Service Area: Collection Services

Supreme Court Sides with Subcontractor in Washington Case

Posted on April 20, 2018 by wpengine - 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.

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 wpengine - 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.

New Legislation for Ontario’s Construction Act

Posted on April 9, 2018 by Kiwi - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Broad Changes for Ontario’s Construction Act Will Include an Extension to the Lien Filing Period

Today’s contribution is authored by Ms. Nancy Kennerly

Broad changes are ahead for Ontario’s Construction Act. In today’s we post, we will take a high-level look at some key changes including the extension of the lien & suit filing periods, and prompt pay guidelines.

NCS will release a white paper in the coming weeks, to provide additional details on these and other changes, including holdback requirements and construction trusts.

The Review Is Complete, Now to Implement

The review of Ontario’s Construction Lien Act (Act) began in February 2015 and in August 2016, the review committee presented its recommendations for improving the Act (we discussed the review in the NCS white paper, Highlights of the Recent Review of Ontario’s Construction Lien Act).

After the in-depth study and consultation process, broad changes are being made to the Ontario statute through Bill 142. While some housekeeping changes took place on December 12, 2017, the substantive amendments will become effective July 1, 2018 and October 1, 2019.

High-Level Look at Some Key Changes Effective July 1, 2018

Construction Lien & Suit to Enforce Lien | Deadline Extended

The deadlines for the filing of a lien and suit to enforce a lien have both been extended.

Current:

– File the lien within 45 days from last furnishing materials or services, but within 45 days from the earlier of publication of the certificate or declaration of substantial performance, or completion or abandonment of the contract.

– File suit to enforce the lien within 45 days from the period in which the lien must be filed.

Effective 7/1/18:

– File the lien within 60 days from last furnishing materials or services, but within 60 days from the earlier of publication of the certificate or declaration of substantial performance, completion, abandonment or termination of the contract.

– File suit to enforce the lien within 90 days from the period in which the lien must be filed.

Lien on Leasehold Interest

Currently, where the lien attaches to a leasehold interest, a claimant may serve notice upon the fee owner at least 15 days prior to first furnishing materials or services. This notice will allow a lien against the fee interest unless the fee owner responds with a notice of non-responsibility within 15 days from receipt of the claimant’s notice.

Under the new legislation, the claimant’s written notice of improvements is repealed, and the landlord/fee owner will no longer be able to disclaim responsibility upon receipt of the notice.

Instead, if the interest of the owner to which a lien attaches is leasehold, and if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10% of the amount of such payment.

Labor & Material Payment Bond and Performance Bond

On public contracts, a Labor & Material Payment Bond and Performance Bond will be required of contractors. The surety must be licensed under the Insurance Act and the bond must cover at least 50% of the contract price or other percentage of the contract price as may be prescribed. Further, the bond must extend protection to subcontractors and persons supplying labor or material to the project.

Claims against the bond must be made in accordance with the terms of the bond. A best practice would be to obtain a copy of the payment bond at the start of a public project.

Changes Effective October 1, 2019

Prompt Payment

In 2013, Bill 69 – Prompt Payment Act debuted, though it struggled to get beyond a standard review. Fortunately, under Ontario’s changes, Bill 69 can rest easy.

Applying to both private and public projects, prompt payment rules will require payment to be made by the owner within 28 days from submission of a proper invoice.

A proper invoice is a written bill or other request for payment in respect of an improvement under a contract between the owner and the contractor, and it is to contain specific information as outlined by the Act or as required by the contract. Failure to pay the invoice within the stated period will result in an automatic accrual of interest from the date the invoice was to have been paid.

The general contractor must pay the subcontractor within 7 days from receipt of payment from the owner. And, all parties in the contractual chain below the general contractor must make payment within 7 days from receipt of payment.

If the owner is not going to make payment within 28 days from receipt of a proper invoice, the owner must submit a notice of non-payment to the general contractor. Similarly, parties below the owner in the contractual chain must submit a notice of non-payment within 7 days from receipt of a notice of non-payment. The notice of non-payment must provide the reason for non-payment and the amount of any dispute.

Adjudication

Adjudication is a rapid construction dispute interim resolution process to avoid payment issues that may otherwise result in project delay. Adjudication is subject to the procedures set out in the contract or subcontract, if they are in compliance with the statute. The party who wishes to refer a dispute to adjudication must serve a written notice of adjudication on the other party, and then request adjudication from the Authorized Nominating Authority. The legislation defines the matters that may be adjudicated as:

– The valuation of services or materials provided under the contract

– Payment under the contract including a proposed change order

– Disputes that are the subject of a notice of non-payment

– Amounts retained / set-off

– Non-payment of holdback

– Any other matter that the parties to the adjudication agree to or that may be prescribed

It’s Only the Beginning

It’s important to understand that any time statute changes, there is an adjustment period. Some adjustments will happen during initial implementation, while others may not surface until a dispute reaches the courts a few years from now.

While there may be additional changes as we move forward, it is likely these changes will be minor. If you have questions regarding the changes in Ontario or how your rights may be impacted, please don’t hesitate to contact NCS.

Top 3 Mistakes Collectors Make According to IACC

Posted on April 6, 2018 by wpengine - In Other Commercial Credit News

According to IACC, Here Are the Top 3 Mistakes Collectors Make

What are the top 3 mistakes made when calling on past due accounts? Poor or out of date supporting documentation of the claim, waiting too long to involve a 3^rd party collection agency & failing to adequately communicate with the debtor, according to a recent article from International Association of Commercial Collectors, Inc. (IACC).

It should come as no surprise that a well-organized paper trail, including pertinent customer information, will ensure a smooth collection process. Which leads us to the mistake identified in IACC’s article, Top 3 Mistakes Internal Collectors Make with Customers When Attempting to Collect on Delinquent Accounts: failing to keep complete & current documentation. What is the most important document? A well-crafted credit application.

“According to IACC President Greg Cohen… the most important document is a properly constructed and complete credit application that will ensure that the customer understands your terms and that you have the proper legal name of the entity and its corporate address, as well as the names of the principles and officers, and the correct email addresses and phone numbers. The credit application should also be reviewed and updated on a regular basis, particularly with larger and higher risk customers.”

Number 2 on the list is a topic we discuss often – don’t wait to turn the past-due account over to a collection agency. It is a well-known fact, and long studied trend, that the longer an account remains past due, the harder it becomes to collect. Some reports indicate the collectability of an account drops to around 50% after six months and drops below 10% after a year.

Rounding out IACC’s list is communication. “Silence is golden,” said no collector ever. Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. How can you combat the silence? IACC recommends finding the communication style that suits your customer & sticking with it.

“It’s important to have a clear understanding of what type of communication your customer best responds to, whether it’s blunt language and a professional but terse reminder of the consequences of not paying on a delinquent account, or whether a softer approach is called for. Also, you need to communicate often and respond to communications quickly in order to express the gravity of the situation.”

How Can You Make the Collection of Past Due Accounts Easier?

This NCS list pops up now & then and never gets old, so I’m going to share it with you once again:

Monitor open invoices: Routinely review open invoices and as soon as an invoice is past due (e.g. If you bill on 30-day terms, day 31) contact your customer and inquire on the invoice.
Try multiple mediums: Use phone calls, emails, demand letters, etc. & make sure you keep track of your communications – good record keeping is important!
Pay attention to cues: Social cues & non-verbal cues are frequently early warning signs that an invoice (or customer) is going to be an issue. When people stop communicating, they are sending a clear signal “I can’t/won’t pay the invoice, and maybe if I ignore you, you will go away.”
Check status: Note changes with your customer’s business, such as a disconnected phone number, undeliverable mail or email, and changes in their corporate status with the Secretary of State.
Review credit: Credit reports can provide a wealth of information, especially for payment history, DBT changes, recent collection placements or judgments.
Cut them off: If you have invoices that a customer isn’t paying, stop extending them additional credit. Debt is like a beast and if you continue to feed it, it will gobble up every last bit and give you nothing in return.
Know when to let it go: Don’t immediately toss the invoice into the bad-debt-write-off-pile. “Let it go” from your desk and move it to the desk of a specialized collection agency. Collection agencies are trained and experienced, not to mention, a third party is sometimes more effective simply because they are a third party – removed from the situation.

Are you struggling with slow-paying customers? Do you need assistance with collection efforts? NCS can help ~ contact us today!

Don’t Gamble with Your Lien Rights in Nevada

Posted on March 19, 2018 by wpengine - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

You Could Roll the Dice, but why Gamble with Your Lien Rights in Nevada?

You can roll the dice with your lien rights, but why would you want to? Mechanic’s lien and bond claim rights are afforded to those furnishing to Nevada construction projects, if you adhere to the statutory requirements. Let’s look at the notice > lien/bond claim > suit process for Nevada.

Furnishing to a Private (Commercial) Project

Nevada is one of a handful of states where the preliminary notice should be served AFTER you begin furnishing. If you are furnishing to a private commercial project in Nevada, you should serve a preliminary notice upon the owner and prime contractor after first furnishing materials or services, but within 31 days from first furnishing materials or services.

If you fail to serve the notice timely, you may serve a late notice, but when the lien is filed it will only be effective for materials or services provided 31 days prior to serving the notice and thereafter. This late notice may also be referred to as a Trapping Notice.

While we always recommend serving the preliminary notice, there are some instances where a notice may not be required. For example, in Nevada, a notice isn’t required for private commercial projects if you contract directly with the owner or if you are providing labor only.

(Thinking about skipping the preliminary notice? You may want to read this post first Failing to Serve the Preliminary Notice Resulted in a Nevada Architect Losing Lien Rights)

Although service of the preliminary notice prompts payment 96% of the time, there is a chance you may need to proceed with a mechanic’s lien. If a lien is required, you should file your lien within 90 days from last furnishing materials or services, or 90 days from project completion, whichever is later. Be sure to serve a copy of the lien upon the owner and prime contractor within 30 days from filing the lien.

Your lien deadline may be shortened if a notice of completion is filed, and the owner notifies you of filing. The lien must be filed within 40 days from the date the notice of completion was filed.

Less than 1% of projects ever make it to the suit phase. Generally once a lien is filed, unpaid funds are recovered by claimants. However, if after filing a lien you remain unpaid, you will want to file suit to enforce your lien after 30 days from filing the lien, but within 6 months from filing the lien.

Think you may be close to an agreement & the suit deadline is creeping up quickly? You may choose to file an extension agreement, which, if agreed to by the owner, will extend the suit deadline. Within 6 months from filing the lien, an Extension Agreement may be filed, extending the deadline for suit up to 6 months from the Extension Agreement. The lien claimant and the owner must sign the Extension Agreement.

Furnishing to a Residential Project?

Make sure you serve a notice of intent upon the owner and prime contractor within the lien filing period and at least 15 days prior to filing the lien. The deadline for filing the lien may be extended up to 15 days from the service of the notice of intent. Of special note, apartment buildings in Nevada are generally considered residential, unlike apartment buildings in other states.

Furnishing to a Public Project

The typical payment remedy on public projects is a bond claim. But, did you know the owner may not require the general contractor to obtain a payment bond?

Fortunately, in Nevada, payment bonds are generally required for general contracts exceeding $100,000, for subcontractors whose contracts exceed $50,000 and for highway construction projects exceeding $250,000. As part of your credit granting process, request a copy of all payment bonds at the time of contract – it’s easier to obtain a copy of the payment bond before anyone finds themselves in “payment trouble.”

There is a preliminary notice requirement for public projects in Nevada. The notice should be served upon the prime contractor after first furnishing materials or services, but within 30 days from first furnishing. Just as with private projects, a late notice may be served but the bond claim, when later served, will only be effective for materials or services provided 30 days prior to serving the notice and thereafter.

Technically, if you have contracted with the prime contractor, you are not required to serve a preliminary notice – but as a best practice, we recommend serving the notice.

If payment is not received on a public project, proceed with serving a bond claim upon the prime contractor within 90 days from last furnishing materials or services. It’s important to note, if you are furnishing to a highway construction project, you should serve the bond claim upon the prime contractor, public entity and surety within 30 days from final acceptance of the contract.

Bond claim didn’t prompt payment? Well, you can proceed with suit to enforce your claim after 90 days from last furnishing materials or services, but within 1 year from last furnishing materials or services. Again, a caveat on highway projects – file suit to enforce the bond claim within 6 months from serving the bond claim notice and within 6 months from final acceptance of the contract.

Does Nevada Have Prompt Pay Laws?

Yes, there is prompt pay statute for both private & public projects.

For private projects, the owner should remit payment to the general contractor based on the terms of the contract. If payment terms are not specified within the contract, the owner must “pay the prime contractor within 21 days after the date the prime contractor submits a request for payment.” (NRS 624.309(1)(b))

In turn, the prime contractor should remit payment to its subcontractors/suppliers “within 10 days after the date the higher-tiered contractor receives payment” from the owner. (NRS 624.624 (1)(a)(2))

You can view additional prompt pay statute for private projects here: Prompt Pay (Nev. Rev. Stat. 624-606 through 624-630)

The payment period on public projects, between the prime contractor and its subs/suppliers, is the same as it is under private projects: “Each contractor shall disburse money paid to the contractor… to his or her subcontractors and suppliers within 10 days after the contractor receives the money…” (NRS 338.550 (1))

There is a difference, however, in the payment period between the owner and the prime contractor. For public projects, the owner should remit payment to the prime contractor within 30 days of receiving the progress bill from the prime contractor.

You can view additional prompt pay statute for public projects here: Prompt Pay (Nev. Rev. Stat. 338.400 through 338.645)

Interesting Fact about Lien Waivers in Nevada

There is language within Nevada statute which dictates that if payment doesn’t clear, the waiver is considered null & void, and the would-be claimant can pursue the lien.

NRS 108.2457 (e) Notwithstanding any language in any waiver and release form set forth in this section, if the payment given in exchange for any waiver and release of lien is made by check, draft or other such negotiable instrument, and the same fails to clear the bank on which it is drawn for any reason, then the waiver and release shall be deemed null, void and of no legal effect whatsoever and all liens, lien rights, bond rights, contract rights or any other right to recover payment afforded to the lien claimant in law or equity will not be affected by the lien claimant’s execution of the waiver and release.

Massachusetts Mechanic’s Lien in a Bankruptcy

Posted on March 16, 2018 by wpengine - In Other Commercial Credit News

What Happens to Your Massachusetts Mechanic’s Lien in a Bankruptcy?

This week we shared an article that focused on the impact of bankruptcy on mechanic’s lien claimants for projects in Massachusetts. In How Bankruptcy Affects Mechanic’s Lien Rights, authors Gregory M. Boucher and Steven Reingold, explain what happens under the automatic stay, the importance of complying with the bankruptcy code, and the key element of when a lien “relates back.”

What Happens Under the Automatic Stay?

Once a bankruptcy petition is filed, the automatic stay prevents creditors from further pursuing the collection of debts. This injunction occurs the moment a party files for bankruptcy protection, hence the “automatic” of automatic stay.

If you are furnishing to a construction project and the project owner files for bankruptcy protection, you can still perfect or file your mechanic’s lien without violating the automatic stay. However, you must comply with section 362(b)(3) of the bankruptcy code and should you need to file suit to enforce your mechanic’s lien, you would have to seek relief from the automatic stay.

It’s a bit trickier when another party in the ladder of supply, such as the general contractor, files for bankruptcy protection. According to Boucher & Reingold “…when a general contractor files for bankruptcy, a subcontractor or supplier might violate the automatic stay by taking action to assert or perfect a mechanic’s lien, even if the owner is not in bankruptcy.”

Might is the keyword here. Boucher & Reingold referenced a NJ case where the GC filed for bankruptcy protection and the court determined payments owed from the owner to the GC were property of the bankruptcy estate. And, as with all things in the mechanic’s lien world, whether a lien filing violates an automatic stay may be state-specific and could be based on attachment.

When the Lien Relates Back or Attaches

Authors Boucher & Reingold use the phrase “relates back,” however, you may have also heard it referred to as attachment. When does a lien attach to the property? In the state of Minnesota, liens attach from the time of first furnishing materials or services. In Ohio, liens are “…effective from the date the first visible work or labor is performed or the first materials are furnished by the first original contractor, subcontractor, material supplier, or laborer to work, labor on, or provide materials to the improvement.

Boucher & Reingold cite Massachusetts and Pennsylvania as additional examples of states where the lien attaches or relates back to the date of first furnishing, and the state of Florida, where the lien attaches to the date of the recording of the Notice of Commencement.

“…in Florida, such rights “relate back” to the date of the recording of a Notice of Commencement in the public records concerning the real property improvements, which typically precedes that start of the work. In those states, where the first date of labor or materials, or the recording of a Notice of Commencement, precedes a bankruptcy petition, a claimant may still proceed with asserting and perfecting its mechanic’s lien rights.”

Claimants should be cautious in states where statute doesn’t allow lien rights to relate back, warns Boucher & Reingold. “However, in those states whose mechanic’s lien laws do not provide for a claimant’s rights to “relate back,” such as New Jersey and New York, a claimant has no ability to assert or perfect its mechanic’s lien rights once a party files for bankruptcy protection without first seeking relief from the automatic stay.”

Know Before You Go

Become familiar with the dates lien attach in the various states, so that you are aware of potential problems. If a party within the ladder of supply files for bankruptcy, ensure your potential or existing mechanic’s lien filing is not in violation of the bankruptcy code.

Proactively, you may want to consider monitoring all parties with a service such as bankruptcy monitoring, which will alert you of a party’s bankruptcy filing. Time is of the essence when a party files for bankruptcy protection, and the sooner you know the faster you can act.

Carefully Review Settlement Agreements

Posted on March 12, 2018 by wpengine - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Carefully Review the Settlement Agreement & Be Prepared to Accept the Terms of the Agreement

In Degraw Const. Group, Inc. v. McGowan Bldrs., Inc., 2017 NY Slip Op 32080 – NY: Supreme Court 2017, parties executed a settlement agreement, which in addition to a payment settlement, required the parties to release one another from further claims. Despite the agreement, the subcontractor filed mechanic’s liens and attempted to proceed with suit. Much to the subcontractor’s dismay, the court upheld the terms of the settlement. The subcontractor’s liens were void and the subcontractor had to pay damages to the general contractor.

Some Background

McGowan Builders, Inc. (McGowan) was the general contractor for two projects: YMCA of Greater New York (YMCA Project) and Nan Shan Development of CPC Queens Senior Center/Day Care Center (Nan Shan Project). For both projects, McGowan hired subcontractor Degraw Construction Group, Inc. (Degraw) to construct concrete foundations, walls and floors.

As with many construction projects, disputes arose. To resolve the disputes, McGowan and Degraw executed a settlement agreement, “Agreement for Termination for Mutual Convenience and Mutual Release.” The settlement agreement dictated that McGowan would pay $150,000 in installments to Degraw, and that both parties agreed to a “mutual release.”

According to the court opinion, the mutual release specified that “[McGowan] and Degraw agree that upon full performance of their obligations hereunder, any and all claims that could have been asserted under the YMCA Subcontractor Purchase Order and the Nan Shan Subcontractor Purchase Order shall forever be released…”

Essentially, the parties agreed the $150,000 would settle debts and the parties agreed they would forfeit further mechanic’s lien actions.

In a Tennis Match of Correspondence

In what can be best described as a tennis match of correspondence, the parties served up letters & responses.

First up, McGowan notified Degraw it would not remit further payment, as McGowan had discovered defects on the YMCA Project. (Until this time, McGowan had paid $100,000 of the $150,000 settlement.) The terms of the settlement agreement had a clause for ‘latent defect claims’:

“[R]elease each other from all potential claims against each other on the YMCA and Nan Shan projects except for claims arising from latent workmanship defects and claims arising from Degraw’s indemnification obligations…”

Unsurprisingly, Degraw then sent a demand for payment & advised it would pursue all remedies, including a mechanic’s lien against the projects, if McGowan did not remit payment.

McGowan served back, reminding Degraw of the terms of the settlement agreement: “The lien claims that you are threatening to file on these projects are contrary to the express terms of the Settlement Agreement. Any sum that may be claimed to be due in a lien filed on either project will be completely arbitrary because the Settlement Agreement does not allocate the principal amount of the settlement and/or the current unpaid balance of $50,000 between the YMCA and the NAN Shan Projects.”

And, of course, McGowan’s correspondence wouldn’t be complete without a subtle jab “As previously advised, if you are foolish enough to file a lien on either the Nan Shan or the YMCA project swift action will be taken to obtain a Court Order for the discharge of such lien(s)…”

Degraw Serves Up Liens, McGowan Counters with Discharge Bonds

Despite the terms of the settlement agreement, Degraw filed two mechanic’s liens. The lien on the YMCA Project was filed for $214,590.46 and the lien on the Nan Shan Project was filed for $87,096.01.

McGowan, in turn, obtained discharge bonds for both liens.

Degraw proceeded with suit to enforce its liens, and McGowan filed a motion to have the liens declared as barred per the settlement agreement, to have the lien amounts declared as willfully exaggerated, to recover damages and to have Degraw’s suit dismissed.

The Court’s Findings

Liens Barred Based on Settlement Agreement: The terms of the settlement agreement were clear. When the parties executed the agreement, they waived the right to proceed with further claims. Therefore, Degraw’s liens were unenforceable.
Liens Willfully Exaggerated: Simple math confirms the liens were exaggerated. The agreement was for $150,000, of which $50,000 was unpaid. The liens were filed for a total of $301,686.47.
McGowan Recovers Damages: Because the liens were in violation of the settlement agreement and willfully exaggerated, McGowan was the prevailing party & was awarded $25,645 in damages.
Degraw’s Suit Dismissed: If there was still any question regarding the validity of Degraw’s liens, let the court’s final finding end it – the liens and suit were dismissed.

The Takeaway

Settlement agreements are not uncommon in the construction industry. We often assist with exchanges of release of lien for payment. But, it’s imperative for parties that execute an agreement to understand that the agreement may be enforceable, just as with any other contract. Review the terms of all agreements, and as a best practice, seek legal guidance before signing anything!

Is “Final Payment” Written on the Check?

Posted on March 9, 2018 by wpengine - In Other Commercial Credit News

Is “Final Payment” Written on the Check? Consider it Final and Paid.

In a recent Mississippi case, one general contractor argued that a payment it received from the owner did not satisfy the total claim amount. The check the general contractor received and subsequently deposited included the phrase “Final Payment.”

The general contractor attempted to recover the remaining balance owed and ultimately, the general contractor proceeded with suit to recover unpaid monies. Amidst litigation of additional issues, the court had to determine whether “Final Payment” written on the check operated as an accord-and-satisfaction of the claim.

Unfortunately for the general contractor, by depositing the “Final Payment” check, they accepted that payment as payment in full and were barred from further recovery.

What is Accord & Satisfaction?

Essentially, accord and satisfaction is synonymous with paid in full. According to the court opinion, Mississippi statute dictates that accord and satisfaction exists if:

Something of value is offered “in full satisfaction of a demand” – i.e. the check
The offer is “accompanied by acts and declarations [that] amount to a condition that if the thing is accepted, it is accepted in satisfaction” – i.e. the phrase “Final Payment” on the check
“The party offered the thing of value” must “understand that if he takes it, he takes subject to such conditions” – i.e. understand the meaning of “Final Payment”
The party accepts the item and/or offer – i.e. depositing the check

Based on the four parameters, as you can see, the court determined the payment the general contractor received, did qualify as accord and satisfaction.

“However, Mississippi law is clear that, despite whatever contentions a party may make to the contrary, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment.”

But, But, But…Final Doesn’t Really Mean Final

This case was recently reviewed by attorney, Matthew Devries in “Paid in Full” Wives’ Tale True? When Endorsing A Check, Yes Ma’am!. In his review, Devries states “The contractor conceded that it cashed the check but argued that it repeatedly asserted to the owner…that it did not consider the “final payment” to be final and that it would continue seeking the remainder of what it was owed.”

For whatever reason, it reminds me of the cliché, “You can’t have your cake and eat it too.” The contractor can’t cash a check, marked as final payment, and then continue collection efforts. Perhaps it’s that pesky word “final” that was getting in the way.

Be Careful!

Checks are monetary agreements and should be treated with care. As a former bank employee, I can tell you there are guidelines for accepting & depositing checks (albeit, they may not always be enforced or followed).

For example, the payee line on the check must match the deposit account name, if you write “for deposit only” on the check you can’t get cash back from the deposit (must be a separate transaction), and post-dated checks can’t be tendered until the specified date.

If you receive payment, and there are conditions or terms within the payment, seek a legal opinion before accepting the payment.