Service Area: Collection Services

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.

Prep to Collect: Key Collection Questions & Important Documentation

Posted on July 22, 2019 by - Credit Risk Management

Prep to Collect: Key Collection Questions & Important Documentation

You’ve gone around and around with your debtor for weeks, maybe even months, but still haven’t received past-due payments. You decide you need collection assistance and think about hiring an attorney. These four collection questions can help determine the best debt recovery plan for your business and better assist in communicating with and demanding payment from your customer.

Four Questions to Consider When Placing Your Collection with an Attorney

How Much Am I Owed?

The amount of money you’re owed can greatly impact how you proceed with the collection process. If it’s a larger past-due payment and/or from a high-risk account, you may want to bypass an in-house placement and send your case right to an experienced attorney for review.

How Past-Due Is the Payment?

It’s important to know exactly how long your receivable has gone unpaid. There could be a pertinent underlying reason for late payments, such as your debtor experiencing financial distress, or maybe there are payment issues higher up the ladder of supply. It’s critical to get out in front on the collection process because the longer an amount goes unpaid, the harder it is to collect. Some studies indicate that after six months the collectability of a past-due amount can be reduced by as much as 52%.

Am I Involved In an Ongoing Dispute with the Debtor?

If you’re involved in an ongoing dispute with the debtor, over issues such as invoice discrepancies or quality-of-work, it could result in late payments. Therefore, we recommend placing your collection with an attorney who will work quickly to resolve dispute(s) and ultimately get you paid.

Is It a Secured Amount?

If you have security in place, such as a UCC filing, mechanic’s lien or bond claim, we recommend attorney involvement to best leverage your security. For example, if you have a lien on an unpaid project, an attorney can assist in resolving the balance owed, including, if necessary, foreclosing on that lien. Similarly, if there is a UCC in place, an attorney can proceed with replevin action or repossession through the courts.

Importance of Documentation in the Collection Process

Why Do I Need Supporting Documentation?

Any collection professional needs thorough, up-to-date information to best demand payment from your debtor. Providing the proper documentation at the start of the collection process will allow an attorney to efficiently and effectively handle your claim – putting you in the best position for receiving payment.

What Type of Documents Do I Need?

Supporting documentation? The more the merrier! Every collection attorney requires basic information such as the debtor’s full name, physical address and the amount owed. However, we recommend you also provide any additional paperwork that supports your claim. This could include signed invoices, written contracts or agreements, proofs of delivery and/or bills of lading. With access to proper backup documentation, the collector can speak more intelligently regarding your claim and even speed-up the collection process.

Important Documents to Include

  • Contract or Agreement
  • Credit Application
  • Invoices and Statement of Account: this should include copies of returned / NSF checks
  • Purchase Orders
  • Proof of Deliveries
  • Personal Guarantee
  • Trade References
  • Correspondence & Notes: this could include emails, letters (demand letters, payment requests & notices) and documented phone conversations
  • Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  • Credit Report

Unfortunately, there’s no sure way of determining the collectability of a past-due account. Therefore, it’s best to weigh the costs against the potential debt recovery and be proactive in your efforts – start taking steps to secure future receivables today.

Are you caught up in past-due payments and need some collection expertise? Let our national network of attorneys, specializing in secured and unsecured commercial collections, help get you paid!        

Iowa Lien Attached to Building, Not Lessor’s Property

Posted on July 12, 2019 by - In Other Commercial Credit News

Who Is Responsible for The Costs Associated with The Construction of The Facility, The Lessor, Lessee or Both?

In Iowa, the Lien Attached to the Building, Not the Lessor’s Property

A lessor owns the real property, signs a 50-year lease with the lessee and the lessee builds a facility on the leased property. Who is responsible for the costs associated with the construction of the facility, the lessor, lessee or both? According to the Iowa Supreme Court, the costs are the responsibility of the lessee, which means the liens can only attach to the lessee’s building and not the real property.

The Case Before the Iowa Supreme Court

Cargill, Incorporated (Cargill) signed a 50-year lease with HF Chlor-Alkali, LLC (HF). Cargill owned the land and the lease was established to permit HF to build a manufacturing facility on the property. HF hired general contractors, who in turn hired multiple subcontractors and suppliers to build the facility. All construction contracts were made with HF – no one contracted with Cargill – and HF owned the building.

What happens next is no surprise: parties in the ladder of supply weren’t paid for the construction of the facility. Mechanic’s liens were filed, and the lien claimants pursued foreclosure actions.

Cargill objected to the foreclosure of the liens against its property and argued the liens could only attach to the building owned by HF and not the property owned by Cargill. Cargill’s argument relied on the 2007 and 2012 statute changes.

The Iowa Supreme Court agreed with Cargill.

Iowa’s 2007 & 2012 Statute Changes Made the Difference

Iowa modified its mechanic’s lien laws in 2007 & again in 2012. These legislative updates included a refined definition of “owner.” Here’s a quick recap from R. Zachary Torres-Fowler in his recent article, The Lessor of Two Evils: Iowa Supreme Court Holds That Mechanic’s Liens Will Not Attach to the Property of a Lessor for Work Authorized by a Lessee.

“…in 2007, the Iowa legislature removed contracts with ‘the owner’s agent’ as a basis for permitting a mechanic’s lien to attach to the owner’s property.  In 2012, the Iowa legislature further revised the mechanic’s lien statute to narrow the definition of ‘owner’ to exclude persons ‘for whose use or benefit any . . . improvement is made.’”

Iowa statute dictates a lien is available “Every person who furnishes…by virtue of any contract with the owner, owner-builder, general contractor, or subcontractor shall have a lien upon such building or improvement…” So, what does that mean for Cargill? The contracts weren’t with Cargill; thus, Cargill’s property is not subject to the lien. Because HF contracted for and owns the building, the lien can only attach to the building.

What Does this Mean for You?

This should be a warning to those furnishing to potential lessor/lessee situations. Don’t assume mechanic’s lien rights will extend to the property; rights may only be available on the leasehold interest, or as in this case, the building on the property.

Each state handles these situations differently and sometimes statute defers to the language within the contract between the lessor/lessee. You may recall a New York case we reviewed in April, in which the property owner was liable for the construction costs, because the lease specifically required the tenant to make the electrical improvements.

Review your contracts, review property ownership, review the lease whenever possible, and always seek a legal opinion.

Mediation or Arbitration, Which Is Best for Your Business?

Posted on June 21, 2019 by - In Other Commercial Credit News

Mediation or Arbitration, Which Is Best for Your Business?

Have you found yourself in a construction dispute, trying to decide whether the dispute warrants trips to court for lawsuit litigation? Have you also wondered whether arbitration or mediation will quell tempers and resolve payment issues, while avoiding costly litigation? Then you may be interested in an article we shared via social media this week: Finding the Right Tool for the Job – Resolving Construction Disputes with Mediation or Arbitration, by Patricia L. Morrison and Theron Davis.

Mediation & Arbitration, We’ve Discussed Before

Mediation and arbitration have appeared in our blog before. In fact, in January we discussed the differences between arbitration, mediation, and lawsuits.

As a quick refresher, mediation and arbitration are two forms of alternative dispute resolution, where a neutral third party is present to facilitate resolutions. What is the primary difference between mediation and arbitration? One allows the third party to issue an enforceable (and appealable) decision regarding the dispute.

In mediation, the third party is there to facilitate discussions, not issue a decision to resolve the dispute; whereas, in arbitration, the third party can issue an enforceable decision to resolve the dispute. It’s important to note, in arbitration the arbitrator’s decision can be appealed, though it’s not commonly done.

While each dispute resolution process has its pros and cons, here are a few more items to consider, as outlined by Morrison & Davis in their article.

1 – Time.

According to Morrison & Davis, mediation tends to be easier and quicker than arbitration. Here’s why arbitration typically takes longer: “…arbitration hearings usually last much longer than mediations, require a considerable amount of planning and preparation, and often include some litigation-type steps such as the exchange of documents, possible examinations for discovery, and the preparation and exchange of expert reports.”

2 – Money.

Based on the amount of time and work that goes into arbitration, it’s not surprising to hear that mediation is often less expensive.

3 – Business Relationship.

This is an excellent point to consider: do you want to preserve the business relationship? “The biggest advantage of mediation over arbitration is that it avoids the adversarial process and, therefore, may preserve the business relationship. If the parties choose to do so, mediation can focus more on the business interests of the parties than on their legal positions. The parties are able to meet in a neutral environment, with an objective mediator, and concentrate on creating a solution to their dispute. The mediator will assist the parties in identifying the strengths and weaknesses of their positions while discovering the underlying interests at the heart of the dispute.”

4 – Control.

Morrison & Davis state that mediation allows for more control over how the dispute is resolved. In mediation, because the third party can’t issue a decision, the two parties must work together to come to resolution – they need to agree upon the resolution. As opposed to arbitration; when the arbitrator issues its decision, it’s quite possible that one or both parties are unhappy with, but bound to, the result.

As you may have noticed, Morrison & Davis seem to prefer mediation over arbitration. I can certainly see why. Mediation appears to be more relaxed/less formal. If I need to resolve a payment issue with my customer, and I don’t want to kill our relationship, I would be inclined to select mediation. I picture arbitration as the solution when my customer is refusing to communicate, making threats to pull business, in other words, kind of being a bully.

Best Practices for Success in Mediation & Life in General

Morrison & Davis provide a solid list of best practices on how to increase the likelihood of successful mediation; here are a few of the highlights:

  • Make an effort to understand the other side’s position
  • Ensure there is sufficient information and be prepared to discuss technical issues
  • Maintain a flexible attitude and open mind about your settlement options

Turns out, these may be excellent best practices for everyday business interactions – even life in general. Catch you next week!