Service Area: Collection Services

Louisiana Mechanic’s Lien Changes Are in Effect

Posted on January 20, 2020 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Louisiana Mechanic’s Lien Changes Are in Effect!

It’s 2020 & the Louisiana mechanic’s lien changes are in effect! Last year we touched on a few changes, now let’s take a deep dive and review what you should know about the Louisiana statute changes which became effective 1/1/2020.

Louisiana – Private Projects & Mechanic’s Lien Rights

First up, the filing of mechanic’s liens (or privileges, as they are referred to in Louisiana). When looking at the new Louisiana lien statute, please remember the effective date of the statute may not immediately be obvious, especially for material suppliers and subcontractors who are not on the jobsite:

The old statute applies for all works:
i.   Where a notice of contract was filed prior to January 1, 2020,
ii.   A notice of termination was filed before January 1, 2020, or
iii.  No notice of termination was filed before January 1, 2020, but the work was
substantially completed or abandoned before that date.

The new statute applies for all works begun on or after January 1, 2020, unless a notice of contract was filed prior to January 1, 2020.

An added caveat is that if completion occurred prior to January 1, 2020 and a Notice of Termination was filed on or after January 1, 2020, a general contractor’s lien must be filed by July 31, 2020, and all other liens must be filed by June 30, 2020.

Notice of Contract – Threshold Increased

The requirement for a Notice of Contract to be filed by a general contractor has increased from $25,000.00 to $100,000.00 under the new statute.  If the general contractor does not file a required Notice of Contract, the general contractor will have no lien rights on that private project.

Unsure Whether a Notice of Contract Has Been Filed?

Conservatively, it would be best to follow the guidelines of the old statute if you are unsure whether a notice of contract has been filed, because the notice requirements of the old statute are more stringent than the newly revised statute.

As to determining whether a Notice of Termination was filed prior to 1/1/2020, or whether the work was substantially completed or abandoned prior to 1/1/20, La. R.S. 9:4822(1) provides for service of a notice upon the owner,  prior to the filing of  a Notice of Termination, substantial completion or abandonment, expressly requesting the owner to notify you of the filing of  a Notice of Termination, substantial completion or abandonment.

Best Practice:  Clarify your deadlines!  If in doubt, track your deadlines using the most conservative calculation.

Lessor’s Notice, Relax!

An important component of the new statute is that the Lessor’s Notice, required of those providing rental materials, has been “relaxed.”

The notice no longer needs to be signed by the lessee and the lessor, and the terms of the agreement do not have to be included within the notice.  Additionally, the deadline for the notice has been extended to within 30 days after first furnishing, and a late notice may be served, but the lien when later filed will be limited to those rents accruing after the notice is given.

Further, a general description of the rental materials being provided should be given, but a full description with specificity of the rental equipment being furnished will no longer be required.  However, a written response must be provided to the owner or contractor if that information is requested by them after their receipt of your lessor’s notice.

Great news, right?!  Keep in mind, if the project falls under the old statute, the more cumbersome notice should be served within 10 days from first furnishing, should be signed by the lessee and the lessor, and should include the terms of the agreement.

The new notice should be used only when you are certain that the project falls under the new effective date.

Notice of Lien Rights

For residential home improvements, the template for the Notice of Lien Rights has been modified by the statute that became effective 1/1/2020.

Notice(s) of Non-Payment

The requirement for the 75-Day Notice of Non-Payment has not changed.  The notice should be served upon the owner and the prime contractor within 75 days from the last day of the month for EACH month in which materials were furnished, but within the period in which a lien must be filed.

Mechanic’s Lien Deadlines

As mentioned in an earlier blog, the Louisiana lien deadline is calculated by a combination of varying factors. This may include whether the project is residential, whether a Notice of Contract was recorded, where you are in the ladder of supply, if/when a Notice of Termination is filed, or the date of substantial completion or abandonment of the project.

That hasn’t changed, and the deadlines for filing a lien remain basically the same.  However, the statute under the new effective date provides an end date for the filing.  And, if furnishing to a residential project, serving a final notice of non-payment at least 10 days prior to filing the lien can extend the lien deadline to 70 days, instead of 60 days, if a notice of contract was not recorded.

Notice of Contract was not recorded:

      • File lien within 60 days after a Notice of Termination was filed, or, if no Notice of Termination was filed, within 60 days after substantial completion or abandonment of the project.
      • On residential projects, subcontractors, suppliers and lessors may instead:
        • Serve a final notice of non-payment upon the owner at least 10 days prior to filing the lien.
        • File the lien within 70 days after a notice of termination or substantial completion or abandonment of the project, if no notice of termination is filed.

Notice of Contract was recorded:

General Contractors:

        • File the lien within 60 days after a Notice of Termination is filed, or, if no Notice of Termination is filed, within 7 months after substantial completion or abandonment of the project.

All Others:

        • File the lien within 30 days after a Notice of Termination is filed, or, if no Notice of Termination is filed, within 6 months after substantial completion or abandonment of the project.
        • Serve a copy of the lien upon the owner within 30 days after the filing of a Notice of Termination

It’s a LOT!

Without question, these are some big changes for Louisiana mechanic’s lien filers. 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 Louisiana or how your rights may be impacted, please don’t hesitate to contact NCS.

Commercial Credit Management Tips for Collections

Posted on January 6, 2020 by - Credit Risk Management

10 Tips for Commercial Credit Management of Collections

I’m excited to share some of my favorite commercial credit management tips from NCS. In this three-part series, we will review tips for Collections, UCCs, and Notices & Liens. Up first? Collections!

Tip #1: Up-to-Date Credit Apps Aid in Collection Success

Make sure you have a corporate credit policy in place to update your debtors’ credit applications annually or, at the very least, if/when they request an increase in credit. Companies are often changing names, locations, banks, officers (just to name a few) and, as their creditor, it’s critical to have accurate and current information on hand. Then, in the event your customer defaults on payment, you’ll have a reliable and up-to-date credit application to aid in your collection success!

Tip #2: 9 Documents Every Collection Should Have

Here are 9 documents you should include with any collection placement: copy of the contract or agreement, copy of the credit application, copies of invoices & a statement of account, copies of proof of delivery/bill of lading, copy of the personal guarantee, your customer’s trade references (including bank name, account number, and copies of returned/NSF checks), copies of correspondence & notes (emails, notices, demand letters, documented phone calls), copy of the corporate certificate, and copies of credit report(s).

Tip #3: Pulling a Credit Report for the Correct Entity

It’s vital to obtain the correct credit history and information for your customer. Here are a few key pieces of information that will assist you with pulling credit info on the correct company:

  • Customer’s corporate legal name
  • Customer’s address (or alternate addresses)
  • Customer’s web address
  • Contact info for officers and/or owners of the company

Tip #4: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors want to file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a mechanic’s lien, bond claim or UCC, grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place. Remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Tip #5: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Here are three things to remember when filing a Bankruptcy Proof of Claim form:

  • Be on Time! Too often, creditors miss the bar date to file.
  • Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
  • Secured or Unsecured? That Is the Question! Know whether you are a secured creditor and file properly.

Tip #6: Benefits of Doing an Asset Search Prior to Suit

Typically, once an attorney has filed suit and obtained judgment, creditors look to asset searches to reveal banking information, properties, vehicles, etc. to attach their judgment to. However, there are creditors who run asset searches prior to placing their claims with a collection attorney. Why would they run an asset search prior to suit? Because creditors want to know if it is worth the time and money to file suit, move through litigation and obtain judgment.

An asset search can be run at any time, on an individual and/or a business. It helps to locate addresses & phone numbers and a full-service asset search includes:

  • Employment
  • Business affiliation
  • Vehicle ownership
  • Real property ownership
  • Banking relationships
  • Bankruptcies
  • Liens
  • Judgments
  • Notices of defaults
  • UCC filings

Tip #7: Consider Using a Customized Letter for Collection

Do you have accounts that are past due, but you are not ready to place them for collection? If you are looking for a less aggressive collection tool, talk to us about our flat fee, customizable letter writing series. Our team will work with you to create the perfect series for your needs. We’ve customized thousands of letters for clients over the years. We use that knowledge and experience to create the best letter for your situation.

Tip #8: Be Aware of a Customer Name and/or Structure Changes

Who is your customer? In recent years, we have seen many mergers and corporate structure changes. It is vital for creditors to be cognizant of any debtor name and/or structure changes, especially when utilizing the collection and litigation process. Suing the wrong entity could result in the court case being dismissed and affect any possible recovery.

What is a creditor to do? You could add a clause within your contract/credit application requiring debtors to notify you within 30 days of these changes and consider enrolling your customers in the NCS Corporate Monitoring Program. With the monitoring program, you will be alerted to registered entity changes reported by the Secretary of State Corporation Division.

Tip #9: Personal Guarantees are a great tool, but even better when notarized!

Most credit professionals would agree that personal guarantees (“PG”) are an effective tool used to reduce credit risk. A guarantee can create a sense of comfort with the creditor, especially when the creditor is shipping on an open account with no other security or leverage.

The personal guarantor, who is often an officer of the company, may pay closer attention to debts that are personally guaranteed to avoid personal lawsuits for collection of the debt. Frequently, the personal guarantor will instruct that those debts which are not personally guaranteed remain unpaid.

As a best practice, require the personal guarantee to be notarized to eliminate the personal guarantor’s claim of a forged signature. Also, consider filing a UCC even when a personal guarantee has been issued.

Tip #10: 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:

  • 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.
  • Pay-When-Paid: 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.
  • 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.
  • Silence: 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.

The Retail Bankruptcy Apocalypse

Posted on November 15, 2019 by - In Other Commercial Credit News

Run! It’s the Retail Bankruptcy Apocalypse

“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?

Secured Transactions – Even on Consignment

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.

In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.

How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.

But Wait, There’s More!

In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy.  Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips. 

Up first? Recognize the warning signs of default or financial distress.

“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”

Next? Ensure you have established terms & conditions.

“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”

And? Consider withholding shipments until the account is current.

“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”

Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.

Then? Watch deliveries & mind the 20-day clock.

“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”

Lastly? Maintain communication.

“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”

  Questions? NCS can help!

Recap of Changes to Ontario’s Construction Lien Act

Posted on October 14, 2019 by - Mechanic's Liens & Bond Claims

Recap of Changes to Ontario’s Construction Lien Act

Over the last two years we have discussed the changes to Ontario’s Construction Lien Act. Now, with all changes in force, here’s a breakdown of what you should know.

More Time to File a Lien

The first wave of changes went into effect in July 2018 and included changes to the deadline calculations for the filing of a mechanic’s lien or a public improvement lien.

  • 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. (Increased from 45 days)
  • File suit to enforce the lien within 90 days from the period in which the lien must be filed. (Increased from 45 days)

The Ontario legislature had earlier provided clarification on whether contracts would fall under old statute or new statute. Would-be-claimants would follow old statute if:

  1. The contract/improvement was entered prior to 7/1/18
  2. Procurement process began prior to 7/1/18
  3. Project is a leasehold interest & the lease was in effect prior to 7/1/18

Essentially, the statutory provisions that became effective 7/1/18 would apply if the contract and procurement process were initiated on or after 7/1/18.

If you aren’t sure whether events took place on or after July 1, 2018, follow the old statute; be conservative in calculating your deadlines. You don’t want to rely on the new 60-day deadline and later find the general contract or procurement began prior to 7/1/18 and that your lien rights should have been secured by day 45. It is certainly better to file a lien early than file a late lien & risk it being unenforceable.

Also of note, as of October 1, 2019, the public improvement lien can no longer be filed against the property of a municipality.  Instead, the public lien will attach to the funds owed by the municipality to the prime contractor.

Requirement for Payment Bonds on Public Projects

While the threshold established for requiring a payment bond on a public project is large ($500,000.00), Ontario statute, effective July 1, 2018, requires the prime contractor to obtain a labour and material payment bond.  A claim must be made within 120 days from last furnishing materials and services, and suit must be filed within 1 year from completion of the project.

All New Adjudication aka Dispute Resolution

Effective for projects procured or entered into on or after October 1, 2019, 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 comply with 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 in respect of a change order, whether approved or not, or 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

Hooray for Prompt Pay

Also effective for projects procured and entered into on or after October 1, 2019, and 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 within 14 days after receiving the proper invoice.  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.

Miller Act Bond Claim: Miss 1 Day, Lose $8M

Posted on October 7, 2019 by - Mechanic's Liens & Bond Claims

Miller Act Bond Claim Deadline: Miss 1 Day, Lose $8M

Miss the Miller Act Bond Claim deadline by a day and lose the right to recover a claim amount of over $8M. Sounds a bit dramatic, no? Perhaps. But the Miller Act is clear, and as one sub-subcontractor has learned, leaves little room for error.

Here’s an Overview of the Miller Act Bond Claim

Mechanic’s lien rights are not available on federal projects. If you are furnishing to a federal project, you would seek payment protection under the Miller Act by serving a Miller Act Bond Claim. Generally, payment bonds are required on general contracts for construction exceeding $100,000.

You are not required to serve a preliminary notice to secure Miller Act Bond Claim rights; however, we recommend serving a non-statutory notice to ensure all parties within the ladder of supply are aware you are furnishing to the project.

You should serve the Miller Act Bond Claim notice upon the prime contractor after last furnishing materials or services, but within 90 days from your last furnishing date. It is imperative (as we’ll see in this case) the Miller Act Bond Claim notice be received by the prime contractor within the 90-day period. The bond claim may be served by any means that provides written, third-party verification or in any way the U.S. Marshal may serve summons.

Should you need to proceed with suit to enforce the bond claim, you would file suit in U.S. District Court after 90 days from your last furnishing, but within one year from last furnishing — another key date in today’s case.

Couple Key Points: You are only protected under the Miller Act if you provide labor or materials to a contractor or first-tier subcontractor. If you are further down the ladder of supply, rights under the payment bond will not extend to you.  Also, the Miller Act prohibits any waiver of rights, unless the waiver is in writing, signed by the person waiving the rights, and executed after that person has furnished labor or materials.

Did You Know?

Did you know Miller Act Bond Claim rights exist in countries other than the United States? It’s true! Assuming the construction project is contracted by the United States government, such as for a military base in another country.

The Case: United States v. Zurich American Insurance Company, Dist. Court, ND Illinois 2019

Our story begins in 2012 when the Army Corps of Engineers hired AMEC Foster Wheeler Environment & Infrastructure, Inc. (AMEC) as the general contractor for construction at the Blatchford-Preston Complex and Al-Udeid Air Base in Qatar. AMEC hired subcontractor Black Cat Engineering & Construction (Black Cat) and Black Cat, in turn, hired sub-subcontractor A&C Construction & Installation, WLL (A&C).

As with any good story, the relationship between Black Cat and A&C soured.

Black Cat terminated its relationship with A&C in December 2015, and according to the court opinion A&C last furnished May 16, 2016. However, the last furnishing is a bit murky because A&C claimed it continued to provide work and equipment into 2017.

On August 16, 2016 A&C served the Miller Act Bond Claim notice with a claim amount of $8,449,710. Then on June 7, 2017, A&C filed suit to enforce its bond claim.

Now, I mentioned the sub-subcontractor lost its rights under the Miller Act because it served its bond claim late – by 1 day. At first glance, you may think May 16th to August 16th is 90 days, but it’s not. Here’s the court breakdown:

“The time between the last work on site was May 16, 2016 and the notice was served on August 16, 2016, a total of 91 days. The lawsuit was filed on June 7, 2017, which is one year and 22 days after May 16, 2016, the date of the last work.”

If you’re like me, you immediately went to the date calculator in The National Lien Digest to see if the math is right. *My inner bond claim guru light is shining bright! * To save you time & confusion, the date is right, but you must consider weekends/holidays etc.

A&C tried to argue that its last furnishing was in 2017, therefore when it filed suit in June 2017, it more than met the notice requirement (A&C actually said that it gave “too much notice.” Too much notice? *Insert my skeptical face here*)

The court didn’t buy the too-much-notice-argument.

“If [A&C] is to rely upon its 90-day notice, then it needed to bring suit…by August 19, 2017 or file a subsequent notice at some later date if there was in fact additional amounts due for labor and/or materials. It did not do so. In fact, its [suit action], which was filed on June 7, 2017, prayed for the exact same amount as was alleged as unpaid in the Miller Act notice. Based on that, one could conclude that no additional labor or materials were furnished after the date of the notice. If… additional amounts did become due after the August 19, 2016 notice … a 90-day notice would be due on or before May 29, 2017. None was filed…

[A&C’s] …argument is that it gave “too much notice” so that AMEC was on notice that Plaintiff was owed money by Black Cat, and therefore the purpose of the statute was satisfied. This, however, does not meet with the requirement that the limitations periods constitute conditions precedent…”

If you are keeping a tally: Court deemed A&C’s last furnishing date was 5/16/16. The bond claim notice was served 91 days from last furnishing and suit was filed 1 year, 22 days from last furnishing. Both actions late, A&C has no bond claim rights!

What Can the Sub-Subcontractor Do Now?

All hope is not lost for A&C and its claim of $8M+. Although securing bond claim rights is ideal, there may be other options available to claimants in the event securing bond claim rights fails. In this case, A&C could (and is) pursue its claim against Black Cat directly, which we refer to as “suit against the debtor.”

Take Away: carefully track bond claim deadlines!

Not a Secured Creditor? Aim To Be Critical Vendor

Posted on October 4, 2019 by - In Other Commercial Credit News

If You Aren’t a Secured Creditor, Maybe You Can Be a Critical Vendor

You want to be a secured creditor! This is our mantra, it’s what we do: Securing Your Tomorrow. We want your company to always be in the best possible position to get paid, but we know there may be times when you will opt out of securing your receivable. If your customer files for bankruptcy protection, and you are not a secured creditor, do you know which creditor class you fall into? I hear your eyes rolling… I mean, I hear you saying, “We’d be an unsecured creditor, Kristin.” But, did you know that might not be the case? You may be a critical vendor.

You Always Want to Be a Secured Creditor

Secured creditors are at the front of the payment line when a debtor files for bankruptcy protection. You always want to be a secured creditor. (Yes, I’m going to hammer that notion home!) So who gets paid after the secured creditors?

#1: secured creditors

#2: administrative expenses

#3: unsecured creditors

The classes of secured & unsecured creditors are self-explanatory; secured creditors have perfected a security interest, whereas unsecured creditors are creditors without a security interest. The second group of people — “administrative expenses” — can encompass many different creditors.

Jason B. Binford recently wrote an article on critical vendors in bankruptcy & he said “Creditors will jostle for position in an attempt to be included in claim classes that take priority over general unsecured claims.”

I now picture creditors as concert goers, jostling their way through a sea of people trying desperately to get to the stage. I think the only way I could be more entertained is if they were jousting creditors!

Who Are These Jostling Creditors?

According to Binford:  “A creditor who provides goods and services to a debtor following the bankruptcy filing is entitled to administrative expense claims that must be paid in full in order for debtor to confirm a plan of reorganization,” or “A creditor who provides goods delivered to the debtor within 20 days prior to the bankruptcy filing is entitled to an administrative expense claim for the value of such goods.” (Psst! These creditors that delivered goods within 20 days prior to the bankruptcy filing may try to rely on 503(b) 9 claims.)

Then There Are Creditors Who Aim to be a Critical Vendor

Oooohhhh, sounds… well, it sounds critical. For creditors that don’t qualify under the administrative claims class or as priority for providing goods within 20 days, being identified as a critical vendor may be the only way to avoid the pit of general unsecured creditors.

So, how can a creditor become a critical vendor? First the creditor needs to convince the debtor that it should be designated as a critical vendor. Once the debtor is convinced and the creditor has been added to the ‘elite list’ of critical vendors, the court must be convinced.

While each jurisdiction determines critical-ness differently, here are the common tests applied by the courts, according to Binford.

  • dealing with the creditor is virtually indispensable to the profitable operations of the debtor;
  • a failure to deal with the creditor risks probable harm or eliminates an economic advantage disproportional to the amount of the claim; and
  • there is no practical or legal alternative to payment of the claim.

Passing these common tests will likely earn you a spot as a critical vendor. But, being a critical vendor may not be all glitz and glamour.

“Designating a claim as critical will usually come with strings attached. As a condition to being paid, the creditor likely will be required to provide the debtor with reasonable credit terms for a particular period of time. Thus, debtors can use critical vendor motions as leverage to obtain post-bankruptcy credit terms from parties that otherwise would likely require the debtor to pay in advance. Critical vendors incur a relatively small amount of risk in providing credit on a go-forward basis to the debtor. If the debtor later falters in bankruptcy and is forced to liquidate, the creditor will have an administrative expense claim for such post-bankruptcy receivables. While administrative expense claims will not be paid in full if a debtor is ‘administratively insolvent,’ such a claim is greatly preferred to general unsecured status.”

Don’t Be a Threat – Actually, Just Don’t Be Unsecured

Binford warns creditors about threatening to stop supplying to the bankrupt debtor. These threats, such as “Pay this pre-bankruptcy-past-due-amount or I stop all shipments to you”, can be viewed as a violation of the automatic stay. Creditors vying for critical vendor status should probably hire an attorney to assist them to avoid any missteps. However, I stand by my opening statement: you should always be a secured creditor! Then, as a secured creditor, you won’t have to jostle or joust to win over the powers that be.

It’s A 180 On The 180 Equipment, LLC Decision

Posted on September 23, 2019 by - UCC Financing Statements

It’s A 180 On The 180 Equipment, LLC Decision: The Collateral Description of “See Attached”

An Illinois Court of Appeals has reversed the Bankruptcy Court’s decision in 180 Equipment, LLC v First Midwest Bank, which had allowed the bankruptcy trustee to avoid the security interest of First Midwest Bank.

Recap of Events from What Happens When a UCC-1 Collateral Description References the Security Agreement?

180 Equipment, LLC (180 Equipment) obtained a loan from First Midwest Bank (Bank) and granted Bank a security interest in 26 specifically identified “categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments and inventory and all proceeds and products thereof.”

In its Financing Statement, Bank identified the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” However, Bank did not include the Security Agreement with the filing of its Financing Statement.

When 180 Equipment filed for bankruptcy protection, the trustee argued that Bank’s security interest was unperfected because it failed to sufficiently describe the collateral. “The trustee… contends that the mere reference to the collateral as being described in the amended security agreement does not suffice to indicate, describe or reasonably identify any collateral.”

Bank argued the filing of the Financing Statement was enough to put other creditors on notice. “…the purpose behind the filing of a financing statement is merely to provide notice to third-party creditors that property of the debtor may be subject to a prior security interest, and that further inquiry may be necessary to determine the identity of the collateral.”

The Bankruptcy Court’s decision? The Bankruptcy Court agreed with the trustee. Bank’s Financing Statement failed to sufficiently identify the collateral. Referring to the Financing Statement, the Bankruptcy Court states “Rather, it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement. The financing statement, on its face, provides no information whatsoever, and therefore no notice to any third party, as to which of the Debtor’s assets First Midwest is claiming a lien on, which is the primary function of a financing statement.”

The Appeals Court Reversed the Bankruptcy Court Decision

As mentioned above, Bank argued its Financing Statement was enough to put other creditors on notice. Although the Bankruptcy Court ruled against Bank’s argument, the Court of Appeals agreed with Bank.

How did the Appeals Court determine Bank’s Financing Statement complied with Article 9? In the Appeals decision, the Court focused on the plain language of Article 9. Specifically, the Court reviewed §9-502, §9-504 and §9-108. These sections are paraphrased below:

9-502: Financing Statement is sufficient if it includes the name of the debtor, the name of the secured party, and indicates the collateral.

9-504: Financing Statement is sufficient if it provides “a description of the collateral pursuant to Section 9-108” or “an indication that the financing statement covers all assets or all personal property.”

9-108: Examples of Reasonable Identification include “(1) specific listing; (2) category; (3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code]; (4) quantity; (5) computational or allocational formula or procedure; or (6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.”

Did I indicate a possible trend? In its decision, the court aimed to define “indicates.” Ultimately, if the Financing Statement indicates the collateral description, the requirements under §9-502 are satisfied.

“…the ordinary meaning of ‘indicate’ is to serve as a ‘signal’ that ‘point[s] out’ or ‘direct[s] attention to’ an underlying security interest. That plain reading of the text allows a party to ‘indicate’ collateral in a financing statement by pointing or directing attention to a description of that collateral in the parties’ security agreement.”

That definition of indicates means Bank’s Financing Statement’s reference to the Security Agreement is sufficient — because it directs subsequent creditors to the Security Agreement.

The Appeals Court states the onus lies with subsequent creditors. If a creditor’s search turns up a Financing Statement and the Financing Statement references the collateral in the security agreement (e.g. “See Security Agreement), the creditor should then request a copy of the Security Agreement to confirm whether there is a conflicting interest in the collateral.

“While financing statements and security agreements both must describe the collateral, ‘the degree of specificity required of such description depends on the nature of the document involved—whether it is a security agreement or a financing statement…’ The ‘prudent potential creditor would request a copy of the security agreement,’ and ‘need look no further than the security agreement’ to resolve questions about the adequacy of the collateral description. The different treatment of these two documents highlights the distinct function each serves under Article 9: the financing statement provides notice of an underlying security interest, while the security agreement creates and specifically defines that interest.”

What a Win! But, Take Precautions

Although the Court of Appeals has reversed the Bankruptcy Court’s decision, as a best practice you should ensure the Financing Statement provides a collateral description, and if attachments are referenced the attachments should be recorded with the Financing Statement.

Construction Lienholder Group Wins in Bankruptcy

Posted on August 9, 2019 by - In Other Commercial Credit News

Grab Your Rally Cap! Construction Lienholder Group Wins in Bankruptcy

If ever there were a time in construction litigation for folks to put on their rally hats, it would be in the case of M & G USA Corp, where the Construction Lienholder Group took grass roots action to ensure their lien rights were protected in a bankruptcy.

Man, Who Doesn’t Love A Good Underdog Story?

This week I read an article by Daniel Lowenthal, Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors, which recapped a Delaware Bankruptcy Court decision in the M & G USA Corp case.

Here are the events leading up to the decision:

– In 2013, the debtor began construction of an industrial plant in Texas (anticipated completion was 2015)

– In 2017, the construction was incomplete, costs and delays were out of control, plus there were “hundreds of millions of dollars in mechanic’s liens being filed.” The debtor filed for bankruptcy protection.

– After the bankruptcy was filed, a group of mechanic’s lien creditors formed an ad hoc creditor committee: Construction Lienholder Group (CLG). In the words of Lowenthal “They made it known right away that they would be heard in the case.”

I’m starting to rally! I picture mechanic’s lien filers in superhero capes standing atop an unfinished industrial plant in Texas, preparing to fight.

CLG asked the judge to appoint an official lienholder committee, but the judge denied the request.  “He said they hadn’t satisfied the ‘heavy burden imposed by 11 U.S.C. § 1102(a)’ and he doubted the ‘propriety or wisdom” of allowing’ a group of putatively secured creditors” to have an official committee in the case,” according to Lowenthal. If an official committee had been recognized, the CLG would have been able to recover professional fees. Despite the judge’s denial of official committee recognition, CLG forged ahead knowing they would be responsible for their own fees.

As the bankruptcy case progressed, CLG retained legal representation, then actively participated in the 363 sale, objected to the debtor’s bankruptcy plan, and even negotiated $32M in DIP financing which allowed the debtors to sell the industrial plant with a clear title.

Once the bankruptcy plan had been confirmed, CLG filed a motion arguing it had made a substantial contribution to the bankruptcy case and should be reimbursed for administrative expenses.

Picture them on the steps of the courthouse, stating the facts of their case, and standing their ground… waiting patiently for the judge to decide. 

Of Course, How Would We Know Our Superheroes Are Heroes If There Isn’t A Villain?

The bankruptcy trustee swooped in and, according to Lowenthal, counter-argued that “…the lien creditors were likely to receive full payment on their claims, that an award of $1.6 million would amount to a “windfall,” that their actions in the case were motivated to protect their own interests, that the motion practice they undertook was costly, and that their ultimate compromise was not necessary for the plan to confirm.”

What Will the Judge Say?

With immense disappointment the crowd falls quiet, heads down, shoulders slumped. Then the murmurs started… here comes the judge. A hopeful hush falls over the crowd as the judge speaks.

“…substantial contribution is a high bar to satisfy. Parties-in-interest are presumed to be ‘self-interested unless they establish that their actions are designed to benefit others who would foreseeably be interested in the estate’…The Bankruptcy Code doesn’t define ‘substantial contribution’ but the contribution must provide ‘tangible, clearly demonstrable benefits to the estate.’”

So, did it? Did CLG provide “tangible, clearly demonstrable benefits to the estate?”

You betcha!

The judge cited two actions CLG took which positively impacted the case. The first? CLG “negotiated for an additional $32 million DIP cushion in the DIP Facility’s lienholder reserve.” These funds allowed the debtor to sell the plant with a clear title, as I mentioned above. If CLG hadn’t negotiated these funds, it is likely the mechanic’s liens would have discouraged potential buyers. Plus, the judge declared CLG played a meaningful role in negotiating the bankruptcy plan.

(They) “facilitated and encouraged the negotiations that led to a settlement between the mechanic’s lienholders and other economic stakeholders…”

But wait, there’s more!

Aside from the additional funds and the significant negotiations, the judge also noted the exceptional group for having:

“… identified and contacted all of the lien claimants, something Judge Shannon described as an ‘arduous task.’  And he further emphasized that the CLG did its work in the case ‘without expectation of compensation.’”

Let’s start that slow clap people!

The judge determined CLG would be compensated under the administrative claims. “…Based on time, the nature, the extent, and the value… of the services provided.”

The Takeaway? Don’t Just Sit There!

I am inspired by the Construction Lienholder Group! They took on the bankruptcy court and they won. They played an active and substantial role in this bankruptcy; they didn’t simply submit a proof of claim form and hope for the best. This should be a reminder to all of us that we shouldn’t be complacent with the rules. It’s OK to buck the system – in a safe way of course – because sometimes you gotta fight for your rights… your mechanic’s lien rights.