Service Area: Notice and Mechanic’s Lien Services

What’s New in Mechanic’s Lien & Bond Claim Law?

Posted on September 20, 2019 by - In Other Commercial Credit News

What’s New in Mechanic’s Lien & Bond Claim Law?

There have been some key developments and changes to mechanic’s lien and bond claim laws throughout the U.S. Notably, changes to retainage in Illinois and Minnesota, new Notice of Nonpayment form in Florida, and bond claim deadline changes in Oklahoma.

Mechanic’s Lien & Bond Claim Law | What’s New Illinois?

Illinois SB1636 restricts the amount of retainage that can be held on a private construction project. A construction contract may provide for withholding up to 10% of any payment made prior to completion of 50% of the contract. When a contract is 50% complete, no more than 5% of the amount of any subsequent payments made under the contract may be held as retainage.

In Illinois Imposes Retainage Limits in Construction Contracts, author Gregory S. Gistenson states “Retainage limits have been introduced in one form or another in every session of the Illinois General Assembly dating back to at least 2005.” WOW!

What else is new? Illinois SB0104 amends the State Prompt Payment Act and requires that contractors pay each subcontractor and material supplier, or provide written notice of refusal to pay, within a set time period after receiving payment from the state or agency. The legislation provides a penalty for a contractor’s failure to pay in accordance with statute. Further, on or before July 2021, the Department of Transportation shall publish on its website a searchable database that allows for queries by the name of a subcontractor or the pay item such that each pay item is associated with either the prime contractor or a subcontractor.

Mechanic’s Lien & Bond Claim Law | What’s New Minnesota?

HF2 requires that project owners and public entities release retainage no later than 60 days after substantial completion, and that unless there is a dispute, contractors must pay all remaining retainage to their subcontractors no later than 10 days after receiving payment from the owner/public entity. After substantial completion, the owner/public entity may withhold no more than 250% of the cost to correct or complete work known at the time of substantial completion.

Mechanic’s Lien & Bond Claim Law | What’s New Florida?

Florida’s new Notice of Nonpayment! Effective 10-1-19 HB1247 provides a newly prescribed form for a Notice of Nonpayment (bond claim), for both private and public projects. The legislation requires a Notice of Nonpayment to be under oath and the claim must include additional information, where applicable, stating the portion of the claimed amount being held for retainage, previous payments made and the value of future furnishings to be made.

The legislation also clarifies that negligent inclusion or omission of any information in the Notice of Nonpayment that has not prejudiced the contractor or surety does not defeat an otherwise valid claim. However, willfully exaggerating the amount unpaid or willfully including a claim for work not performed or materials not furnished is fraudulent.

When providing rental equipment, the Notice of Nonpayment must be served no later than 90 days after the date the rental equipment was on the job site and available for use.

Mechanic’s Lien & Bond Claim Law | What’s New Oklahoma?

Rounding out our changes is Oklahoma. Effective 11-1-19, HB2305 adjusts the time frames for filing an action against a payment bond. When contracting with a subcontractor, a bond claim must be made within 90 days from last furnishing materials or services. If contracting with the prime contractor, a bond claim is optional. Under HB2305, suit to enforce a claim under the bond must be made within 1 year from last furnishing materials or services; however, the deadline for suit will be extended to 2 years from last furnishing materials or services if a claim was made against the bond within 1 year from last furnishing materials or services.

Public Projects and Preliminary Notices

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

public projects and preliminary notices

Public Projects & Preliminary Notices: Preliminary Notices Aren’t Just for Private Projects

Do you know there are 19 states that require a preliminary notice be served to protect bond claim or public improvement lien rights? A common misconception is that preliminary notices are only required for private projects (securing mechanic’s lien rights), but that’s just not true. In today’s post we are going to review the 19 states with preliminary notice requirements on public projects.

19 States with Preliminary Notices for Public Projects

Arizona, California, Florida, Georgia, Iowa, Louisiana, Massachusetts, Michigan, Montana, Nevada, New Jersey, North Carolina, Ohio, South Carolina, Texas, Utah, Washington, Wisconsin and Wyoming all have a preliminary notice requirement for public projects.

Arizona: 20 days from first furnishing

Serve notice upon the prime contractor within 20 days from first furnishing materials or services. A late notice may be served, but the bond claim, when later served, will only be effective for materials and services provided 20 days prior to serving the notice and thereafter. Serve an amended notice if the contract amount stated within your notice increases by 20% or more.

California: 20 days from first furnishing

Serve notice upon the prime contractor and public entity within 20 days from first furnishing materials or services. A late notice may be served, but the stop notice, when later served, will only be effective for materials and services provided 20 days prior to serving the notice and thereafter.

Florida: 45 days from first furnishing

Serve notice upon the prime contractor prior to or within 45 days from first furnishing materials or services. When supplying specially fabricated materials, serve notice prior to or within 45 days from the date fabrication begins. The notice must be received within the 45-day period.

Georgia: 30 days after first furnishing

Serve Notice to Contractor upon the prime contractor within 30 days after first furnishing materials or services, or within 30 days from the filing of the Notice of Commencement, whichever is later.

Iowa: 30 days after first furnishing

Serve notice upon the prime contractor within 30 days after first furnishing materials or services. No notice is required when contracting directly with the prime contractor.

Louisiana

Lessor’s Notice: Serve a copy of the lease upon the owner and prime contractor within 10 days after the equipment is first placed on the project site.

Notice of Non-Payment: Serve notice of non-payment upon the owner and prime contractor within 75 days from the last day of the month for EACH month in which materials were furnished, but within the period in which a sworn statement must be filed.

Massachusetts: 20 days from receiving final written approval for specially fabricated materials

When furnishing specially fabricated materials, a notice may be served upon the prime contractor within 20 days from receiving final written approval for such materials. Serving the notice will protect the right to serve a bond claim even if the materials are not incorporated into the project.

Michigan: 30 days from first furnishing

Serve notice upon the prime contractor within 30 days from first furnishing materials or services.

Montana: 30 days after first furnishing

Serve notice upon the prime contractor after first furnishing, but within 30 days from first furnishing materials or services.

Nevada: 30 days after first furnishing

Serve notice upon the prime contractor after first furnishing materials or services, but within 30 days from first furnishing materials or services. A late notice may be served, but the bond claim, when later served, will only be effective for materials or services provided 30 days prior to serving the notice and thereafter.

New Jersey

Bond Claim: Serve notice upon the prime contractor prior to furnishing materials or services. A late notice may be served, but the bond claim, when later served, will only be effective for materials and services provided after serving the notice.

Municipal Mechanic’s Lien: Serve notice upon the public entity within 20 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided after serving the notice.

North Carolina: 75 days from first furnishing

Serve a Notice of Public Subcontract on the prime contractor within 75 days from first furnishing materials or services.

A late notice may be served, but the bond claim, when later served, may only include materials or services provided within 75 days prior to serving the Notice of Public Subcontract and thereafter.

Ohio: 21 days from first furnishing

Serve notice upon the prime contractor within 21 days from first furnishing materials or services. A late notice may be served, but the bond claim, when later served, will only be effective for materials and services provided 21 days prior to serving the notice and thereafter.

South Carolina: as soon as possible

Serve a Notice of Furnishing upon the principal of the bond as soon as possible. The bond claim, when later served, will be limited to the amount owed by the principal of the bond at the time the Notice of Furnishing was received.

Texas

Notice of specially fabricated materials: 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 retainage: Serve notice 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 non-payment: 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.

Utah: 20 days from first furnishing

File preliminary notice with the State Construction Registry within 20 days from first furnishing materials or services or within 20 days from the filing of a notice of commencement, whichever is later. A late preliminary notice may be filed; however, the bond claim will only be enforceable for materials and services furnished 5 days or later after the notice is filed.

Washington

Bond Claim: Serve notice upon the prime contractor within 10 days from first furnishing materials or services.

Public Improvement Lien: Material suppliers must serve notice upon the prime contractor within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 60 days prior to serving the notice and thereafter.

Wisconsin: 60 days after first furnishing

Serve notice upon the prime contractor within 60 days after first furnishing materials or services.

Wyoming: 60 days from first furnishing

Serve notice upon the prime contractor within 60 days from first furnishing materials or services.

Remember, Just a Guideline for Notices & Public Projects

Please remember, this post provides a general guideline for these states. There may be circumstances where the notice is recommended but not required; frequently, when selling to the prime contractor on a public project, the notice isn’t required. Carefully review the information in The National Lien Digest or within each states’ statute to confirm you are serving the proper notice upon the proper parties within the proper time frame.

Even if the notice isn’t required, it’s a best practice to serve the notice so all parties within the ladder of supply are aware you are furnishing to the project!

Can I File a Lien If I’m Still Furnishing Materials or Labor?

Posted on September 13, 2019 by - In Other Commercial Credit News

Can I File a Mechanic’s Lien If I’m Still Furnishing Materials or Labor?

Construction projects can take a long time to complete; Rome wasn’t built in a day. Getting paid in the construction industry takes just as long – longer maybe. So, it’s not surprising when a construction company comes to us and wants to file a mechanic’s lien even though they are actively furnishing materials and/or labor to a project. Clients frequently ask, “Can I file a mechanic’s lien if I’m still furnishing to the project?” I wish the answer were as simple as “yes” or “no.”

OK, So Can I File a Lien if I’m Still Furnishing?

Like how I dodged that question? The truth is, whether a lien can be filed prior to your last furnishing may depend on varying factors, but primarily on statute. For example, in New York, statute indicates the lien may be filed “at any time during the progress of work” which implies you could still be furnishing when you file your lien.

N.Y. LIE Article 1, Section 10 (1.) Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished;

However, other states like California, explicitly state the lien should be filed AFTER furnishing has been completed.

C.A. Civ. Code, Article 2. Conditions to Enforcing a Lien [8410 – 8424]

    1. A claimant other than a direct contractor may not enforce a lien unless the claimant records a claim of lien within the following times:

(a) After the claimant ceases to provide work.

(b) Before the earlier of the following times:

(1) Ninety days after completion of the work of improvement.

(2) Thirty days after the owner records a notice of completion or cessation.

One California Subcontractor Learned the Hard Way

I was just reading Precision Framing Systems Inc. v. Luzuriaga, Cal: Court of Appeal, 4th Appellate Dist., 2nd Div. 2019. In this case, the subcontractor filed its lien while it was still furnishing to the project. When the subcontractor filed suit to enforce its lien, the project owner argued the lien was filed too soon. The circuit court agreed with the project owner, and subsequently the appeals court also sided with the owner. California statute is clear, you must complete furnishing prior to filing the lien.

The subcontractor argued that when it filed its lien, it didn’t know it would have to provide additional materials/labor. The additional furnishing was to fix an issue, not work within the terms of the contract. If it was work outside of the contract, wouldn’t that mean the furnishings within the contract had already been completed, making the lien valid? In reviewing the case further, I came across a recent article, by attorney Garrett Murai, in which he explained the Court of Appeals decision:

“The Court of Appeals, noting that [the] subcontract required that [subcontractor] supply and install ‘trusses . . . necessary to complete the . . . project,’ held that the repairs performed in February 2014 were part of [subcontractor’s] ‘work’ and that because [subcontractor] had recorded its mechanics lien in January 2014 it had done so prematurely.

The Court of Appeals also explained that the fact that the general contractor deemed [subcontractor’s] work to be complete is irrelevant, since the scope of [subcontractor’s] work was established by its contract not by ‘the factually unsupported legal opinion of two witnesses.’

Finally, explained the Court of Appeal, while ‘it may seem unfair to hold that [subcontractor] recorded its claim prematurely’ when ‘it did not know that it had any work left to do’ that the Court had ‘not found any case law suggesting that a claimant’s subjective knowledge or belief as to whether it has ceased to provide work is relevant’ and further that ‘nothing in the Mechanic’s Lien law prohibited [subcontractor] from recording its claim again after the repairs were prepared.'”

Best Practice – Best to Finish Furnishing Before Filing the Lien

As a best practice, you should complete furnishing before filing the mechanic’s lien. Bear in mind, this is a general rule of thumb; there may be extenuating circumstances that would permit or necessitate the filing of a lien prior to finishing furnishing. When in doubt, seek a legal opinion, carefully review statute, and carefully review your contract.

Oregon Lien Rights Extended by Change Order

Posted on August 30, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Here’s a Case in Oregon where One Claimant’s Lien Deadline Was Extended, Thanks in Part to a Change Order

In Oregon, the mechanic’s lien should be filed within 75 days from last furnishing materials or services. So how did one subcontractor file a valid lien nearly a year after its technical last furnishing? The answer is in the change order!

At a Glance: Protecting Oregon Mechanic’s Lien Rights

The preliminary notice deadline for private Oregon projects can sneak up on you. You should serve a Notice of Right to Lien upon the owner within 8 business days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 8 business days prior to serving the notice and thereafter.

The mechanic’s lien deadline is 75 days from last furnishing materials or services, or within 75 days from completion, whichever is earlier. Suit to enforce the lien should be filed within 120 days from filing the lien.

Bethlehem Construction, Inc. v Portland General Electric Company

Here’s a quick timeline for Bethlehem Construction, Inc. (“Subcontractor”) furnishings & subsequent lien filing:

– Subcontractor finished furnishing under the original contract in April 2015 ($122,851 contract)

– Subcontractor was called back to the job in December 2015 for additional work, identified under a change order ($578.13 change order)

– Subcontractor filed a mechanic’s lien in January 2016 for furnishings under original contract and additional change order

Obviously, if the subcontractor’s last furnishing was in April 2015, the lien filing date of January 2016 would have been far beyond the “75 day rule.” At least that was the argument made by the opposing parties. However, the change order that was issued for the subcontractor’s additional work in December 2015 directly referenced the original contract.

For the Court of Appeals, the change order was key: the change order referenced the original contract, which meant both the April furnishing and December furnishing were under the same contract.

“The document was entitled ‘Change Order Request,’ had the original contract number and name in the ‘reference’ field and specified the ‘scope of change’ to the original contract. That document evidences Owner and Subcontractor shared intention that the later work and the earlier work comprised two parts of one single contract.”

But wait – isn’t a furnishing of less than $600 a bit low to be “significant” for a last furnishing amount – perhaps even trivial? According to Blake Robinson in his article Oregon Court of Appeals Clarifies Timing Rule for Constructions Liens, the furnishing of less than $600 wasn’t trivial… not even trifling.

“The court also concluded that the later work was not ‘trivial or trifling’—which was significant because the 75-day deadline to record a lien is not extended by the contractor or subcontractor returning to the project to perform ‘some trifling work or a few odds and ends after apparently completing the job and removing its equipment.’ Here, the later work was not trivial or trifling because the Change Order Request specifically required the work, and the work was ‘significant to the project.'”

Survive the Oregon Trail, I Mean the Oregon Mechanic’s Lien

Oregon’s statute is clear: the lien deadline is 75 days from last furnishing or 75 days from completion. Ensure your lien rights are secure by timely filing your lien and always have proper backup documentation, such as change orders, to support your claim.

Oh, and watch out, you wouldn’t want to die of dysentery.

C’mon, I can’t write about Oregon without a solid reference to the greatest computer game of all time.

Illinois Mechanic’s Lien and Bond Claim Rights

Posted on August 26, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

What You Should Know About Protecting Lien & Bond Claim Rights in Illinois

In 2019, Illinois HB2722 passed, which added protection under the payment bond for those who provide rental equipment to public projects. The legislation (effective 1/1/20) defines material, labor, apparatus, fixtures and machinery to include those rented items that are on the construction site and those rented tools that are used or consumed on the construction site in the performance of the contract on account of which the bond is given.

What else should you know about Illinois mechanic’s lien and bond claim rights? Read on! 

Protecting Mechanic’s Lien Rights in Illinois

For private commercial projects, there is generally no statutory provision requiring a preliminary notice — but the pros know serving a non-statutory notice is a terrific best practice!

The lien is a two-step process: 1) serve the Notice of Lien and 2) file the Lien.

  1. Serve a copy of the notice of lien upon the owner and the lender within 90 days after last furnishing materials or services. The notice of lien is not required when contracting directly with the owner.
  2. File the lien within 4 months after last furnishing materials or services. In certain circumstances a lien may be filed after 4 months from last furnishing materials or services, but it will have limited effectiveness.

The lien is enforceable for the unpaid portion of the contract, except when the owner has disregarded the requirement to obtain sworn statements from contractors when making payments.

For private residential projects, which would be an owner-occupied single-family residence, there is a preliminary notice requirement.

  • Contractors contracting directly with the owner: Provide a printed statement to the owner as part of your contract or as a separate printed statement and serve a Contractor’s Sworn Statement prior to payments being made by the owner.
  • Those not contracting directly with the owner: Serve notice upon the owner within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for amounts not paid to the prime contractor at the time the notice is received.

The mechanic’s lien guidelines for residential projects are the same as commercial projects, with one extra step: when contracting directly with the owner, serve a copy of the lien upon the owner within 10 days after filing the lien.

Should you need to proceed with suit to enforce your lien, whether on a commercial project or residential project, file suit within 2 years from last furnishing materials or services, but within 30 days from receipt of a demand to commence suit.

Did You Know? While the statute allows liens for those who lease construction equipment on a commercial project, the statute does not allow liens for those who lease construction equipment if the improvement is either a single-family residence or a multi-family residence of fewer than 12 units in a single building.

Need more details on mechanic’s liens in Illinois? Click here to read full statute!

Protecting Bond Claim & Public Improvement Lien Rights in Illinois

Like private commercial projects, public projects do not have a preliminary notice requirement. As a best practice, serve a non-statutory notice & include a request for a copy of the payment bond. Typically, for state projects or any political subdivision thereof, payment bonds are required for general contracts exceeding $50,000.

In the event you need to proceed with a bond claim, serve the bond claim notice upon the public entity within 180 days from last furnishing materials or services. Within 10 days from serving the public entity, serve a copy of the bond claim notice upon the prime contractor. File suit to enforce the bond claim within 1 year from last furnishing materials or services, but within 90 days from serving the public improvement lien, if a public improvement lien was served.

When proceeding with a public improvement lien, you should serve the lien upon the public entity and the prime contractor as soon as possible to trap funds, but within 30 days from written demand. The claim is a lien on the funds owed to the prime contractor by the owner at the time the lien is served.

Key Suit Notes for Public Improvement Liens

  • File suit to enforce the public improvement lien within 90 days from serving the lien.
  • On State projects, file suit at least 15 days prior to the date the appropriation of funds will lapse.
  • Serve a copy of the complaint upon the owner within 10 days from filing.

Have Questions? Need Help? We’re here for you!

Preliminary Notices 101: A Beginner’s Guide

Posted on August 19, 2019 by - Preliminary Notices & Construction Credit

A Beginner’s Guide to the Preliminary Notice

Generally, the first step in the mechanicʼs lien process is to serve preliminary notices to various parties within the ladder of supply. It’s important to note that a preliminary notice is not a mechanic’s lien, but rather a prerequisite to filing the lien that identifies you as a supplier of labor and/or materials to the construction project. It’s also not a legal document that will affect your customer’s creditworthiness, unlike a mechanic’s lien which is formally filed with the state and/or county.

A preliminary notice goes by different names depending on the state in which it’s served. Some alternative names include: notice to contractor, notice to owner, notice of furnishing and prelien notice. Be careful not to confuse a preliminary notice with a notice of intent to lien.

Know the Difference: Statutory vs. Non-Statutory

Statutory notices establish your right to lien in the event of non-payment. They are governed by state law and typically must be served upon the general contractor and/or project owner within the specified timeframe. However, it’s recommended you serve the notice upon all parties within the ladder of supply to increase transparency and prioritize your payment. In states where a preliminary notice is required, failure to send a notice or meet the stated deadline can invalidate your right to file a mechanic’s lien on the project.

Currently, 43 states in the U.S. and one province in Canada have provisions for a preliminary notice to be served prior to filing the lien. However, not all 43 states require a notice for every project type (private vs. public). Be sure to review the statutory requirements carefully.

Non-Statutory notices are not required by state law and are served upon all parties within the ladder of supply. This type of notice is strictly a precautionary measure intended to prompt timely payment. Failure to serve a non-statutory notice does not affect your mechanic’s lien rights.

Include Thorough & Accurate Job Info in Your Preliminary Notices

Collecting thorough and accurate job or project information is a critical part of the mechanic’s lien process. Job information is any and all detail pertaining to a given construction project. You should obtain this information prior to serving your notice to ensure it’s as complete as possible. It’s important to review the statute carefully, as missing or omitting required job information such as the furnishing dates, claim/contract amounts, party specifics, and material descriptions can leave you in an unfavorable position when it comes time to file a lien on the project.

Don’t Delay – Meet Your Deadlines!

As with many other aspects of the mechanic’s lien process, the deadline to serve your preliminary notice varies state by state. In most cases, your notice must be served within a set timeframe from when labor and/or materials are first furnished on the project. For example, a private project in the state of Ohio requires the preliminary notice to be served within 21 days from first furnishing, while a private project in Florida has a more lenient requirement of 45 days.

Some states, such as Texas and Louisiana, require a preliminary notice to be sent for every month that payment is not received. These states require greater management of deadlines which can slightly complicate the process.

Forget the Format? No Way!

Just as preliminary notices vary in name, type and deadline, each state has its own specific formatting requirements. Some states are particular about seemingly small details such as font size and bold/italic/underlined words or phrases. There have even been cases where companies lose their mechanic’s lien rights due to something as detailed as margin size. Review & re-review formatting requirements so you don’t lose your lien rights.

Make No Mistake – Serve Your Preliminary Notices Correctly

In most cases, preliminary notices must be sent by certified mail with return receipt requested or by registered mail. It’s important to save a copy of the notice and receipt so that if/when you file a mechanic’s lien on a project, you can prove compliance with the statute. Be aware, in several states, notices must be posted to an online registry.

Let’s Recap!   

  • A statutory preliminary notice establishes your right to lien in the event of non-payment
  • If serving a notice is not a statutory requirement, serve a non-statutory notice
  • Be sure your notice includes thorough & accurate job information
  • Be on time! Notice deadlines are critical
  • Make sure your notice meets any and all formatting requirements
  • Play it safe and send all notices by certified mail with return receipt requested, or as otherwise dictated by statute

Want more information on the mechanic’s lien process, or need assistance drafting & serving a preliminary notice? Contact NCS today!

Furnishing Labor and Performing Labor Are Different

Posted on August 12, 2019 by - Mechanic's Liens & Bond Claims, UCC Financing Statements

According to Oklahoma Court of Appeals, Furnishing Labor and Performing Labor Are Different

An Oklahoma Court of Appeals has determined mechanic’s lien rights don’t extend to a party furnishing labor, because under Oklahoma statute, furnishing labor and performing labor are not synonymous.

Protecting Lien Rights in Oklahoma

When you are furnishing to a private project in Oklahoma, you secure your right to file a mechanic’s lien by serving a prelien notice upon the owner and prime contractor within 75 days from last furnishing materials or service. The prelien notice may not be required if you are contracting directly with the owner, if the lien claim is less than $10,000, if the lien claim is for retainage only, or if the project is a non-owner-occupied residential project.

If you need to file a lien and you contracted with the contractor or the subcontractor, you should file the lien within 90 days from last furnishing. However, if you contracted with the owner, the lien deadline is within 4 months of last furnishing.

Oklahoma Court of Appeals States Furnishing Labor & Performing Labor Aren’t the Same

The Case: Advanced Resource Solutions, LLC v. Stava Building Corporation & Mid-Continent Casualty Company v. McDermott Electric, LLC

The Parties:

  • General Contractor: Stava Building Corporation (Stava)
  • Subcontractor: McDermott Electric, LLC (McDermott)
  • Sub-Sub and/or Supplier: Advanced Resource Solutions, LLC (ARS)

The Chain of Events

Stava hired McDermott as an electrical subcontractor for the construction on the Luther-Walmart project. McDermott contracted with ARS, a temporary staffing agency, and ARS provided temporary laborers. The contract between McDermott and ARS was “laborers for commercial construction on an open account.”

ARS provided laborers to McDermott on this open account, for the construction on the Luther-Walmart project, for several months. When McDermott failed to pay over $100,000 in outstanding invoices, ARS filed a mechanic’s lien. After the lien was filed, Stava filed a bond to discharge the lien from the property.

After Stava posted the bond, the question of whether ARS held a valid lien claim came up. Stava argued that Oklahoma’s lien statute states the lien claimant “must have performed labor” to have a valid claim. This is an excerpt of Stava’s argument from the court decision:

“ARS was a professional employer organization (PEO) and did not “perform labor” as required under the lien statutes. Therefore, ARS, a supplier or provider of labor, was not within the class of persons entitled to assert a mechanic’s lien in Oklahoma.”

Of course, ARS disagreed, claiming it is a “…temporary staffing company, as it was the direct employer of the licensed journeymen and apprentice electricians that worked on the Walmart Project. Thus, it was the employer that furnished labor within the meaning of the lien statutes and therefore a proper lien claimant.”

 The Court Says

“ARS merely furnished labor, licensed apprentice and journeymen electricians to McDermott, who then actually labored. Furnishing labor is not the same as performing labor.”

Unfortunately for ARS, the Court of Appeals determined ARS is not within the class of parties entitled to mechanic’s lien rights. Why? Because technically, ARS wasn’t the party performing the labor, ARS provided people who performed the labor.

Is this a distinction without a difference?

No, as it turns out, the Court of Appeals decision indicates that statute may have afforded ARS lien rights if it were a contractor instead of a subcontractor. In other words, the statute specifically includes ‘performs’ labor or ‘furnishes’ labor under the statute for contractors, whereas the statute for subcontractors only includes ‘performs’ labor, not ‘furnishes’ labor.

“In the present case, under the contractor statute, § 141, any person who performs labor or furnishes labor, materials, or equipment under a contract to make improvements to real property shall have a lien on the real property for the value of that labor, materials, or equipment. However, under the subcontractor statute, § 143, the Legislature choose to limit potential lien claimants to those who actually perform labor or furnish materials or equipment. The Legislature did not include those who furnish labor.”

Did ARS Have Other Options? UCCs Maybe?

After reviewing this case, I spoke with Cindy Bordelon, NCS’ in-house UCC expert and manager. We discussed the details of the case and I asked Cindy whether ARS could have filed a UCC when it initially contracted with McDermott.

“Yes! Based on the case information, ARS provided the laborers on an open account, essentially extending credit.  Article 9 allows the securing of an ‘Account’ which is defined by 9-106 as ‘any right to payment for goods sold or leased, or for services rendered.’ With a signed security agreement granting the security interest, ARS could have filed a UCC on McDermott.”

Even though ARS says they provided the laborers for a specific project, the Luther-Walmart?

“Certainly. Actually, since it appears ARS provided the laborers on an open account, McDermott could have used the laborers on any project, and a valid UCC filing could have protected ARS.”

If you furnish labor (i.e. temporary staffing) or if you furnish materials & are too remote for lien rights, you may want to consider implementing UCCs.

Construction Lienholder Group Wins in Bankruptcy

Posted on August 9, 2019 by - In Other Commercial Credit News

Grab Your Rally Cap! Construction Lienholder Group Wins in Bankruptcy

If ever there were a time in construction litigation for folks to put on their rally hats, it would be in the case of M & G USA Corp, where the Construction Lienholder Group took grass roots action to ensure their lien rights were protected in a bankruptcy.

Man, Who Doesn’t Love A Good Underdog Story?

This week I read an article by Daniel Lowenthal, Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors, which recapped a Delaware Bankruptcy Court decision in the M & G USA Corp case.

Here are the events leading up to the decision:

– In 2013, the debtor began construction of an industrial plant in Texas (anticipated completion was 2015)

– In 2017, the construction was incomplete, costs and delays were out of control, plus there were “hundreds of millions of dollars in mechanic’s liens being filed.” The debtor filed for bankruptcy protection.

– After the bankruptcy was filed, a group of mechanic’s lien creditors formed an ad hoc creditor committee: Construction Lienholder Group (CLG). In the words of Lowenthal “They made it known right away that they would be heard in the case.”

I’m starting to rally! I picture mechanic’s lien filers in superhero capes standing atop an unfinished industrial plant in Texas, preparing to fight.

CLG asked the judge to appoint an official lienholder committee, but the judge denied the request.  “He said they hadn’t satisfied the ‘heavy burden imposed by 11 U.S.C. § 1102(a)’ and he doubted the ‘propriety or wisdom” of allowing’ a group of putatively secured creditors” to have an official committee in the case,” according to Lowenthal. If an official committee had been recognized, the CLG would have been able to recover professional fees. Despite the judge’s denial of official committee recognition, CLG forged ahead knowing they would be responsible for their own fees.

As the bankruptcy case progressed, CLG retained legal representation, then actively participated in the 363 sale, objected to the debtor’s bankruptcy plan, and even negotiated $32M in DIP financing which allowed the debtors to sell the industrial plant with a clear title.

Once the bankruptcy plan had been confirmed, CLG filed a motion arguing it had made a substantial contribution to the bankruptcy case and should be reimbursed for administrative expenses.

Picture them on the steps of the courthouse, stating the facts of their case, and standing their ground… waiting patiently for the judge to decide. 

Of Course, How Would We Know Our Superheroes Are Heroes If There Isn’t A Villain?

The bankruptcy trustee swooped in and, according to Lowenthal, counter-argued that “…the lien creditors were likely to receive full payment on their claims, that an award of $1.6 million would amount to a “windfall,” that their actions in the case were motivated to protect their own interests, that the motion practice they undertook was costly, and that their ultimate compromise was not necessary for the plan to confirm.”

What Will the Judge Say?

With immense disappointment the crowd falls quiet, heads down, shoulders slumped. Then the murmurs started… here comes the judge. A hopeful hush falls over the crowd as the judge speaks.

“…substantial contribution is a high bar to satisfy. Parties-in-interest are presumed to be ‘self-interested unless they establish that their actions are designed to benefit others who would foreseeably be interested in the estate’…The Bankruptcy Code doesn’t define ‘substantial contribution’ but the contribution must provide ‘tangible, clearly demonstrable benefits to the estate.’”

So, did it? Did CLG provide “tangible, clearly demonstrable benefits to the estate?”

You betcha!

The judge cited two actions CLG took which positively impacted the case. The first? CLG “negotiated for an additional $32 million DIP cushion in the DIP Facility’s lienholder reserve.” These funds allowed the debtor to sell the plant with a clear title, as I mentioned above. If CLG hadn’t negotiated these funds, it is likely the mechanic’s liens would have discouraged potential buyers. Plus, the judge declared CLG played a meaningful role in negotiating the bankruptcy plan.

(They) “facilitated and encouraged the negotiations that led to a settlement between the mechanic’s lienholders and other economic stakeholders…”

But wait, there’s more!

Aside from the additional funds and the significant negotiations, the judge also noted the exceptional group for having:

“… identified and contacted all of the lien claimants, something Judge Shannon described as an ‘arduous task.’  And he further emphasized that the CLG did its work in the case ‘without expectation of compensation.’”

Let’s start that slow clap people!

The judge determined CLG would be compensated under the administrative claims. “…Based on time, the nature, the extent, and the value… of the services provided.”

The Takeaway? Don’t Just Sit There!

I am inspired by the Construction Lienholder Group! They took on the bankruptcy court and they won. They played an active and substantial role in this bankruptcy; they didn’t simply submit a proof of claim form and hope for the best. This should be a reminder to all of us that we shouldn’t be complacent with the rules. It’s OK to buck the system – in a safe way of course – because sometimes you gotta fight for your rights… your mechanic’s lien rights.