Service Area: Collection Services

Retail Bankruptcy and the Impact on the Landlord

Posted on August 24, 2018 by - Credit Risk Management, In Other Commercial Credit News

Bankruptcy, Bankruptcy Everywhere. Landlord, Landlord Have No Fear

Landlords are impacted by retail bankruptcy, too! The hot topic continues to be retail bankruptcies – with no signs of slowing down. We’ve previously discussed what retail bankruptcies mean for creditors who supply inventory, but what about the landlord? Most brick and mortar stores are leased by the retail entity; very few retailers own the building in which they are located.

Read on to learn more about what landlords can do to protect themselves in commercial bankruptcies.

Look Out for the Automatic Stay

The automatic stay is an injunction that stops any and all collection activity against the bankrupt entity and the automatic stay goes in to effect as soon as the bankruptcy petition is filed. The automatic stay impacts ALL creditors, whether supplying an inventory of board games or leasing the property to the bankrupt entity.

However, a landlord may have some remedies available, so long as the landlord seeks bankruptcy court approval first.

In an excellent article by Lars Fuller, Unique Challenges for Commercial Landlords Posed by Large-Scale Retailer Bankruptcies, Fuller explains the actions for which the landlord will need court approval:

  • Changing the locks on the premises or engaging in other self-help remedies.
  • Commencing or continuing to prosecute an action to evict the debtor.
  • Sending notices to the debtor to terminate the lease or revoke a right of lease renewal (even if the lease allows the landlord to take that action).
  • Demanding payment of past due rent.

Know the adage “easier to ask for forgiveness than permission?” Yeah, that doesn’t apply to this situation. If you fail to obtain court approval, prior to taking any of the above actions, you may be subject to fines, damages or even held in contempt of court, according to Fuller.

What about the Cash?

We recently discussed DIP financing, and Fuller recommends “Landlords should also review budgets because they often provide the first signal regarding the debtor’s intentions for the Chapter 11 case, including whether it will be maintaining or closing stores and on what timetable.”

And, while you are reviewing those budgets, check to see whether the budget allows for rent payments under administrative claims.

Accept or Reject?

Section 365 of the Bankruptcy Code is specific to the treatment of leases in a bankruptcy. Fuller provides four key issues for landlords regarding the treatment of their leases in bankruptcy:

  • Ensuring payment of post-petition rent and other lease charges, including stub rent.
  • The effect on the landlord of an assumption of the lease versus a rejection of the lease.
  • The circumstances under which the debtor can assign the lease, including the conditions particular to assigning shopping center leases.
  • Timing and other strategic considerations.

Ultimately, the bankrupt entity has an opportunity to review its leases and decide whether it is a lease they want to maintain (i.e. reject or accept). The debtor has up to 210 days to make decisions on their leases; decisions should be made within 120 days of the bankruptcy filing, but an extension may be granted for an additional 90 days.

Obviously, money is a driving factor for bankruptcy – if a debtor has some leases that are costlier or more restrictive than others, they will take this as a chance to reject or renegotiate those costly leases. A more favorable lease, such as one that is in a great location & likely seen as appealing to prospective buyers, will likely be assumed or accepted by the debtor. It should come as no surprise, landlords benefit from leases that are assumed or accepted versus those that are rejected.

Pro Advice

Fuller recommends landlords carefully review the bankrupt entity’s pleadings to “discern its intentions for its leases and then evaluate the benefit of joining forces with other landlords or pursuing rights individually.” My recommendation: Make sure you have legal representation! Don’t take on the challenge of legal documentation on your own.

DIP Financing: What Is It? Who Provides It?

Posted on August 17, 2018 by - Credit Risk Management, In Other Commercial Credit News

DIP Financing: What Is It? Who Provides It? What If You Filed a UCC?

DIP stands for Debtor in Possession. When a business files for chapter 11 bankruptcy protection, the existing management or ownership maintains possession and control of its business. However, the bankrupt entity needs financing to keep its business operational throughout the bankruptcy process. One way for a bankrupt entity to obtain cash is through DIP Financing.

Unfortunately, if a business is on the brink of bankruptcy, lenders aren’t usually eager to extend a loan to the business. To be fair, a lender’s hesitation to lend to a bankrupt entity is not unlike my hesitation to touch a hot stove – you know the risk and you know the consequences.

Given the risks of lending to bankrupt businesses, the Bankruptcy Code affords would-be lenders various perks, often including the benefit of a priority security interest.

In his article, DIP Financing: How Chapter 11’s Bankruptcy Loan Rules Can Be Used To Help A Business Access Liquidity, Bob Eisenbach mentions the perk of a priority security interest:

“When the debtor company has lined up a lender, it files a motion seeking Bankruptcy Court approval of the DIP financing. Typical DIP financing terms include a first priority security interest, a market or even premium interest rate, an approved budget, and other lender protections.”

The concept of priority over subsequent creditors may be referred to as a priming lien. Marshall S. Huebner, in Debtor-in-Possession Financing, further advises lenders may “insist on a first-priority priming lien on the debtor’s inventory, receivables, and cash (whether or not previously encumbered), a second lien on any other encumbered property, and a first-priority lien on all of the debtor’s unencumbered property.”

Who Provides DIP Financing?

Does this financing come from a random bank? Not necessarily. In fact, DIP financing often comes from prepetition lenders. According to Market Trends, Recent Deal Terms in Retail DIP Financing, author Jordan Myers refers to this as “defensive” financing.

“Prepetition lenders, rather than new third-party lenders, are a frequent source of DIP financing to retail debtors. They do so, in part, to protect their position against possible priming liens—a practice known as “defensive” DIP financing. “

What About Creditors with a Properly Perfected Security Interest: UCCs?

The American Bankruptcy Institute states a creditor with a properly perfected security interest has priority over DIP.

“…[I]f a secured creditor is perfected as of the petition date, its security interest trumps the DIP, and the estate benefits from the secured creditor’s collateral only after the secured creditor is repaid. However, if the secured creditor is not perfected as of the petition date, then the DIP prevails and the secured creditor shares pro rata with other unsecured creditors.”

Confused? ABI has a bubbly example!

“Consider this hypothetical: Donald the debtor owns a case of fine champagne. Your client, Cartman Corp., just won a lawsuit against Donald. You send out the sheriff to pick up the champagne to satisfy the claim. Under California law, once the sheriff lays his hands on the champagne, you’ve got a lien; other states may date the lien from the time you send your order to the sheriff, or perhaps even from the time you win your lawsuit. To recap: If some secured creditor is perfected before Cartman Corp. gets its lien, then that secured creditor gets first dibs in the champagne. Otherwise, first dibs go to the Cartman Corp.”

Takeaway? While DIP Financing holds significant benefits for the lender, a properly perfected security interest is certainly in a better position than an unsecured creditor. File UCCs!

Serve a Mechanic’s Lien on an Out-of-State Party

Posted on August 13, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Need to Serve a Mechanic’s Lien on an Out-of-State Party? According to One Case, You Should Serve the Lien via Certified Mail with Return Receipt Requested

If a mechanic’s lien needs to be served upon an out-of-state party, how should the lien be served? Is it enough to simply drop it in the mail? Should it be sent certified mail? How about by courier? A recent appeal before the Pennsylvania court determined the Pennsylvania mechanic’s lien should have been served upon the owner in California via certified mail with return receipt requested.

General Contractor Hired for Renovations

The general contractor was hired by the owner to renovate property in Pennsylvania. The GC provided services between December 2014 and July 2015. However, the owner filed disputes and claims against the GC, which prevented payment to the GC. In turn, the GC filed a mechanic’s lien in the amount of $61,000.

General Contractor Mails a Copy of the Lien

The GC filed his lien after having sent the notice of filing the lien on the same day, December 16, 2015. On January 26, 2016, the GC filed an affidavit stating the owner was served with a copy of the lien at a California address, via regular first-class mail on December 18 and via certified mail with return receipt requested on December 21.

On February 8, 2016, the GC filed another affidavit stating the certified mail was returned as “unclaimed.” The GC also stated the lien was sent again on February 8, and claimed the lien was served via email on December 16. This gets a bit confusing, because the GC’s various affidavits reference dates out of order, so here it is in chronological order:

  • December 16, 2015: GC files its lien, claims it notifies the owner of the lien via email
  • December 18, 2015: GC serves the lien via first-class mail
  • December 21, 2015: GC serves the lien via certified mail, with return receipt requested — subsequently the mail is returned as “unclaimed”.

I Knew, But I Didn’t Know

The owner claimed it did not receive notification of the lien, making the GC’s lien invalid. HOWEVER, January 28, 2016, the owner filed an emergency motion to release the lien. In other words, “I did know about the lien, that’s why I filed a motion to have it released. But, my argument to the court is the GC failed to comply with statute, which makes the lien invalid.” While that is not a quote from the case, imagine with me, that’s what the owner said.

The court granted the discharge request, so long as $61,000 (to cover the amount of the lien) was deposited in escrow. And ultimately, the court dismissed the GC’s lien for failure to comply with statute.

But what kind of story would this be, if it just ended there? The GC filed an appeal.

On Appeal, Failure to Comply = No Lien

The appeal ended with the same verdict as the initial trial: the GC failed to comply with the statutory requirements. According to the court opinion, here’s the statutory requirement –

The Mechanics’ Lien Law of 1963 states that (1) written notice of the lien must be served within one month after filing, (2) an affidavit of service must be filed within 20 days after service, and (3) failure to serve the notice or to file the affidavit is grounds for striking the claim. 49 P.S. § 1502(a)(2). The statute further requires that service of the notice of filing be made in the same matter as a writ of summons in assumpsit or by posting. 49 P.S. § 1502(c).

But the owner lives in California, not Pennsylvania, does that matter? The court stated, because the owner is out of state “service upon (owner) is complete upon delivery of mail ‘where a copy of the process [is] mailed to the defendant by any form of mail requiring a receipt signed by the defendant or his authorized agent.’”

OK, but the certified mail was returned as “unclaimed” does that count as substantial compliance? Nope. Per the court, if the certified mail had been returned as “refused” then the GC could have met the statutory requirements by serving the document via first-class mail. So, two things: 1. The certified mail was not refused, it was unclaimed. and 2. The GC served the document via first-class mail BEFORE it was sent certified.

Not to mention, the GC filed its affidavit more than 20 days after the filing of the lien – but that point seemed moot based on the court’s determination that improper service of the document was enough to invalidate the lien.

What Should the GC Have Done?

First, the GC should have better managed the lien deadlines. The GC’s affidavit was late, because it was served more than 20 days after the lien filing. Second, the GC should have initially served the lien in accordance with statute – certified with return receipt requested or personal service. If certified mail had been refused, the GC would have maintained statutory compliance if it had then served the document via first class mail.

You can access the text for this case here.

Are Pre-Construction Management Services Lienable?

Posted on August 6, 2018 by - Mechanic's Liens & Bond Claims

What Are Pre-Construction Management Services and Are They Lienable in New York?

The Westchester County Supreme Court has determined “pre-construction management services” are lienable, but the claimant had better be prepared to provide a clear, itemized statement of account. In coming to its decision, the Court aimed to answer, “what services are lienable.”.

In the matter of Old Post Rd. Assoc. LLC v. LRC Construction, LLC, 2018 NY Slip Op 28148 – NY: Supreme Court 2018, Old Post Road Associates, LLC petitioned to have LRC Construction, LLC’s lien invalidated. Fortunately, the lien for $250,000 remains intact.

What Constitutes “Improvement of Real Property”

Old Post Road Associates, LCC claimed LRC Construction, LLC’s (LRC) lien was invalid because the claim is based on “pre-construction management services” as opposed to “management services provided during construction.” Is it simply semantics? Not necessarily.

The court turned to New York’s mechanic’s lien statute for clarification on what is considered an improvement.

Yes, this is a long section, but I’ve intentionally included all of it to demonstrate that New York’s lien law is quite thorough with what is considered an improvement. However, to save you the time, I have highlighted the text the court relied on in bold font.

The term “improvement,” when used in this chapter, includes the demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement, and shall also include any work done or materials furnished in equipping any such structure with any chandeliers, brackets or other fixtures or apparatus for supplying gas or electric light and shall also include the drawing by any architect or engineer or surveyor, of any plans or specifications or survey, which are prepared for or used in connection with such improvement and shall also include the value of materials manufactured for but not delivered to the real property, and shall also include the reasonable rental value for the period of actual use of machinery, tools and equipment and the value of compressed gases furnished for welding or cutting in connection with the demolition, erection, alteration or repair of any real property, and the value of fuel and lubricants consumed by machinery operating on the improvement, or by motor vehicles owned, operated or controlled by the owner, or a contractor or subcontractor while engaged exclusively in the transportation of materials to or from the improvement for the purposes thereof and shall also include the performance of real estate brokerage services in obtaining a lessee for a term of more than three years of all or any part of real property to be used for other than residential purposes pursuant to a written contract of brokerage employment or compensation.

Why focus on “…and shall also include the drawing by any architect or engineer or surveyor, of any plans or specifications or survey, which are prepared for or used in connection with such improvement”? In theory, architects/engineers/surveyors are providing services PRIOR to the commencement of physical construction, which may correlate to “pre-construction management services.”

Need to Support Statute? Find Some Case Law

Statute isn’t enough to assist the court with its decision; enter case law. As I read cases, I often see courts reference cases dating back 5-20 years, even 50 years. This is the first time I’ve read a case referencing a decision that is nearly 100 years old. But, with good reason – the court reviewed two cases & the conflicting decisions were:

  1. The 1929 Case: The lien claimant was hired as a “superintending engineer.” The claimant aided with contract procurement, which was deemed un-lienable, and supervised the demolition of the building prior to construction of new building, which was deemed lienable.
  2. The 1995 Case: The lien claimant applied for permits and approvals – “professional engineering and professional surveying services rendered in connection with obtaining municipal approvals for the development of an equestrian facility.” The services were deemed lienable, because the services would ultimately “enhance” the property.

There are some similarities in the services provided, aside from the obvious similarity of occurring prior to commencement of physical construction. Primarily, both cases demonstrate a party providing supervision of, or preparing for, the improvement. Ultimately, the property owners in both cases would benefit from the services provided by the claimants.

The court in LRC’s case found the 1995 case to be most applicable to LRC’s lien. In what must have been riveting petitions, answers & motions, the court asked LRC to elaborate on the services rendered. After all, “pre-construction management services” is quite broad.

What Services Were Rendered?

In this flurry of responses, LRC provided the following:

“(i) recommending the change to the structural system for the project at the Property to a system more suitable for a low rise luxury condominium; (ii) recommending changes to the design team to architects and engineers with more experience designing the type of luxury condominium product Petitioner was constructing; (iii) providing finish selections, facade recommendations and mechanical, electrical and plumbing system recommendations for the type of design required for the high end condominium marketplace; (iv) consulted with land use attorneys to prepare for and attend Petitioner’s Planning Board meetings; (v) prepare site logistics and access plans for the Property; (vi) perform a constructability review for the project at the Property (vii) attend meetings with consultants and officials to assist the approval process and, (viii) prepare construction budgets to assist in the design development process for the project at the Property.”

As you can see, there are some items on this list that may not be lienable, such as “prepare for and attend Petitioner’s Planning Board meetings.” However, as the court pointed out, much of what was provided falls under the category of engineering planning, which is, as we now know, lienable.

Could LRC Have Avoided This Debate?

It’s not often that a lien filing ends up contested in court; our research shows liens go to suit less than 1% of the time. However, one way LRC may have avoided some confusion, would have been to provide a more thorough description of materials/services provided. A thorough description may have not alleviated all confusion, but it would have provided some clarity.

As a best practice, claimants should sufficiently describe materials and services provided in all notice and lien documentation. Plus, claimants should be able to produce an itemized statement of furnishings.

Serving a PA Mechanic’s Lien: Sheriff or Public Posting

Posted on July 30, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Be Sure to Serve the Mechanic’s Lien via Sheriff or Publicly Post It

In Pennsylvania, statute dictates a mechanic’s lien be served by a sheriff. If the sheriff is unable to serve the lien, the lien claimant has an opportunity to meet statutory requirements by posting the lien “upon a conspicuous public part of the improvement.” The Superior Court of Pennsylvania says claimants must strictly adhere to statutory requirements.

Mechanic’s Liens in Pennsylvania

Pennsylvania rolled out statute changes the end of 2016. While there were significant overall changes, the statute dictating the service of the mechanic’s lien remained the same.

1502. Filing and notice of filing of claim

(c) Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous public part of the improvement.

“Adult in the same manner as a writ of summons in assumpsit” means sheriff. If the sheriff is unable to successfully serve the mechanic’s lien, the claimant can still meet statutory requirements, by posting a copy of the document on the jobsite.

There are several states whose statute can be quite confusing or convoluted. But, all in all, Pennsylvania’s statute is quite clear: serve the lien via sheriff or post it at the jobsite. Unfortunately, it appears this statutory requirement is frequently managed incorrectly by claimants. In fact, in May, the Superior Court of Pennsylvania heard the appeal of one subcontractor and confirmed the subcontractor failed to comply with statute.

The Cost of Failing to Properly Serve the Lien

$581,840.39 = the cost of failing to properly serve the lien.

In Forbes Excavating, LP v. Weitsman New Castle Realty, LLC, Pa: Superior Court 2018, lien claimant, Forbes Excavating, LP (Forbes) filed a lien on 10/28/2016 for a claim of $581,840.39. According to statute, Forbes need to serve the notice of filing upon the owner within 1 month from filing the lien, which would have been by 11/28/2016.

On 11/15/2016, the sheriff attempted service of Forbes’ notice upon Weitsman New Castle Realty, LLC (Weitsman). The sheriff was unable to complete service, because the individual at the address advised it was not the correct address for Weitsman.

This is a portion of text from the sheriff’s affidavit:

[Sheriff Sigler] made a diligent search and inquiry for the within named Defendant [Weitsman Realty] … but was unable to locate them… nor to ascertain the Defendant[‘s] present whereabouts, and I do therefore return the within Mechanics Lien, NOT FOUND.

Reason:

The above address is Ben Weitsman of New Castle, per Ron Saley, general manager there. [Weitsman Realty] is not known there[.]

Once service failed, Forbes could have attempted service again, or it could have posted a copy of the document on the premises in plain view.

On 1/10/2017, service was attempted again, to the same address as before, and was successfully delivered to the office manager at the address.

The Battle of Complaints Ensues

As with most legal situations, there was back & forth between parties. Forbes filed suit to enforce its mechanic’s lien and in response, Weitsman contested, stating Forbes failed to comply with statute. Weitsman argued that Forbes failed to serve a copy of the lien timely and once the document was successfully served, it was given to an “individual who was not authorized to accept service” – the office manager.

Weitsman didn’t need its second argument regarding the office manager, because its first argument was more than enough for the court. However, this was not before Forbes lodged an argument that when the sheriff originally attempted service, the person at the address lied to the sheriff when stating Weitsman wasn’t located at that address.

Forbes claimed “…that Weitsman Realty’s ‘refusal to accept service on November 15, 2016 constituted valid service under Pennsylvania law’ and, thus, it properly served Weitsman Realty with timely notice of the Claim on November 15, 2016.” Forbes further argued that Weitsman was “constructively served;” however, if Forbes had wanted that argument to work, it should have filed an affidavit of service within 20 days from the attempted service of the document. At least, that was what the court said.

“This claim immediately fails because, even if the Mechanics’ Lien Law permitted the type of constructive service [Forbes] advocates, [Forbes] did not file “an affidavit of service of notice, or the acceptance of service” within 20 days of November 15, 2016.”

There are additional technicalities at play, such as when service failed, the sheriff indicated the party was “not found,” not that “service was refused,” indicating there is no way to prove the person at the address lied to or refused to avoid receiving the document. But, technicalities like this were nothing more than another proverbial nail in Forbes’ coffin.

Despite the drama with service by sheriff, Forbes did have another option: Post. Document. At. Jobsite. Forbes wasn’t without options when original service was unsuccessful, Forbes just failed to execute the options.

The Court’s Parting Advice

Statute is to be strictly interpreted & failing to follow the law means failing to secure a mechanic’s lien. Must be a painful $581,840.39 lesson.

“…this Court specifically held… the service requirements under the Mechanics’ Lien Law are not subject to the doctrine of substantial compliance — and that they must be strictly construed. Appellant’s claim to the contrary is thus meritless…”

Mechanic’s Liens and Bond Claims are a Right

Posted on July 27, 2018 by - In Other Commercial Credit News

Mechanic’s Liens & Bond Claims are a Right, Not a Blanket

If you have supplied materials or labor to a construction project, you have a right to be paid. If you have complied with the state’s statute, you have a right to file a mechanic’s lien.  You can’t see my face, but right now I am fired up!

Fired up over a right to lien? Not exactly.

Truth is, I read a great article this week, but the title of the article initially bothered me: “Lien and Bond Claims: A Subcontractor’s Security Blanket.”

The title bothered you? Yes, and I think it’s because I immediately pictured Linus, famous Peanuts’ character, helplessly clinging to his blanket for solace. That’s not what mechanic’s liens and bond claims are. They aren’t a weakness we cling to, hoping for payment!

Mechanic’s liens and bond claims are built on a firm foundation of law and the law is representative of strength, and if used properly, you will protect your Right. To. Be. Paid!

Pardon me as I step off my soapbox.

A Little Dramatic, I Know

Before my little soapbox moment, I did say “I read a great article this week.” And that is the truth. In his article, Marc J. Felezzola Esq., of Babst Calland, discusses the common mistakes made by subcontractors when trying to secure mechanic’s lien/bond claim rights.

Before he dives into the pitfalls, the attorney provides an overview of the rights afforded to those furnishing to private and public construction projects. As I read further, breezing through the general information on liens and bonds, I see it.

Security.

And then I realize, Felezzola isn’t using the term “security” in a weak manner. Rather, he reminds me that “security” is protection, safety or, as Google puts it, “the state of being free from danger or threat.”

“Thus, generally speaking a subcontractor or material supplier (collectively, a “subcontractor”) always should have security for the work it performs. For a private project, that security comes in the form of a mechanic’s lien. For a public project, the security generally comes in the form of a payment bond.”

Felezzola’s Warnings

Felezzola warns would-be claimants of the importance of complying with preliminary notice requirements and subsequent lien and bond claim requirements, and, he further cautions about waiving claim rights within a contract:

“Blanket lien waivers are enforceable in approximately 20 states, and in those states, signing a subcontract with a blanket lien waiver will automatically deprive a subcontractor of mechanic’s lien rights all of its work. Thus, in states where blanket lien waivers are valid, subcontractors who sign contracts containing them will have no payment security for their work unless the project is bonded.”

Another piece of advice? Don’t assume a payment bond has been issued on a public project. Yes, in most states, there are statutory requirements for contractors to obtain proper payment bonds. However, as Felezzola points out, there aren’t always consequences for folks that fail to obtain a bond.

“…[A]lthough all states have some law requiring prime contractors to post payment bonds as security for subcontractor work, not all of those laws provide consequences in the event the prime contractor does not actually post a payment bond. For example, although Pennsylvania law requires payment bonds for all public projects, the law provides no penalty in the event the prime contractor simply fails to post the requisite payment bond, and Pennsylvania courts have held a subcontractor has no redress against the government for failing to ensure the required bond was posted. Thus, at least in Pennsylvania, a subcontractor working on a public project may find itself working without payment security despite laws requiring payment bonds.”

As a best practice, always obtain a copy of the payment bond BEFORE furnishing or at the time you sign the contract.

A Security Blanket It Is

Felezzola is right. Liens and bond claims are a security blanket for those furnishing to a construction project. Just be careful; the security blanket only exists if you take the proper steps to secure your rights. If you fail to take the proper steps, that strong security blanket will quickly become a useless wet blanket.

Subcontractor Granted New Hampshire Mechanic’s Lien

Posted on July 23, 2018 by - Mechanic's Liens & Bond Claims

Subcontractor on New Hampshire Project Granted $4.9M Mechanic’s Lien

In a recent New Hampshire case, the subcontractor alleged the general contractor & owner withheld payments for completed subcontract work. The general contractor & owner tried several arguments, but failed to foil the subcontractor’s lien.

Read on to learn more about the court’s decision to uphold the subcontractor’s mechanic’s lien for $4,917,122.02.

Fraser Engineering Company, Inc. v. IPS-Integrated Project Services, LLC, 2018

In September 2014, property lessee, Lonza Biologics, Inc. (Lonza) hired general contractor, IPS-Integrated Project Services, LLC (IPS), for the design and construction of a manufacturing facility in Portsmouth, New Hampshire. IPS, in turn, hired subcontractor, Fraser Engineering Company, Inc. (Fraser), to furnish mechanical and plumbing services to the project.

59,845 Hours of Overtime?!

Apparently, by December 2015, IPS and Fraser discussed accelerating the project work, though Fraser was hesitant and warned of potential labor inefficiencies. Nonetheless, IPS told Fraser to put in the overtime and after several months of overtime, Fraser’s employees had clocked an additional 59,845 hours.

In August 2016, Fraser submitted a final invoice to IPS in the amount of $4,006,505.72, which included $3,324,083.30 in labor overtime and change orders for $682,422.42, plus retainage in the amount of $1,554,867.29. As you can imagine, IPS rejected this final invoice, so, in January 2017, Fraser served IPS & Lonza with a notice of intent to lien.

Time Out for The National Lien Digest

Here’s a quick review of the mechanic’s lien requirements for New Hampshire.

For private projects in New Hampshire, you should serve a preliminary notice upon the owner prior to your first furnishing. Then, you should serve a statement of account upon the owner at least once every 30 days, showing an account of materials or services furnished during the preceding 30 days for which payment has not been received. (Similar to a notice of non-payment.)

Did you serve the preliminary notice & subsequent statements of account, but still haven’t been paid? Under New Hampshire statute, you should file suit to establish and enforce the lien within 120 days from your last furnishing date. In other words, you can’t simply go to the recorder’s office & file a mechanic’s lien — you need to file suit with the court first.

Back to Fraser

Two days after serving its notice of intent, Fraser filed a motion with Rockingham County Superior Court to file a mechanic’s lien. The court granted Fraser’s motion – here’s the breakdown of the lien amount, as it increased from the final invoice Fraser had submitted to IPS:

“Fraser specifically sought a lien totaling $4,917,122.02, including $3,324,083.30 in unpaid man-hours resulting from the labor inefficiency, $682,422.42 caused changes to the scope of Fraser’s work, $593,155.13 in outstanding subcontract balance, and $317,461.17 in outstanding change order requests.”

Fraser’s mechanic’s lien was filed against the property; in this case, it attached to the leasehold (Lonza is the lessee).

IPS Objects: Timeliness, Waiver, Incorrect Lien Amount

IPS contested Fraser’s lien, claiming Fraser failed to file its lien timely, waived its right to lien and filed the lien for the incorrect amount. The court first addressed the issue of timeliness.

As I mentioned above, suit to establish & enforce the mechanic’s lien must be filed within 120 days of last furnishing. Fraser submitted its final invoice to IPS in August 2016, however, Fraser continued furnishing through October 2016.

“The subcontract required Fraser to tag valves and mark pipes. Fraser started this work on August 9, 2016. The work continued through at least October 3, 2016. All told, Fraser employees spent 1,199 hours tagging valves and marking pipes in August, September, and October 2016.”

IPS argued the furnishings at the end of September and beginning of October weren’t substantial furnishings. Fraser counter-argued that because the work in September/October was required by the subcontract, it should count towards a later last furnishing date.

After considering previous cases and New Hampshire statute (which is quite brief), the court determined Fraser filed its lien timely.

“Here, Fraser has presented evidence that its employees tagged valves and marked pipes for 1,199 hours over a nearly two-month period, concluding less than 120 days before the date Fraser sought to perfect its lien. Additionally, there is no dispute that the subcontract expressly required valve tagging and pipe marking. Given the remedial nature of the mechanics lien statute, and the absence of any authority compelling a different outcome, the court cannot conclude that this work was so de minimis that it did not extend Fraser’s lien. The court therefore overrules the defendants’ objections insofar as they contend that Fraser failed to timely perfect the mechanics lien.”

Next up, the court reviewed the argument that Fraser waived its lien rights. While this section of the decision is a bit murky, the court ultimately rejected IPS’ argument and determined Fraser did not waive its lien rights.

Lastly, the court tackled the claim amount. IPS argued “(1) that Fraser overstated its claim to include disputed amounts; (2) that the lien is limited by law to the amount Lonza owed IPS at the time of Fraser’s notice of lien; and (3) that Fraser’s claim prematurely includes unpaid retainage.”

Ultimately, the court declined to reduce the claim amount of the lien and rejected IPS’ argument that the lien was limited to the amount Lonza owed IPS ($1,866,961.87).

But, New Hampshire is an unpaid balance lien state, right? It is! Except, in this case, the owner’s contract with the general contractor does not identify a dollar amount, it simply states that Lonza would pay IPS for “the cost of trade labor including the indirect costs, overhead and profit for all [s]ubcontractors and equipment necessary for construction.” The court stated it could not determine the total due to IPS from Lonza and, therefore, declined to reduce Fraser’s lien amount.

So, That’s It?

Not quite. The court states the “merits” of Fraser’s claim have yet to be determined; these merits will be decided by an arbitrator. For now, Fraser’s lien remains in place for $4,917,122.02, because IPS failed to sway the court.

“It is up to the arbitrator, not this court, to determine the relative merits of Fraser’s claims and the defendants’ defenses to those claims…the court concludes that the defendants have not demonstrated that Fraser’s lien should be discharged or reduced. The court therefore overrules the defendants’ objections and grants Fraser’s motion to perfect the lien in the amount of $4,917,122.02.”

Waiving Bond Claim Rights Under The Miller Act

Posted on July 20, 2018 by - In Other Commercial Credit News

Are You Waiving Your Bond Claim Rights Under The Miller Act?

If you furnish to a federal construction project, and your contract includes a provision for claim resolution outside of the Miller Act, are you prohibited from pursing a claim under the Miller Act? Are you waiving your rights? Short answer: No. Unless…

Miller Act Statute

The statute for federal projects is relatively straightforward and applies to all states; meaning unlike state statutes which vary, federal statute is the same across the board. U.S. Federal projects in foreign lands may also fall under the protection of the Miller Act.  Those furnishing to a federal project are not required to serve a preliminary notice, but a bond claim should be served with 90 days after the date of last furnishing, and suit should be commenced within one year after the date of last furnishing.

Typically, the general contractor is required to obtain a payment bond if the construction contract exceeds $100,000. And, would-be claimants can request a certified copy of the payment bond from the contracting agency.

3133. Rights of persons furnishing labor or material

(a) Right of Person Furnishing Labor or Material to Copy of Bond. – The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond…

Waiving Rights in a Contract

If your contract calls for alternative dispute resolution or waives rights in lieu of action under the Miller Act, does this mean you have lost your rights under the Miller Act?

This is a hot topic in construction: waiving rights to mechanic’s liens and bond claims. Some statutes clearly define whether rights are waived or if the waiver of rights is enforceable, while others are clear as mud. Fortunately, for federal projects, it’s not overly complicated. Yes, rights can be waived; however, the waiver must be in writing and it can’t be executed until after the claimant has completed furnishing.

3133. Rights of persons furnishing labor or material

(c) Waiver of Right to Civil Action. – A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is-

(1) in writing;

(2) signed by the person whose right is waived; and

(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.

Earlier I said that federal statute is the same in all states, and while this is true, the courts hearing federal cases may not make the same decisions. So, when I say “Yes, rights can be waived” I’m taking statute at its word – no gray area. But, as you know, in construction credit, there is a LOT of gray area.

Christopher M. Horton, associate with Smith Currie, recently wrote an article, Does the Miller Act Trump Subcontract Dispute Provisions? In his article, Horton discusses a few examples of different states and their stance on whether a contract can prevent someone from pursuing a Miller Act claim.

“…[C]ourts have considered whether subcontract provisions requiring exhaustion of dispute procedures prior to initiating a Miller Act suit conflicts with the waiver provisions of the Miller Act. Only a few federal courts have addressed this issue… (D.C., Maryland, Nebraska, New Jersey, Pennsylvania, Virginia), have found that such provisions are unenforceable and do not require dismissal or stay of a Miller Action lawsuit.

A minority of courts (Louisiana, California, and Hawaii) have upheld dispute exhaustion provisions and entered dismissals or stays of Miller Act. Contrary to the decisions referenced above, the courts rendering these decisions based their rulings upon the fact that the provisions at issue included express language that required a stay for Miller Act claims pending exhaustion of the dispute procedures…. The subcontractor’s Miller Act remedies remained intact pending exhaustion of the contractual dispute procedures.”

OK, so, perhaps my statement about federal statute being clear was a tiny bit inaccurate — turns out, it can get quite muddy. Though, it seems, at least based on Horton’s article, that courts may allow claimants to pursue a Miller Act claim even if alternative dispute options are identified in the contract.

Best advice? Before you sign the contract, carefully review it with legal counsel. Do not blindly sign a contract, assuming it will all pan out.