Service Area: Collection Services

The Carmack Amendment

Posted on May 26, 2015 by - Credit Risk Management

The Carmack Amendment: What Is It? Why Does It Matter?

Today’s contribution is authored by Ms. Michelle Gerred, Esq., NCS Notice & Mechanic’s Lien and Collection Services

Do you ship goods to your debtor? Are you a material supplier shipping materials to a jobsite? If you answered “yes” to either of these questions, then you may want to take a moment to learn more about the Carmack Amendment.

A Little History

The Carmack Amendment (not to be confused with Carmex, the lip balm) was enacted in 1906 after congress enacted the Interstate Commerce Act in 1887. Essentially the Interstate Commerce Act was an attempt to regulate interstate transportation and its subsequent amendment, Carmack, was the adoption of uniform guidelines used to determine who is liable for goods that are damaged during transit.

Why It Matters

The Carmack Amendment only covers actual damage to the shipped goods and does not provide protection against “consequential damages” or “liquidated damages” caused by the carrier.

What are consequential damages? They are damages that are the consequence of the issue, such as delay.

If the carrier damages your goods, which requires new goods to be manufactured or shipped, and the goods don’t make it to their destination on time, the carrier won’t be at fault – even though the carrier essentially triggered a domino effect when it damaged the shipment. Therefore if you are back-charged for the delay or liquidated damages, you will not be able to recover against carrier for those consequential damages, under the Carmack Amendment.

All Is Not Lost

However, some recent cases have offered hope! In Am. Natl Fire Ins. Co. v. Yellow Freight Sys., 325 F.3d 924, 931 (7th Cir. 2003) the court determined some damages, including damages for delay, lost profits, and all reasonably foreseeable consequential damages, could be sought against the carrier. The catch? Only if those damages were foreseeable.

In order to proceed against the carrier for consequential damages, you must show that the carrier had actual notice of the special circumstances that could put them on the hook for those types of damages. (see Contempo Metal Furniture Co of California v East Texas Motor Freight Lines, 661 F.2d at 765) This means you need to include a delay damage clause in your contract with the trucking company.

What If I Use a Transportation Broker, Can I Recover from Them?

Unfortunately, no. Brokers enjoy the same protection under the amendment. In fact, under the amendment, instead of going against the broker, your only recourse is to go against the transporter for the actual damage done to the product.

But Wait, There’s More

Be careful and ask about rates and limiting liability when contracting. A carrier can limit its liability for any damages by using an established rate or tariff.   When looking at limiting the carrier’s liability the courts look to see if the carrier:

  • obtained the shipper’s agreement for his choice of liability,
  • gave the shipper a reasonable opportunity to choose between two or more levels of liability, and
  • issued a receipt or bill of lading prior to moving the shipment.

Therefore, you must look at your documentation closely when using a carrier; the fact is the carrier could have a clause within the documents alerting you to an established rate limiting the carrier’s liability to a set dollar amount.

Remember the document does not necessarily have to say what the limitation is, like an insurance policy does, it just has to say there is a limitation.  It is up to the shipper to ask for specifics or to negotiate for a higher rate, especially when the possibility of consequential damages comes into play.  Needless to say, liability limited in this way is the most highly litigated issue under the amendment.

As always, when in doubt, seek a legal opinion!

Idaho Supreme Court: Lien Rights for the Sub and Engineer

Posted on May 18, 2015 by - Mechanic's Liens & Bond Claims

Idaho Supreme Court: Is the Sub Required to file Multiple Liens & when do Lien Rights begin for the Engineer?

In a recent appeal heard before the Idaho Supreme Court, the court was tasked with determining, among other issues, whether an engineer’s lien relates back to the first day of physical construction or the first day services were rendered, as well as whether or not a supplier had to file multiple liens for materials provided to a mixed use, two phase project.

  • In this particular case, there are many parties making many different claims – here’s a breakdown of the parties we are going to focus on in today’s post:
  • The Project: Summer Wind at Orchard Hills Residential Golf Course Development (“Project”)
  • The Project Owner: Union Land Company (“Union”)
  • The Engineer: Stanley Consulting, Inc. (“Stanley”)
  • The Contractor: Extreme Line Logistics, Inc. (“ELL”)
  • The Subcontractor: Hap Taylor & Sons, Inc. dba Knife River (“Knife River”)

The Backstory

According to the court opinion, the Project was a “…multi-use development made up of approximately 91 residential building lots and a golf course and involved two phases.” Union hired contractor ELL for a portion of the construction, in turn, ELL subcontracted Knife River for paving on Phase 1 of the project.  A year into the project, ELL goes back to Knife River to “contract for additional work” (i.e. Phase 2).

Eventually, Knife River filed a lien on Phases 1 & 2, because ELL failed to remit payment to Knife River. Were multiple liens required?  Meanwhile, in a separate contract, Union hired Stanley to provide engineering services. Unfortunately, Union did not pay Stanley therefore Stanley also filed a lien.   Stanley & Knife River’s liens are overlapping, so who has priority?

First Issue: Priority – When do an engineer’s lien rights begin?

The district court determined that Stanley’s lien only related back to the date that “visible construction commenced”.  Fortunately, the appeals court did not agree with that decision.

According to the appeal court’s interpretation of statute and previous case law, if an engineer files a lien, the effective date of the lien is the first day that the engineer rendered its services.

“…Idaho Code section 45-501’s plain language unambiguously indicates that an engineer has a lien on services performed off-site and before construction commences, so long as those services were authorized under the relevant contract.”

Based on the statute wording, the appeals court granted judgment in favor of Stanley, permitting the effective date of the lien to date back to the first day professional services were rendered.

Second Issue: Multiple Liens – Are multiple liens required on a two-phase project?

Knife River sought remedy under Idaho’s mechanic’s lien statute and despite the vagueness of whether or not Knife River’s contributions were to two projects or one project, the district court held that Knife River’s single lien was valid.

The appeals court wanted to provide clarification on whether or not Knife River supplied under one or two contracts

“…the first question is whether Knife River paved the roadways and golf cart paths under one continuous contract or two separate contracts.”

Unfortunately, due to ambiguity (invoices with various job numbers, contract language advising that changes should be written [some were not], the entire project being viewed as one construction etc.), the appeals court remanded the case back to the district court, with the order that the district court determine “…whether one continuous contract governed the entirety of Knife River’s paving at Sumer Wind Development…”

A Few Good Lessons

  • Review statute carefully
  • Review contracts carefully
  • Maintain proper documentation (invoices, change notices, contract amendments)
  • When in doubt, consult an attorney

The appeals court text for this case can be viewed here: Stanley Consultants v. Integrated Financial Associates

Payment Bonds vs. Performance Bonds

Posted on May 5, 2015 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Payment Bonds vs. Performance Bonds

In this corner we have an $8.4 million bond, created & executed to protect you in the event the principal does not pay as promised! Please welcome PAYMENT Bond! And in this corner, we have an $8.4 million bond, created & executed to protect you in the event the principal does not perform as promised! Please welcome PERFORMANCE Bond!

Let’s…Get…Ready…To…

Clarify the differences between payment & performance bonds! (Admit it, you read this to yourself in the loud announcer voice.)

What is the Difference between a Payment Bond and a Performance Bond?

A payment bond is a promise of payment and a performance bond is a promise of performance.

  • A payment bond is a surety bond, most often on public projects, issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.
  • A performance bond is a bond issued to one party of a contract as a guarantee of the performance of the other party to meet the obligations specified in the contract.

When Should I Make a Claim Against the Payment Bond?

The answer to that is simple – how long are you willing to wait for payment? Although each state has guidelines for when to serve a bond claim and to whom the claim should be served (often the deadline is 90 days from last furnishing), the real question should be “Are you willing to wait 90+ days for payment?” IF the answer to that question is “No way, I don’t want to wait 90 days or more for payment!” then you should proceed with a claim against the principal’s payment bond sooner rather than later.

How Do I Know if a Bond Has Been Issued?

In some cases you may uncover surety or bonding information when you obtain a copy of the Notice of Commencement or while gathering job information. Otherwise, you could inquire with the owner of the project, ask the bond principal (i.e. the GC) or even hire an outside vendor to proceed with a bond investigation.

Some public entities, like Texas Department of Transportation, provide a list of active construction projects on their website. The information provided may include the project name/location, the costs affiliated with the construction and the name of an individual you can contact for further information.

Best Practice

When securing your receivables, it’s important to obtain a copy of the payment bond, and often easiest to obtain a copy at the start of a project. It’s possible to obtain a copy just before you make a claim, but once payment problems arise, folks tend to be more reluctant to cooperate and provide copies of bonds. Also, there may be cases where your credit decision might hinge on whether or not a project is bonded.

Bear in mind, each state has its own statute dictating whether or not payment bonds are required as well as the steps necessary to secure your right to make a claim against the payment bond.

Demand Letters and UCC Filings

Posted on April 15, 2015 by - Credit Risk Management, UCC Financing Statements

What You Should Know about Demand Letters & UCC Filings

The demand letter is often overlooked as a collection tool for UCC filers, but it can be a cost effective alternative to the processes of repossession or litigation. As we’ve mentioned before, demand letters are not kind, gentle, love notes. Demand letters are typically harshly worded, authoritative notifications – after all, the definition of demand is “…an insistent and peremptory request, made as if by right.” which loosely translates to mean “It’s mine! You have it, pay me or give it back.”

What Should I Include in a Demand Letter?

Always remember to be factual & succinct. When you have filed a UCC, you should use that filing as leverage within your demand letter. Make sure to include the following information in the demand:

  • Date of the demand
  • Your company’s name and contact information
  • Your debtor’s name and contact information
  • The date the Security Agreement was executed
  • The UCC filing number and the date of the filing
  • Reference to the Collateral Description
  • Reference to the Default Terms
  • The amount of the debt
  • The due date of the debt
  • How the debt should be paid
  • The consequence of not paying the debt

You are probably wondering “How on earth can I be succinct when I have to include ALL of this information?!” And the answer is to remember to stick to the facts, no additional commentary or emotion need be in the demand, just the facts.

Who Should Receive a Copy of the Demand Letter?

The demand should be served upon your debtor and it is recommended you include a copy of the Security Agreement and a copy of the UCC filing.

There’s a Consequence for Every Action

Always include a description of the consequences for not paying the debt.  It’s important to include realistic ramification: “…If payment is not received, we may pursue all available legal remedies available under the Ohio Uniform Commercial Code.”

Can I Send a Demand Letter even if I Didn’t File a UCC?

Yes, absolutely YES! There are no prerequisites for sending a demand letter, other than the outstanding debt.

When Should I Send a Demand Letter?

You may find a demand letter to be most beneficial before attempting to repossess your goods or before proceeding with enforcement of the UCC filing under the Uniform Commercial Code.

 Looking for an example of a general demand letter? Download one for free

Demand Letters and Mechanic’s Liens

Posted on April 13, 2015 by - Credit Risk Management

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

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

What should I include in a demand letter?

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

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

Who should receive a copy of the demand letter?

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

The Consequences of Not Paying

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

Be specific as to a realistic ramification for not paying:

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

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

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

When would I send a demand letter?

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

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

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

Supplying Rental Equipment to a Construction Project

Posted on April 9, 2015 by - Mechanic's Liens & Bond Claims

3 Things to Know if You’re Supplying Rental Equipment to a Construction Project

Although great strides have been made within the last several years, there are still instances where construction law differs for those who provide rental equipment to a construction project.

Many states, like California, Connecticut & Florida, specifically include rental equipment within their statute, allowing providers of rental equipment to secure mechanic’s lien rights as long as they follow the same guidelines set forth by statute for any labor and/or material supplier securing rights.

Other states may not specify rental equipment within their statute, but case law has supported the inclusion of rental equipment (Arkansas, Ahern v. Salter, 2014).  And then, there are those states that do not provide protection for the rental equipment supplier within their statutes or their case law.

Know the Statute Specific Requirements For Rental Equipment

We already know that mechanic’s lien statutes in each state are different – “like snowflakes, no two states are alike” – so it should come as no surprise when I say “You should always double check statute before serving your preliminary notice or filing a mechanic’s lien.”

Although no two states are alike, some states do have things in common. Can you name two states that have separate requirements for those that are providing rental equipment? Louisiana & Missouri!

Missouri

According to The National Lien Digest, you should serve the notice upon the owner within 15 business days from the first use of the rental equipment. Persons who use rented machinery or equipment in performing work should file the lien within 6 months after the indebtedness shall have accrued. Persons who rent machinery or equipment to others should file the lien within 60 days after the date the last rental machinery or equipment was removed from the project.

Louisiana

Lessors of Equipment: at the time of entering the contract, obtain the lessee’s signature on a notice to be served upon the owner and the prime contractor within 10 days from when the equipment is first placed on the project site.

In other states, like Illinois, rental equipment liens are allowed on commercial projects, but are not allowed on a single-family residence, or a multi-family residence of fewer than 12 units in a single building.

Case law (Griffin Dewatering Corp. v. B.W. Knox Construction Corp., 2001 WL 541476) confirmed there are no provisions under Delaware statute to protect those who provide rental equipment.

Know Your Last Furnishing Date

Even if service of the rental equipment is a part of the contract, the date the service was received is not used to determine the last furnishing date. Typically, the owner is only responsible for the work that was performed to improve his property, therefore the last furnishing date would be the last date the equipment was used on the job, not the date the equipment was picked up or serviced

Know that Multiple Liens May be Required

If you supply multiple pieces of equipment to a property, there is a chance that a separate lien will be required for each piece of equipment. Attorneys have conflicting opinions as to whether or not a separate contract for each piece of equipment requires separate liens or whether one lien is sufficient, and it is quite possible that two attorneys in the same state will have differing opinions.

My advice: know that it is a possibility & always make sure you use a construction oriented attorney.

Best Practice

Even though each state does not specifically call out rental equipment within their statute, it does not automatically mean you won’t be entitled to secure mechanic’s lien rights. It’s best to serve a notice on every project – make sure you follow statute parameters – and when in doubt, seek a legal opinion.

Two Questions to Ask Before Releasing a Mechanic’s Lien

Posted on April 1, 2015 by - Mechanic's Liens & Bond Claims

Always ask yourself these two questions before you release a mechanic’s lien

What is a Release of Lien?

“A release of lien is a document recorded upon the satisfaction of a claim of lien. Statutory penalties may be incurred if a lien is not released upon satisfaction”

What should I know before releasing a lien?

Once you have made the decision to file a mechanic’s lien, the next decision you will need to make is when to release the mechanic’s lien. Before you rush to release your security, you should ask yourself:

“Have I been paid in full?  Has the payment cleared?”

Too obvious? Perhaps, but if you can answer “yes” to both of these questions, you should feel confident that it is safe to release the mechanic’s lien.

If you have not been paid in full and/or the payment has not cleared, you should be very cautious. Think of the proverbial “Do not pass go, do not collect $200.” If you release the mechanic’s lien, and you have not received/cleared full payment, you may forfeit your security and subsequent recourse on unpaid funds.

I’ve been paid; do I have to release the lien right away?

Some states have a specific time frame described in their statute (i.e. in Arizona, the lien must be released within 20 days from satisfaction), but a good rule of thumb is to promptly release the lien once the lien has been satisfied. Not only is a timely release of the satisfied lien required by law, it is also a respectful business practice.

Do I have release options?

In some states you can file a partial release of lien. A partial release of lien is just what it sounds like – you are releasing a portion of the original mechanic’s lien, as opposed to the full amount of the mechanic’s lien. For example: you filed a lien for $100,000 and your customer has paid you $25,000; you could file a release for the $25,000 and the lien will remain in place for the balance of $75,000.

Make sure you consult an attorney before proceeding with a partial release. You want to make sure you are adhering to statute and not forfeiting your lien rights.

What if I haven’t been paid, but my customer agrees to pay me if I release the lien?

Your customer doesn’t want to pay until the lien is released, and you don’t want to release the lien until you are paid.  It is not uncommon to Exchange a Release of Lien for payment.

Essentially, you will give your customer the executed (but not recorded) release of lien and your customer will give you payment in certified funds. Then, you can deposit the payment and your customer can record the release of lien.

Best Practice

Though an exchange is fairly common, it may not hurt to have an intermediary – just to help keep everyone honest.

Problems with Preliminary Notices

Posted on March 18, 2015 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Here Are 5 Mistakes Commonly Seen with Preliminary Notices

Securing your mechanic’s lien and bond claim rights often begins with serving a preliminary notice. If the first step in securing your rights (serving a preliminary notice) isn’t a solid step, you may find yourself with an invalid mechanic’s lien and unpaid claim.

1. Not Serving a Preliminary Notice

This may seem like a no-brainer, but it is an all too common problem. Contractors, subcontractors & suppliers find themselves in a position where they haven’t been paid, so they pursue the remedy of a mechanic’s lien or bond claim. Unfortunately, much to the dismay of these claimants, the courts interpret the law strictly and if a preliminary notice is required per statute and no preliminary notice was served, no lien rights exist.

Three cases come to mind: Mel Stevenson & Associates, Inc. V. Giles (2004), J. Roux Design & Associates, Inc. V. Backes Et Al (2005), and JE Dunn Construction v. (West Edge BK) (2010). In all three cases, the claimants didn’t serve a preliminary notice, filed a mechanic’s lien, pursued suit to enforce the mechanic’s lien and the lien was thrown out because a preliminary notice was required and not served.

2. Serving an Improperly Formatted Document

Nearly every state has a unique notice format and requirements which are enforced with strict scrutiny.  Some states are particular about the font type and size, which words or phrases are or are not in bold/italic/underlined and even the margin sizes.

Some companies learn this the hard way: “…A contractor must strictly comply with all statutory requirements for prelien notices.  Because Niewind did not provide prelien notice in the statutorily required type, the mechanic’s lien did not attach to the Carlsons’ property…”

3. The Notice is Missing Required Information (claim/contract/materials description)

Along the same lines as serving an improperly formatted document, often times, claimants serve an incomplete notice. Missing required information from a notice can be just as toxic as serving no notice at all. Again, review statute carefully and be sure to include the information required, such as specific parties, furnishing dates, contract & claim amounts or a description of the materials/labor provided.

4. Neglecting to Serve the Required Parties

Most states whose statute requires a preliminary notice to be served are quite specific as to which parties must receive a copy of the notice. If you don’t serve a required party with the notice, you may end up like Shady Tree Farms in Shady Tree Farms v. Omni Financial – Shady Tree Farms’ preliminary notice wasn’t served on the lender (a required party) and the trial court held that the mechanic’s lien for $1,959,244.50 could not be enforced.

5. Proper Service of the Preliminary Notice

We have previously discussed this particular issue on our blog: “Overnight Delivery, Registered Mail, Certified Mail! Oh My!” Review statute closely and deliver the notice as required by statute, whether it’s via certified mail, FedEx, Pony Express or Carrier Pigeon.

The power of a preliminary notice is frequently underestimated and even misunderstood.