Service Area: Collection Services

Texas Construction: Public Projects Notices & Bond Claims

Posted on January 17, 2020 by wpengine - In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Notices and Bond Claims for Texas Public Constructions Projects

Furnishing to a public project in Texas? Well saddle up, today’s post is just for you! Let’s review the notice and bond claim requirements for Texas public projects.

Are Payment Bonds Required?

Generally, payment bonds are required for Texas public projects when the general contract exceeds $25,000, and on municipal projects or DOT projects, bonds are required for contracts exceeding $50,000.

Always attempt to obtain a copy of the payment bond from the public entity which contracted the project.

Notices? There’s a Few

Notice of Retainage

Does your contract call for retainage? Serve notice of retainage upon the prime contractor no later than the 15th day of the second month following first furnishing materials or services, stating the total dollar amount to be retained and the general nature of the retainage agreement.

Notice of Specially Fabricated Materials

Are your materials specially fabricated? A Notice of Specially Fabricated Materials may protect the right to serve a bond claim if the materials are not incorporated into the project. Serve notice upon the prime contractor no later than the 15th day of the second month in which claimant received and accepted the order.

Notice of Non-Payment

If you are contracting with a subcontractor, you should serve notice upon the prime contractor no later than the 15th day of the second month following each month in which materials or services were furnished. If you are contracting with the prime contractor, no notice of non-payment is required.

Bond Claim aka Sworn Statement of Account

Serve bond claim notice (sworn statement of account) upon the prime contractor and surety no later than the 15th day of the third month following each month in which materials or services were furnished. When serving a bond claim notice for only retainage, serve bond claim notice within 90 days from completion of the public work contract.

You should serve the various notices & bond claim via certified mail; spring for the extra $ and add on return receipt.

Amanda Garza reviews who should be served and at what address in her article Perfecting Bond Claims on Public Projects in Texas.

Notices to the prime contractor must be sent to the prime contractor’s: (1) residence or (2) last known address.

Notices to the surety must be sent to the surety:

(1.) at the address stated on the bond or on an attachment to the bond;
(2.) at the address on file with the Texas Department of Insurance; or
(3.) at any other address allowed by law.

Bonus: A Lien on Funds? Maybe!

When contracting directly with the prime contractor on a public project that does not exceed $25,000.00, a lien on funds may be available. If contracting directly with the prime contractor on a public project for a municipality or a joint board created under the Transportation Code, that does not exceed $50,000.00, a lien on funds may be available.

You should serve a Lien on Funds upon the public entity and the prime contractor no later than the 15th day of the second month following the month in which materials or services were furnished.

Pennsylvania Construction Notice Registry and the SCCM Number

Posted on January 13, 2020 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Pennsylvania State Construction Notice Registry: What is a SCCM Number and Why Does It Matter?

Pennsylvania has a State Construction Notices Directory, which houses filed notices for construction projects of $1,500,000 or more. These notices include Notices of Commencement, Notices of Furnishing, Notices of Non-Payment and Notices of Completion. Within the directory, each project is assigned a unique identifier, also known as a SCCM number.

The SCCM number is often included within contracts and if you see this number listed within your contracts it is important to make NCS aware of the file number.

Why Should I Tell NCS?

The State Construction Notices Directory is a database that can be searched by keyword. Unfortunately, search engines can be frustrating and with seemingly limitless name variations, correctly identifying and linking to the project within the directory can be a challenge.

“Wait, what? What do you mean, name variations?”

Everyone identifies projects in a different manner. Any given project could easily go by a dozen different names. As an example, let’s say there are several parties working on an improvement here at NCS. The general contractor has recorded a Notice of Commencement which identifies the project as “NCS Front of Building Renovation.”

Party 1 calls the project “NCS”
Party 2 calls the project “Main Building Improvement NCSCredit”
Party 3 calls the project “729 Miner Road Improvement”
Party 4 calls the project “Portico Build Out / Miner”

Now, let’s say you are party 4 and identified “Portico Build Out /Miner.” If we search the directory with the information provided, we may not be able to match it to “NCS Front of Building Renovation.” If a match can’t be found in the directory or if a project is linked incorrectly, it may jeopardize your rights.

Providing NCS the SCCM number allows us to quickly and accurately identify the correct project within the State Construction Notices Directory, and then link to the correct document to protect your lien rights.

OK, How Do I Tell You the SCCM Number?

When you submit a preliminary notice request via NCS Online Services, the following prompt will appear followed by a blank space to enter the SCCM number.

If a Notice of Commencement has been posted on the SCND, please provide the Notice ID number, if available.

Condominiums & Mechanic’s Liens, Be Sure to Answer this Critical Question

Posted on January 10, 2020 by wpengine - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Furnishing to the Construction or Improvement of a Condominium Project?

Here’s a Critical Question to Answer Before You File Your Mechanic’s Lien

There are important questions to answer before filing a mechanic’s lien. Where’s the project, who’s the owner, who’s your customer, what’s your claim amount, do you have back up documentation, etc. If you need to proceed with a mechanic’s lien on condominiums, there’s at least one more question to add to the list: Did you improve a unit or a common area?

Improving a Unit or Improving a Common Area?

Condominiums are comprised of two different parts: units & common areas. Units are typically individual housing spaces. Each unit is assigned its own distinct APN and is owned or leased exclusively by an individual owner. Common areas are any space except the individual units. Common areas may include hallways, elevators, a club house, landscaping and parking lots, and are typically owned by the condominium association.

A mechanic’s lien can only be filed against the property improved. Therefore, if you furnish to the improvement of a unit, and you are unpaid for furnishings, your lien should be filed on the individual unit.

Unlike individual units, the common elements of a condominium do not have APNs. Let’s say you provide carpeting for the building hallways, outside of the individual units. If you are unpaid for the carpeting, your lien won’t be filed against one unit; rather it will be filed against all.

How Do I Know If I Furnished to Units or Common Area?

Your records (purchase order, invoices, contract etc.) should indicate whether you are furnishing to individual units or a common area. As your work progresses, keep detailed notes regarding which units were improved — it will save you a great deal of time down the road!

Can’t I Just File a Lien on Everything?

Generally, no, as I mentioned before, your lien rights are limited to the spaces that were improved. But I did say “generally.”

Here’s commentary from R. Thomas Dunn from his article Condominium Mechanic’s Liens.

“Some states, including California, Virginia, and Colorado, provide a mechanism to afford a mechanic’s lien remedy to contractors improving common areas of condominiums. Their approach, which is also recommended by the Uniform Construction Lien Act, is a blanket lien approach…. Apportionment of the value performed for common areas and the units is required. If such a blanket lien is placed on the common areas, a unit owner may discharge the lien by paying the particular sum attributable to his unit. Cal. Civ. Code § 1369.

Similarly, under the Uniform Construction Lien Act; a claimant may file a blanket lien, which attaches to the individual units as opposed to the common elements… The blanket lien becomes a fractionalized lien against each unit for that unit’s proportional share of the cost.”

Liens Could Be Expensive & Take Time

A quick note. If you improved several individual units, and statute requires a separate lien for each unit, your typical lien fees won’t apply. There will likely be additional title work, notifications, and recording fees, plus it will probably take more time to prepare. Before you file a lien for a condominium project, seek a legal opinion. Don’t wait until the last minute & be sure to provide the attorney with all back up documentation.

Commercial Credit Management Tips for Collections

Posted on January 6, 2020 by wpengine - Credit Risk Management

10 Tips for Commercial Credit Management of Collections

I’m excited to share some of my favorite commercial credit management tips from NCS. In this three-part series, we will review tips for Collections, UCCs, and Notices & Liens. Up first? Collections!

Tip #1: Up-to-Date Credit Apps Aid in Collection Success

Make sure you have a corporate credit policy in place to update your debtors’ credit applications annually or, at the very least, if/when they request an increase in credit. Companies are often changing names, locations, banks, officers (just to name a few) and, as their creditor, it’s critical to have accurate and current information on hand. Then, in the event your customer defaults on payment, you’ll have a reliable and up-to-date credit application to aid in your collection success!

Tip #2: 9 Documents Every Collection Should Have

Here are 9 documents you should include with any collection placement: copy of the contract or agreement, copy of the credit application, copies of invoices & a statement of account, copies of proof of delivery/bill of lading, copy of the personal guarantee, your customer’s trade references (including bank name, account number, and copies of returned/NSF checks), copies of correspondence & notes (emails, notices, demand letters, documented phone calls), copy of the corporate certificate, and copies of credit report(s).

Tip #3: Pulling a Credit Report for the Correct Entity

It’s vital to obtain the correct credit history and information for your customer. Here are a few key pieces of information that will assist you with pulling credit info on the correct company:

Customer’s corporate legal name
Customer’s address (or alternate addresses)
Customer’s web address
Contact info for officers and/or owners of the company

Tip #4: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors want to file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a mechanic’s lien, bond claim or UCC, grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place. Remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Tip #5: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Here are three things to remember when filing a Bankruptcy Proof of Claim form:

Be on Time! Too often, creditors miss the bar date to file.
Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
Secured or Unsecured? That Is the Question! Know whether you are a secured creditor and file properly.

Tip #6: Benefits of Doing an Asset Search Prior to Suit

Typically, once an attorney has filed suit and obtained judgment, creditors look to asset searches to reveal banking information, properties, vehicles, etc. to attach their judgment to. However, there are creditors who run asset searches prior to placing their claims with a collection attorney. Why would they run an asset search prior to suit? Because creditors want to know if it is worth the time and money to file suit, move through litigation and obtain judgment.

An asset search can be run at any time, on an individual and/or a business. It helps to locate addresses & phone numbers and a full-service asset search includes:

Employment
Business affiliation
Vehicle ownership
Real property ownership
Banking relationships
Bankruptcies
Liens
Judgments
Notices of defaults
UCC filings

Tip #7: Consider Using a Customized Letter for Collection

Do you have accounts that are past due, but you are not ready to place them for collection? If you are looking for a less aggressive collection tool, talk to us about our flat fee, customizable letter writing series. Our team will work with you to create the perfect series for your needs. We’ve customized thousands of letters for clients over the years. We use that knowledge and experience to create the best letter for your situation.

Tip #8: Be Aware of a Customer Name and/or Structure Changes

Who is your customer? In recent years, we have seen many mergers and corporate structure changes. It is vital for creditors to be cognizant of any debtor name and/or structure changes, especially when utilizing the collection and litigation process. Suing the wrong entity could result in the court case being dismissed and affect any possible recovery.

What is a creditor to do? You could add a clause within your contract/credit application requiring debtors to notify you within 30 days of these changes and consider enrolling your customers in the NCS Corporate Monitoring Program. With the monitoring program, you will be alerted to registered entity changes reported by the Secretary of State Corporation Division.

Tip #9: Personal Guarantees are a great tool, but even better when notarized!

Most credit professionals would agree that personal guarantees (“PG”) are an effective tool used to reduce credit risk. A guarantee can create a sense of comfort with the creditor, especially when the creditor is shipping on an open account with no other security or leverage.

The personal guarantor, who is often an officer of the company, may pay closer attention to debts that are personally guaranteed to avoid personal lawsuits for collection of the debt. Frequently, the personal guarantor will instruct that those debts which are not personally guaranteed remain unpaid.

As a best practice, require the personal guarantee to be notarized to eliminate the personal guarantor’s claim of a forged signature. Also, consider filing a UCC even when a personal guarantee has been issued.

Tip #10: Four Signs Your Customer May Be in Financial Distress

Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress:

Change in Corporate Status: Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close.
Pay-When-Paid: In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.
Broken Promises: This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended.
Silence: Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.

Arkansas Mechanic’s Lien and Bond Claim Rights

Posted on December 16, 2019 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Here’s What You Should Know about Arkansas Mechanic’s Lien and Bond Claim Rights

Did you know that Arkansas is the home of Crater of Diamonds State Park and the park allows the general public to search for diamonds? Not only can you search for diamonds, but the park operates under the best playground rule ever: Finders. Keepers.

Unfortunately, mechanic’s liens and bond claims don’t operate under the “finders, keepers” rule, so be sure to familiarize yourself with the statutory requirements!

Arkansas Mechanic’s Liens

Arkansas has separate notice requirements for commercial and residential projects if the residential project is 4 or fewer units.

Commercial and Residential (with more than 4 units): Serve notice of non-payment upon the owner and prime contractor after last furnishing materials or services, but within 75 days from last furnishing materials or services.
Residential (with 4 or fewer units): Include notice in contract or serve residential notice upon the owner before first furnishing materials or services. (The notice may be served after furnishing, but the lien, when later filed, will only be effective from the date the notice was served.) A residential contractor who fails to give the notice may be fined up to $1,000.00 and is barred from bringing an action to enforce any provision of the residential contract.

For commercial & residential projects (with more than 4 units), the notice is not required if you are contracted directly with the owner. For residential projects with 4 or fewer units, the notice isn’t required if the notice is incorporated within your contract, the prime contractor or another lien claimant has served the notice upon the owner, the prime contractor furnishes a payment and performance bond, or you contract directly with the owner, to provide materials or services, but you are not a home improvement contractor or a residential building contractor.

Whether the project is commercial or residential, the mechanic’s lien deadline is the same. You should serve a notice of intent upon the owner at least 10 days prior to filing the lien. Then, file the lien after last furnishing but within 120 days from last furnishing. If the notice of intent cannot be served within the 10-day time frame, file the lien and suit to enforce the lien within 120 days from last furnishing materials or services, requesting both the lien and foreclosure.

In the event you need to proceed with suit to enforce your lien, you should file suit within 15 months from filing the lien.

Did You Know about Bond Claims on Private Projects?

Generally, payment bonds are required for religious or charitable organization construction contracts of $1,000.00 or more. If the payment bond is recorded, only the prime contractor shall have a lien on the property.

A.C.A. 18-44-504 Construction by religious or charitable organizations.

(a) No contract in any sum exceeding one thousand dollars ($1,000) providing for the repair, alteration, or erection of any building, structure, or improvement shall be entered into by any church, religious organization, charitable institution, or by any agency of the foregoing, unless the contractor shall furnish to the party letting the contract a bond in a sum equal to the amount of the contract.

(b)

(1) The bond shall be filed in the office of the clerk of the circuit court in the county in which the property is situated.

(2) Any person or his or her assigns to whom there is due any sum for labor or material furnished may bring an action on the bond for the recovery of the indebtedness. No action shall be brought after six (6) months from the completion of the church, hospital, orphanage, charitable institution, or benevolent institution.

(3) If the bond is not filed as provided in this subsection, any person performing labor or furnishing material, except the principal contractor, shall have a lien upon the property for the unpaid amount of the claim.

It is recommended to serve notice upon the owner and prime contractor after last furnishing materials or services, but within 75 days from last furnishing materials or services. It is recommended to serve the bond claim in accordance with the terms of the bond; frequently a bond claim should be served within 90 days from last furnishing.

Arkansas Bond Claims

Payment bonds are typically required for general contracts exceeding $35,000, however, contracts executed by the Arkansas Department of Transportation are exempt from this bonding requirement.

A.C.A. 22-9-203 (G) Such other pertinent facts or information which to it may appear necessary or desirable.

(2)(A)(i) Every bid submitted on public construction contracts for any political subdivision of the state is void unless accompanied by a cashier’s check drawn upon a bank or trust company doing business in this state or by a corporate bid bond.

(ii) Every bid submitted on public construction contracts for the state or any agency or department of the state is void unless accompanied by a cashier’s check drawn upon a bank or trust company doing business in this state or by a corporate bid bond, except for projects under thirty-five thousand dollars ($35,000).

(iii) A bid bond is not required for public construction contracts for the state or any agency or department of the state under or equal to thirty-five thousand dollars ($35,000).

(B) This bid security shall indemnify the public against failure of the contractor to execute and deliver the contract and necessary bonds for faithful performance of the contract.

(C) The bid security shall provide that the contractor or surety must pay the damage, loss, cost, and expense subject to the amount of the bid security directly arising out of the contractor’s default in failing to execute and deliver the contract and bonds.

(D) Liability under this bid security shall be limited to five percent (5%) of the amount of the bid.

You should carefully review the terms of the bond to determine when the bond claim should be served & who should receive a copy of the claim. Frequently a bond claim is required within 90 days from last furnishing. You should file suit to enforce the bond claim within 6 months from the date final payment is made on the contract (or 12 months from the date final payment is approved on Arkansas Building Authority projects).

Failed to Timely Serve West Virginia Notice Upon the Owner

Posted on December 9, 2019 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

If You Serve the West Virginia Notice Upon the Owner and It’s Late, You Will Lose Your Mechanic’s Lien Rights

What happens to your West Virginia mechanic’s lien if you fail to timely serve the lien upon the project owner? You guessed it; you’d lose your mechanic’s lien!

Securing Mechanic’s Lien Rights in West Virginia

For West Virginia private projects there is an optional preliminary notice that may be served prior to furnishing.

38-2-20. Preliminary notice to owner; effect.

Any laborer or other person employed to do any work or furnish any materials… may, before doing any work or furnishing any material or machinery, give the owner of such building or other structure or improvement thereto notice in writing that if he is not paid therefor by the person employing him he will look to the owner for payment…

You should file the lien within 100 days from last furnishing. Unless you contracted directly with the owner, you should also serve a copy of the lien upon the owner within 100 days from last furnishing.

38-2-11. Notice and recordation of lien for supplies furnished to contractor or subcontractor.

For the purpose of perfecting and preserving his or her lien, every materialman or furnisher of machinery… within one hundred days after he or she has ceased to furnish the material or machinery or other equipment shall give to the owner or his or her authorized agent, by any of the methods provided by law for the service of a legal notice or summons, a notice of the lien.

Statute is clear, if you fail timely record your lien, the lien will be discharged.

38-2-14. Discharge of lien for failure to comply with article.

The failure of any person claiming a lien under this article to give such notice as is required… or the failure of any such claimant of any such lien to comply substantially with all of the requirements of this article for the perfecting and preservation of such lien, within the time provided therefor in this article, shall… operate as a complete discharge of such owner and of such property from all liens for claims and charges of any such contractor, subcontractor, materialman or laborer, for any work claimed to have been performed and for any materials, machinery or other necessary equipment claimed to have been furnished in connection with such work.

1 Day or 14 Days, a Late Lien is Still Late

In Worldwide Machinery LP v. Columbia Gas Transmission, LLC, Columbia Gas Transmission LLC (Columbia), the owner of the Mountaineer Express Pipeline Project, hired Welded Construction Inc., who in turn hired Worldwide Machinery LP (Worldwide) to provide equipment to the project. Worldwide furnished for several months and its last furnishing was October 31, 2018.

On February 22, 2019 Worldwide filed a mechanic’s lien in the amount of $55,028.58. Columbia filed a motion to have the lien discharged claiming Worldwide failed to file its lien timely. The court granted the motion.

The key here is the amount of time between the last furnishing date and the mechanic’s lien filing date. I’ll save you from the math and tell you that February 22, 2019 was 114 days after Worldwide’s last furnishing date of October 31, 2018. Based on the last furnishing date of October 31, 2018, the lien deadline was February 8, 2019, which means Worldwide’s lien was filed 14 days too late.

“This flaw is fatal to plaintiff’s mechanic’s lien claim” according to the court. Because even one day late is one day too many: “Discharge of a lien is required when a party misses the deadline for providing notice by even as little as one day.”

Don’t Be That Guy!

Never assume a court will lean (ha ha) your way. Always carefully track and calculate your deadlines, because missing a day could mean losing a lot!

Mechanic’s Lien & Bond Claim Rights in Kansas

Posted on December 2, 2019 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Click Your Heels Three Times for Mechanic’s Lien and Bond Claim Rights in Kansas

OK, maybe you can’t simply click your heels to file a lien in Kansas, but you can read today’s post to learn more about the steps to securing lien and bond claim rights!

Kansas Mechanic’s Liens

For private, commercial projects there is no statutory provision requiring a preliminary notice, however, we recommend serving a non-statutory notice as a best practice.

For private residential projects there is a statutory notice:

Residential Projects(residence intended for use by not more than two families):
- New Construction: File a Notice of Intent to Perform no earlier than 18 months prior to filing a lien, but prior to title passing to the buyer.
- Improvement: Serve warning statement upon the owner or obtain and retain a statement signed by the owner that states they were given a warning statement.

Whether furnishing to commercial or residential, the mechanic’s lien deadlines are as follows.

Subcontractors or Material Suppliers:
- File the lien within 3 months from last furnishing materials or services and serve a copy of the lien on the owner, the prime contractor and the party with whom you contracted.
Prime Contractors:
- File the lien within 4 months from last furnishing materials or services and serve a copy of the lien on the owner.

When furnishing to a commercial project, a Notice of Extension to file lien, which extends the time to file a lien to 5 months from last furnishing materials or services, may be filed within the above lien period. Serve a copy of the Notice of Extension on the general contractor or construction manager, and on the owner.

In the event the mechanic’s lien does not prompt payment, you should file suit to enforce the lien within 1 year from filing the lien or, if a promissory note was attached to the lien in lieu of a statement, within 1 year from the maturity date of the promissory note.

Bonus Tips

Kansas is a full balance lien state, which means the lien is enforceable for the full amount owed, regardless of payments made by the owner.
The contractor or owner may record a payment bond as security, preventing liens from attaching to the property or discharging any liens already filed.

Bond Claim for a Private Project? Yep!

Kansas statute provides that a properly recorded payment bond will prevent mechanic’s liens from attaching to the property. It is recommended to serve a bond claim upon the prime contractor within 90 days from last furnishing materials or services.

Kansas Bond Claims

Like commercial projects, the public Kansas statute does not provide for a preliminary notice & we recommend serving a non-statutory notice.

Generally, payment bonds are required for general contracts exceeding $100,000; you should always attempt to obtain a copy of the payment bond from the public entity. There are separate bond requirements for state highway projects & county road projects.

State Highway Projects: Generally, payment bonds are required on general contracts exceeding $1,000.00.
County Road Projects: Generally, payment bonds are required on general contracts exceeding $25,000.00.

You should serve the bond claim notice in accordance with the terms and conditions of the payment bond. Frequently a bond claim notice is required within 90 days from last furnishing.

For state highway projects, you should serve your bond claim within the terms of the bond, plus you should file an itemized statement of account with the Secretary of Transportation within 6 months from completion of the project.

Should you need to proceed with suit to enforce your bond claim, you should file suit within 6 months from completion of the project, unless it is a state highway project, where the deadline is within 1 year from completion of the contract.

The Retail Bankruptcy Apocalypse

Posted on November 15, 2019 by wpengine - In Other Commercial Credit News

Run! It’s the Retail Bankruptcy Apocalypse

“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?

Secured Transactions – Even on Consignment

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.

In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.

How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.

But Wait, There’s More!

In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy. Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips.

Up first? Recognize the warning signs of default or financial distress.

“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”

Next? Ensure you have established terms & conditions.

“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”

And? Consider withholding shipments until the account is current.

“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”

Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.

Then? Watch deliveries & mind the 20-day clock.

“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”

Lastly? Maintain communication.

“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”

Questions? NCS can help!