Service Area: Collection Services

Properly Perfected UCC and Repossession

Posted on December 18, 2017 by - UCC Financing Statements

Can a Properly Perfected UCC Really Give Me the Right to Repossess?

Yes, a properly perfected security interest and proof of debtor default may afford you the right to repossess the collateral. Today’s post reviews a recent case that demonstrates the power of a properly perfected UCC.

In CNH INDUSTRIAL CAPITAL, AMERICA, LLC v. T & P FARMS, LLC, Dist. Court, ND Mississippi 2017, the court granted the Secured Party the right to repossess its equipment because it had 1.) proven the debtor defaulted on the contract and 2.) properly perfected a security interest through UCC Financing Statements.

Background: The Contract, The UCC-1s & The Replevin

In 2015, the debtor, T & P Farms, LLC (T & P) purchased over $1M in farming equipment from Medlin Equipment Company of Mississippi County (Medlin).

According to the court opinion, there were 4 pieces of equipment sold, and each sale was “…evidenced by a Retail Installment Sale Contract and Security Agreement.” (3 of the 4 sales were addressed in the replevin action.)

Included in the contract, aside from the security language and terms of the sale, was a clause regarding debtor default: “the seller has the right to ‘take possession of all Collateral, without notice or hearing…’” and Medlin assigned its interest in the equipment to CNH Industrial Capital America, LLC (CNH). Subsequently, a PMSI filing was properly perfected, by CNH, for each sale/contract.

By the end of 2016, the debtor had stopped making the agreed upon monthly payments and in May 2017, CNH filed a replevin action.

What is Replevin Action?

Wex Legal Dictionary defines replevin as the action used by creditors to repossess collateral from debtors in default. “A writ authorizing the retaking of property by its rightful owner (i.e., the remedy sought by replevin actions).”

The rules of replevin may vary by jurisdiction and this case looks to Mississippi statute (Section 11-37-101 of the Mississippi Code). According to the court opinion, a replevin action requires a declaration under oath to include:

(a) A description of any personal property;

(b) The value thereof, giving the value of each separate article and the value of the total of all articles;

(c) The plaintiff is entitled to the immediate possession thereof, setting forth all facts and circumstances upon which the plaintiff relies for his claim, and exhibiting all contracts and documents evidencing his claim;

(d) That the property is in the possession of the defendant; and

(e) That the defendant wrongfully took and detains or wrongfully detains the same

The Secured Party Prevailed

When a replevin action is filed, the party filing the action needs to prove their right to repossess the collateral. In this case, the Secured Party filed the action, then the Secured Party proved its properly perfected security interest as well as the default of its debtor.

“A plaintiff in a replevin action establishes the right to immediate possession by demonstrating a default on a purchase contract and a perfected security interest in the collateral.”

The debtor is afforded an opportunity to defend against the repossession. The debtor asked the court to consider equitable defense (a defense based on fairness, not law), based on the debtor’s need for the equipment to maintain his business and support his family.  The debtor further added he should not have to pay for the equipment, because the equipment was faulty.  Unfortunately, the debtor’s defense wasn’t persuasive enough.

“While a rule of equity may play some role in this determination, such as where a party claims an equitable lien in the subject of the action, T & P has not cited, and this Court has not found, any authority which supports the proposition that a possessory interest in collateral may be equitably created by either the condition of collateral unrelated to the existence of a default or the need for continued possession.”

CNH properly perfected its security interest and successfully established the debtor’s default, therefore, the court granted CNH the right to repossess the equipment.

UCC for the win!

Substantial Compliance with Florida Lien Law

Posted on November 17, 2017 by - In Other Commercial Credit News

Substantial Compliance with Florida Lien Law & Unfortunate Irony

I know the saying is “Don’t mess with Texas.” But, would-be mechanic’s lien claimants shouldn’t mess with Florida! Florida statute is concise and there is little room for error. For example, the Notice to Owner must be received within 45 days from first furnishing — not mailed within 45 days, received.

Fortunately, however, one subcontractor prevailed based on the court’s decision that the subcontractor substantially complied with statute.

The Case of the Notice of Commencement Mix-Up

According to the court decision, the project owner hired two General Contractors for improvements to the same property. One GC (GC-1) was renovating lodges & the other GC (GC-2) was renovating the clubhouse.

As you know, Florida requires Notices of Commencement for construction projects. In this case, the project owner filed two Notices of Commencement – one for the lodges & one for the clubhouse.

The subcontractor went to the job site to obtain the Notice of Commencement from the owner. Then, once it had the Notice of Commencement, the subcontractor served a timely Notice to Owner upon all parties identified within the Notice of Commencement.

It was later discovered, by GC-2 (the subcontractor’s customer), the owner had provided the subcontractor with the wrong Notice of Commencement. The subcontractor was notified of the error and said it would amend its Notice to Owner to include the correct GC. But, the subcontractor failed to serve an amended Notice to Owner.

Owner Argued the Notice to Owner was Invalid

The subcontractor filed a mechanic’s lien for an unpaid balance of $32,535.87 and subsequently sought to enforce its lien. The owner argued the subcontractor’s lien was invalid, because the subcontractor did not serve the Notice to Owner on the correct parties.

Fortunately for the subcontractor, the court determined the subcontractor substantially complied with statute.

In When Substantial Compliance ‘Trumps’ Strict Construction of Florida Lien Laws, author Amandeep Kahlon explains 4 key points the court used to determine that the subcontractor substantially complied with statute.

“(1) The defect in the NTO resulted from the owner’s providing the subcontractor with a notice of commencement that listed the wrong general contractor;

(2) the correct general contractor, designated by the owner for receipt of the NTO, received actual and timely notice that the subcontractor was supplying materials to the project;

(3) the general contractor treated the subcontractor as a potential lienor during the performance of the work by having the subcontractor attend meetings and sign partial lien waivers in requesting payments; and,

(4) the owner could not demonstrate any adverse impact caused by the error on the NTO.”

Unfortunate Irony

Do you know what the unfortunate irony is? As a best practice, the subcontractor goes to jobsites to obtain Notices of Commencement, directly from the owner, to ensure it has the correct Notice of Commencement for completing its Notice to Owner.

Take It Easy Florida

Florida is strict with statute compliance, however, as Kahlon says, “Florida courts may go to great lengths to preserve a subcontractor’s lien rights.” But don’t bank on Florida’s flexibility; familiarize yourself with and adhere to the statutory requirements.

The Critical Role of Furnishing Dates in Lien Rights

Posted on November 10, 2017 by - In Other Commercial Credit News

The Critical Role of Furnishing Dates and Your Lien Rights

A key to properly calculating mechanic’s lien and bond claim deadlines is knowing your first & last furnishing dates. Simple; date is a date, right? Oddly, determining your last furnishing date may sometimes be more difficult than it should be.

What is “Last Furnishing”

Generally, your last furnishing date is the date on which you last substantially furnish materials or perform services on a project. When clients ask how to determine their first & last furnishing dates, it frequently seems easier to explain what doesn’t count as a last furnishing. Typically, punch list work, warranty, or remediation will not extend your last furnishing date.

Can Last Furnishing Include Off-Site Work?

In some cases, yes, according to a recent legal decision reviewed by lawyer Chad Kopach.

In Timeliness of the Lien – Rethinking the “Date of Last Supply,” Kopach reviews a recent Ontario court decision, where the court determined the subcontractor’s lien was timely, even though the lien deadline was calculated based on an off-site  last furnishing, and not the last date the subcontractor was physically on the job.

According to Kopach, parties on the ladder of supply often look to time sheets to determine the date of last furnishing.

“When determining if they still have time to lien, most subcontractors look to their time sheets to find out when their workers were last on site, thinking that they are out of time to lien if the last timesheet is dated more than 45 days ago.

Similarly, the owner and general contractor will often rely on site records (including log books and time sheets) to determine what subcontractors still have lien rights based on who was on site within the last 45 days.”

How will the court determine a claimant’s last furnishing? Kopach states a court may review the subcontract to determine whether off-site work would qualify as furnishing. At least, that’s where the court looked in this case.

Within the subcontract, the subcontractor was to provide additional “design and other preparatory work” during a scheduled shutdown. Thus, the court determined the last furnishing date used by the claimant was sufficient.

“Supply” Doesn’t Always Mean “Physically Supply”

Kopach reminds readers, the definition of “supply” may vary.

“…services and materials supplied to an improvement are supplied physically. Accordingly, in many cases a subcontractor’s date of last supply is the same day that the subcontractor was last physically on site.

However, the Act does not limit “supply” to mean only physical supply, and defines the supply of services as including “any work done or service performed upon or in respect of an improvement” (emphasis added).”

Be Conservative

Although this case appears to be more “exception” & less “rule” it’s important to remember that a last furnishing date may not be the last date you were physically at the job site. Just be careful when determining your last furnishing date – always make sure it is substantial. And, of course, use the most conservative last furnishing date possible when calculating your deadlines.  When in doubt, seek a legal opinion.

Who Owns the Improved Upon Property?

Posted on November 3, 2017 by - In Other Commercial Credit News

Who Owns the Improved Upon Property?

In Owner Roulette: Avoid Construction Lien Headaches, authors Roy E. Wagner & Christopher T. Koehnke (“authors”) reviewed a recent Wisconsin court decision where the lien claimant “incorrectly” identified the owner within its lien. At least, that was the owner’s attempted defense.

The Case in a Nutshell

Here’s a quick look at the case:

“Bayland Buildings (“Bayland”) filed a construction lien against Siren Saukville, LLC (“Siren”), the party that Bayland believed to be the owner of the project under the terms of its construction contract. However, Siren had in fact been bought out by Spirit Master Funding VIII, LLC (“Spirit”), and Spirit was then the actual owner of the project at the time Bayland filed its construction lien.”

Ultimately, Spirit argued Bayland’s lien was invalid, because the lien identified the incorrect owner. Fortunately, the Court of Appeals determined Bayland’s lien was valid and enforceable, because Bayland did not receive constructive notice that the property ownership had changed.

How to Identify Property Owner

The case is interesting, but what I found to be of greater interest are the authors’ suggestions on how to ensure the property owner is properly identified.

The authors suggest claimants could confirm property ownership via the Register of Deeds or obtain a title report letter from the title company. I will add, ownership information may also be obtained from the County Assessor, and many counties make searchable data available online.

What other suggestions do the authors provide? Check the municipal tax records. “While this may be a less reliable way to get information regarding real estate ownership, checking the most recent municipal tax bill records will at least provide a contractor with ownership information as of the end of the most recent tax year.”

Plus, monitor all communication including change orders.

“Obviously change orders can vastly change the scope or price of any construction project. However, they may also provide a contractor with constructive notice of a change in ownership or even impact lien rights. To the extent that change orders are issued and a contractor is asked to sign a “Partial Waiver of Construction Lien,” a contractor needs to be aware that signing such a waiver may impact the ability to foreclose on a lien and obtain a monetary judgment for the full amount that is owed, or even provide constructive notice regarding a change in ownership.”

Best Practice

Don’t guess! Take the time to confirm property ownership, and if applicable, serve the registered agent for the owner.

Serve Your Mechanic’s Lien in Accordance with Statute

Posted on October 27, 2017 by - In Other Commercial Credit News

Always Serve Your Mechanic’s Lien in Accordance with Statute

Just as with notice requirements, lien statute varies by state, which means the required method(s) for service of the lien can vary. In The Critical Importance of Properly Serving a Construction Lien Claim, author Adam Sklar reviewed a recent New Jersey Court of Appeals decision, where the claimant’s lien was invalidated based on “defective service” of the lien.

Case Snapshot

The claimant was a subcontractor, hired by the general contractor, for the improvement to a condominium property. When the GC failed to pay the subcontractor, the subcontractor filed and served a construction lien.

What Was Defective?

As I read the case, I was confused; after all, it appeared the lien claimant followed statutory requirements, including serving the document via certified & first class mail. Where did the claimant go wrong?

According to Sklar’s review, the claimant mailed its lien to the street address of the project. Unfortunately, the project street address was not the “…last known business or residence of the owner or community association” as dictated by statute.

Here’s a quick look at statute:

N.J.S. 2A:44A-7 a. Serving of lien claim by claimant.

(1)   simultaneous registered or certified mail or commercial courier whose regular business is delivery service; and
(2)   ordinary mail addressed to the last known business or residence address of the owner or community association, contractor or subcontractor.  A lien claim served upon a community association need not be served upon individual “unit owners” as defined in section 3 of P.L.1993, c.318 (C.2A:44A-3).

Therefore, service of the lien was defective. Sklar also noted the court opinion didn’t rely solely on service to an incorrect address “…even if service had been made to the Association’s proper business address, the certified mailing of the lien had been returned unclaimed and the subcontractor had failed to present any evidence relating to the status of the ordinary mail.”

Can’t the Claimant Serve the Lien Again, if the Lien Was Recorded Timely?

New Jersey statute states the lien must be served upon all parties within 10 days from the filing of the lien. Sklar mentions the lienmay be served late, but that wouldn’t have changed the outcome. Why?  Because New Jersey is an unpaid balance lien state and the owner, not having been properly served with the lien, paid the GC in full, leaving no funds to lien.

Best Practice: Serve the Address on the Corporate Certificate

A best practice from Sklar? Serve the document upon the address listed on the entity’s corporate certificate.

“When filing a lien … a claimant must do a corporate search with the State to ensure it has the proper business address for that entity.  Of course, there may be other ways to determine the proper last known business address … but the corporation’s registered agent address, as filed with the State, should always be deemed a valid address for service of a lien.”

Did You Know?

NCS also follows this best practice & encourages our clients to serve the registered agent whenever possible.

Can Your Mechanic’s Lien Rights Be Waived?

Posted on October 23, 2017 by - Mechanic's Liens & Bond Claims

Can Your Mechanic’s Lien Rights Be Waived within a Contract/In Advance of Furnishing? Maybe.

We are often asked whether a waiver of lien rights clause can be incorporated within a contract. In theory, anything can be included in a contract. The more specific question is whether a contractual waiver of lien rights is enforceable.

I feel like a broken record, but the answer is: maybe.

First, please understand the consequences of a waiver of lien clause. Essentially, if you sign a contract that includes a waiver of lien rights, you are forfeiting your right to file a mechanic’s lien in the event you are unpaid. This type of clause can put subcontractors & material suppliers at a significant disadvantage and increase their risk/exposure.

Fortunately, several states find these clauses to be unenforceable, permitting claimants an opportunity to file a lien.

Generally, each state falls in to one of three categories:

  • Lien rights can be waived within the contract in advance of furnishing
  • Lien rights cannot be waived within the contract in advance of furnishing
  • It is undefined whether lien rights can be waived within the contract in advance of furnishing

Yes, Lien Rights Can Be Waived Within the Contract/In Advance of Furnishing

First up are the states that find the waiver of lien rights within a contract to be enforceable. States such as Colorado, Nebraska and Virginia (general contractors only).

Nebraska’s statute seems straightforward.

52-144. Waiver of construction lien rights; what constitutes; validity; effect.

(1) A written waiver of construction lien rights signed by a claimant requires no consideration and is valid and binding, whether signed before or after the materials or services were contracted for or furnished. Ambiguities in a written waiver are construed against the claimant.

Virginia clearly states general contractors can waive their lien rights in advance of furnishing, but subcontractors or material suppliers cannot.

43-3 Lien for work done and materials furnished; waiver of right to file or enforce lien

1. Any right to file or enforce any mechanics’ lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien, except that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien rights in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor’s, lower-tier subcontractor’s, or material supplier’s lien rights in a contract executed prior to providing any labor, services, or materials is null and void.

No, Lien Rights Cannot Be Waived Within the Contract/In Advance of Furnishing

Several states, including states with a higher volume of construction projects, find a contractual waiver of lien rights to be unenforceable. States such as California, Florida, Nevada, New York & Texas.

In Florida, a potential lien claimant cannot waive their lien rights prior to furnishing.

713.20 Waiver or release of liens. —

(2) A right to claim a lien may not be waived in advance. A lien right may be waived only to the extent of labor, services, or materials furnished. Any waiver of a right to claim a lien that is made in advance is unenforceable.

According to New York statute, the contractual waiving of lien rights is “against public policy.”

34. Waiver of lien.

Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable.

Um, I Don’t Know, Maybe

The third set of states, including Arizona, Louisiana and Washington, fail to provide a firmly defined “yes or no” as to the enforceability of a contractual waiver of lien.

Arizona’s statute begins with “no, you cannot waive lien rights,” but you can waive your lien rights, if the proper documentation is executed.

33-1008. Waiver of lien

A. An owner or contractor by any term of their contract, or otherwise, may not waive or impair the claims or liens of other persons whether with or without notice except by their written consent… Any term of the contract to that effect shall be void. Any written consent given by any claimant pursuant to this section is unenforceable unless the claimant executes and delivers a waiver and release.

B. No oral or written statement purporting to waive, release or otherwise adversely affect a claim is enforceable or creates any estoppel or impairment of a claim unless it is pursuant to a waiver and release prescribed by this section or the claimant had actually received payment in full for the claim.

Washington doesn’t specifically say “waiver of lien” or “lien waiver” rather they deem an “act of coercion” as unreasonable.

RCW 60.04.035 Acts of coercion—Application of chapter 19.86 RCW.

The legislature finds that acts of coercion or attempted coercion, including threats to withhold future contracts, made by a contractor or developer to discourage a contractor, subcontractor, or material or equipment supplier from giving an owner the notice of right to claim a lien required by RCW 60.04.031, or from filing a claim of lien under this chapter are matters vitally affecting the public interest for the purpose of applying the consumer protection act, chapter 19.86 RCW. These acts of coercion are not reasonable in relation to the development and preservation of business. These acts of coercion shall constitute an unfair or deceptive act or practice in trade or commerce for the purpose of applying the consumer protection act, chapter 19.86 RCW.

Sign It or Not?

As a best practice, it’s prudent to carefully review all contractual agreements prior to signing. If you furnish to construction projects, you should carefully preserve your right to file a mechanic’s lien, and sometimes that may include modifying a contractual agreement to eliminate waiver of lien language.

If you have any concerns or doubts, seek legal guidance before signing any documents.

Bonus – Click here to download a Quick Reference Guide: Can Lien Rights Be Waived in Your Contract in Advance of Furnishing?

Is a Contractor’s License Required to File a Lien?

Posted on October 20, 2017 by - In Other Commercial Credit News

Are You Securing Lien Rights? Be Careful, a Contractor’s License May Be Required

As if understanding mechanic’s lien laws wasn’t complicated enough, it’s also vital that you understand and adhere to the licensing requirements for each state.

Did you know, an unlicensed contractor in California cannot recover unpaid monies via a mechanic’s lien? It’s true:

CA Bus. & Prof. Code 7031

(a) …no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person…

California is not alone. Arizona, Florida & South Carolina, to name a few, have similar statutory guidelines.

Arizona: 33-981 C. A person who is required to be licensed as a contractor but who does not hold a valid license as such contractor issued pursuant to title 32, chapter 10 shall not have the lien rights provided for in this section.

Florida: 713.02 Types of lienors and exemptions. — (7) Notwithstanding any other provision of this part, no lien shall exist in favor of any contractor, subcontractor, or sub-subcontractor who is unlicensed…

South Carolina: Section 29-5-15 (A) To file a mechanics’ lien, a contractor must provide the county clerk of court or register of deeds proof that he is licensed or registered if he is required by law to be licensed or registered. As proof of licensure or registration, the contractor must record his contractor license number or registration number on the lien document when the lien document is filed.

This week, we shared two articles which both address the consequences of failing to be a licensed contractor.

In “The Importance of Proper Licensing for Contractors”, author Jennifer Therrien, advises readers that licensing requirements not only vary by state, but also vary based on the type of work provided. Therrien’s article references several recent cases where contractors, of varying trades, learned the costly lesson of failing to comply with licensing requirements.

In one case, an unlicensed contractor who provided road work services had to pay back over $750,000 to the prevailing party.

Another case involved a homeowner & its landscaper. At the time of contract, the homeowner was aware the landscaper was not licensed. Prior to contract completion, the landscaper did obtain its license and some of its work was performed while licensed. Then, the homeowner filed suit against the landscaper to recover ALL monies paid. Unfortunately, California statute is unforgiving, and the landscaper had to refund the entire amount it received – even funds paid while their license was intact. Further, the court said it was irrelevant that the homeowner knew the landscaper wasn’t licensed! Talk about dirt-y.

The second article shared, Unlicensed Contractor Shoots for the Stars . . . Sputters on Takeoff, recaps a recent Appeals case involving Elon Musk’s Space X. In this case, the contractor argued, among other things, that it furnished non-construction services, relieving it of the requirement for a contractor’s license. Author, Garret Murai, reminds readers “…[I]f you are performing construction work in California (with a value of $500 or more) you are required to hold valid contractor’s license. If you don’t, there could be dire consequences.”

Owners Can Bond Off Liens & Contest Frivolous Liens

Posted on October 6, 2017 by - In Other Commercial Credit News

In Washington, Owners Can Bond Off Liens & Contest Frivolous Liens

In Washington Mechanic’s Liens: How Recent Changes Impact Contractors, author Marti McCaleb not only provides an overview of the steps required to secure a mechanic’s lien in Washington, but also answers the question “What if someone files a lien against me?”

Washington’s preliminary notice requirements may seem a bit confusing. Although today’s post isn’t going to review Washington’s statute in depth, here’s a quick look at information on the Notice to Customer and the Notice to Owner.

Information courtesy of The National Lien Digest©:

Notice to Customer: On small commercial projects (small = general contract value of $1,000-$60,000, or 4 or fewer unit residential projects where the general contract is more than $1,000), contractors who contract directly with the owner must serve a Notice to Customer upon the owner and obtain a signed copy prior to first furnishing materials or services.

Notice to Owner: On commercial, multi-family, or small commercial projects, serve notice upon the owner and prime contractor within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 60 days prior to serving the notice and thereafter. No Notice to Owner is required for subcontractors contracting directly with the prime contractor, laborers, and those contracting directly with the owner.

Beyond the basic information above, there are additional guidelines based on whether the project is new construction on a single-family residence or construction on an existing single-family residence.

The section of McCaleb’s article I found most interesting is the information she provides to project owners on what they can do once a lien has been filed on their property.

Up first: bond off the lien.

“An owner or prime contractor can bond around a lien by obtaining a surety bond under the following requirements:

– If the disputed amount is $10,000 or over, then 150% of the lien amount.

– If the disputed amount is $10,000 or less, then $5,000 or twice the amount of the lien.

The lien attaches to the bond and releases the property. The lien foreclosure proceeds as normal; however, the surety must be added as a party to the lien foreclosure action.”

McCaleb also explains frivolous liens and provides defense options. According to McCaleb, a frivolous lien is a lien that “presents no debatable issue and is devoid of merit that it has no possibility of success.”

“In response to a lien that appears to be frivolous, a party can request a show cause hearing where the applicant must show that the lien is frivolous and “made without reasonable cause” or is “clearly excessive.” If the lien claimant fails to show, the lien will be released.”

I’ve reviewed several cases where the lien was questioned based on an exaggerated or excessive claim amount. In a general sense, an exaggerated lien could be deemed a frivolous lien. This should serve as a reminder that a lien claimant needs to have documentation to support its claim.