Service Area: Collection Services

Arbitration, Mediation, Lawsuit – What’s the Difference?

Posted on January 18, 2019 by - Credit Risk Management, In Other Commercial Credit News

Arbitration, Mediation, Lawsuit – What’s the Difference?

Over the holiday break, I spent some time reading articles I’ve (shamefully) had bookmarked for way too long. One of these articles reviewed the pros & cons of arbitration in construction disputes, although for me, it better explained the similarities and differences of arbitration and a lawsuit.

Construction Arbitration: The Pros and Cons by Jason Strickland of Ward and Smith, P.A.

Arbitration vs. Mediation vs. Lawsuit

I don’t think I have ever confused a lawsuit with arbitration or mediation, but I have certainly confused arbitration with mediation. Here are key features explained by Strickland:

“Mediation is a settlement conference in which the parties meet (typically in person) and use a third-party neutral to act as a settlement facilitator.  The third-party neutral is called the mediator.”

It’s important to note, the mediator can’t force a settlement – which I didn’t know. I assumed the mediator has the same powers that an arbitrator has.

“A lawsuit is conducted in a court of law and usually is initiated by a plaintiff filing a complaint, in which the plaintiff will ask for some form of relief from the defendant.”

In the NCS world, a lawsuit is often referred to as “suit to enforce…” a lien or bond claim.

Now, this explanation of arbitration is new to me, in part:

“Arbitration is essentially a lawsuit but without court involvement.”

Wow. “Arbitration is essentially a lawsuit but without court involvement.” Yes! That’s a great explanation. Why? Because arbitration is binding, just like a legal decision.

Mind. Blown.

“The parties agree… to submit their dispute to arbitration rather than to pursue a lawsuit in court.  The parties’ agreement gives the arbitrator the power to issue a decision as to the parties’ rights and obligations, and such decision will be legally binding on all parties. Thus, arbitration is very different from mediation because the third-party neutral provides a legally binding decision.  However, arbitration is not mutually exclusive with mediation.  In many cases, parties will have a dispute resolution provision in their contract that will allow, or require, the parties to mediate first, and if the mediation is unsuccessful, to then submit their dispute to arbitration.” – Jason Strickland

The Differences (Pros & Cons) Between Arbitration and Lawsuits

Strickland reviews several differences between arbitration and a lawsuit. Here’s a quick table to break down Strickland’s points.

So, who wins? Arbitration or Lawsuit?

Obviously, it will depend on your circumstances and contractual language, but both options have their pros & cons. A key benefit in arbitration is the efficiency; with a less formal environment and the rarity of appeal, it can prevent a case from dragging on. On the flip side, construction disputes typically involve a myriad of parties, which can be easier to accommodate within a court/lawsuit setting.

Blanket UCC Filings & Your Frequently Asked Questions

Posted on January 14, 2019 by - UCC Financing Statements

Blanket UCC Filings & Your Frequently Asked Questions

What is a Blanket UCC Filing?

A Blanket UCC filing is a security interest in all the 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). The UCC filing elevates the status of your accounts receivable to that of a secured creditor.

Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

Why Choose a Blanket Filing?

Let’s hear from expert, Cindy Bordelon, NCS’ UCC Services Manager!

“When determining the type of UCC to be filed, you first must define your goal.  Do you want to take a priority interest in your goods and be able to repossess? Or, would you rather take a security interest in all of the customer

’s assets?  If your goal is “all assets,” clearly identify the collateral and have your customer grant that interest by executing a Security Agreement.  With the Security Agreement signed, you can proceed with your blanket filing, knowing your position is the day and time the UCC filing is recorded. As a best practice, I recommend always conducting a UCC search before filing. This search will tell you who may be ahead of you and what your potential position may be, helping you to make a good credit decision.”

Is there a Filing Deadline?

Much like other credit remedies, there are “deadlines” for filing a timely Financing Statement. If you are filing a Blanket UCC, the filing should be recorded prior to lending or shipping.

What if My Customer Defaults or Files for Bankruptcy Protection?

If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.

  • If your customer filed Chapter 7, file a secured proof of claim.
  • If your customer filed Chapter 11, file a secured proof of claim and monitor for distribution.

What If My Customer Sells Its Business?

Companies sell businesses all the time. The primary reason a company sells its business is because it is in fiscal distress, and selling the business is a means of escaping the debt. If they can escape the debt, how can a UCC possibly help? Your UCC filing acts as a lien on the business; therefore, before title passes from one party to another, the lien should be acknowledged and either settled or renegotiated.

Who Wants to Hear a Story?

Here’s a story of a new restaurateur, whose creditors secured via Blanket Filings, and the fate of the restaurateur’s secured & unsecured creditors in a Chapter 7 bankruptcy.

Chef Charles is going to start a restaurant. He’s worked in the restaurant industry his entire working life and thinks “OK, I’m pretty good at this. I know how to run a restaurant, and how to make foods that are delicious and attractive, plus I can create an environment where people will want to dine.”

Chef Charles creates his business plan and determines he needs start-up capital, so he goes to the bank with his business plan and a request for $20,000. The bank reviews his plan and decides to lend the $20,000 to Chef Charles, and the bank perfects their security interest.

Chef Charles is ready to start. Various vendors will solicit Chef Charles regarding different materials and services he may need, and each vendor that successfully sells their goods to Chef Charles will need to decide whether they are going to sell on open credit terms, via credit card or cash in advance. If the vendor decides to sell on open terms, the vendor will need to further decide whether they will sell on a secured or unsecured basis.

Chef Charles has selected his vendors. Of his numerous vendors, four of them have taken a security interest and filed a UCC.

Secured Creditor 1: $10,000

Secured Creditor 2: $10,000

Secured Creditor 3: $5,000

Secured Creditor 4: $10,000

We’ll assume the remaining vendors have opted to sell on unsecured open terms.

Business is underway! At any given time, Chef Charles has $61,000 in assets.

Unfortunately, 3 years later Chef Charles becomes a statistic, when his business fails, and he files for Chapter 7 bankruptcy protection.

What happens to his creditors? It’s simple, Chef Charles’s assets will be liquidated and creditors will be paid by priority. Creditor priority is based on first in time, first in right.

The bankruptcy trustee is going to liquidate Chef Charles’s $61,000 in assets and begin paying his creditors.

The bank was the first party to lend and take a secured interest, so they will be the first paid, then the other vendors who filed UCCs will be paid in the order in which they secured their interest.

Once the secured creditors have been paid, there is $6,000 remaining, and that $6,000 will be disbursed on a pro-rata basis to all general unsecured creditors.

In this case, Chef Charles has 100 unsecured creditors that were each owed $1,000. Each of these creditors will receive $60 (based on the pro-rata disbursement) or 6 cents on the dollar

More questions on Blanket Filings, contact us!

Mechanic’s Liens and Discharge Bonds

Posted on January 11, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Mechanic’s Liens and Discharge Bonds

We know mechanic’s liens can be bonded off, we’ve discussed it before. But it’s a topic that can be quite confusing, especially when each state treats the bonds a bit differently. I recently read an article from Surety Bond Quarterly, that I found not only entertaining, but quite educational on the perks and perils of a lien discharge bond – let’s dig in!

“Mechanics’ Lien Discharge Bonds — The Substitutes of the Surety World”

In this article, written by attorneys Mike F. Pipkin and Jacob L. McBride (collectively “authors”), authors compare a lien discharge bond to a substitute teacher.

First, let’s take a moment to relive “substitute days.” Most, if not all, of us know what it was like to have a substitute teacher in school.

Walking into class to see your regular teacher has been replaced by a new face often triggered a mini-party in your head, because it meant a break from the routine, a decreased likelihood of a test, an increased likelihood of the AV club wheeling in a projector (I may be showing my age), and if you were a procrastinator, it may have given you a little extra time to finish the homework from the night before.

OK, so how is a discharge bond like a substitute teacher? According to authors, “Mechanics’ lien discharge bonds… substitute for a previously filed mechanics’ or materialman’s lien, providing relief to owners and contractors alike from the onerous procedures, rules, and remedies that such liens carry with them. They may provide added time to negotiate a settlement by substituting their own statutes of limitations. While mechanics’ lien discharge bonds are not without their risks, they offer a satisfying alternative in that owners and other stakeholders can insulate their property interests from foreclosure, while contractors have a simpler alternative to recovery than foreclosure.”

Two substitute teacher & discharge bond commonalties that jump out? Both may provide relief/reduce pressure and they may provide additional time.

There’s Always a Risk of One Kid Spoiling It for the Group

You know the kid – the one who saw the line drawn in the sand and crushed it with rude comments, long trips to the bathroom and picking on other kids. The kid that put the whole class at risk of having “quiet time” or forcing the substitute to turn off the movie.

Just as there were risks in school, there are risks with discharge bonds. Specifically, according to authors, why a discharge bond was issued to begin with. It’s important to understand, a payment bond and a discharge bond are not the same.

“Unlike a typical payment bond, issued to protect against potential future circumstances, a lien discharge bond is born out of an existing dispute over nonpayment that resulted in a lien being filed on real property. In other words, a surety executing a lien discharge bond steps into a situation where the principal is already not paying the obligee(s).”

In other words, the discharge bond is issued because there is already a payment problem. Because they are issued based on a “known” issue, the scope of the discharge bond can be limited. Authors remind us the discharge bond is frequently issued for an amount that totals the value of filed mechanic’s liens, which means it is “[U]nlike a typical payment bond with its broad scope… the scope of a lien discharge bond is limited to specific, identified lien claimants with specific, limited lien values…”

The Savvy Substitute Reigns Supreme

As a kid, I remember the different feeling between seeing a new substitute versus a seasoned veteran. A seasoned veteran knew the rules, enforced the rules, and provided a bit of relief from schooling but we knew better than to push our luck. What’s the discharge bond equivalent? Rules still apply, deadlines must be met, and statute must be complied with — from authors:

“Like the wise substitute teacher who learns and enforces the class rules, the surety can assert the defenses of its principal. Because a lien discharge bond provides substitute security for the lien, most states require a claimant to have complied with the requirements of the lien statute to make a claim on the bond. The lien discharge surety can defend against a claim by identifying any defects in the lien claim, such as failure to meet standing requirements, failure to provide proper notice, and failure to perfect the lien claim, among others. The surety may also use any substantive defenses it has available to the validity of a claim as well as applicable affirmative defenses, such as statute of limitations and waiver.”

Be aware of & follow statute carefully. Earlier this year we reviewed a case in New York where the claimant failed to follow lien statute when its lien was discharged by a bond, and lost its rights.

As a best practice in liens & in school: assume the substitute has the same authority and follow the rules, otherwise, there will be consequences.

UCCs Have Priority Over 503(b)(9) Claims

Posted on December 17, 2018 by - Credit Risk Management, UCC Financing Statements

503(b)(9) Claims & Consignment Agreements are No Match for Properly Perfected UCCs

Businesses file for bankruptcy protection; it is an unfortunate and uncontrollable reality. Considering the likelihood of debtor default, some creditors take unnecessary and avoidable risks relying on reactive recovery. Secured creditors, however, wisely mitigate these risks through the proactive protection afforded to creditors under Article 9 of the Uniform Commercial Code (UCC).

Proactive Takes Priority

It’s true. In bankruptcy, a properly perfected security interest, in compliance with UCC Article 9, has priority over unsecured creditors, creditors with administrative claims, 503(b)(9) claims, and even consignment agreements. If you attended CRF’s Fall Forum, the Bankruptcy Judge Panel – Three Judges/One Verdict reinforced the priority UCC filings have over 503(b)(9) claims and consignment agreements.

The proof is in Sections 506 & 507 of the bankruptcy code. Section 506 defines what is considered a secured claim and Section 507 dictates the payout priority of claims.

Ultimately, the payout priority in a Chapter 11 filing is:

  1. Secured Creditors (e. creditors who have a perfected security interest)
  2. Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (e. creditors without a security interest)

Secured creditors are paid before all other claims, to the extent of the pledged collateral. After secured creditors have been paid, payments are made to creditors with administrative claims. The administrative claims may include costs associated with the management of the bankruptcy (i.e. attorneys), post-petition claims and 503(b)(9) claims. Among those paid last in a bankruptcy, if paid at all, are general unsecured creditors.

“Who Needs UCCs? We File 503(b)(9) Claims”

Yes, 503(b)(9) claims can be advantageous for an unsecured creditor. The bankruptcy code was amended in 2005 to include a new administrative claim: 503(b)(9). With the addition of 503(b)(9) claims, some creditors became complacent. The availability of a 503(b)(9) claim seemed to misleadingly allay creditor concerns, “Nah, I don’t need UCC filings. We just file a 503(b)(9) to get paid.” This somewhat false sense of security can easily cost creditors millions of dollars.

Under 503(b)(9), creditors may file a claim for “the value of any goods received by the debtor within the 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”

As you can imagine, there are challenges with 503(b)(9) claims. High-profile cases are in heated debate over the definition of “received by” for the 20 day rule. And, of course, there is the question of what constitutes a “good” because services are not covered under these claims, and whether those goods have been sold in the ordinary course of business.

As an aside, a member of the panel at CRF’s Fall Forum, Judge Christopher S. Sontchi, Chief Judge of The United States Bankruptcy Court for the District of Delaware, has presided over several cases determining “goods” and “receipt.” Notably, in one case, Judge Sontchi looked to the UCC definition of goods and subsequently held that electricity is not a “good” under 503(b)(9).

To be clear, a UCC filing is not without potential obstacles. Your UCC must be properly perfected and there is a narrow margin for error. But, ensuring a UCC has been properly perfected is less cumbersome than proving goods are goods, defining date of receipt and verifying goods are sold during ordinary course of business.

We Sell on Consignment, No UCC Necessary

“Why would I file a UCC if I’m selling on consignment?” Because the law allows you to establish priority as a secured creditor! A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your debtor defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided to the debtor.

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Is a UCC required for consignment sales? No. Creditors are not required to file a UCC. In default or bankruptcy situations, when a creditor is selling on consignment, there is a chance the creditor could argue it is “commonly understood” the debtor engages in consignment sales. But making that argument seems shaky at best, not to mention inefficient – how much time would it take to successfully make that argument vs. filing the UCC and granting a security interest at the beginning of the relationship?

UCCs are Payment Priority

Please understand, UCCs are not a guarantee; there are no recovery guarantees in bankruptcy; after all, 100% of nothing is nothing. However, without a properly perfected UCC, you are just another unsecured creditor, wading in an overcrowded shallow pool for payment. With a properly perfected UCC, you are a payment priority.

Article was originally published in the Credit Research Foundation 4Q 2018 CRF News

What To Do When You Can’t Get Change Orders in Writing

Posted on December 14, 2018 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

What To Do When You Can’t Get Change Orders in Writing

Change orders can be tough to track. Nearly every construction project has change orders and with the number of parties on a given project and the number of projects any one party is involved in, it is no surprise that change orders are often overlooked or simply given a verbal approval to proceed.

But like all documentation, it can be vital in supporting your claim. So, what can you do when a formal change order isn’t issued?

What You Can Do When You Can’t Get a Change Order in Writing

A change order, which is a change to the original contract, should be formally issued and approved. Should. There are a lot of things that we should do: make the bed, exercise daily, avoid sugary drinks, etc. Unfortunately, we don’t always do what we should.

It’s so easy to simply send additional materials and invoice your customer when he calls in search of more scaffolding. It’s a pain to go through the proper channels to get a formal document, especially when your customer needs materials now, not a week or two from now when the formal request is issued.

If your contract requires change orders to be in writing, and a request for formal documentation falls on deaf ears, don’t just assume it’ll be OK, find a way to document, document, document. Those are the words of Todd Heffner of Smith Currie in his article Can’t Get a Written Change Order? Document, Document, Document.

Heffner mentions that if a dispute arises over an undocumented change order, “The general trend is for courts to allow a contractor to recover for the extra work that was performed.” But why risk it? If you can’t get a formal document, Heffner recommends utilizing email as a way of informal documentation.

“For example, the contractor can send an email to whoever is directing the work requesting clarification of what is to be done. The email chain will provide written evidence that the contractor did not proceed as a volunteer or consider the changed work to be in the original scope.”

What happens if the email recipient won’t acknowledge the email or refuses to respond? Is it still worth documenting? Yes, Heffner notes you can still send an email regarding the change, but follow it up with a letter sent via certified mail:

“This can be done initially by sending a long email documenting exactly what was directed and why it constitutes a change to the work. Any such email should be followed by a letter sent via certified mail. Both email and letter should give the owner, architect, or engineer a limited time to disagree, e.g., ‘We will proceed with this work in x days unless you direct otherwise.’”

The Pencil Remembers What the Mind Forgets

I’ve probably spouted this proverb before, with many thanks to my 7th grade history teacher, but it is worth repeating. “The pencil remembers what the mind forgets” – in other words, write down events and occurrences.

Document change requests, keep track of waivers, carefully itemize statements, match bills of lading/proofs of delivery to outstanding invoices. The paper trail can be annoying, with random bits of extraneous information slid in an offhanded email or quick text, but it’s critical in supporting any potential claim you may have.

UCC-1 Collateral Description Reference Security Agreement

Posted on November 30, 2018 by - In Other Commercial Credit News, UCC Financing Statements

What Happens When a UCC-1 Collateral Description References the Security Agreement, but the Security Agreement Isn’t Attached?

What happens to a security interest when the collateral description within the Financing Statement says, “see attached Security Agreement,” but the Security Agreement isn’t filed with the Financing Statement? The security interest is unperfected.

Sound familiar? Perhaps because we just reviewed a case a few weeks ago with a similar fate. While these two cases are different, the underlying similarity is failing to include additional documentation with the Financing Statement.

The Case: 180 Equipment, LLC v First Midwest Bank

$7,600,000 = the total owed to the Secured Party, according to the Secured Party’s proof of claim.

180 Equipment, LLC (180 Equipment) obtained a loan from First Midwest Bank (Bank) and granted Bank a security interest in 26 specifically identified “categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments and inventory and all proceeds and products thereof.” 180 Equipment does not own any real property, so Bank’s security interest essentially covered all assets.

In its Financing Statement, Bank identified the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” However, Bank did not include the Security Agreement with the filing of its Financing Statement.

When 180 Equipment filed for bankruptcy protection, the trustee argued that Bank’s security interest was unperfected because it failed to sufficiently describe the collateral. “The trustee… contends that the mere reference to the collateral as being described in the amended security agreement does not suffice to indicate, describe or reasonably identify any collateral.”

Bank argued the filing of the Financing Statement was enough to put other creditors on notice. “…the purpose behind the filing of a financing statement is merely to provide notice to third-party creditors that property of the debtor may be subject to a prior security interest, and that further inquiry may be necessary to determine the identity of the collateral.”

The court’s decision? The court agreed with the trustee. Bank’s Financing Statement failed to sufficiently identify the collateral. Referring to the Financing Statement, the court states “Rather, it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement. The financing statement, on its face, provides no information whatsoever, and therefore no notice to any third party, as to which of the Debtor’s assets First Midwest is claiming a lien on, which is the primary function of a financing statement.”

Could safe harbor have saved Bank’s security interest?

“In accordance with section 9-504(2), which permits the use of a supergeneric description in a financing statement, [Bank] could have perfected its security interest by indicating its collateral in the financing statement as “all assets” or “all personal property.” The Uniform Commercial Code Comment to section 9-504 refers to the supergeneric description alternative as a “safe harbor” that “expands the class of sufficient collateral references” in order to accommodate the common practice of debtors granting a security interest in all or substantially all of their assets.”

A Failed Financing Statement

Despite Bank’s persistent efforts to argue the perfection of its security interest, the court deemed the security interest unperfected for failure to comply with the provisions under Article 9. After all, how can other creditors determine whether collateral is already subject to security interest, if they don’t have access to a description of the collateral.

“A financing statement that fails to contain any description of collateral fails to give the particularized kind of notice that is required of the financing statement as the starting point for further inquiry.”

Bonus: Warning to Private Equity Companies?

In an article by Deborah Enea of Pepper Hamilton LLP, Enea notes that private equity companies should heed lessons from this case.

The case provides important guidance to private equity companies, including:

– If a private equity company invests in a target as a secured creditor, the private equity company should avoid ambiguous collateral descriptions in its UCC-1 financing statements.

– Collateral descriptions in UCC-1 financing statements should include super-generic descriptions (such as “all assets of the debtor”) while avoiding reference to definitions in an underlying agreement.

– If collateral descriptions in UCC-1 financing statements refer to definitions in an underlying agreement, the underlying agreement must be attached to the financing statement.

Collateral Descriptions within Your UCC Financing Statement: Perfectly Imperfect

Posted on November 16, 2018 by - In Other Commercial Credit News, UCC Financing Statements

Perfectly Imperfect Collateral Descriptions within Your UCC Financing Statement: It’s a Delicate Balance.

A properly perfected security interest is nothing without a collateral description. In fact, it’s not properly perfected at all – it’s unperfected. A properly perfected security interest requires compliance with Article 9, which includes a Security Agreement and the subsequent filing of the UCC-1 Financing Statement.

Contents of a Security Agreement

What information should the Security Agreement contain? A Security Agreement should include the following:

  • The name & address of the debtor
    • The name for an organization must be the name as it appears in the public organic record
    • The name for an individual, depending on the state, should be the name as it appears on the unexpired driver’s license
  • A granting clause
  • A collateral description
  • Reference to governing law
  • The date of the agreement
  • Signatures from authorized individuals

Contents of the UCC Financing Statement

Article 9-502 clearly identifies the information that is to appear in the Financing Statement: the name of the debtor, the name of the secured party and the collateral description.

(a) [Sufficiency of financing statement.] Subject to subsection (b), a financing statement is sufficient only if it:

(1) provides the name of the debtor;

(2) provides the name of the secured party or a representative of the secured party; and

(3) indicates the collateral covered by the financing statement.

What Constitutes a Sufficient Collateral Description?

Article 9-108 provides the following:

(a) Except as otherwise provided… a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”

(b) [Examples of reasonable identification.]

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

Be careful, there’s a fine line between being too specific and too generic.

Can I Attach My Collateral Description as an Exhibit to the UCC Filing?

Yes, you could attach an exhibit to your filing. But… just because you can, doesn’t mean you should. Authors from Troutman Sanders LLP explained in their recent article UCC Incorporation by Reference: An Imperfect Way to Perfect: “Generally, a UCC-1 financing statement’s collateral description is sufficiently descriptive when it refers to details provided in an attachment.” And, they further stated “a collateral description that refers to an unattached, lapsed financing statement may be sufficient when the UCC-1 includes the financing statement’s filing number.”

However, a bankruptcy court recently deemed a security interest unperfected, because the document which identified the collateral was not available at the local clerk’s office (interestingly, it was available on other websites – just not the local clerk’s). According to the authors, the court “held that a UCC-1 financing statement is ineffective to perfect a security interest if the public document to which its collateral description referred is not available at the local clerk’s office where UCC records are maintained.”

A Bit of Background

The debtor issued bonds pursuant to a “pension funding bond resolution.” The debtor & secured parties executed Security Agreements accordingly. The resolution was posted publicly online and provided the pledged property in detail, but did not provide a description of the collateral.

The bond holders filed UCC-1s to properly perfect their security interest, and within the UCC-1 they described the collateral as the “pledged property described in the Security Agreement attached as Exhibit A hereto and by this reference made part hereof.” The UCC was then filed with a copy of the Security Agreement, although, it did not include the separate resolution that identified the collateral.

So, what’s the problem? Without the resolution document, “an interested third party reading the financing statement and the attached security agreement would know to look for the resolution to find a detailed description of the collateral but would not be able to find the resolution at… the applicable financing statement filing office.” The court further noted it would be out of scope to have an interested third party tracking down a document — even if it is just a matter of going to a different website.

Be Careful, Because Perfect Can Quickly Be Imperfect

UCC filings can be quite precarious. Again, there is a fine line between a collateral description that is too specific or one that is too generic.  Just as it is debatable whether a court will uphold a security interest as perfected if the collateral is identified within an exhibit. Be careful, be thorough, don’t take short cuts and always review.

Parting thoughts from Troutman Sanders LLP:

“Although this bright-line rule tightens court oversight of the incorporation by reference doctrine, it provides needed clarity moving forward for practitioners — particularly those looking to save a bit of work or time by not including a full collateral description on the financing statement itself. Lenders should refrain from drafting collateral descriptions that rely on extrinsic documents, especially when the referenced document is not attached as an exhibit to the financing statement. Lenders should take particular care when using collateral descriptions that contain terms that are defined in nonpublicly available documents, such as credit agreements and security agreements, if those documents are not attached to the financing statement, and this decision suggests that financing statements may be insufficient to perfect if not all applicable defined terms are specifically included on the financing statement itself or on an exhibit annexed to the financing statement. Lenders should ensure that interested third parties can sufficiently identify the covered collateral without having to take additional steps in the search process. If further sleuthing is needed, the UCC-1, and the drafting skills of its scribe, may be deemed imperfect.”

Miller Act May Not Cover Unused Labor

Posted on November 12, 2018 by - Mechanic's Liens & Bond Claims

Furnishing to a Federal Construction Project? Beware, the Miller Act May Not Cover Unused Labor

The Miller Act is federal statute that requires payment bonds on projects contracted by the United States. We’ve previously discussed the Miller Act, but this post is going to take a look at something that isn’t covered under the Miller Act: unused labor.

Goose Creek Nuclear Power Facility

The United States Department of the Navy hired general contractor, Caddell Construction Co. (DE), LLC (Caddell), to construct the Goose Creek Nuclear Power Facility near Charleston, South Carolina. In accordance with statute, Caddell obtained the appropriate payment bond.

Caddell hired Allan Spear Construction, LLC (ASC) to provide “supplemental concrete” to the project. Within the contract, there is a provision that “[ASC] will have a minimum of 12 consecutive weeks to provide a minimum of 20 workers over the 12 weeks period.”

ASC interpreted this provision as a minimum – as in, “for a minimum of 12 weeks, the GC will pay for at least 20 workers, even if the GC doesn’t use the 20 workers.” Of course, this is not the same provision interpretation that Caddell had – but we’ll come back to that.

According to the court opinion, Caddell initially used at least 20 workers. But as time went on the number of needed workers dropped. Caddell continued to pay ASC as though it were using the 20 workers, but eventually Caddell stopped paying for the 20 workers & began paying for only the workers used.

When payments dropped, ASC made a demand upon Caddell for payment and then filed suit against the payment bond, seeking claims just under $600,000.

May Be Valid Breach of Contract Claim, But Not Under Miller Act

ASC filed suit (and additional breach of contract claims) to recover the funds ASC believed it was owed by Caddell, based on ASC’s interpretation of the contractual provision: ASC will be paid for 20 workers per week for 12 weeks.

Caddell contested this claim, arguing ASC’s claim does not fall within the parameters of the Miller Act, because the claim is not based on labor/materials provided, rather it’s based on labor not used.

3133. Rights of persons furnishing labor or material

(b) Right To Bring a Civil Action –

(1) In general.-Every person that has furnished labor or material in carrying out work provided for in a contract for which a payment bond is furnished under section 3131 of this title and that has not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished or supplied the material for which the claim is made may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due.

The court observed “the surety of a bond furnished by the Miller Act may not be held liable for claims which a subcontractor may have against the prime contractor not based on labor or materials furnished.” To be within the scope of the Miller Act, the claim must be for labor or materials that were actually furnished.

The court decided ASC’s claims may be appropriate for a breach of contract claim, but not a Miller Act claim.

“Here, by ASC’s own allegations, Caddell paid for the laborers actually used but breached their contract by refusing to meet the twenty-laborer-minimum provision. Because ASC seeks damages arising out of an agreement to pay for twenty laborers not actually used—rather than “labor performed” or “materials furnished”—the Miller Act does not provide the remedy. Accordingly, the Court finds that ASC’s only cause of action against the Moving Defendants fails as a matter of law. Therefore, the Court grants the Moving Defendants’ Motion for Summary Judgment.”

Securing Rights Under the Miller Act

For those who have furnished labor or materials to a federal project, and have not been paid, the bond claim should be served after your last furnishing, but within 90 days from your last furnishing. If serving the bond claim does not prompt payment, file suit to enforce the Miller Act Bond Claim in U.S. District Court after 90 days from last furnishing materials or services, but within 1 year from last furnishing materials or services.

Questions about securing rights under the Miller Act? Contact us today!