Service Area: Collection Services

Demand Letters and Mechanic’s Liens

Posted on April 13, 2015 by - Credit Risk Management

What You Should Know about Demand Letters and Mechanic’s Liens

A demand letter is a strongly worded request for payment, most often served upon your customer, advising legal action may be taken if payment is not received within a specified time period.  A demand letter is not intended to be “a-walk-in-the-park-chasing-rainbows-and-butterflies.”

What should I include in a demand letter?

In order for a demand letter to be successful, it should contain factual information and be succinct/to the point.

  • Date of the demand
  • Your company’s name and contact information
  • Your debtor’s name and contact information
  • A reference to the debt (i.e. provide the project name or purchase order number)
  • The amount of the debt
  • The due date of the debt
  • How the debt should be paid
  • The consequence of not paying the debt

Who should receive a copy of the demand letter?

The demand should be served upon your debtor, but it is recommended you also send a copy of the demand to any party that may contribute to you being paid; this could include the project owner, project manager, prime contractor, subcontractor, lender and surety. The more people you notify, the greater the influence on the party not paying you!

The Consequences of Not Paying

Any time you send a demand for payment, you need to ensure there is a clear consequence for failing to remit payment. You may be thinking “A consequence? Why? They should just pay me!” See, the party(s) involved need to know there is a consequence for not paying you – sort of like when a child goes to touch a hot stove, we warn them “Don’t touch that or you will get burned and it will hurt!” – getting burned and the significant pain are the consequences of touching the stove. (Just to be clear, I’m not condoning “bringing pain” to your customer, though I now hear a voice saying “You want I should break your knee caps”…)

Be specific as to a realistic ramification for not paying:

“…If payment is not received, we may pursue all available legal remedies against you, including, but not limited to, filing a lien.”

Can I send a demand letter if I didn’t serve a notice?

Yes, absolutely YES! There are no prerequisites for sending a demand letter, other than the outstanding debt. Just remember to word the consequence accordingly.

When would I send a demand letter?

Here are a few instances where a demand letter may be the most useful and cost effective tool for recovering an outstanding debt:

  • Before proceeding with a mechanic’s lien or bond claim
  • Before proceeding with suit to enforce a mechanic’s lien or bond claim
  • Before placing an account with a collection agency

Remember: demand letters can expedite payment, allow you to maintain control of your collection process and save you money.

The Benefit of UCC Filings

Posted on March 24, 2015 by - UCC Financing Statements

The Benefits of Secured Transactions and Article 9 of the Uniform Commercial Code

The subjectivity in evaluating credit worthiness magnifies the need for credit tools. Article 9 of the Uniform Commercial Code provides an opportunity for trade creditors to collateralize or “secure” their goods and/or accounts receivable utilizing the personal property assets of their customer.

Sounds Like a Big Deal!

Not really. From your customer’s perspective, a UCC filing is practically irrelevant, unless there is a bankruptcy. In addition, the filing never costs the debtor a dime… ever. A Security Interest or UCC filing simply elevates the status of your receivable and/or inventory/equipment to that of a secured creditor.

How Does It Work?

In a bankruptcy, all creditors are split into two classes: secured and unsecured.

  • In a Chapter 7, secured creditors are paid first in the order the UCCs were filed; unsecured creditors split what is left over on a pro-rated basis.

A UCC filing ensures you are a secured creditor and therefore in the best possible position to get paid. In addition, a Purchase Money Security Interest filing provides the priority right of repossession of your inventory or equipment at default or bankruptcy. You define default in your security agreement.

  • In a Chapter 11, all secured creditors have the same status providing substantial leverage over the unsecured creditors as it relates to leveraging liquidation.

The UCC process is a cost-effective solution for securing your inventory, equipment and/or receivables, especially important in today’s fragile economy.

Your customer’s only involvement in the process is signing a security agreement. This agreement or contract may be a stand-alone document or can be added to a standard credit application or other document. When your customer signs a security agreement, the UCC-1 perfects or records the security interest. A security interest collateralizes your company through equipment, inventory, the proceeds from the sale of your inventory, and your accounts receivable. Once the filing is completed, it protects all transactions for five years. Protect your bottom line as a secured creditor.

Types of UCC Filings

In an earlier post we discussed the differences between Blanket Filings and PMSI Filings; however, there are additional UCC filings.

  • Consignment sales: Goods sent to an agent for sale with title being held by consignor until a sale is made.
  • Bailment: Goods, which will be processed or improved in some manner, delivered in trust for a limited period.
  • Tooling: Tools provided to an outside manufacturing company in order for that company to provide a finished product for sale.
  • Warehousing Situations: Stocked goods or inventory held at a third party location.
  • Installments/Promissory Notes: Payment for a debt made in intervals.

How Do You Begin?

Determine when and where security is applicable in your business. For example, your company may deem filings are necessary for all customers with credit lines higher than $10,000.

Once you have set an account threshold, begin implementing the UCC filings by having your customer sign a security agreement. The best time to have your customer sign the agreement is at the time of contract and it’s a best practice to include the security agreement within the terms of your loan or credit application.

Top 5 Mistakes in Security Agreements

Posted on March 11, 2015 by - UCC Financing Statements

UCC Filings: Top 5 Mistakes in Security Agreements

In an earlier post we discussed the art of drafting a perfect security agreement and today we’d like to discuss the common mistakes in security agreements.

1. Incorrectly Identifying the Debtor

How difficult is it to identify the debtor aka your customer – significantly more difficult than it should be. The greatest obstacle with identifying your customer is ensuring you have the correct spelling of their corporate legal name – not their DBA or trade name. Leaving off “Inc.” or “The” can deem a filing seriously misleading & subsequently unenforceable.

Always review the Articles of Incorporation to confirm your debtor’s name.

2. Omitting Debtor’s Address

Remember, omitting information is just as fatal as listing the information incorrectly. Make sure you correctly identify and list the corporate address of your debtor.

3. Date, Date, Date

Don’t lose rights because you forget to list the date or you list the wrong date. In a recent case the lender lost its secured position (on $1,100,000.00) because the Security Agreement was dated December 13th and the Promissory Note was dated December 15th. Due to the discrepancy the court held that there was no perfected security interest.

Don’t go it alone!

A best practice in drafting security agreements (or any document for that matter) is to have someone else review the document. In grade school we had proofreading buddies – just because we aren’t in grade school anymore, doesn’t mean we should stop taking advantage of another set of eyes.

4. Authorized Signatures

First, make sure the agreement is signed. Second, make sure the person signing the document is permitted to sign the document. Because a security agreement is part of a consensual process, it’s imperative that the parties signing the document are authorized to do so.

5. Don’t Forget the Granting Clause

The granting clause actually grants the security interest, so do yourself a favor and confirm it is written into the agreement! In fact, without the granting clause, the security agreement isn’t actually a security agreement.

When in doubt, seek a legal opinion.

Request a review of your security agreement to ensure the necessary parts are in place & accurate. Drafting a security agreement does not have to be difficult, but it does need to be perfect – that’s why it’s called a “perfected security interest” when you become a secured creditor. Don’t lose your security because you didn’t perfect the security agreement.

Collectability of an Unsecured Collection

Posted on February 26, 2015 by - Credit Risk Management

Have you ever wondered “Is my unsecured collection collectable?”

“Is this past due, unsecured account even collectable?” It’s a common question in the minds of credit professionals. I wish I had a Magic 8 Ball that would always say “YES! Yes, it IS collectable!” with every anxious shake, unfortunately the responses in my Magic 8 Ball are varied and there is no guarantee it will land on “YES!” every time. When determining the collectability of an account, there are several factors that should be taken into consideration.

I mean, as fun & entertaining as the Magic 8 Ball can be, I feel I should remind you that it’s not the best way to determine the collectability of a past due account.

Yes, unsecured collections can be more difficult to collect than secured collections (i.e. past due accounts secured by a UCC filing, mechanic’s lien or bond claim), though you shouldn’t abandon all hope when an unsecured past due receivable hits your desk. When you are evaluating the collectability of account, specifically one that is unsecured, we recommend you use the following questions as a guide to help you determine the likelihood of a successful collection.

How Old Is the Receivable?

How many days past due is this account? 30? 90? 180? It’s no secret: the longer an account remains unpaid the harder it becomes to collect. In fact, studies indicate, after six months, the collectability of a past due account may be reduced to 52%.

Do You Have Documentation?

Do you have thorough, accurate and up-to-date documentation? This could include a contract or purchase order, current credit application, statement of account, open invoices, communications between you and your customer, bounced checks, the dates of received payments etc. The more documentation you have to support your claim, the more leverage it can provide to a collector, and more leverage may mean a more likely collection.

Also, obtaining personal guarantees provides additional leverage because it holds the principal(s) of the debtor corporation personally responsible for the debt.

Is Your Customer Still in Business?

Though it may seem fairly obvious, it’s worth noting. If your customer is no longer in operation, it does make the collection more difficult – not necessarily impossible. Take the time to confirm their corporate registration with the Secretary of State is active and in good standing or even drive by their place of business to see if it is vacant.

Does Your Customer Have Assets?

Knowing what, if any, assets your customer has may provide you additional leverage – for example, you may discover additional assets which could give more power to a settlement offer. If you want to know what assets are available, you may find some of these tools helpful:

Is Your Customer in other Collection Litigation, Judgments or Bankruptcy?

Understand that if your customer has several past due accounts with multiple creditors, it could reduce the likelihood of you recouping payment. Of course, if your customer has filed for bankruptcy protection, collection efforts must cease, though you can file a proof of claim with the courts.

C’Mon Magic 8 Ball!

There is no winning formula for determining the collectability of a past due receivable. Make sure you weigh the costs against the potential recovery – and make sure you take steps to secure future receivables!

If or When, Contingent Payment Clauses

Posted on February 24, 2015 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Payment Clauses: Pay-IF-Paid or Pay-WHEN-Paid

It’s hard to believe that two small words, with seemingly “useless, yet endless” functionality, can cause such a flurry of confusion and chaos. Though it’s true – “if” and “when” are two words that, if and when they are incorporated into a contract, could determine whether or not a subcontractor is paid, regardless of services provided.

Both pay-if-paid and pay-when-paid are considered contingent payment clauses. According to the American Subcontractors Association, Inc. a contingent payment clause is

“…a contractual provision that makes payment contingent upon the happening of some event. In construction subcontracts, the typical contingent payment clause makes the subcontractor’s payment contingent upon the payment of the contractor by the owner.”

Before we get too far, let me clarify one thing: when it comes to contingent payment clauses, no two states are alike in their interpretation of these clauses – attorneys and courts throughout the U.S. provide differing opinions, decisions and enforcements.

What is Pay-If-Paid?

Pay-if-paid is generally interpreted to mean that the subcontractor will receive payment from the GC if the GC is paid by the owner. The Public Contracting Institute states that pay-if-paid makes the “owner’s payment to the prime a “condition precedent” for the prime’s payment to its subs.”

Note: Many states will not honor pay-if-paid unless the language in the agreement clearly states that payment by the owner is a condition precedent to you being paid.

So, for example, if the owner files for bankruptcy protection and does not pay the GC, then the GC is not obligated to pay the Sub.

What is Pay-When-Paid?

Pay-when-paid is generally interpreted to mean that the subcontractor will receive payment from the GC when (or after/once) the GC receives payment from the owner. Typically this clause includes a timeframe in which the sub will be paid:

“Once the owner remits payment to Mr. GC, Mr. GC will wait 10 days and on the 11th day, Mr. GC will pay Mr. Sub”

The Public Contracting Institute advises that pay-when-paid is viewed more as a “timing provision” – i.e. the GC has to pay the Sub within a reasonable amount of time from when the sub invoices.

Which Clause is Better?

A pay-when-paid clause is much better than a pay-if-paid clause, as the general contractor is not relieved of the responsibility to pay his subcontractors if he is not paid.  However, payment clauses can be tricky and you should seek a legal opinion if your contract has a clause you are uncomfortable with.

“IF” and “WHEN”

Regardless of “if” and “when” clauses, make sure you review your contract carefully to ensure you are able to secure your mechanic’s lien or bond claim rights.

Protect Your Consignment Sales

Posted on January 26, 2015 by - UCC Financing Statements

Protect Your Consignment Sales with UCC Filings

If you allow customers to have possession of goods under a “consignment” agreement prior to the actual sale, you are at risk of losing your rights in the goods. To protect your interest, you must have perfected a security interest in those goods under Article 9 of the Uniform Commercial Code (“UCC”) prior to delivery.

What is a consignment?

A consignment is when the owner (the consignor) retains title to goods delivered to the consignee. The consignee will then hold the goods for sale or use. When the goods are sold, the consignor’s rights attach to the proceeds. If the consignee is not able to sell the goods they can be returned to the consignor without any obligation. The advantage of a consignment sale is that it minimizes the risk of non-payment and can be an option when doing business with a poor credit risk.

Does consignment carry risk?

There is a credit risk to be managed in a consignment sale. If the consignor does not take the necessary steps to protect ownership of its goods, the consignor can lose interest in the goods and proceeds.

How can the consignor protect the consigned goods?

Consignors can perfect their security interest by complying with Article 9 of the Uniform Commercial Code.

How to comply with the Uniform Commercial Code?

The consignor’s goods on consignment, or the proceeds from the sale of those goods, may become the subject of a competing creditors claim in the event of bankruptcy or default. The consignor must comply with the Uniform Commercial Code (UCC) for perfecting a security interest in the goods. A perfected consignment interest will afford the consignor priority in their consigned goods over a judicial lien creditor, a bankruptcy trustee and other secured creditors.

Steps to secure the consigned goods

  1. Possess a Consignment Agreement signed by both the consignor and consignee stating  the terms and conditions of the consignment, grant a security interest and describe the goods being consigned. The description of the goods must make them easily identifiable. Generic descriptions such as “all goods” are not acceptable. Then, before delivery…
  2. Make public the “existence” of the Consignment Agreement by filing a UCC Financing Statement [UCC-1] in the consignee’s state of organization.
  3. Conduct a UCC search and send authenticated notification to all previously secured creditors. The notification advises that the consignor has or expects to acquire a purchase money security interest in the described goods of the consignee.

When all of the perfection steps have been completed the consigned goods are protected against competing claims. Remember that any consigned goods delivered prior to the perfection steps are not secure from prior secured parties.

Have you successfully perfected your consignment interest?

Unless you are familiar, comfortable and confident with the process, assistance is recommended.

Recovery via Judgment Liens

Posted on January 20, 2015 by - Credit Risk Management

Will I Ever Receive Payment on Old Judgment Liens and Mechanic’s Liens?

Will you receive payment on old judgment and mechanic’s liens? Short answer: maybe. We watch the markets and monitor index trends closely, because our business fluctuates as the economy fluctuates. Obviously this is no secret – all businesses see ebbs & flows with changes in the economy – that’s what makes the economy work (or not work, depending on who you ask).

This may be a bold statement, but I’ll say it anyway: the real estate market is recovering. Saying this is bold, because the term “recovering” or “recovery” is abundantly overused and has become somewhat diluted throughout this last recession. However, now that there is upward movement in the real estate market, we are seeing benefits trickle down to contractors, subcontractors and suppliers.

How does a rebounding real estate market benefit contractors, subcontractors and suppliers? Well, there is the obvious: more projects are underway, which means more work is available and of course that should mean more money. However, we are also seeing an increase the payment of old debt.

More and more title companies are calling to pay off old judgment liens and mechanic’s liens that remain of record. This makes sense, because you can’t sell your property if the title is clouded aka if there is an encumbrance on your property.

To help ensure you are putting yourself in the best possible position to get paid, we recommend you:

  • Consider getting a judgment, even if your debtor appears to be uncollectable. It’s important that you review your options closely and make sure it is the right fiscal choice based on what you are owed and the costs associated with placing the judgment.
  • Make sure the judgment is recorded as a lien in the county in which the debtor has property. 28 U.S. Code § 3201 – Judgment Liens section (a) Creation clearly states “A judgment in a civil action shall create a lien on all real property of a judgment debtor…”
  • Consider renewing old judgments before they expire. Again, review your options & weigh the costs vs. the benefits, but don’t let these securities lapse.

In a perfect world a mechanic’s lien and/or judgment lien filing will get you paid, but the reality is that recovering monies secured by any instrument can take time. As it turns out, patience may be the next best thing to judgments and mechanic’s liens.

*It is recommended you seek a legal opinion via an experienced attorney. Every situation is unique and may require thorough review.

Accurately Indexed UCC Filing

Posted on January 5, 2015 by - UCC Financing Statements

Accurately Indexed UCC Filing: Conduct a Reflective Search After Every UCC Filing

Obtaining a reflective search is the best practice to make sure the UCC Financing Statement or UCC change statement has been indexed accurately.

What is a Reflective UCC Search?

A reflective UCC search confirms that a UCC filing was recorded. The reflective search returns a jurisdictional report by debtor name reflecting all UCC filings through the date of your recorded UCC filing. This search also lists previous secured creditors by filing date to help determine your filing position. In 2001, Revised Article 9 changed the requirements of the debtor name and implemented standard search logic.

What is the Debtor Name?

Section 9-503(a) describes the debtor name as either:

  1. A registered organization, of which the name is as indicated on the public record of the debtor’s jurisdiction of organization; or
  2. An individual, which several states describe as the name on a birth certificate or driver’s license.

Article 9-506(b) clearly states “a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.” Not following the rules for a correct debtor name will affect whether the UCC filing is found using the state’s standard search logic.

What is Standard Search Logic?

In 2001, standardized search logic rules were developed by the International Association of Commercial Administrators (IACA). IACA is the professional association for government administrators of business organizations and secured transaction record systems. Each state formed its own search logic rules based on IACA’s rules. The strict search logic intentionally left no margin for error or variances of the debtor name.

How are Filings Recorded?

A filing is recorded according to the law of a particular filing state. Options include XML, internet manual entry, fax or mail. Many states still have manual processes that can lead to errors by either the submitting party or the filing officer. Such errors can jeopardize the security.

Additionally, each state has its own rules to record names and index filings. Your filing is indexed in accordance with the particular method used in the recording state. This means the filing party must know the nuances of each state’s filing system in order to search the filings properly. For example, punctuation can be extremely important in one state and of little importance in another. Other ways states have adopted different rules include:

  • Punctuation
  • Apostrophes
  • The ampersand (&)
  • How to treat the word “the”
  • Spaces
  • Individual names

Can a Reflective Search Help Confirm the Accuracy of a UCC Filing?

When done properly, a reflective search can confirm the accuracy of a UCC filing. It can assure:

  • No errors in debtor name were made by the recording entity.
  • The filing was recorded in accordance with a particular state’s methods and format.
  • Change statements are indexed to the proper original filing.

Are you sure your debtor name is indexed correctly?

Unless you are familiar with these processes in all 50 states, assistance is recommended.