Service Area: Collection Services

UCCs and Liens Make Your Company a Payment Priority

Posted on May 14, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

Use UCC Filings and Mechanic’s Liens to Make Your Company a Payment Priority

Businesses prioritize how, when and which vendors are paid and often pay secured creditors ahead of unsecured creditors. But why? In this article, we will review how you, as a trade creditor, can use secured transactions to ensure you are a payment priority for your customers and how you can avail yourself of legal protections, should your customer default or file for bankruptcy protection.

How Does Your Debtor Prioritize Payments?

If your debtor decides to pay 3 of its 10 creditors this month, how or why does the debtor choose which three they are going pay?

Perhaps it’s because the creditor provides a product or service that is vital to the day-to-day operation of the debtor’s business. It could be the debtor has a longstanding relationship with the creditor, so the debtor ensures they are always paid timely. Or, maybe it is because the creditor has security, either through the filing of a UCC or the service of a preliminary notice to protect mechanic’s lien rights.

Why does security make a creditor a priority? Debtors tend to pay secured creditors first, because failing to pay may result in significant consequences.

For example, if a creditor has properly perfected a security interest through a UCC filing, the creditor could leverage the UCC to repossess the goods or collect money directly from third parties. And, the service of a preliminary notice or filing of a mechanic’s lien alerts all parties involved that there is a payment issue. Once the issue is known, it’s hard to hide from it.

Payment Priority | The Leverage of UCC Filings

Article 9 of the Uniform Commercial Code was created to promote commerce. UCCs provide trade creditors the opportunity to secure goods and/or accounts receivable by using the debtor’s personal property/assets as collateral. To create a security interest, you must have a signed security agreement, record the Financing Statement to make the security interest public record and notify the prior secured creditors to establish priority in inventory.

There are two primary types of UCC filings: Blanket and Purchase Money Security Interest (PMSI).

A Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

A PMSI filing provides the same benefits as the blanket filing, with the addition of the priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.

In the event the debtor defaults on payment or files for bankruptcy protection, the type of UCC filing in place dictates the next steps available to the creditor.

For example, if you filed a PMSI, you would first determine whether you would like your equipment/inventory back. If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets. If you want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace. If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

In addition to the security of the UCC filing, the Security Agreement can be used as leverage for breach of contract. Payment terms are written into every Security Agreement. Therefore, if your customer defaults, they are breaching the terms of a signed agreement.

It’s also worth mentioning that a UCC filing program has widespread benefits. Not only will a sound UCC filing program make you a payment priority, it will also minimize financial risk, reduce DSO, improve cash flow and increase sales. UCCs aren’t solely used for reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines.

Payment Priority | Using the Mechanic’s Lien Process

Payment cycles in the construction industry are painfully slow. It’s all too common to see invoices age 60-90 days, and still be considered “average payment terms.” Fortunately, in construction, creditors can leverage the mechanic’s lien process to reduce DSO. More specifically, NCS clients with a sound preliminary notice program have experienced an average of a 25% reduction in DSO, with some clients experiencing reductions as high as 50%.

Much like Article 9, mechanic’s lien laws were created to promote commerce and provide creditors, who furnish to the improvement of real property, credit security. However, unlike Article 9, there is very little that is uniform about mechanic’s lien laws, as each state has its own statute.

Become familiar with the mechanics lien statute for the state in which your project is located. It’s important to know the deadlines for each action in advance, to allow ample time to follow the state’s requirements & to take advantage of every opportunity to protect your receivables.

Implementing a mechanic’s lien process is one of the greatest securities available to the construction credit professional. To leverage your position as a secured creditor, you must have a solid foundation for your mechanic’s lien process, which may include a properly drafted, executed & served preliminary notice.

A preliminary notice is a low-cost, proactive alternative to the high-cost & high-stress, reactive remedy of a collections placement. Serving preliminary notices regularly reduces the need to file a mechanic’s lien or proceed with suit actions.

— 97.3% of the time, serving a notice will get you paid.

— 99% of the time a notice and mechanic’s lien will get you paid.

— Only 1% of the time will a project go to suit.

A 97.3% success rate is HUGE and the primary driver behind that success is that everyone within the contractual chain knows you are supplying to the project and taking steps to secure your rights as a creditor – there is transparency.

Don’t be afraid! Too often, companies are led to believe that by protecting their rights to get paid, they will jeopardize projects and relationships. UCC Article 9 and Mechanic’s Lien and Bond Claim laws are there to protect creditors.

Be a payment priority; implement secured transactions.

Substantial Completion, Completion and Acceptance

Posted on May 11, 2018 by - In Other Commercial Credit News

Substantial Completion, Completion and Acceptance Are Not the Same

The Court of Appeals in Georgia recently deemed a supplier’s suit action was untimely, because the supplier failed to comply with filing suit within one year from substantial completion of the project.

Ah, What’s in a Date?

Dates are imperative in accurately determining mechanic’s lien and bond claim rights and the deadlines associated with securing those rights.

What dates? No, not your plans for Saturday night or the peculiar fruit often found in fruit cake.

Dates as in calendar dates, or significant events. Dates may include first & last furnishing dates, date of project completion and the date of final acceptance.

Completion is the date of fulfillment of the prime contract for the work of improvement. Acceptance is an official act where entry is made in the government records that a public work under a contract is completed and accepted.

Then there’s that word: substantial. As if tracking lien and bond claim deadlines weren’t tricky enough, there is this added caveat of “substantial.”

While it seems the definition of substantial may end up in a judge’s hands to determine, generally items such as punch list work, warranty work, remediation and small shipments don’t qualify as substantial.

Georgia, on My Mind & in the Courts

If you are furnishing to a public project in Georgia, you should serve the bond claim within 90 days from last furnishing and file suit to enforce the bond claim after 90 days from last furnishing, but within one year from completion and acceptance of the project.

In this case, the claimant filed its suit action nearly four years after the project was deemed substantially complete, arguing that its maintenance and repair obligations extended the date of project completion.

Jane Fox Lehman reviewed the recent court decision in her article Eleventh Circuit Holds That the Statute of Limitations on Payment Bond Claim Under Georgia Law Commences at Substantial Completion Rather Than Final Acceptance. 

According to Lehman’s review, the owner deemed the project substantially complete in 2010, the punch list work was completed, and final acceptance occurred in 2011. In 2014, the claimant discovered the owner was closing out the project and the claimant brought the suit action against the payment bond. Regardless of whether calculating from substantial completion or final acceptance, the claimant was far beyond the one year mark.

But, getting back to completion vs. acceptance “The Court of Appeals noted that Georgia’s statute of limitations on payment bond claims commenced at the “completion of the actual construction work and acceptance thereof by the public authority,” and that Georgia courts had construed the term “completion” to mean not just total completion, but also substantial completion with only punch list items remaining.”

When its arguments on completion date(s) were lost, the supplier tried to argue the statute of limitations had not expired, because the payment bond remained active.

“Finally, the Court rejected Strickland’s argument that the statute of limitations had not run because the payment bond remained in “full force and effect” until all suppliers were paid, and Strickland had not been paid. Strickland’s interpretation would render the statute meaningless because the limitations period would never begin where a supplier or subcontractor had not been paid.”

What’s a Supplier to do?

For starters, pay attention! If I look at the sheer amount of time that passed where the supplier wasn’t paid, I can’t help but think “Why are you waiting years to pursue payment?!” Suppliers need to carefully monitor deadlines and act accordingly. The laws are there to protect you, but you must take steps to closely adhere to the requirements.

In this case, Georgia’s statute is quite clear on time limits:

“No action can be instituted on the payment bonds or security deposits after one year from the completion of the contract and the acceptance of the public works construction by the proper public authorities.” – O.C.G.A. § 36-91-95

Securing Mechanic’s Lien Rights in Wyoming

Posted on May 7, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Are You Furnishing to a Construction Project in Wyoming?

Then You Should Take a Look at this Post about Securing Mechanic’s Lien Rights in Wyoming!

Here’s everything you didn’t know you should know about securing mechanic’s lien rights on projects in Wyoming.

The Notice to Owner

General contractors, subcontractors & material suppliers, including those furnishing rental equipment, can secure a mechanic’s lien in Wyoming, if the parties take the proper steps.

If you are contracted directly with the owner, the Notice to Owner aka Notice of Right to Lien should be served upon the owner prior to receiving any payment, including advances.

If you are a subcontractor or material supplier, a notice should be served upon the owner & the general contractor within 30 days from first furnishing. The general contractor should provide subcontractors & material suppliers with the name and address of the owner and a legal description of the property.

When claimants serve the preliminary notice, burden is placed on the owner to provide claimants with a copy of the Notice of Completion. The Notice of Completion is important because the mechanic’s lien deadline is calculated based on the earlier of last furnishing or completion.

The Notice of Intent & Mechanic’s Lien

Wyoming is one of several states with a Notice of Intent that should be served prior to the lien filing, essentially making the lien a three-step process.

Claimants should serve the Notice of Intent at least 20 days before filing the lien. The lien deadline is then calculated based on last furnishing or substantial completion, whichever comes first. The deadline is different based on whether you contracted directly with the owner or a subcontractor/material supplier.

  • General Contractors: file the lien within 150 days from last furnishing or within 150 days from substantial completion, whichever comes first.
  • Subcontractors/Material Suppliers: file the lien within 120 days from last furnishing or within 120 days from substantial completion, whichever comes first.

Once the lien has been filed, a copy of the lien should be served upon the owner within 30 days from the filing date. On commercial projects, Wyoming is a full balance lien state, which means the lien is enforceable for the full claim amount, regardless of payments made by the owner.

Suit & Release

If after filing the lien a claimant remains unpaid, the next action is suit to enforce the lien. Suit should be filed within 180 days from the date of the lien filing.

Once payment has been received, claimants should release their lien within 30 days from satisfaction and serve a copy of the release upon the owner within 30 days.

Bond in Lieu of Lien

Wyoming is one of the many states that allow parties to substitute another form of security for the lien, such as a payment bond.

According to statute “…[A] corporate surety bond, letter of credit, cash or cash equivalent of established value approved by the court having jurisdiction over the lien claim in the county where the lien was filed in an amount equal to one and one-half (1½) times the amount of the lien.”

Lien on Leasehold

Furnishing to tenant situations can be tricky, but Wyoming offers clear guidance. If an improvement is authorized or paid for by the landlord, then a lien would attach to the real property. However, if an improvement is not authorized by the landlord, a lien would attach to the leasehold interest.

Oil/Gas Liens

Wyoming offers a lien remedy specific to mines, quarries, oil, gas & other wells. These types of improvements are inherently complicated. Frequently, these projects cover multiple parcels and the lien may attach to the real property or an interest in the property. Legal advice is recommended.

If the project falls under the Mines, Quarries, Oil, Gas or Other Wells statute, “The lien claimant may file a lien statement in the office of the county clerk in any county where any part of the land, leasehold, mine, quarry, pipeline or other property to which a lien may attach under this chapter is situated within one hundred eighty (180) days” – Wyo. Stat. Sec. 29-3-106.

Lien Waivers & Waiver of Lien Rights

This is a state where statute dictates the format of the lien waiver. You can view the document in its entirety by reviewing Wyo. Stat. Sec. 29-10-101. Preliminary notice of right to lien; lien waiver form. But, here’s the “meat” of the waiver.

Note to lien claimant:  Signing this form has legal implications.  If you have any questions regarding how to complete this form or whether it has been properly completed, you should consult an attorney.

In consideration of the PAYMENT received to date, the undersigned does hereby waive, release, and relinquish any and all claim and/or right of lien against the project and the real property improvements thereto for labor and/or materials furnished for use in construction of the project; provided however, the undersigned reserves all claims and/or rights of lien as to monies withheld as retainage in the amount of $_______________, and any labor and/or materials hereafter furnished for which payment has not yet been made.  The undersigned has not been paid the sum of $________________ for work performed and/or materials provided under contract on this project and retains the right to file a lien against the property and pursue any and all actions to recover the full amount due, including any and all equitable claims.  The undersigned acknowledges receipt of payment for work performed or materials provided and acknowledges that this waiver may be relied upon by the owner even if the undersigned accepts payment in uncertified funds and such payment is subsequently dishonored or revoked, in which case this lien waiver shall remain in full force and effect.  The foregoing waiver shall not apply, however, if payment tendered by the owner is dishonored or revoked.

Also, in Wyoming, lien rights cannot be waived within a contract.

Prompt Pay Statute

Unfortunately, for private projects, Wyoming does not provide specific statute on prompt pay/contingent payment clauses. However, on public projects, prompt pay is governed by Wyo. Stat. § 16-6-601 through Wyo. Stat. § 16-6-602.

Questions? Have questions not covered in today’s post? Contact us today!

Lien Should Be Filed by Registered Entity

Posted on May 4, 2018 by - In Other Commercial Credit News

A Lien is Only Valid if it is Filed by a Registered Entity

A construction lien can be invalidated if the lien claimant doesn’t exist. Well… wait. Of course, a non-existent entity can’t file a lien! In this case, “doesn’t exist” = “not registered” with the Secretary of State or comparable agency.

Registered Name, Not Just for UCCs

Frequently, when referring to the importance of an entity’s name and its standing with the Secretary of State, we are discussing UCC filings. After all, Article 9 dictates the debtor’s name should appear on the Financing Statement as it appears on the public organic record. Not to mention, if an entity isn’t in good standing with the Secretary of State, it’s often an early warning sign of bigger issues.

‘Know Thyself”

Ryan P. Krushelnitzky reviewed an Alberta court decision in his article, Contractor Know Thyself: If you don’t, you may lose your lien.

Essentially, the lien claimant registered its lien under the name Advantage Custom Homes Inc. However, Advantage Custom Homes Inc. was not a registered entity at the time the lien was registered. The business was transitioning from 7083335 Canada Inc. to Advantage Custom Homes Inc., and while a public announcement was made about the upcoming changes, the changes were not yet in effect.

Ultimately, the property owners contested the lien and argued the lien was invalid because “a non-existing company is not a person that can register a lien.”

The judge relied on section 6 of the Builder’s Lien Act, specifically the word “person.”

Builders’ Lien Act, RSA 2000, c B-7, s 6(1)

Creation of lien

6(1) Subject to subsection (2), a person who

(a)    does or causes to be done any work on or in respect of an improvement, or

(b)    furnishes any material to be used in or in respect of an improvement,

for an owner, contractor or subcontractor has, for so much of the price of the work or material as remains due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made.

According to Krushelnitzky, “Justice Khullar explained that in order to determine who might be a “person” for the purposes of Section 6(1), the critical issue was to determine “who did the work,” because “the party doing the work is entitled to file a builders’ lien.”

And in this case, the party that performed the work at the time was 7083335 Canada Inc. not Advantage Custom Homes Inc.

“the issue is simply that the corporate entity of Advantage Custom Homes Inc. did not exist on October 26, 2016 so was not “a person” that could file a lien.” – Justice Khullar

Krushelnitzky’s Take Away

Krushelnitzky reminds claimants, small mistakes matter.

“Builders’ liens can be tricky. Small mistakes at the time of registration can result in the loss of lien rights. Contractors that operate using multiple corporate entities, or that engage in corporate restructuring during the course of a project, need to be particularly mindful that the proper, existing, legal entity is the party registering the lien. The best way to avoid losing a lien is to seek legal advice before the lien is registered.”

NCS Best Practice

When filing a lien, ensure your backup documentation is in line, and confirm you are filing under the correct legal name. The name, as it appears on your contract, should match the name as it appears with the Secretary of State, W-9, etc. If you are in the process of a name change or the transition occurs mid-project, be prepared to provide supporting documentation, such as copies of the Articles of Incorporation or merger documents.

Business names change and registrations/renewals can be overlooked.

If you have any concerns, it’s best to seek legal guidance as soon as possible.

Can a New York Mechanic’s Lien Be Filed Too Early

Posted on April 30, 2018 by - Mechanic's Liens & Bond Claims

Can a New York Mechanic’s Lien Be Filed Too Early?

A case recently presented to the Supreme Court of New York County questioned whether the claimant’s lien was served too soon. The Supreme Court reviewed and found the lien was not served too soon & the claimant’s lien would remain valid. But, what’s “too soon” in New York?

New York Mechanic’s Lien Statute 1996

To add some perspective, let’s take a moment to discuss the 1996 statute change for New York. I pulled a copy of the legislation from the New York State Archives, and the Memorandum in Support of Legislation recommended the lien law be amended to accommodate liens served within 5 days before filing the lien.

At the time, NY statute dictated a lien claimant should serve a copy of its lien within 30 days after the filing of the lien. In his recommendation to the governor, Mr. Kemp Hannon advised the statute was “unduly burdensome” and the new legislation would “provide lien holders with greater flexibility for serving a notice of lien, while simultaneously ensuring that persons receive reasonable notice of the lien.”

How was the statute “unduly burdensome?” According to Hannon’s recommendation:  “In an effort to comply with the service requirements of the lien law, some lien holders ultimately serve a notice of lien on the day of or immediately before filing. Under these circumstances, the lien is invalid and the lien holder must re-serve and re-file the notice of lien.”

Essentially, making a claimant wait to serve a copy of the lien until after the lien was filed was too restrictive, and in some cases, it caused claimants to double up on their lien filing efforts.

New York Mechanic’s Lien Statute Today

Ultimately, the legislation passed. NY Lien Law changed from “…[W]ithin 30 days of the filing of the notice of lien, the lienor shall serve a copy of the notice of lien upon the owner.” to “Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice upon the owner…” (NY LIE Article 2, Sec. 11)

For commercial projects, the mechanic’s lien should be filed within 8 months from the date of last furnishing. The claimant should serve a copy of the lien upon the owner, the prime contractor & the contracted party within 5 days before or 30 days after the filing of the lien. Also, the claimant should file a proof of service with the County Clerk within 35 days after the lien is filed.

What if the Claimant Serves the Lien 10 Days Before Filing?

In “K”-Detailing, Inc. v. N & C Ironworks, Inc., 2018 NY Slip Op 30500 – NY: Supreme Court 2018, the lien claimant “K”-Detailing, Inc. (“K”), served a copy of its mechanics lien June 28, 2016 and then filed said lien July 8, 2016.

The GC & Owner contested the lien, claiming it to be invalid because the claimant served a copy of the lien 10 days before filing the lien; obviously more than the 5 days outlined within New York’s statute. The GC & Owner petitioned to have the lien vacated, based on claimant’s failure to comply with statute.

“K” cited other legal decisions where liens remained valid, even though the liens were served earlier than 5 days prior to filing.

The Supreme Court sided with “K” —

“…the Lien Law was amended in 1996 to allow service of the lien prior to filing the lien because it was a reasonable practice designed to foster prompt notice. The Court finds that serving notice of the lien ten days prior to filing does not merit a dismissal based on this legislative history because the purpose of amending the Lien Law was to ensure that owners get timely notice of a lien.”

The Supreme Court cited 2 precedents, one where the lien was served 6 days before filing & another where the lien was filed 13 days before filing. In both cases, the courts determined that early service did not cause harm to the defendants.

The Supreme Court further added that within statute and the changes made in 1996, “…there is no discussion about why service of the lien five days prior to filing is permissible but longer periods, such as ten or twenty days before, are not appropriate. The focus of the legislation was to allow ‘a brief period so as to still be reasonably contemporary with the filing’.”

Thus, “The Court is unable to find that serving notice of the lien 10 days early (or five days earlier than provided for in the statute) frustrates the goal of service that is reasonably contemporary with filing of the lien. And the fact is that courts looking at this issue have permitted service of lien earlier than five days prior to its filing and the Moving Defendants have not demonstrated that they suffered any prejudice from the early notice.”

What Should You Do?

As a best practice, adhere to statute. In this case, statute says “Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice upon the owner…” However, if you find yourself in a situation where the area is a bit gray, consult an expert as soon as possible!

Federally Funded Does Not Mean Federal Project

Posted on April 23, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Federally Funded Does Not Mean Federal Project

“The U.S. Government funded this construction project, so it’s a federal project, right?”

This is a frequently asked question and the answer is: not necessarily.

Project type, as it pertains to determining mechanic’s lien or bond claim rights, is dictated by project ownership, not funding. In other words, who owns the property?

In general, construction projects are either private, public or federal; however, there are instances where a project may be a hybrid, such as private property leased by a public entity.

Project Type: Private, Public or Federal?

A private project is a private improvement contracted by a private entity, e.g. a person, company or corporation. A public project is an improvement of public works or building under formal contract made by any government authority, e.g. the state, county, city or political subdivision. And, a federal project is a contract for the construction, alteration or repair of any public building or public work of the United States.

Prime Contractor Says Project is Private, Subcontractor Says Project is Federal

In US v. Triangle Construction Co., Inc., Dist. Court, SD Mississippi 2018, the subcontractor, Metro Mechanical, Inc. (Metro) argued their right to claim under the Miller Act, because the construction project was federally funded.

Triangle Construction Co., Inc. (Triangle) contracted with Mississippi Portfolio Partners III, LP (Owner) for the improvement on four apartment complexes in Mississippi and obtained a payment bond from U.S. Specialty Insurance Company (Surety).

Triangle hired Metro to provide HVAC and plumbing renovations. When Triangle failed to pay Metro $150,555, Metro filed suit under the Miller Act.

Triangle contested the suit, stating the projects are private and the Miller Act doesn’t apply. Metro then argued the projects fall under the Miller Act because Triangle obtained payment bonds, and since payment bonds aren’t required on private projects, the project must be federal.

“And Metro suspects that the Projects are covered by the Miller Act because Triangle secured payment bonds for them. [Doc. 12, p. 3] Metro reasons that, because Mississippi law does not require a contractor on a private project to obtain a payment bond, and because such bonds can be costly, [Triangle] must have obtained payment bonds on the Projects to fulfill the Miller Act’s bond requirement.”

Interesting logic, right? Right. According to the court opinion, the Miller Act doesn’t define “public work for the Federal Government”, however, “…[a] federally-funded project is not necessarily a ‘public work’ under the Miller Act.”

The court further stated, the Miller Act would only apply if the Federal Government (or its agent) is a party to the construction contract.

Let’s review the parties involved in the contractual chain:

– Owner: Mississippi Portfolio Partners III, LP

– Prime Contractor: Triangle Construction Co., Inc.

– Subcontractor: Metro Mechanical, Inc.

– Surety: U.S. Specialty Insurance Company

The list does not include the Federal Government.  The court’s final word: “It is undisputed that neither the Federal Government nor any of its agents was a party to any contract for work on the Projects. Indeed, Metro’s complaint confirms that the only parties to that contract were Triangle and Mississippi Portfolio Partners III, LP. [Doc. 1, ¶4] Under this standard, as under Mississippi Road Supply, the Miller Act is inapplicable.”

What Remedy Should Metro Have Pursued?

This case is a bit unique. Generally, securing mechanic’s lien rights is the remedy for private projects. However, because Triangle obtained payment bonds, Metro may have pursued a claim against the bond.

From The National Lien Digest | Bond Claims on Private Mississippi Projects

Payment Bonds

– Where a contractor gives a payment bond, providing payment protection to the full extent provided by public statute (Section 31-5-51), the payment bond will prevent liens from attaching to the property.

– It is recommended to also follow the procedures to protect your lien rights.  The statute regarding the private payment bond is new and it is not clear how the courts will interpret the requirements.

Notice

– Generally, there is no statutory provision requiring a preliminary notice. Serving a non-statutory notice is recommended.

Bond Claim

– Serve the bond claim notice in accordance with the terms and conditions of the payment or performance bond.

– Frequently, a bond claim notice is required within 90 days from last furnishing materials or services.

Suit

– When a payment bond is provided, file suit to enforce the bond claim in accordance with the terms and conditions of the payment bond.  Frequently, suit is required within 1 year from last furnishing materials or services.

Projects to Watch Out For?

The Federal Government often funds projects for which they have no ownership interest.  In those cases you must look to the state statute, or if there is no statute for private payment bonds, to the bond itself, for the terms and conditions of the bond.

As an example, the U.S. Department of Agriculture frequently provides funding to telephone companies for cable to be laid in rural areas.  While the U.S. helps to fund the project, they typically have no ownership interest.  Even though a payment bond may be available these private projects, displaying the USDA Rural Utilities Service on the bond heading, the Miller Act will not apply.

Another scenario would be where the U.S. Department of Housing and Urban Development funds a low-income housing project that is privately owned; HUD will typically appear on the payment bond heading, but the Miller Act would not apply.

Unsure of Project Type?

If you are unsure whether you would secure mechanic’s lien or bond claim rights, consider submitting the project to NCS for review or contact us with questions.

Supreme Court Sides with Subcontractor in Washington Case

Posted on April 20, 2018 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Subcontractor Complied with Washington Statute, according to the Supreme Court

Previously, we reviewed a case before a Washington Appeals Court, where the subcontractor’s right to recover its claim was hinging on whether the subcontractor named the correct parties in the foreclosure action. This case made it to the Washington Supreme Court and the decision stands: when a lien is bonded off, the only required party in the foreclosure action is the surety.

The subcontractor can recover its claim!

The Case: Inland Empire Dry Wall Supply Co., v. Western Surety Company

You can read our earlier post here, but here’s the recap.

The Supreme Court’s decision? The subcontractor complied with statutory requirements & the surety was the only required party in the foreclosure action.

subcontractor filed a lien, general contractor obtained a bond to release the lien, subcontractor proceeded with suit & named the surety in the foreclosure action, the surety objected, saying the owner should have also been named, trial court agreed with surety, appeals court agreed with sub, case went to supreme court, supreme court decided...

But why doesn’t the owner have to be included? In her article, Washington Supreme Court Upholds Rule That Property Owner and General Contractor Are Not Indispensable Parties in a Lien Foreclosure Action Against the Surety of the Lien Release Bond, author Jennifer Beyerlein explains.

“When a lien release bond is obtained…the real property is released from the lien and becomes “unreachable” and the bond becomes the security for enforcement of payment… [T]he Court found that neither the real property owner nor the entity who purchased the lien release bond are necessary parties in any action to enforce the lien against the surety who posted the lien release bond… because the surety is substituted for the real property owner in the eyes of the mechanic’s lien statutes for purposes of enforcement.”

Recovery of Claim + Legal Fees = Happy Subcontractor

Within its decision, the Supreme Court awarded fees to the subcontractor –

“Pursuant to RAP 18.1(i) and RCW 60.04.181(3), if on remand the trial court determines Inland Empire to be the prevailing party in the lien foreclosure action and upon submission of satisfactory proof of the claimed amount due, judgment against the bond should be entered. Reasonable attorney fees and expenses, including statutory fees and costs on appeal, are also recoverable.”

What this all Necessary?

Truthfully, litigation, regardless of circumstance, is never pleasant. It is quite possible this could have been avoided, had the subcontractor named the other parties in the initial foreclosure action. But, without a crystal ball, no one could have known for sure.

The best advice I can offer when foreclosure actions are imminent? Ensure your legal counsel is well-versed in construction law.

How to Handle Suit When Mechanic’s Liens Expire

Posted on April 16, 2018 by - Mechanic's Liens & Bond Claims

You Should Understand Suit to Enforce Your Claim, Because Mechanic’s Liens Don’t Live Forever

What happens after a mechanic’s lien has been filed? The mechanic’s lien will remain in place forever, right? Does a mechanic’s lien have an expiration date? If the mechanic’s lien expires, do I have to file a release of lien, or can I just ignore it?

Often, the filing of a valid mechanic’s lien will prompt payment. In fact, when a notice and a lien are filed as part of a complete process, the claimant will be paid 99% of the time. A lien claim that has been satisfied (paid in full or settled) should always be released. But what happens to the liens on the 1% of projects that aren’t paid?

There’s a Step 3? Proceed with Suit

Generally, the first step to protecting your lien rights is to serve a preliminary notice.  Step two is to file, and possibly serve, the lien.  Many folks don’t realize the third step, if payment has not been received, is to file suit by the state’s prescribed deadline.

What is Suit?

A suit, or lawsuit, is an action in a court of law to enforce a claim. Is this the same as foreclosure? Foreclosure is a legal action to enforce a lien against real property with the purpose of having the property sold to satisfy the lien.

Suit may lead to foreclosure. During litigation, it may come to light that debts can only be paid if the property is sold & the proceeds are then used to square up the debts. Please understand, it has been our experience that suit does not usually result in foreclosure/sale of the property; more often, during the suit phase, settlement agreements are reached without the need for sale of the property.

When is the Suit Deadline?

The suit deadline is dictated by state statute. Yes, each state is different, but most states calculate the deadline:  1. From the date of the lien filing (this is the most common) 2. From the date of last furnishing 3. From the date the debt became due (typically defined as last furnishing) or 4. From completion of the project.  In certain states, the service of a demand to commence suit/notice of contest may shorten the deadline to file suit.  Also be aware, in some states, if a surety bond is obtained to take the place of a lien, the suit deadline may change.

As an example, in California, the suit deadline is within 90 days from the recording of the lien.

8460.(a) The claimant shall commence an action to enforce a lien within 90 days after recordation of the claim of lien. If the claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable. ARTICLE 6. Enforcement of Lien [8460 – 8470]

Whereas, in Illinois, claimants should file suit to enforce the lien within 2 years from last furnishing materials or services, but within 30 days from receipt of a demand to commence suit.

“Such suit shall be commenced or counterclaim filed within two years after the completion of the contract, or completion of the extra or additional work, or furnishing of extra or additional material thereunder.” – 770 ILCS 60/9, from Ch. 82, par. 9

“Upon written demand of the owner, lienor, or any person interested in the real estate… requiring suit to be commenced to enforce the lien… suit shall be commenced or answer filed within 30 days thereafter, or the lien shall be forfeited.” – 770 ILCS 60/34, from Ch. 82, par. 34

Many states provide the owners with the opportunity to serve a notice to commence suit (sometimes called a notice of contest) to force lien claimants to either take action within a short time period or to go away.  This provision allows owners to more quickly weed out invalid claims or claims that will not be pursued through suits to foreclose.

If the Mechanic’s Lien Has Expired, is a Release of Lien Necessary?

As a best practice, a mechanic’s lien that has “expired” or is no longer enforceable should be released.

When a lien is filed, it becomes public record and encumbers the property. Unless a release of lien is filed, the public record will continue to reflect the lien and it will appear as an encumbrance, even if the lien is invalid, expired or unenforceable.

Can an Unreleased, Expired Lien, Be Used as Leverage?

Although I am in the camp that would recommend invalid/expired/unenforceable liens be released, there is another camp that believes the lien can still be leveraged.

I recently read an article, “Didn’t Foreclose on Your Mechanic’s Lien? What Should You Do Now?,” by Kelly M. Davis Esq. Davis explained that an unreleased, invalid lien was used as leverage or “bargaining power” because the title company discovered the lien in the public record & wanted the lien released.

“If you fail to foreclose, your lien is oftentimes considered “invalid.” … So, where does this leave you?  Many times, it leaves you with some bargaining power down the line… I will have a title company contact me asking for a payoff amount for a lien I filed years before. In this situation, there is rarely an argument as to whether the lien is still valid just how much my client will accept to release its lien… “

Again, I’m of the camp that believes a lien, whether satisfied or invalid, should always be released. But, know the options available to you, and weigh those options carefully before proceeding.

In the End, it’s Suit or Release

Once a lien has been recorded, you will need to carefully track the suit deadline. As the deadline approaches, decide whether you want to pursue legal action. If you decide not to enforce your lien, or if you miss the deadline to enforce your lien, take steps to have the lien released. As always, before you make any decisions that could impact your right to get paid, seek guidance.