Service Area: Collection Services

Michigan’s Design Professional Lien Rights Amended

Posted on March 1, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Michigan’s Design Professional Lien Rights Were Recently Amended

At the end of 2018, Michigan amended a portion of its Construction Lien Act regarding mechanic’s lien rights & procedures for design professionals. This amendment specifically addresses what a design professional can do in the event it is unpaid and the owner does not proceed with the project.

Michigan Construction Lien Act (MCL 570.1101)

To be clear, Michigan’s Construction Lien Act provided design professionals mechanic’s lien rights prior to this amendment. What statute didn’t account for, at least not well, was what happened if the project owner didn’t move forward with the project.

Under the amended statute, design professionals should record a Notice of Professional Services Contract (or Notice of Professional Services Subcontract) with the register of deeds. This notice should be filed once the written contract is executed but no later than 90 days after last providing professional services.

“(2) A design professional may record a notice under subsection (1) at any time after the written contract is executed regardless of whether the professional services under the written contract have been commenced or completed, and regardless of whether the erection, alteration, repair, or removal of the structure or the other improvement to which the professional services relate has been, or is ever, commenced or completed. However, a design professional shall not record a notice later than 90 days after the design professional, or another person acting by, through, or under the design professional, last performed professional services.” 570.1107a

There are two sections to the statute. The time frames are the same, but if you “subcontract for professional services with design professional” the notice requirements are slightly different. The notice for those subcontracting must include written approval from the owner.

“(1) A person that furnishes professional services under a written subcontract with a design professional who has recorded a notice under section 107a, and whose engagement has been approved in writing by or on behalf of the owner of the property, may record with the register of deeds for the county in which the property is located a notice of the subcontract…” 570.1107b

Hot Tip!

Michigan statute provides a template for the Notice of Professional Services! (click for 570.1107a “contract” or 570.1107b for “subcontract”)

Jeffrey Gallant recaps the high points in his article “New and Improved” Design Professional Lien Rights and Procedures in Michigan, including that a “lead” design professional must file its notice before the subcontract design professional can file its notice.

Gallant’s recap (formatting added):

“The Design Professional Notice

(a) is valid for one year after it’s recorded, but subsequent notice can be recorded if needed;

(b) has a priority date (relative to other interests and encumbrances on the property) based on the date the notice is recorded unless actual physical construction work commences;

(c) has a priority date based on the first date of actual physical construction work, if construction commences.

The amended CLA also maintains equal priority between construction lien claimants, irrespective of whether the lien claimant is a design professional, contractor, subcontractor or supplier.”

Does This Mean No More Notices of Furnishing or Mechanic’s Liens?

Nope! As Gallant confirms, design professionals must still comply with serving a notice of furnishing and filing a lien within the required time frame.

The Notice of Professional Services Contract is an additional security, helping you if the project doesn’t move forward. Whereas the general mechanic’s lien statute (notice>lien>suit) is there to help you once the project is under construction.

Wondering about mechanic’s lien rights in Michigan? Check out our post on Pure Michigan!

Tennessee Lien Rights & Everything You Should Know

Posted on February 25, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Tennessee Mechanic’s Lien Rights & Everything You Should Know

It’s the home of the Grand Ole Opry, Music Row, Graceland, Great Smoky Mountains National Park, the Belmont Mansion and even Justin Timberlake! It’s Tennessee. Securing mechanic’s lien rights on Tennessee projects can be challenging. In today’s post we will break down the requirements to put you on the path to payment.

Tennessee Mechanic’s Liens

In Tennessee (TN), the preliminary notice requirements are dictated by the project type (commercial or residential) and who you contracted with (directly with the owner or another member of the ladder of supply).

If you are furnishing to a private commercial project & you contracted directly with the owner, you should serve a notice upon the owner prior to commencing the project. As the prime contractor, you may record your contract to have priority over subsequent conveyances.

If you are furnishing to a private commercial project & you contracted with the prime contractor or a subcontractor, you should serve a notice of non-payment upon the owner and prime contractor within 90 days from the last day of EACH month in which materials or services are provided.

Yikes, that’s a mouthful!

Here’s an example:

If you furnish February 7, 2019 your notice of non-payment for your February furnishing is due May 29, 2019. (90 days from February 28 is May 29.)

Now, if you are paid for your February furnishing before the May 29th deadline, then you don’t need to serve a notice of non-payment.

Pro-Note: TN courts have ruled the notice of non-payment must be received within the 90-day period. This means, the document must be in the hands of the required parties by the 90th day – you can’t simply drop it in the mail on day 90.

Residential projects are a bit different. First, it’s important to understand that a residential project is defined as owner-occupied one-, two-, three-, or four-family dwelling units.

Unlike its commercial counterpart, for those furnishing to residential projects, a notice of non-payment is not required for months furnished but unpaid. HOWEVER, you will only have mechanic’s lien rights on a residential project if you contract directly with the owner.

Mechanic’s lien deadlines in TN are dictated by project completion or abandonment. For commercial projects, you should file the lien and serve a notice of the lien on the owner within 90 days after completion or abandonment of the project or 30 days from the date the notice of completion was filed.

For residential projects, you should file the lien and serve a notice of the lien on the owner within 90 days after completion or abandonment or 10 days from the date the notice of completion was filed.

Pro-Tip: Calculate your deadlines conservatively! Knowing the date of project completion can be difficult, to say the least. We recommend calculating your mechanic’s lien deadline 90 days from your last furnishing date.

TN statute provides an example the Notice of Lien. At face value it appears to be no big deal – it’s just a form. But remember, it really isn’t JUST a form – to have a valid lien you must complete and properly record the document with correct required information! (see 66-11-112. Preservation of priority of lien for subsequent purchasers or encumbrances — Abandonment — Lien on structure with water furnished by well — Form for notice of lien)

Our research shows less than 1% of your projects will go to suit.

In the unlikely event you need to file suit to enforce your mechanic’s lien, you should file suit within 90 days from the date the lien is served upon the owner. If you are contracting directly with the owner, you should file suit within 1 year from completion or abandonment of the project.

Need help with your Tennessee notice of non-payment or mechanic’s lien?

Contact us – our Tennessee experts are standing by!

Time for Preparation, There’s No Rest Post-Recession

Posted on February 22, 2019 by - Credit Risk Management, In Other Commercial Credit News

Use this Time as Preparation, There’s No Rest Post-Recession!

FMI has released its 2019 U.S. and Canada Construction Outlooks. The report contains a considerable amount of valuable information, but one topic is forefront: be prepared for the next recession. Today I’ll touch on steps outlined by FMI as well as NCS best practices you can implement to ensure you are prepared for the next economic downturn.

Awesome T-Shirt: “Keep Calm, Stay Focused and Get Ahead of the Next Downturn”

I’m going to emboss it & stick it to my computer as a reminder! The introduction to FMI’s outlook article is titled “Keep Calm, Stay Focused and Get Ahead of the Next Downturn.” Yes, I think it would be a great t-shirt, but more importantly, it’s a reminder that you have an opportunity to ensure you have the working capital and business model to make it through the next downturn.

What did we learn during the Great Recession? Hopefully you learned the value in proactively securing receivables! During the Great Recession, you likely experienced supply chain disruptions, slow pay/no pay customers, depleted liquidity or cash flow issues, and even customer insolvency. What have you done to prevent these experiences going forward?

FMI recommends addressing these 7 hurdles now:

1. Evaluate underperforming departments and employees. If you have been dragging your feet on eliminating a low performing division or a poor performing employee, now is the time to have the conversations. You don’t want this hanging over the business during tough economic times. FMI says, “During the last recession, these types of issues plagued E&C companies for far too long. Leadership that is slow to react and respond can make or break a company.”

2. Be selective in new projects. Select projects within your core competencies. FMI has a saying: “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.”

3. Look at the big picture and have a strategy in place. “Living in a reactive mode and not being proactive and taking charge of shaping your own destiny and future can become your biggest detriments.”

I will come back to 4 & 5. Let’s jump to 6 & 7: get your sales game on!

6. & 7. Strengthen existing client relationships, build new relationships, and get your sales folks prepared.

“…educate your people on “how to behave in a recession”—estimators with project selection, field managers with scope management, PMs with cash management, etc. Client interaction across all company levels will increase your presence with clients, give you an inside track and improve collaboration among future leaders.”

4. Know your costs and plan accordingly. “Understanding the total costs for each project and how these costs break down is the first step in knowing where and how you can improve profit margins.”

5. Cash is King! “Conduct a risk analysis on all existing projects slated to complete more than six months out. Identify high-risk projects and how each will be staffed to take to project completion. Leverage and utilize a multiskilled workforce: In-house, self-perform capabilities can mean a difference on margins, time and manpower, while all-around adaptability can make a firm indispensable to satisfied clients.”

And this is where the NCS best practice fits in: implement a UCC and Mechanic’s Lien process.

Supply goods? Renting equipment?

File a UCC, even if it’s “a good, longtime customer” because absolutely no one is safe from insolvency. A properly perfected security interest affords you crucial leverage if your customer defaults, plus, it puts you at the front of the payment line in the event of bankruptcy.

Furnishing to a construction project?

Serve a preliminary notice. Every. Time. The notice is critical when pursuing a mechanic’s lien or bond claim. Many states require the service of a notice in order to proceed with a lien or bond claim. If you fail to serve a notice and you can’t file a lien, you have lost the leverage the law affords – is that a risk you want to take?

Ensuring the process is in place now helps to normalize the process for your internal customers (sales & credit) and your external customers. This is big: NORMALIZE.

UCCs and mechanic’s liens are not to be feared. It is a business practice used by millions and it can be vital to your working capital and subsequent business survival.

Implementing the process now, when economic times are great, helps put a positive spin on UCCs and mechanic’s liens.

It gives you an opportunity to demonstrate to your customers that there is no harm in either process, because everyone is getting paid & happy. Then, when the next downturn comes around, you will spend less time scrambling to secure these rights and battling upset customers – “Why did you send me this prelien notice?!?!” – and more time increasing your sales and, in turn, your working capital.

There’s No Ice Cream in Bankruptcy. Wait, What?!

Posted on February 18, 2019 by - Credit Risk Management, UCC Financing Statements

There’s No Ice Cream in Bankruptcy. Wait, What?!

In bankruptcy, we frequently hear terms like preference payment, claw back, and new value. What do these terms mean? Further, what do these terms have to do with ice cream?

Let me tell you a little story about an ice cream truck and its weekly deliveries to a now insolvent grocery store.

The Ice Cream Truck – Music to My Ears!

Blue Bell Creameries, Inc. (Blue Bell) supplies ice cream and related items to a variety of businesses, including a grocery store chain, Bruno’s Supermarkets, LLC (Bruno’s). Each week, Blue Bell would deliver ice cream to Bruno’s and twice a week Bruno’s would remit payment to Blue Bell.

Soon, Bruno’s payments dropped from twice a week to once a week. Blue Bell continued its routine deliveries, after all, Bruno’s wasn’t paying twice a week, but Bruno’s was still paying within terms. Then Blue Bell began hearing rumors about Bruno’s cash flow problems, even the possibility that Bruno’s was preparing for bankruptcy. Technically, Blue Bell was still receiving timely payment from Bruno’s — what should Blue Bell do?

Blue Bell decided to continue supplying to Bruno’s, all the way to the date of bankruptcy. Soon after Bruno’s bankruptcy filing, Blue Bell found itself scooped into a lawsuit: the bankruptcy trustee wanted to recover ALL payments Blue Bell received from Bruno’s during the 90 days prior to the bankruptcy filing, to the tune of over $500,000.

Ice Cream Break

This period, the 90 days prior to the date of the bankruptcy filing, is also known as the preference period. Payments made during the preference period are often referred to as preference payments. The court opinion defines preference as

“… as defined by § 547(b), a preference occurs when an insolvent debtor transfers money to pay a creditor for a prior debt within 90 days before filing a bankruptcy petition.”

Claw backs and Happy Tracks. One of these is a term for the bankruptcy trustee obtaining preference payments from creditors and the other is a delicious ice cream treat. You guessed it, the act of obtaining these payments is known as claw back. “The trustee will claw back payments from the creditor.” A defense against preference or to alleviate claw backs? New value.

bankruptcy and new value

Back to Blue Bell

Blue Bell recognized and admitted based on 547(b) of the bankruptcy code the trustee could claw back the money Bruno’s paid Blue Bell. (It’s the “ordinary course of business” defense)

But this story wouldn’t be as sweet if it stopped now. Blue Bell argued the payments it received from Bruno’s provided “new value” which is in line with 547(c).

I like the bankruptcy court’s explanation of new value for this case

“… lots of ice cream products that [Bruno’s] was able to sell to its customer in its efforts to remain financially afloat.”

If the court agreed with the new value defense, the trustee couldn’t go after those payments. But the court didn’t agree, stating the new value defense requires the new value to remain unpaid.

There is a confusion related to the idea of remaining unpaid. I’m not going to create a brain freeze by explaining too much about it, but here’s a high level look:

Essentially, Blue Bell wouldn’t have been permitted to use the new value defense because Bruno’s actually paid them for the goods Bruno’s received from Blue Bell — Blue Bell could have used the new value defense if it continued supplying to Bruno’s and Bruno’s didn’t pay them.

Fortunately for Blue Bell, the Court of Appeals determined Blue Bell could use the new value defense, despite payments received from Bruno’s. Why?

In part, it’s because the “one of the ‘principal policy objectives underlying the preference provisions of the Bankruptcy Code’ is ‘to encourage creditors to continue extending credit to financially troubled entities while discouraging a panic-stricken race to the courthouse.’” Despite the rumors, and subsequent realities of Bruno’s fiscal situation, Blue Bell continued to supply its delicious treats.

You can view the Court of Appeals case here: Kaye v. Blue Bell Creameries, Inc.

UCC the Proverbial Sundae Topper

Could a properly perfected security interest have saved Blue Bell from this melty mess? Quite possibly. A properly perfected UCC provides an additional defense against preference payments.

We’ve previously discussed the higher risks of supplying to foodservice, beverage and hospitality industries. This is no different. Never assume, no matter how large your customer is, your customer is immune to insolvency. File UCCs and ensure you are in the best possible position to get paid.

Arkansas: You Can’t Lien a Property You Didn’t Improve

Posted on February 15, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Arkansas Mechanic’s Liens: You Can’t Lien a Property You Didn’t Improve

Turns out, if you want to secure a mechanic’s lien in Arkansas, the lien must be filed against property you improved. Kind of feels like a face-palm moment, right?

I know what you are thinking “Kristin, of course I can’t file a lien against a property if I didn’t furnish to the property.” So, let me clarify, if the property owner has multiple parcels of land, you need to specify which parcel is related to the improvement. Identifying the wrong parcel, as one supplier has learned, can result in an invalid lien.

Steps to Securing Lien Rights in Arkansas

Commercial projects and residential projects are treated differently in Arkansas.

Residential Notice:

  • Include notice in contract or serve residential notice upon the owner before first furnishing materials or services. (The notice may be served after furnishing, but the lien, when later filed, will only be effective from the date the notice was served.)
  • A residential contractor who fails to give the notice may be fined up to $1,000.00, and is barred from bringing an action to enforce any provision of the residential contract.
  • No residential notice is required when:
    • the notice is incorporated within your contract,
    • the prime contractor or another lien claimant has served the notice upon the owner,
    • the prime contractor furnishes a payment and performance bond, or
    • you contract directly with the owner, to provide materials or services, but you are not a home improvement contractor or a residential building contractor.

Commercial and Residential (with more than 4 units):

  • Serve notice of non-payment upon the owner and prime contractor after last furnishing materials or services, but within 75 days from last furnishing materials or services.
  • The 75-day notice is not required of prime contractors contracting directly with the owner.

In Arkansas, the mechanic’s lien for commercial and residential projects is a two part process: notice of intent followed by the filing of the lien.

  • Serve a notice of intent upon the owner at least 10 days prior to filing the lien.
  • File the lien after last furnishing materials or services, but within 120 days from last furnishing materials or services.
  • Serve a copy of the lien upon the owner.
  • If the notice of intent cannot be served within the 10-Day time frame, file the lien and suit to enforce the lien within 120 days from last furnishing materials or services, requesting both the lien and foreclosure.

This Is for the Birds, or Is It?

According to the court opinion, the property owner had at least 5 parcels of land. The owner’s home & a barn were on one of the parcels, and the subsequent parcels held several poultry houses.  [The home & barn were at 20190 Garman Road and the poultry houses were at 20178 Garman Road.]

The HVAC materials furnished by the supplier were for the improvement of two poultry houses. When the supplier filed its lien, the supplier included a legal description of the property. But the legal description was for the parcel that held the house & barn [20190 Garman Road], not the parcel with the two poultry houses [20178 Garman Road].

Arkansas statute specifically states “the lien shall contain a correct description of the property to be charged with the lien.” A.C.A. § 18-44-117 In this case, the supplier clearly identified the wrong property in its lien.

In his article Construction Law in Arkansas: Construction Lien Filings and Property Descriptions – Sometimes Less Is More, author Larry Watkins leaves us with great advice:

“… if you provide a detailed real property description, make sure it describes the construction site where the materials or labor were provided. Remember that for describing property for lien filing purposes, general may be better than specific, and, sometimes, less is more.”

Need help securing your mechanic’s lien rights in Arkansas? Contact us today!

Approve More Small Businesses for Larger Sales

Posted on February 11, 2019 by - Credit Risk Management

Approve More Small Businesses for Larger Sales

By: Pam Ogden President, Business Credit Reports

As originally published in the Credit Research Foundation 3Q 2018 CRF News

Small businesses are a critical component of the American economic engine, contributing about half of the gross domestic product of the US. Companies that undervalue this all-important segment are leaving money on the table.

In any credit deal, you want to extend as much credit as possible without exceeding acceptable risk levels to generate the biggest sales possible. This principle is not limited to only large, well- established companies with dozens or hundreds of tradelines. The same applies to smaller, growing companies that may have more limited credit records. The challenge is in collecting enough information on the smaller company to establish a certain level of comfort on the risk front. The more information, the better, of course.

Smaller Companies Have Thinner Credit Records

Companies that issue credit are not required to report their payment data to all of the credit bureaus. In fact, they are generally not required to report payment activity at all. The credit bureaus all have data acquisition teams whose sole job is to get lenders, manufacturers, distributors, utilities and other companies to send them their account data to build and update the credit bureau’s database.

So, if there is nothing forcing companies to report their payment data to the credit bureaus, what is the result? We get disparate credit records across the various credit bureaus. Each credit bureau has a different perspective on a company. Nobody has the complete picture. This problem is amplified in the case of a small business that doesn’t have many credit relationships to begin with. Each credit relationship makes up a greater share of the complete credit picture. Missing even one or two of these can dramatically change the risk profile of a small company.

Credit managers know that less data on a prospective customer frequently means more risk. Credit policies are written to reduce credit offered when there is less information on a company. This puts smaller companies at a disadvantage in terms of obtaining the credit that they need to grow their business. It also means the company issuing credit to the small business is granting less credit, thereby limiting the revenue opportunity.

Combining Multiple Credit Data Sources is the Key

The problem of incomplete credit records on small businesses is solved by leveraging multiple credit bureaus in the credit granting process. If each credit bureau has a piece of the complete picture, putting them all together delivers a full 360-degree view of the company. With three major credit bureaus and several others with strength in particular industries, the only way to get a complete credit picture of a small company is to pull them together.

Many credit managers employ a first-pull/second-pull practice whereby they check one credit bureau first, and then cascade to additional bureaus for additional information as needed. The drawback with this approach is you are paying for multiple reports to multiple providers and those reports are separate reports. Also, a hit on the first pull may result in a credit approval without proceeding to the second pull, which may indicate a higher credit limit.

A more efficient and economical approach is to utilize a business credit information provider that combines the data and analytics from multiple credit bureaus into one report. This means only one report needs to be pulled by the credit analyst and only one credit vendor relationship needs to be maintained by the credit manager. Also, the total price of a blended business credit report is frequently lower than the total price of multiple credit reports.

Higher Hit Rates

Often, small businesses are declined for credit because no record could be found in the queried database. This is a lost opportunity for the small business applicant and could also be a lost opportunity for the company that is considering issuing credit.

Pulling the data of multiple business credit bureaus into one report results in higher hit rates on small businesses. While one credit bureau may not have any information on a small company, another one might. Checking the databases of two, three or four credit bureaus increases the likelihood of finding a credit record on a small company.

While it may not be practical to query two, three or four credit bureaus separately, using a credit information provider or tool that connects to all of the bureaus gets the job done in one search. This results in higher hit rates and more approvals.

Bigger Sales

Bigger sales require higher credit limits. Higher credit limits require more information on a company that supports the case to grant credit. By pulling together data from multiple credit bureaus, you build a thicker, more complete credit record. With a more complete credit record, credit managers are able to approve higher credit lines which accommodate larger sales.

Credit managers that are able to approve larger credit lines without increasing risk are heroes to their companies. Sales people are happy because Credit granted them room to negotiate a large deal. Management is happy because more revenue is flowing in.

More Prospects for Growth

Today’s small businesses are tomorrow’s medium and large companies. Once a budding company has established a relationship with a vendor, it’s unlikely they will change as long as the provider continues to deliver as needed.

Establishing relationships with companies early in their life cycle enables suppliers to grow their own business and increases the prospects of a long, mutually-beneficial relationship.

In fact, one of the main reasons growing companies switch providers is because another provider is willing to grant more credit than the incumbent. Using a multi-bureau credit solution or tool can establish the relationship on the right foot with larger credit lines and keep it that way as credit lines are extended over the life of the relationship.

More Information Means Less Risk

We’ve covered how pulling together data from multiple credit bureaus into one solution increases revenue, but we’d be remiss if we didn’t also mention the fact that having more information on small businesses helps mitigate risk.

Because the credit bureaus frequently don’t have the full picture on small businesses, the credit bureau used in a single-bureau model may paint a rosy picture of a company while missing a key piece of derogatory information. Pulling together multiple credit bureaus’ data into one report reduces the chances of missing a key negative factor.

The Key Takeaway

Don’t leave money on the table as a result of no-hits and thin credit records on small businesses! Access credit reports that pull all the credit bureaus together into one search and one report for stronger hit rates and a more complete credit picture. With a comprehensive picture, you can issue higher credit limits and minimize your risk.

Would you like access to comprehensive credit reports without the hassle of contracts?

Which Bond is Which? Bond Types in Construction Credit

Posted on February 4, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Which Bond is Which? Bond Types in Construction Credit: a Bond Breakdown

The construction credit world is chock full of industry-specific terms and definitions; sometimes it’s tough to keep them straight. “Bond” is one of those terms. Is it a payment bond, performance bond, bid bond, contractor’s bond, prevention bond, discharge bond? And, who is a party to a bond?

What are Common Bond Types in Construction Credit?

Although this isn’t an exhaustive list, it shows the top hits:

  • Payment
  • Performance
  • Bid
  • Prevention
  • Discharge
  • Contractor’s License

Most Common Bond Type We Work With? Payment Bond!

A payment bond is a surety bond, particularly on public projects, issued as an assurance of payment to certain parties should the principal of the bond breach their construction contract. Bonus: In Canada, a payment bond is often referred to as a Labour and Material Payment Bond.

“We asked an NCS payment bond expert,

“When should a credit manager obtain a copy of the bond?”

Pros Know these Best Practices!

Up Next? Performance Bond

A performance bond is issued to one party of a contract as a guarantee of the performance of the other party to meet the obligations specified in the contract.

Heed! Payment and performance bonds are often issued together, but they guarantee very different things: payment bonds guarantee payment, performance bonds guarantee performance.

Third on the List: Bid Bond

At NCS, we don’t work too closely with bid bonds, though we do see them. The key to remember here is a bid bond is used during the bid process and is for the protection of the obligee (the party requesting the bids).  A bid bond guarantees the contractor will accept the award of a contract under the terms stated within their bid or the surety will compensate the obligee.

Inside Scoop: In some states, a bid bond converts to a payment bond! Ohio provides a form of bond that at first is just a bid bond. If the contract is awarded to the principal of that bond, the bond then transforms into a payment and performance bond. HOWEVER, the bond only converts to a payment bond once the contract has been awarded.

Prevention & Discharge

Although prevention bonds & discharge bonds are not the same, I put them together because they share the same goal: attach security to the bond rather than the property.

  • Prevention bonds prevent a lien from attaching to the property
  • Discharge bonds remove a lien that has already attached to the property

You may be familiar with discharge bonds if you have ever received notification that a lien has been bonded off or bonded around. A bonded off lien does not eliminate your rights, it changes your rights. Instead of pursuing the claim against the property, you would pursue the claim against the bond.

 Rounding Out the List: Contractor’s License Bond

In some states, such as California, a contractor is required to obtain a bond before they can get a contractor’s license.

According to The Contractors State License Board, “The bond or cashier’s check is filed for the benefit of consumers who may be damaged because of defective construction or other violations of contractors’ state license law, and for employees who have not been paid wages they are owed.”

Essentially, this bond obligates the contractor to adhere to various rules/regulations and helps protect consumers and other businesses mitigate loss if issues such as fraud arise.

 Who is a Party to the Bond? “Bond. Payment Bond.”

Earlier, Mark mentioned it’s important to know who the principal of the bond is. The principal, sometimes referred to as the obligor, is the party on the bond that has an obligation to pay the debt. In construction, we frequently see bonds where the General Contractor is the principal or obligor.

The other important party on the bond is the obligee. The obligee is the party the principal is bound unto or contracted with. I mentioned we frequently see bonds where the GC is the obligor, which would make the project owner the obligee.

GC’s aren’t the only payment bond principals. We do encounter bonds where the principal is the subcontractor and the obligee is the GC. Always carefully review the bond! Player Recap:

  • Principal: whose bond is it?
  • Obligee: with whom did the principal contract?
  • Surety: who is the bond company/insurance company?
  • Claimant: who is covered by the bond?

Is a Payment Bond Required?

Each state has its own statutes requiring payment bonds on construction projects.  Some statutes may require the general contractor to obtain a payment bond on every construction project, and other states may only require a payment bond when the total value of the construction project exceeds a certain threshold.

Are You a Claimant Under the Bond?

If the payment bond is required by statute, claimants will most likely be defined by the statute.  In some cases, the statute may refer to the terms of the bond, or the bond may not be covered by a statute (think subcontractors’ bonds), and the bond must be reviewed to determine the definition of a claimant.

Who’s on the Job? A Look at the Contractual Chain

Posted on January 21, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Who’s on the Job? A Look at the Contractual Chain

What do you call the collective group of parties on a construction project? (Sounds like the start of a fun dad-joke!) We often refer to the collective parties as the contractual chain or the ladder of supply.

It can be tough to identify all parties within a contractual chain, but in today’s post we are going to review the different types of parties that may be involved.

Let’s Start with the Project

The project is the location where new construction or an improvement to an existing building/property is taking place. The project is where your materials and/or services will be incorporated.

Our Contractual Chain Begins: The Owner

The project owner is the party who has an interest in the project and who contracts for the construction/improvement. The owner, either of the real property or of a leasehold interest in the property, hires a general contractor.

The General Contractor

After entering into a contract with the owner, to carry out the work of improvement or new construction, the general contractor (“GC”), sometimes called the prime contractor, will likely hire one or more subcontractors and/or material suppliers.

That Brings Us to First-Tier Subcontractors / Material Suppliers

A first-tier subcontractor is a party that contracts directly with the GC to do a portion of the work.  A first-tier material supplier is one who contracts directly with the GC to provide only materials (no labor) to the project.  Neither has privity of contract with the owner.

 “No privity of the what?”

It’s a mouthful, I know.

We often hear this phrase in mechanic’s lien/bond claims statute: privity of contract is the legal relationship between two parties.

In this case, it may describe the relationship between the GC and owner or between the subcontractor/material supplier and the GC. Think of “privity” as “direct” – the subcontractor does not have a direct relationship to the project owner, the subcontractor’s direct relationship is with the GC.

Second-Tier Subcontractors / Material Suppliers

Frequently, the first-tier subcontractor / material supplier will turn around and hire additional sub-subcontractors or material suppliers. You may be starting to understand the “chain” portion of “contractual chain.” Here’s a visual:

contractual chain 1

Seems simple enough, right?

And, it is possible that the contractual chain will be that simple, but it’s more likely it will look something like this:

contractual chain 2

Each hired party is likely to hire another party, which can make one construction project confusing, busy and risky!

Pro-Note: There are often multiple contractual chains within one project. It’s important to identify the contractual chain specific to your contract.

In the next chart, I’ve identified my contractual chain by filling in the boxes with green. There are a lot of parties involved in this project, and each party’s involvement may indirectly impact me, but right now I am only concerned with identifying the parties between me & the money. In this case, I’m a material supplier and my customer is a subcontractor hired by the GC.

contractual chain 3

Who’s Covered?

Unfortunately, not all parties’ payment rights are protected under a mechanic’s lien or a bond claim. See, as the contractual chain grows, it is possible that parties will be too remote to be covered under the statute. Let’s go back to our first visual, except this time you’ll notice the 2nd material supplier is in red. This is a case of “Material Supplier to Material Supplier”:

contractual chain 4

Although statutes vary by state, and every case is different, if you are a material supplier furnishing to a material supplier, your mechanic’s lien and bond claim rights may be questionable. Additionally, based on state statute, rights may be limited when contracting with a lower-tier subcontractor. Please understand, it is always recommended to proceed with a statutory notice, even when your rights may be questionable, as the statute is not always clear and the notice may help to prompt payment!  However, you should always seek legal guidance for your specific situation(s).

BONUS!

You can download a quick reference guide to see which states may cover material supplier to material supplier situations. Does a Material Supplier to Material Supplier Have Mechanic’s Lien / Bond Claim Rights?