!