Service Area: Notice and Mechanic’s Lien Services

Legislative Changes in Tennessee for Construction Industry

Posted on August 2, 2019 by - In Other Commercial Credit News

Legislative Changes in Tennessee for the Construction Industry

Earlier this year we shared a post that was all about Tennessee. Since that post, there have been some legislative changes that may impact those in the construction industry. A recent article from Bass, Berry & Sims PLC recaps some of the key changes and what those changes could mean for you.

What’s New Tennessee?

Repeal is the word for Tenn. Code Ann. § 66-21-108.

In May 2018, Tennessee legislature enacted statute that allowed an owner to recover up to $100,000 in attorney’s fees, reasonable costs, and damages, if the owner successfully challenged the validity of a mechanic’s lien filed on their property.

“This created a significant risk of liability for general contractors and subcontractors in the event their recorded mechanic’s or materialmen’s liens were later found to be invalid.” – Bass, Berry & Sims PLC

As of April 2019, this statute has been repealed (with an exception for the owners of certain residential units.) It sure didn’t take legislators long to make changes!

Continuing Education, Certified Electrical Inspectors and Construction Managers for Utility Districts

According to Bass, Berry & Sims PLC, residential contractors licensed after January 1, 2009, will need to complete eight hours of continuing education every two years. Bonus for those of you in trade organizations: “…active membership in a trade association, if proof of such membership is filed with the board, constitutes four hours of continuing education annually, and could cover the biannual requirement.”

Electrical inspectors are joining the plumbing and mechanical inspectors in certification requirements. Of course, the certification requirements vary by trade. Electrical inspectors will need to be certified by the Tennessee State Fire Marshal and then comply with recertification every three years.

Construction managers aren’t just for city, county, or local government organizations anymore. Tennessee is welcoming utility districts into the fold. “Under the revised law, utility districts and utility authorities are also authorized to contract with construction managers for new projects or additions to existing facilities.”

More Time to File a Mechanic’s Lien? Not this Time.

You know the saying “kickin’ the can down the road?” Apparently, that’s the name of the game for the Tennessee Senate Commerce and Labor Committee (Committee). The Committee opted to hold off on a bill that would extend the time for filing a mechanic’s lien from 90 days to 12 months and would give suppliers more time to serve the notices of non-payment. But that’s not all – Bass, Berry & Sims PLC says pay-if-paid would be no more.

“Perhaps most significantly, the bill would prohibit the use the “pay-if-paid” provisions in contracts between prime contractors and subcontractors. These commonly used provisions make payment from the owner a condition precedent to the prime contractor’s obligation to pay its subcontractors and suppliers.”

We’ll have to wait & see what comes from the Tennessee Senate when they review the bill again in 2020. Stay tuned for more updates on legislative changes!

Virginia’s Mechanic’s Lien Form Has Changed

Posted on July 26, 2019 by - In Other Commercial Credit News

Virginia is for Lovers of Mechanic’s Liens: Virginia’s Mechanic’s Lien Form Has Changed

Virginia is for lovers… lovers of mechanic’s liens? Maybe that’s not the slogan the state of Virginia had in mind. Although I may be one of the few that loves mechanic’s liens, today I would like to share the love & discuss the changes to Virginia’s mechanic’s lien form which went into effect July 1, 2019. The changes include the addition of the property owner’s address, the date from which interest is claimed, and identifying any amount of the claim that is not due at the time of the lien.

Securing Mechanic’s Lien Rights in Virginia

If you are furnishing to a private commercial project in Virginia, you are not required to serve a preliminary notice to secure your mechanic’s lien rights. However, we always recommend serving a non-statutory notice to ensure other parties are aware you are furnishing to the project.

Should you need to file a mechanic’s lien, serve the lien upon the owner and prime contractor within 90 days from the last day of the last month in which materials or services were furnished, but within 90 days from the project completion or work termination. The lien may only include, except for 10% retainage, materials or services furnished within 150 days prior to the last furnishing date stated in the lien. Accordingly, multiple liens may be required.

Two points of interest for lien filers in Virginia:

  • Virginia is an unpaid balance lien state, so if you need to file a lien you should file it sooner rather than later.
  • Virginia statute dictates that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish their lien rights, right to assert bond payment claims, or the right to assert claims for additional costs in advance of furnishing any labor, services, or materials.

In the unlikely event that you need to proceed with suit to enforce your lien, you should file suit within 6 months from filing the lien or within 60 days from the project completion or work termination, whichever is later.

What’s in the Virginia Mechanic’s Lien

According to § 43-4. Perfection of lien by general contractor; recordation and notice the lien shall include the name and address of the property owner, the name and address of the lien claimant, the claimant’s contractor license number, a description of the materials or services provided, the claim amount, any amounts of interest due, and in addition to a statement declaring your intention to claim a lien, a description of the location of the real property.

New to the form is a section regarding monies that are not yet due: “Amount claimed: $__________. If any part of the amount claimed is not due as of the date of this mechanic’s lien, identify the date or event upon which it will be due and the sum(s) to which the due date(s) or event(s) apply: _________.”

How important is the new section? According to Virginia construction lawyer, Christopher G. Hill, this change is important and leaving it blank could cost you your lien rights.

“… addition of a specific section of the form spelling out which portion if any are claimed but not due (for instance retention or money subject to pay if paid clauses) as of the date of the recording of the memorandum of lien. Failing to spell this out on your memorandum of lien could potentially cost you a valid lien given the picky nature of these powerful but finicky beasts.”

Yikes! If you have questions or concerns about your lien rights in Virginia, it’s always best to seek a legal opinion.

“Virginia Love” picture is courtesy of Virginia.org

Prep to Collect: Key Collection Questions & Important Documentation

Posted on July 22, 2019 by - Credit Risk Management

Prep to Collect: Key Collection Questions & Important Documentation

You’ve gone around and around with your debtor for weeks, maybe even months, but still haven’t received past-due payments. You decide you need collection assistance and think about hiring an attorney. These four collection questions can help determine the best debt recovery plan for your business and better assist in communicating with and demanding payment from your customer.

Four Questions to Consider When Placing Your Collection with an Attorney

How Much Am I Owed?

The amount of money you’re owed can greatly impact how you proceed with the collection process. If it’s a larger past-due payment and/or from a high-risk account, you may want to bypass an in-house placement and send your case right to an experienced attorney for review.

How Past-Due Is the Payment?

It’s important to know exactly how long your receivable has gone unpaid. There could be a pertinent underlying reason for late payments, such as your debtor experiencing financial distress, or maybe there are payment issues higher up the ladder of supply. It’s critical to get out in front on the collection process because the longer an amount goes unpaid, the harder it is to collect. Some studies indicate that after six months the collectability of a past-due amount can be reduced by as much as 52%.

Am I Involved In an Ongoing Dispute with the Debtor?

If you’re involved in an ongoing dispute with the debtor, over issues such as invoice discrepancies or quality-of-work, it could result in late payments. Therefore, we recommend placing your collection with an attorney who will work quickly to resolve dispute(s) and ultimately get you paid.

Is It a Secured Amount?

If you have security in place, such as a UCC filing, mechanic’s lien or bond claim, we recommend attorney involvement to best leverage your security. For example, if you have a lien on an unpaid project, an attorney can assist in resolving the balance owed, including, if necessary, foreclosing on that lien. Similarly, if there is a UCC in place, an attorney can proceed with replevin action or repossession through the courts.

Importance of Documentation in the Collection Process

Why Do I Need Supporting Documentation?

Any collection professional needs thorough, up-to-date information to best demand payment from your debtor. Providing the proper documentation at the start of the collection process will allow an attorney to efficiently and effectively handle your claim – putting you in the best position for receiving payment.

What Type of Documents Do I Need?

Supporting documentation? The more the merrier! Every collection attorney requires basic information such as the debtor’s full name, physical address and the amount owed. However, we recommend you also provide any additional paperwork that supports your claim. This could include signed invoices, written contracts or agreements, proofs of delivery and/or bills of lading. With access to proper backup documentation, the collector can speak more intelligently regarding your claim and even speed-up the collection process.

Important Documents to Include

  • Contract or Agreement
  • Credit Application
  • Invoices and Statement of Account: this should include copies of returned / NSF checks
  • Purchase Orders
  • Proof of Deliveries
  • Personal Guarantee
  • Trade References
  • Correspondence & Notes: this could include emails, letters (demand letters, payment requests & notices) and documented phone conversations
  • Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  • Credit Report

Unfortunately, there’s no sure way of determining the collectability of a past-due account. Therefore, it’s best to weigh the costs against the potential debt recovery and be proactive in your efforts – start taking steps to secure future receivables today.

Are you caught up in past-due payments and need some collection expertise? Let our national network of attorneys, specializing in secured and unsecured commercial collections, help get you paid!        

Iowa Lien Attached to Building, Not Lessor’s Property

Posted on July 12, 2019 by - In Other Commercial Credit News

Who Is Responsible for The Costs Associated with The Construction of The Facility, The Lessor, Lessee or Both?

In Iowa, the Lien Attached to the Building, Not the Lessor’s Property

A lessor owns the real property, signs a 50-year lease with the lessee and the lessee builds a facility on the leased property. Who is responsible for the costs associated with the construction of the facility, the lessor, lessee or both? According to the Iowa Supreme Court, the costs are the responsibility of the lessee, which means the liens can only attach to the lessee’s building and not the real property.

The Case Before the Iowa Supreme Court

Cargill, Incorporated (Cargill) signed a 50-year lease with HF Chlor-Alkali, LLC (HF). Cargill owned the land and the lease was established to permit HF to build a manufacturing facility on the property. HF hired general contractors, who in turn hired multiple subcontractors and suppliers to build the facility. All construction contracts were made with HF – no one contracted with Cargill – and HF owned the building.

What happens next is no surprise: parties in the ladder of supply weren’t paid for the construction of the facility. Mechanic’s liens were filed, and the lien claimants pursued foreclosure actions.

Cargill objected to the foreclosure of the liens against its property and argued the liens could only attach to the building owned by HF and not the property owned by Cargill. Cargill’s argument relied on the 2007 and 2012 statute changes.

The Iowa Supreme Court agreed with Cargill.

Iowa’s 2007 & 2012 Statute Changes Made the Difference

Iowa modified its mechanic’s lien laws in 2007 & again in 2012. These legislative updates included a refined definition of “owner.” Here’s a quick recap from R. Zachary Torres-Fowler in his recent article, The Lessor of Two Evils: Iowa Supreme Court Holds That Mechanic’s Liens Will Not Attach to the Property of a Lessor for Work Authorized by a Lessee.

“…in 2007, the Iowa legislature removed contracts with ‘the owner’s agent’ as a basis for permitting a mechanic’s lien to attach to the owner’s property.  In 2012, the Iowa legislature further revised the mechanic’s lien statute to narrow the definition of ‘owner’ to exclude persons ‘for whose use or benefit any . . . improvement is made.’”

Iowa statute dictates a lien is available “Every person who furnishes…by virtue of any contract with the owner, owner-builder, general contractor, or subcontractor shall have a lien upon such building or improvement…” So, what does that mean for Cargill? The contracts weren’t with Cargill; thus, Cargill’s property is not subject to the lien. Because HF contracted for and owns the building, the lien can only attach to the building.

What Does this Mean for You?

This should be a warning to those furnishing to potential lessor/lessee situations. Don’t assume mechanic’s lien rights will extend to the property; rights may only be available on the leasehold interest, or as in this case, the building on the property.

Each state handles these situations differently and sometimes statute defers to the language within the contract between the lessor/lessee. You may recall a New York case we reviewed in April, in which the property owner was liable for the construction costs, because the lease specifically required the tenant to make the electrical improvements.

Review your contracts, review property ownership, review the lease whenever possible, and always seek a legal opinion.

Lien Dissolution Bond and Suit-To-Enforce Action

Posted on June 14, 2019 by - In Other Commercial Credit News

A Quick Story about a Lien Dissolution Bond and Its Trusty Suit-To-Enforce Action

A “lien dissolution bond,” which can be filed to remove mechanic’s liens from a property, is one of many names or phrases given to bonds of this type. Some other names or phrases you may recognize include: bonded off lien, discharge bond, bonding around/over lien, lien prevention bond, transfer bond, and a new one to me, a target lien bond. (Much to my dismay, “target lien bond” has nothing to do with shopping at the infamous Target.)

While today’s post has little to do with my shopping obsessions, it does focus on what happened in one Massachusetts case when the lien claimant took steps to foreclose on the lien dissolution bond.

Massachusetts Statute Allows for Liens to be Dissolved by Filing a Bond

We’ll get the technical aspect out of the way first. Section 14 of G.L. c. 254 (i.e. Massachusetts mechanic’s lien statute) provides that a lien dissolution bond can be filed with the Registry of Deeds to remove a mechanic’s lien filed against a property.

“Any person in interest may dissolve a lien under this chapter by recording or causing to be recorded in the registry of deeds in the county or district where the land lies, a bond of a surety company authorized to do business in Massachusetts and in a penal sum equal to the amount of the lien sought to be dissolved conditioned for the payment of any sum which the claimant may recover on his claim for labor or labor and materials. Upon the recording of the bond, the lien shall be dissolved…”

Section 14 also explains that a notice of the recorded bond and copy of the bond should be provided to the lien claimant whose lien has been dissolved. And, statute states “The claimant may enforce the bond by a civil action commenced within ninety days after the later of the filing of the statement required by section 8 or receipt of notice of recording of the bond, but such bond shall not create any rights which the claimant would not have had, or impair any defense which the obligors would have had, in an action to enforce a lien.”

Section 14 is referring to the deadlines laid out under section 8 for mechanic’s liens. Here are the mechanic’s lien deadlines from The National Lien Digest –

  • File a Statement of Account no later than the earliest of:
    • 90 days from the recording of a Notice of Substantial Completion,
    • 120 days from the recording of a Notice of Termination, or
    • 120 days from the last furnishing of materials or services by the prime contractor or the subcontractor.
  • File suit to enforce the lien within 90 days from filing the Statement of Account.

In other words, a claimant can proceed with suit to enforce the lien dissolution bond within the same deadlines as they would for a mechanic’s lien: 90 days from the date the lien was filed.

Yikes, That’s A Lot of Technical. What about the Case?

I know – the downside to some of these cases is the crazy technicalities that need to be explained prior to getting to the good stuff. So, on to the good stuff!

The question before the court was “if a claimant proceeds with suit against the bond, are they required to record an attested copy of their complaint?” Because the mechanic’s lien statute states an “attested copy” of the suit action must be recorded with the Registry of Deeds.

The short answer? Nope.

According to an article by Kevin Mortimer and Samuel Tony Starr, the surety is the party that contested the court’s decision.

“…when the supplier/lienholder filed a timely enforcement action against the subcontractor and bond surety, the surety moved for summary judgment—arguing that the lienholder had failed to comply with the strict requirements of Section 14 by failing to record an attested to copy of its complaint with the Registry of Deeds.”

And the lower court sided with the surety. But, what good is a case that isn’t appealed?

Upon appeal, the Supreme Judicial Court overturned the earlier decision, because the language within statute does not state there is a requirement for recordation of an attested copy. In fact, the court compared the lack of language in section 14 to the inclusion of language in section 12.

Essentially: if the statute wanted an attested copy to be recorded, it would have said so.

But wait, there’s more. The surety argued that an attested copy should be recorded to notify other parties of the suit, even if they are non-parties to the action.

“…the Court acknowledged the surety’s valid concern that many entities, including the general contractor and other subcontractors, may have an interest in knowing about a lien dissolution bond’s enforcement action. The surety asserted that since such entities are not named as parties to the action, they would not receive service, and therefore would not have knowledge of it.”

Perhaps We Will See New Legislation?

Well, it’s certainly possible. When the court acknowledged the surety’s concern about notifying interested parties of the suit action, it made a footnote comment that may be fortuitous “Any resolution of this issue, however, is for the Legislature.” So, it’s possible that new legislation may develop from this case.

You can read the court opinion here: City Electric Supply Co. v. Arch Insurance Co.

Check Out Our Top 10 Lien Waiver Questions

Posted on June 10, 2019 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

NCS Top 10 List: Lien Waiver Questions

Lien waivers are one of the most popular documents within construction credit. We’ve compiled a list of the top 10 lien waiver questions.

Let’s Dig In!

1. What Is a Lien Waiver?

A lien waiver is a signed document in which the would-be lien claimant agrees to waive rights to its claim based on payment received.

2. What Information Should Appear within the Waiver?

Every lien waiver should clearly identify the property name & project location, the debtor’s name (your customer), the invoice or purchase order number, the payment amount and the disputed claim amount. If the lien waiver is for partial payment, you should also include the payment period or a through date.

3. Is a Lien Waiver the Same as a Release of Lien?

No, and this is a common misconception. A lien waiver acknowledges receipt of payment whereas a release of lien releases a previously recorded document.

4. Are Lien Waivers the Same in All States?

Most states do not require a specific lien waiver format. However, there are about a dozen states that do have specific lien waiver requirements, including Arizona, California, Colorado, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri (residential projects), Nevada, Texas, Utah, and Wyoming.

Important Note: GA & MS allow for an Affidavit of Non-Payment to be recorded if a waiver has been executed and payment has not been received.  Watch the statutory time requirements!

5. Are There Different Types of Lien Waivers?

Yes! Lien waivers are either conditional or unconditional as well as partial or final.

  • Conditional: subject to requirements made or granted on certain terms
  • Unconditional: not subject to requirements; absolute
  • Partial: existing only in part; incomplete
  • Final: the last; end; termination or conclusion

  • Partial Conditional Lien Waiver: waives rights to a claim for a dollar amount or through a specified date, conditioned upon receipt and clearance of the partial payment.
  • Partial Unconditional Lien Waiver: waives rights to a claim for a dollar amount or through a specified date. The waiver is not conditioned upon clearance of a payment.  If the check is not received, or does not clear, the contractor/subcontractor/supplier will have waived their rights to that partial payment.
  • Final Conditional Lien Waiver: waives rights to a claim, conditioned upon receipt and clearance of a final payment. If the contractor/subcontractor/supplier does not get the final payment, or the payment does not clear, the waiver does not waive their rights.
  • Final Unconditional Lien Waiver: waives all rights to a claim. The waiver is not conditioned upon clearance of a final payment.  The contractor’s/subcontractor’s/supplier’s rights will be waived whether payment is received or cleared.

6. Can a Conditional Lien Waiver be an Unconditional Lien Waiver?

Yes, an unconditional lien waiver may be masquerading as a conditional lien waiver. It’s critical to review the entire document (don’t rely on the document title).

We frequently see two phrases within the “consideration clause” of the waiver, which indicate the waiver is unconditional and not conditional:

  • “the receipt whereof hereby acknowledged” and
  • “the receipt and sufficiency of which are hereby acknowledged”

These two phrases are legalese for “I have received the payment and the payment cleared.”

7. Which Waiver is Preferred?

Conditional lien waivers are preferred over unconditional lien waivers, because the “conditions” provide the creditor with leverage, in the event payment is not received or does not clear.

8. I Signed an Unconditional Waiver and the Check Didn’t Clear. Do I Lose My Lien Rights?

Yes, it is likely you would lose your lien rights if the waiver was a final unconditional lien waiver. However, depending on the circumstances in which the waiver was given there could be new causes of action in addition to receipt of bad check.

If you waived your rights and payment didn’t clear, seek legal guidance ASAP!

9. Does a Lien Waiver Waive My Right to Cause of Action for Lost Profits or Disputed Change Orders?

It is likely your right to cause of action will be waived, because frequently waivers will include language such as “all possible causes of action.” That said, it will depend on the specific language within the waiver you signed. You should have an attorney review the waiver and confirm.

Note: If the waiver provides for carve outs, it is recommended you enter the amounts remaining due in this section.

10. Can Payment (Legally) Be Withheld if a Lien Waiver Is Not Signed?

Yes, if a party is requiring an executed waiver in exchange for payment, the payment can be withheld until the signed waiver is received. You may be reluctant to sign a waiver without cleared payment, and I would be too!

In situations such as this, many of our clients will hire an attorney to facilitate the exchange of waiver for payment.  When you hire an attorney to facilitate the exchange, the attorney will hold both the funds and the signed document.

Essentially, the funds are held in escrow until payment has cleared. Once the payment has cleared, the attorney would remit funds to you and provide the signed waiver to the other party. If the funds do not clear, or payment is not made, the attorney will not release the signed waiver to the other party.

Any Other Waiver-Words-of-Wisdom?

Before you sign a waiver you should confirm the dollar amounts match (what you are waiving & the amount received), double check to ensure the document is properly dated and signed, carefully review the waiver language so you don’t inadvertently waive too much, and honestly, there is a lot at risk when executing lien waivers: seek a legal opinion.

Fiber Optic Networks: Can I File a Mechanic’s Lien?

Posted on June 7, 2019 by - In Other Commercial Credit News

Fiber Optic Networks: Can I File a Mechanic’s Lien?

Lienability. One of the many questions we are asked is “Can I file a mechanic’s lien on that?” Or, if we must relay the unfortunate news that an improvement isn’t lienable, we are then asked, “Why can’t I lien that?” Determining what is or isn’t lienable might be the only task that can be just as confusing as the lien laws themselves.

In early 2017 we discussed an Illinois case that left a subcontractor unpaid to the tune of $3M and without the remedy of a mechanic’s lien. In that case it was the construction of a wind turbine, which the court deemed as a trade fixture. and declared mechanic’s liens filed on the property as invalid.

Wind and solar farms are often questionable when it comes to rights under mechanic’s lien statutes, but they aren’t alone. Some electrical work, excavation for pipelines, and even installation of fiber optic technology, also face a questionable fate under mechanic’s lien statutes.

Fiber Optic Technology and Mechanic’s Liens (in Ohio)

Technology shows no sign of slowing down, in fact it will likely increase at the speed of fiber optic technology…

[Do you hear the echoes, see the lightning strikes, and me sporting dark sunglasses in a snappy black suit?!]

OK, so my humor is a bit lame, but, it’s an entertaining way to segue to whether the installation of fiber optic networks is lienable.

First, what do we know about the typical fiber optics network? They can be massive. Much like wind farms, solar farms, and pipelines, fiber optic networks cover multiple parcels – sometimes within multiple counties or even states.

“An optical network—a data communication network built with fiber optic technology—uses a series of optical fiber cables, placed on properties typically owned by someone other than the network provider and spread out over a large geographic area. An operator connects and operates this network from real property known as an exchange, which the provider typically owns or leases.” Nick Pieczonka, author of Mechanics’ Lien Law and Work Performed on Optical Networks

In his article, Pieczonka goes on to answer two critical questions: “Can a lien attach to the property owned or leased by the network provider, even though the contractor performed no physical labor at the property?” and “How are work orders treated and what impact does that have?” The second question is interesting, but I want to focus on the first: can a lien attach to the property.

According to Pieczonka, the answer is yes. Yes, a lien can attach to the property, because the work benefits the entire network. Here’s his answer:

“The end user, not the optical network provider, generally performs work on optical networks on property it owns. So can a lien attach to the optical network provider’s real property—which houses the network’s exchange—even though no work took place on that property? The answer appears to be yes. For example, Ohio’s Revised Code §1311.08 provides, in pertinent part:

[W]here work or labor has been performed or material has been furnished for improvements which are located on separate tracts or parcels of land but operated as an entire plant or concern, and erected under one general contract, the lien for the labor or work performed or material furnished attaches to all such improvements, together with the land upon, around, or in front of which such labor or work is performed or material is furnished…

As a result, because the contractor’s work benefits the entire network and the provider operates the network at an exchange it owns or leases, the lien may attach to the entire improvement, including the exchange itself…  Indeed, the network provider’s lease, ownership documents, or master contract with the contractor may describe the network and the land being improved (i.e., the entire network or the exchange), which would also support the proposition that the lien can attach to the network provider’s exchange…”

It’s important to note, Pieczonka is referring to Ohio statute – as we know, each state’s law is different. But wow – this is huge!

Fiber Optic? Take Note!

There are a few things to keep in mind, if you are providing services similar to those described above:

  • Be prepared for expensive title work (you may have to identify each parcel & the owner of each parcel)
  • Multiple liens may be required
  • You may encounter easements, which could lead to a question of lien priority
  • The lien may be limited to the leasehold interest (depending on the state statute)

Let’s Talk About Commercial Bankruptcy

Posted on June 3, 2019 by - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

Let’s Talk About Commercial Bankruptcy: The More You Know, the Greater Your Chance at Preserving Your Rights as a Secured Creditor

The more you understand about commercial bankruptcy and the bankruptcy process, the greater chance of preserving your rights as a secured creditor and ultimately receiving payment.

Refresher: What’s a Secured Creditor?

A secured creditor has a security interest over some or all of the assets of its debtor. This status can be achieved and maintained through a variety of credit tools such as Mechanic’s Liens, Bond Claims and UCC filings.

In the event of the debtor’s bankruptcy or default, secured creditors have payment priority over their unsecured counterparts, significantly improving the likelihood of getting paid.

The Breakdown: Chapter 7 vs. Chapter 11

In Chapter 7 bankruptcy, the debtor ceases operations, its assets are liquidated by an appointed Trustee, and the funds are used to pay the outstanding debt.

In Chapter 11 Bankruptcy, the debtor wants to continue operating. The debtor will undergo significant structural changes and arrange to pay its creditors over a set period of time.

The Bankruptcy Proof of Claim

As a creditor, it’s important you take the proper steps to protect your interest. Depending on the type of commercial bankruptcy your customer has filed, you may be required to file a Proof of Claim with the bankruptcy court by the specified date, also known as the bar date.

As per the United States Bankruptcy Court, a Proof of Claim is “a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money.” This document is critical because it provides proof to the court that your claim amount is valid and owed, as well as what class to associate your claim with.

Generally, this document will include:

  • Debtor name
  • Case number
  • Creditor information, including mailing address
  • Claim amount
  • Basis for the claim
  • Type of claim (secured or unsecured)
  • Supporting documentation

In the event of Chapter 7 bankruptcy, you must file a timely proof of claim in order to share in any distribution of funds. The bar date refers to a date, established by the bankruptcy court and based on a variety of factors, by which the proof of claim must be filed. Often, creditors fail to submit the document in time and suffer the consequence of an invalid claim. Whether your claim amount is secured or unsecured, be sure to meet the stated deadline to preserve your rights and maximize any potential distribution.

In a Chapter 11 proceeding, it’s typically unnecessary for a creditor to file a Proof of Claim. This is because the debtor is required to file a Schedule of Assets and Liabilities, which formally lists its creditors’ claim amounts. However, filing a Proof of Claim is recommended if:

  • The claim amount is listed incorrectly on the Schedule of Assets & Liabilities or,
  • The claim amount is defined as designated, unliquidated or contingent

In these cases, if a Proof of Claim is not filed, the bankruptcy court will deem the information on the Schedule of Assets & Liabilities as correct and distribute the funds accordingly.

If your debtor has recently filed for bankruptcy, it’s critical to act quickly and take the necessary steps to validate your claim amount. Immediately determine the type of bankruptcy preceding you’re dealing with and whether you should complete a Proof of Claim form. If filing, be sure the document is accurate and ON TIME.

We Can Help

Don’t risk an invalid claim and losing out on payment distribution. Let NCS assist in preparing, filing and monitoring your bankruptcy Proof of Claim today. Contact us for more information!