Service Area: Notice and Mechanic’s Lien Services

Serve Notices via Certified Mail

Posted on September 18, 2017 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

The Value in Serving Notices via Certified Mail, Return Receipt Requested

In July 2012, various portions of California’s mechanic’s lien statute changed, including service and proof of service of a preliminary notice, specifically to prove service of preliminary notice via affidavit and a copy of the return receipt. (Civ. Code, former § 3097.1, subd. (a); Stats. 2010, ch. 697, § 16 [repealed])

From the appeals opinion:

“Civil Code former section 3097.1 provided that: ‘Proof that the preliminary 20-day notice required by Section 3097 was served in accordance with subdivision (f) of Section 3097 shall be made as follows: [¶] (a) If served by mail, by the proof of service affidavit described in subdivision (c) of this section accompanied either by the return receipt of certified or registered mail, or by a photocopy of the record of delivery and receipt maintained by the post office, showing the date of delivery and to whom delivered, or, in the event of nondelivery, by the returned envelope itself.’”

In March 2012, in compliance with California’s mechanic’s lien statute, a subcontractor served its preliminary notice via certified mail, with no return receipt requested.

The subcontractor eventually filed a lien for $81,857.55, because the general contractor failed to remit payment. The property owner argued the subcontractor did not comply with statutory requirements for service of the notice & the circuit court agreed, subsequently invalidating the subcontractor’s lien.

In 2016, an appeals court reinstated the lien rights for the subcontractor. Read on to learn more!

Bit of Background

Hub Construction Specialties, Inc. (Hub) furnished rebar to a private project owned by Esperanza Charities, Inc. (Esperanza). Hub served a preliminary notice via certified mail and could demonstrate, via the USPS website, that the notice was delivered & that Esperanza received the notice. BUT, Hub did not have a signed return receipt.

From the appeals opinion:

“Plaintiff ‘furnished postage to the U.S. Postal Service sufficient to serve all certified mail items and possesses a `Certified Mailer Manifest for: 3-16-12′ reflecting [the general contractor, defendant and the construction lender] as addressees and bearing an Official Stamp of the United States Postal Service.’

Plaintiff did not request, and did not pay a fee to the United States Postal Service for, a “return receipt” for the notices.

The U.S. Postal Service website tracks certified mailed items and the tracking for the certified mailed items indicates that they were all delivered. Further, [defendant] has acknowledged in verified discovery responses that it received the preliminary notice which [plaintiff] served. There is no signed return receipt.’”

In 2013, Hub filed suit to enforce its mechanic’s lien and the trial court invalidated Hub’s lien because “plaintiff ‘cannot provide sufficient proof of service by documentation of the return receipt of certified mail, [or] a photocopy of the record of delivery and receipt maintained by the post office, showing the date of delivery and to whom delivered … as required under the statute in effect at the time the effectiveness of the preliminary notice as given is sought to be established.’”

Then, in 2016, the appeals court determined Hub served the preliminary notice in compliance with the statute, and subsequently reversed the trial court’s decision.

“In short, in a case where defendant has admitted that notice was served in the statutorily prescribed manner, plaintiff need not comply with the statutory requirements for proving that notice was served in the statutorily prescribed manner.”

Takeaway & Best Practice

California statute has since changed and proof of document delivery is vital. Here’s an excerpt from current statute.

8110.

Except as otherwise provided by this part, notice by mail under this part shall be given by registered or certified mail, express mail, or overnight delivery by an express service carrier.

8118.

(b) If the notice is given by mail, the declaration shall be accompanied by one of the following:

(1) Documentation provided by the United States Postal Service showing that payment was made to mail the notice using registered or certified mail, or express mail.

(2) Documentation provided by an express service carrier showing that payment was made to send the notice using an overnight delivery service.

(3) A return receipt, delivery confirmation, signature confirmation, tracking record, or other proof of delivery or attempted delivery provided by the United States Postal Service, or a photocopy of the record of delivery and receipt maintained by the United States Postal Service, showing the date of delivery and to whom delivered, or in the event of nondelivery, by the returned envelope itself.

(4) A tracking record or other documentation provided by an express service carrier showing delivery or attempted delivery of the notice.

NCS always recommends serving preliminary notices via certified mail with return receipt requested (@ NCS, we serve notices via certified electronic return receipt). The additional cost to addon “return receipt” is significantly (an understatement) less than potential court costs & time trying to prove the document was received.

You can read the full appeals decision here: HUB CONSTRUCTION SPECIALTIES, INC. v. ESPERANZA CHARITIES, INC., Cal: Court of Appeal, 2nd Appellate Dist., 8th Div. 2016

Payment Bonds Can Be Conditional Too

Posted on September 15, 2017 by - In Other Commercial Credit News

Payment Bonds Can Be Conditional Too

Are you furnishing to a private Florida project where a payment bond has been issued? Then you should take a few minutes to review an article we shared this week, The Conditional Payment Bond Trap Facing Florida Subcontractors.

Types of Payment Bonds Available on Private Projects in Florida

First, a primer on the payment bonds available on a private, Florida project:

1 – The owner may require the general contractor to obtain a payment bond. If the payment bond is not properly recorded along with the Notice of Commencement, the payment bond would be a non-statutory payment bond.

2 – A conditional payment bond that is properly recorded along with the Notice of Commencement will be designated as such, and it will include the wording:

(§713.245) This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.

3 – An unconditional payment bond will prevent any liens from attaching to the property if the bond is properly recorded along with the Notice of Commencement. The unconditional bond will not include the conditional wording.

Conditional Payment Bonds Are Precarious

In the above article, author Ryan W. Owen, explains conditional payment bonds and their precarious nature. Owen advises that conditional payment bonds don’t provide the same protections as a standard payment bond.

“Conditional payment bonds do not provide owners or subcontractors with the same protections as standard payment bonds. The surety’s obligation under a conditional bond is only triggered when the owner pays the general contractor and the general contractor fails to pay its subcontractors.”

How can you avoid losing your bond claim rights? As a best practice, always serve the preliminary notice and bond claim upon all parties, and file the mechanic’s lien (when available). And, at the very least, read the terms of the bond!

“Florida subcontractors must carefully examine any bonds attached to a notice of commencement and remember to take all the appropriate steps necessary to protect their lien rights against the project and their claim against the bond when the bond is conditional.”

Owen’s article also includes a chart, which maps rights available if a standard payment bond, conditional payment bond or no bond is issued for a project. Included in the chart is whether a pay-when-paid clause is valid, and notice time frames for 1st and 2nd tier subcontractors and material suppliers.

What is a Notice of Intent to Lien?

Posted on August 28, 2017 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

What is a Notice of Intent to Lien? Is It the Same as a Preliminary Notice or a Demand Letter?

The first step in securing mechanic’s lien or bond claim rights is often the service of a statutory notice. The statutory notice, depending on the project state, may be called any number of names: Preliminary Notice, Prelien Notice, Notice to Owner, Notice of Furnishing, and the list goes on.

Once the preliminary type notice is served, and payment has not been received, a Notice of Intent may be required.

What is a Notice of Intent?

A Notice of Intent is a statutory notice, required in many states, to be served prior to filing a mechanic’s lien.

Here’s a quick look at some states with a requirement for a Notice of Intent:

Notice of Intent on a Private Commercial Project

  • Alabama: If the Preliminary Notice was not served prior to furnishing, serve a Notice of Intent upon the owner as soon as possible to trap funds, but prior to filing the lien.
  • Arkansas: Serve Notice of Intent upon the owner least 10 days prior to filing the lien.
  • Colorado: Serve Notice of Intent upon the owner and prime contractor at least 10 days prior to filing the lien.
  • Connecticut: Serve a Notice of Intent upon the owner and the prime contractor within 90 days from last furnishing materials or services.
  • Illinois: Serve a copy of the notice of lien upon the owner and the lender within 90 days from last furnishing materials or services.
  • Missouri: When contracting directly with the prime contractor or a subcontractor, serve a notice of intent upon the owner at least 10 days prior to filing the lien.
  • North Dakota: Serve a notice of intent upon the owner at least 10 days prior to filing the lien.
  • Wisconsin: Serve a notice of intent upon the owner at least 30 days prior to filing the lien.
  • Wyoming: Serve a Notice of Intent on the owner at least 20 days prior to filing the lien.

“I thought a Notice of Intent was a demand for payment.”

Well, in a way it is. Typically, if you are serving a Notice of Intent, it is because you are unpaid and intend to pursue a mechanic’s lien, but must first comply with statutory requirements.  Often, the Notice of Intent is a component of the mechanic’s lien itself.

Notice of Intent = Demand Letter

Unfortunately, throughout the construction industry, document types don’t carry a uniform title.  While some may use the terms Notice of Intent and Demand Letter interchangeably, NCS uses the term Notice of Intent only when the action is required by statute.

When a Notice of Intent is not required by statute, NCS recommends claimants serve a demand letter before proceeding with a lien, as it may be enough to prompt payment, without expending the cost for a mechanic’s lien. A demand letter, much like the name implies, is a demand for payment.

“A demand served upon a debtor, advising legal action may be taken including, but not limited to, filing a lien or suit to enforce a lien, making a claim against a bond, or filing suit to enforce a bond claim, or whatever other remedies may be available, if payment is not received within a specified time frame. Copies may also be sent to the owner, prime contractor, and subcontractors on a construction project.”

“How do I know which document to send?”

Just ask NCS! As a service provider, our notice & mechanic’s lien specialists are available to provide you with recommendations based on your project information. If you’d prefer to venture out on your own, then I would recommend referring to statute for the state in which your project is located.

The Miller Act & Your Bond Rights in Tribal Construction

Posted on August 21, 2017 by - Mechanic's Liens & Bond Claims

No Miller Act Bond Claim Rights on Tribal Construction Project

A recent district court decision in Oklahoma, left one subcontractor unhappy and unpaid to the tune of $184,343.95.

Bond claims are a key risk-reducing tool for those furnishing to construction projects. Bond claims are generally available on public and federal projects, and are sometimes available on private projects.

Unfortunately for one subcontractor, the court decided a Miller Act Bond Claim was not available on a DOT construction project in Oklahoma, even though a payment bond was issued with the United States as the obligee. Why was the bond claim remedy unavailable? Because the construction didn’t qualify as a “public work of the Federal Government.”

The Case

J.A. Manning Construction Co., Inc. v. Bronze Oak, LLC and Mid-Continent Casualty Company

The United States Department of Transportation entered an agreement with the Cherokee Nation for the construction of a bridge in Mayes County, Oklahoma. Cherokee Nation hired general contractor, Bronze Oak, LLC (Bronze), who in turn hired subcontractor J.A. Manning Construction Co., Inc. (J.A.).

According to the court decision, a payment bond was issued for the project; the principal of the bond was Bronze and the obligee was the United States of America.

“The payment bond lists Bronze Oak as the principal, Mid-Continent as surety, and the United States of America as obligee. Id. at 1 (‘We, the Principal and Surety(ies), are firmly bound to the United States of America . . . in the above penal sum.’). The payment bond states that it is ’for the protection of persons supplying labor and materials‘ pursuant to the Miller Act. Id. at 2.”

Typically, if the payment bond obligee is United States of America, the project is deemed a federal project and potential claimants would follow the statutory guidelines under the Miller Act.

Bond Puzzle: County Property, Cherokee Build, Federal Obligee

Property Owned by the County, Construction Decisions Made by Cherokee Nation, Payment Bond Obligee is the U.S.

Confused? Me too! With public, federal & sovereign parties all contributing to a construction project, it was up to the court to clarify jurisdiction in this case.

To determine jurisdiction, the court weighed the following: “whether the United States is a contracting party, an obligee to the bond, an initiator or ultimate operator of the project; whether the work is done on property belonging to the United States; or whether the bonds are issued under the Miller Act.”

Jurisdiction Break Down

Let’s break it down:

  • The U.S. is a contracting party? No, the U.S. is not a contracting party.
  • The U.S. is the obligee of the payment bond? Yes, the U.S. is identified as the obligee.
  • The U.S. is the initiator/ultimate operator of the project? No, Cherokee Nation is the ultimate operator. (However, the court opinion also indicates that DOT “retained some control over the project by requiring semi-annual reports on, and occasional access to for inspections.”)
  • The U.S. owns the property being improved (i.e. federal land)? No, the property is owned by Mayes County.
  • The bond is issued under the Miller Act? Yes, the bond was issued under the Miller Act.

The “no’s” have it. Of course, it’s more technical than that. The heavily weighted factor, according to the court, was whether or not the U.S. is a contracting party. As mentioned above, the U.S. is not a contracting party. Here’s an excerpt from the court opinion.

“[C]onsidering the entirety of the circumstances, the federal government’s relationship to the project is not strong enough to classify the project as a ’public work of the Federal Government.’ The project was funded by the federal government through a program that gives tribes an annual lump sum to carry out transportation projects… The United States is the obligee of the payment bond, but even with federal funding of the project, this is not enough to bring the project under the Miller Act. The project is owned and maintained by the County and is not on federal land. The Nation initiated the project, and the federal government is not a contracting party. Finally, agreements among the contracting parties that federal law will apply does not transform a project that does not fall under the Miller Act into one that does. ‘Federal subject matter jurisdiction cannot be consented to or waived.’”

What’s a Claimant to do?

Based on this decision, the claimant does not have rights under the Miller Act as the Federal government has no jurisdiction.  However, NCS would recommend proceeding with a non-statutory bond claim against the general contractor’s payment bond, along with pursuing the debtor (filing suit if necessary). Another option could be the filing of a UCC-1.  Of course, the UCC filing would need to be done before supplying materials to your customer, so that decision would have to be made at the time of contract.

Ultimately? If you find yourself in a situation where rights are questionable, seek a legal opinion & please do so as soon as possible–don’t wait.

Timely Amend Your Proof of Claim

Posted on August 11, 2017 by - In Other Commercial Credit News

Need to Amend the Proof of Claim? Here’s a Tip, Don’t Wait 7 Years

We’ve discussed bankruptcy proof of claims before, but today we are reminded just how vital accuracy is when filing a proof of claim.

In Delaware Court Shuts Down Creditor’s ‘Unreasonable’ Motion to Amend its Proof of Claim, author Aditi Kulkarni-Knight discusses a recent bankruptcy decision.

Here’s a quick breakdown (oversimplification) of the decision. The debtor filed for bankruptcy protection in January 2009 and the court set the bar date for September 30, 2009. The creditor filed their initial proof of claim timely, in the amount of $21,281. Then, in November 2016, the creditor filed a motion to amend its claim to add a co-claimant and to increase its claim amount to $81 million.

(The increase in claim amount was because the creditor wanted to “convert its claim for contractual royalties to a claim for more than $81 million of alleged copyright infringement damages.”)

The Claim Amount Increased by 363,438%. Whoa!

Unsurprisingly and as you can imagine, the court denied the creditor’s request. Asking to amend your claim 7 years after the bar date & increasing your claim amount by 363,438% seems unreasonable to me too!

I read a lot of case law. While it’s usually fact based with rare anecdotal bits, occasionally a judge tells it like it is – this is one of those cases.

“the court stated, ‘the law is clear: ignorance is not a sufficient reason to permit amendment’ Additionally SNMPR was represented by counsel when it filed the Claim, and ‘lawyers are charged with knowing the law.’”

(I admit it, when I read it, I absolutely chuckled “Ooooh, burn!” at my desk.)

It’s True, It’s Ridiculous

The judge is right, of course, improperly completing a proof of claim and wanting to fix it 7 years later is ridiculous. The creditor had months to properly review their claim and complete the document.

As a best practice, Kulkarni-Knight recommends due diligence.

“The case serves as a warning to creditors and creditors’ counsel alike when filing proofs of claim. Courts may be unwilling to allow amendments to proofs of claim when (1) a considerable amount of time has passed since the bar date, (2) the amended amount of the claim far exceeds the original amount of the claim, or (3) the amendment changes the substantive nature of the claim. Creditors and their counsel must ensure that proofs of claim include as much detail as possible at the time they are filed, that the amount sought is accurate and supported by appropriate documentation, and that all legal bases for the claim are asserted. While a motion to amend may be necessary in light of newly-discovered evidence, creditors and their counsel can avoid such motions by doing their due diligence and legal analysis before they file their proof of claim.”

Contact NCS with questions!

3-in-3: Payment & Performance Bonds

Posted on August 7, 2017 by - Mechanic's Liens & Bond Claims

3-in-3: Payment & Performance Bonds

Today’s 3-in-3 features Jenna Burnett, Notice & Mechanic’s Lien Specialist. Read this post to learn more about payment & performance bonds.

Payment & performance bonds were created to allow risk to be shifted from public/government agencies, to the private sector; specifically, to the private surety companies that post the bonds.

In Construction, what are the bond types and who do they protect?

Jenna: The two main types of bonds are performance and payment bonds.

A performance bond protects the owner if the contractor fails to complete the project according to contract, whereas a payment bond protects suppliers and subcontractors who are furnishing material and labor to the project.

Generally, on public and federal projects, the contractor will obtain both a payment and performance bond; however, it is the payment bond that you would look to for payment protection.

When should a credit manager look to obtain a copy of this bond?

Jenna:  It is best to try and obtain a copy of the bond at the beginning of the project, before there are problems on the job.

Also, by obtaining a copy up front, you can review the bond to make sure you are protected. Important details to review include who the principal on the bond is and who they are bound unto. Most of the time, the general contractor will be the principal and will be bound unto the owner of the project, but sometimes the subcontractor may obtain a bond as well.

If a creditor isn’t paid, can they leverage the payment bond to recover payment?

Jenna: Yes, to recover payment, a formal claim is generally required, and is usually served upon the principal of the bond and the surety, stating that you’re making a claim and looking to the surety for payment.

The requirements for a claim may differ, depending on who the principal of the bond is, as a general contractor’s bond will generally look to the terms of the statute, which varies by state, and a subcontractor’s bond most often will look to the terms of the bond.  It is critical to obtain a copy of the bond to confirm the principal of the bond, along with the terms of the bond.

It’s important to note, bonds may not be available on all jobs.

Most public and federal projects will have a payment bond; however, sometimes a bond may not be required if the general contract does not meet the dollar threshold defined by statute.  To ensure security exists, you should always ask for a copy of the payment bond when you sign your contract, rather than just assume there’s a bond.

There may also be occasions where a payment bond has been issued for a private project.

Some states even have statutes that if a project is properly bonded, lien rights may not be available. The National Lien Digest© provides the details for those specific cases and also provides a quick reference guide on payment bond threshold requirements by state.

3-in-3 Takeaway

A payment bond is a valuable risk-reducing tool for creditors furnishing materials and/or services to construction projects.

As a best practice, always obtain a copy of the bond up front and make sure you are familiar with the state statute, to ensure you take appropriate steps in the event of non-payment.

Can a Mechanic’s Lien Be Avoided in Bankruptcy

Posted on August 4, 2017 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Can a Mechanic’s Lien Be Avoided in Bankruptcy?

This should come as no surprise: mechanic’s lien and bond claim rights vary by state. Right? We remind you of this frequently. (It’s the reason that resources like The National Lien Digest are so important.) It turns out, the time and information requirements for lien filings aren’t the only part of the lien process that is state specific.

According to an article from Robinson + Cole, The Enforceability of Mechanics’ Liens in Bankruptcy is Dependent on State Law, whether a lien can/can’t be avoided in bankruptcy is also state specific.

“In a recent decision, the Third Circuit Court of Appeals held that a mechanic’s lien filed by an unpaid supplier against a construction project, after the contractor through whom the materials were furnished filed for bankruptcy protection, was voidable. However, the Court noted that this doesn’t apply if applicable state law permitted the lien to relate back to a date prior to the filing of the petition. Under the laws of most states, perfected mechanics’ liens do in fact relate back to the first day on which the lienor furnished labor, materials, or equipment to the construction project.”

The referenced case involves an unpaid supplier who filed a mechanic’s lien, in compliance with New Jersey statute.

The contractor, who had failed to pay the supplier, filed for bankruptcy protection. Naturally, the supplier took steps to enforce its mechanic’s lien, but the contractor filed a motion claiming the supplier’s suit to enforce the mechanic’s lien was a violation of the automatic stay.

Unfortunately for the supplier, the trial court, and subsequently the appeals court, agreed with the contractor, and the supplier’s mechanic’s lien was invalidated. However, as the trial court pointed out, a lien may sometimes survive a bankruptcy, depending on the date the lien relates back to.

“[T]he result would have been different if applicable state law provided for the mechanics’ liens to relate back prior to the filing of the bankruptcy petition. …[T]he filing of a mechanic’s lien by a subcontractor did not violate the automatic stay provision because, under Pennsylvania law, the date of filing the mechanic’s lien related back to ‘the date of visible commencement upon the ground of the work of erecting or construction the improvement.’ New Jersey law contained no such provision; therefore, the mechanic’s lien was effective only as the date of filing.”

If you have concerns about a project you are furnishing to, or a party within the contractual chain filing bankruptcy, you may want to take an extra step and confirm statutory guidelines for the date to which the lien relates back.

Four Signs Your Customer May Be in Financial Distress

Posted on July 31, 2017 by - Credit Risk Management

Four Signs Your Customer May Be in Financial Distress

Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress.

#1 Change in Corporate Status

Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close. Check out this testimonial:

“The customer business standing with each State is one early red flag signaling that something could go wrong with collecting accounts receivable. Using the service NCS has been providing, our company has already identified two accounts with open credit limits which could have resulted in material losses.

One of the accounts identified had $100,000 open credit limit and open accounts receivable. NCS notified us the account had fallen inactive with the State. Subsequent conference calls with our customer’s CFO found the customer was “very close to running out of cash and it is unlikely to be funded further by outside investors.” Given such dire status provided verbally as well as the State standing, we reduced the limit to $0.” — Credit Manager, currently utilizing NCS’ Corporate Monitoring

#2 Pay-When-Paid

The dreaded contingent payment clause. In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.

#3 Broken Promises

This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended. Empty or broken promises don’t pay the bills!

#4 Silence

Silence is golden — unless you have a toddler or a customer with past due invoices.

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. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.

Bonus! Part of knowing your customer, is also knowing who they do business with. If your customer’s biggest customer has filed for bankruptcy protection, it could easily impact your customer’s cashflow.

What Can You Do?

We’ve previously covered some tips on handling past-due receivables. Tips include closely monitoring open invoices (don’t allow days beyond terms to get out of hand), trying various methods of contact (phone, email, letter) stopping by their office (if able) to review credit reports and carefully looking for recent collection placements/judgments.

Lastly, stop extending credit. Don’t expose your AR to any unnecessary risk. If your customer isn’t paying their bill, then don’t give them the opportunity to make the debt worse.