Service Area: Notice and Mechanic’s Lien Services

Recovery via Judgment Liens

Will I Ever Receive Payment on Old Judgment Liens and Mechanic’s Liens?

Will you receive payment on old judgment and mechanic’s liens? Short answer: maybe. We watch the markets and monitor index trends closely, because our business fluctuates as the economy fluctuates. Obviously this is no secret – all businesses see ebbs & flows with changes in the economy – that’s what makes the economy work (or not work, depending on who you ask).

This may be a bold statement, but I’ll say it anyway: the real estate market is recovering. Saying this is bold, because the term “recovering” or “recovery” is abundantly overused and has become somewhat diluted throughout this last recession. However, now that there is upward movement in the real estate market, we are seeing benefits trickle down to contractors, subcontractors and suppliers.

How does a rebounding real estate market benefit contractors, subcontractors and suppliers? Well, there is the obvious: more projects are underway, which means more work is available and of course that should mean more money. However, we are also seeing an increase the payment of old debt.

More and more title companies are calling to pay off old judgment liens and mechanic’s liens that remain of record. This makes sense, because you can’t sell your property if the title is clouded aka if there is an encumbrance on your property.

To help ensure you are putting yourself in the best possible position to get paid, we recommend you:

  • Consider getting a judgment, even if your debtor appears to be uncollectable. It’s important that you review your options closely and make sure it is the right fiscal choice based on what you are owed and the costs associated with placing the judgment.
  • Make sure the judgment is recorded as a lien in the county in which the debtor has property. 28 U.S. Code § 3201 – Judgment Liens section (a) Creation clearly states “A judgment in a civil action shall create a lien on all real property of a judgment debtor…”
  • Consider renewing old judgments before they expire. Again, review your options & weigh the costs vs. the benefits, but don’t let these securities lapse.

In a perfect world a mechanic’s lien and/or judgment lien filing will get you paid, but the reality is that recovering monies secured by any instrument can take time. As it turns out, patience may be the next best thing to judgments and mechanic’s liens.

*It is recommended you seek a legal opinion via an experienced attorney. Every situation is unique and may require thorough review.

Serve Notice After First Furnishing

Serve the Preliminary Notice AFTER You Begin Furnishing

Did you know some states require the preliminary notice to be served after you begin furnishing? Georgia, Iowa, Nevada & Wisconsin case law and/or statute instruct the claimant to serve the required preliminary notice once furnishing has commenced.

Georgia, Iowa, Nevada, and Wisconsin

Georgia

  • Private Projects: Serve Notice to Contractor within 30 days after first furnishing materials or services or within 30 days from the filing of the Notice of Commencement, whichever is later.
  • Public Projects: Serve Notice to Contractor within 30 days after first furnishing materials or services or within 30 days from the filing of the Notice of Commencement, whichever is later.

Iowa

  • Private Projects: Serve notice within 30 days after first furnishing materials or services.
  • Public Projects: Serve notice within 30 days after first furnishing materials or services.

Nevada

  • Private Projects: Serve notice after first furnishing materials or services, but within 31 days from first furnishing materials or services.
  • Public Projects: Serve notice after first furnishing materials or services, but within 30days from first furnishing materials or services.

Wisconsin

  • Residential Projects: Serve notice within 60 days after first furnishing materials or services (10 days if a prime contractor).
  • Public Projects: Serve notice within 60 days after first furnishing materials or services.

Most of us are familiar with states like California: serve the preliminary notice within 20 days of first furnishing. Typically, in states like California, it’s OK to serve the notice before you begin furnishing, as long as you serve the notice within the 20 days. But, as with everything in the construction credit industry, not all state statutes are the same.

Additional Resources from NCS

Interested in knowing which states have preliminary notice requirements for private projects (commercial & residential) or public projects? Check out these NCS Quick References!

For additional clarification on each state’s statute, please take a look at The National Lien Digest© or consult an attorney.

Bankruptcy Payout Priority – Secured Creditors Make Bank

Bankruptcy Payout Priority – Secured Creditors Make Bank

As a credit professional, you’ve likely heard this once or twice: “It’s better to be a secured creditor than an unsecured creditor.” After all, credit is how the majority of us do business in today’s economy and, as credit professionals, we want to insure we are paid for the goods & services we provide.

I often hear secured-credit-skeptics say “If my customer files bankruptcy, I won’t see a dime, why waste my money on a UCC or lien” or “Once the courts get paid, there won’t be anything left for me” and, my favorite, “My customer and I have a great relationship, they’ll never fail & I will always get paid.”

“If I file a UCC Financing Statement is it a guarantee that I will get paid?”

As with everything in life, there are no guarantees – with the exception of death and taxes. No, you are not guaranteed to be paid in the event your customer files bankruptcy; however a perfected UCC filing will make you a secured creditor, which would put you in the best possible position to get paid.

“If a company files bankruptcy, which creditors get paid first?”

The bankruptcy code is specific, detailed and, well…it’s long – but here is the basic payout priority:
Payout Priority in Chapter 11 Bankruptcy

  1. Secured Creditors (i.e. creditors who have a perfected security interest)
  2. Administrative Expenses (i.e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (i.e. creditors without a security interest)

“Do creditors really get paid?”

Yes, creditors really do get paid – although every bankruptcy exit plan is different. Let’s take a look at a few bankruptcy cases, which demonstrate the immense benefit of being a secured creditor rather than an unsecured creditor.

  • Filene’s Basement “Secured creditors have been paid in full, holders of priority claims and convenience class claims have received 100% of their allowed claims, and unsecured creditors have been paid 50% of their allowed claims.”
  • Uno “The plan gives the holders of $142 million of senior secured debt 100 percent of the stock in the new company. Unsecured creditors who sell their claims will receive about 13 percent.”
  • HomeBanc Corp.  “The accompanying disclosure statement says that unsecured creditors with $223.5 million in claims would recover between 1 percent and 10 percent. Secured creditors with claims of $69.6 million would be paid fully.”
  • Intermet Corp. “The disclosure statement says first-lien creditors should expect a 70 percent recovery while second-lien term loan lenders, owed $107 million, and unsecured creditors with $93 million in claims, could realize around 1 percent.”

Although there are no guarantees, time and time again we see secured creditors receiving more funds than unsecured creditors.

The information presented here illustrates that secured creditors are in the best possible position to get paid. However, this assessment does not guarantee a payout in future bankruptcies.

Small Mistake High Price in Mechanic’s Liens

In the Field of Mechanic’s Liens, a Small Spelling Error has Large Price Tag

Mechanic’s Lien laws are notoriously complex and courts across the nation are often strict when determining compliance with statutes.  A New York court issued a decision which highlights the high costs of seemingly minor technical mishaps in the filing of a mechanic’s lien.

The Supreme Court of New York

New York County ruled in A. & L. Construction Corp. v. East Harlem Developers, LLC, that the plaintiff, A. & L. Construction Corp., lost the ability to foreclose its mechanic’s lien due to a minor error in the spelling of its name on the lien.

A. & L. Construction (A. & L.) filed proceedings to foreclose a mechanic’s lien against East Harlem Developers in the amount of $150,229.79.  The defendant, East Harlem Developers, filed a motion for summary judgment alleging the mechanic’s lien was invalid because the plaintiff, A. & L. Construction, is not the corporation named on the mechanic’s lien and the contract.

Evidently, on both the mechanic’s lien and the contract, the entity listed is “A&L Construction Corp.,” not “A. & L. Construction Corp.”  The defendant alleged it never did business with A&L Construction, which had different owners than A. & L., never did business with the defendant, and was dissolved three years before the parties contracted and work begin on the project.

The court explained that A. & L. had actually filed a previous action to enforce its mechanic’s lien which was dismissed for lack of standing.  A. & L. was instructed to re-file an action with its correct legal name and to correct its corporate name on the mechanic’s lien.  While A. & L. filed the current action with the correct name, it did not amend the existing mechanic’s lien.

“The Mechanic’s Lien is Unenforceable!”

A. & L. contended it was a mere scrivener’s error that misspelled the corporate name on the contract and mechanic’s lien. It urges that this minor error should not affect the validity of its mechanic’s lien.

The court, however, disagreed.

It turned to the language of the lien statute which requires the notice of lien state the name of the lienor. It found A. & L. failed to provide any evidence that the spelling was a scrivener’s error besides the plain assertion.  Accordingly, the court held the lien to be unenforceable and granted summary judgment to East Harlem.

The case of A. & L. illustrates the harsh consequences of even a minor error in the realm of mechanic’s liens. The difference between “A&L” and “A. & L.” is miniscule.  It is hardly even noticeable; a difference of two periods and two spaces.  A. & L. had likely taken to referring to itself as the simplified A&L for shorthand purposes, and failed to correct itself on official documents.

To a layperson, the error appears minor and understandable.  However, to the New York court, the error was significant enough to cost A. & L. a $150,229.79 mechanic’s lien.

What Are Joint Check Agreements?

What Are Joint Check Agreements?

No, it has nothing to do with twisting your arm while depositing a check at the bank, although I’m certain some may believe this to be true. A Joint Check Agreement is an agreement between multiple parties, allowing one party to make payment through a check issued to two or more payees. These types of agreements require the consent of multiple parties (i.e. the GC & the Sub or the Owner & the GC) and are often used as an additional tool in managing risk associated with construction credit.

What’s the benefit of a Joint Check Agreement?

The primary benefit of a joint check agreement is the additional security it can provide.

  • General Contractors like joint check agreements because they help to ensure the subcontractor will pay its suppliers with the appropriate funds (i.e. Circumvent robbing Peter to pay Paul).
  • Material Suppliers and other parties contracted with subcontractors like joint check agreements for added security on a potentially risky credit situation. (i.e. perhaps there is a lack of solid credit info on the general contractor)

What information should be included in a Joint Check Agreement?

Let’s break down the contents of a sample Joint Check Agreement provided by The Credit Research Foundation.

First, include the date of the agreement, the invoice(s)/purchase order(s) to be covered under the agreement, your company name & address as well as your customer’s name & address.

Date Purchase Order Number
Your Company Name Your Customer’s Name (Party 2)
Your Company Address Party 2 Address
Your Company City/State/Zip Party 2 City/State/Zip

Gentlemen:

YOUR COMPANY NAME has been requested by PARTY 2 to furnish certain (specify:  parts, components, etc.) on credit under purchase order number: ___________________ dated: ________________. The project is identified by PARTY 3 purchase order # __________________, dated: _________________.

Next, identify the authorized signors (the individual at each company that is permitted to execute this type of agreement) as well as the terms and conditions of the sale.

PARTY 2 and PARTY 3 understand and agree that: (1) the undersigned signors are authorized agents of said companies and are duly empowered to enter into and make a binding agreement on behalf of their respective companies; (2) YOUR COMPANY NAME standard terms and conditions of sale which appear on each of YOUR COMPANY NAME invoice and the application of credit shall govern all sales of goods and/or equipment from YOUR COMPANY NAME to PARTY 2 in accordance with its contract with PARTY 3.

Make sure to include wording that covers the materials/labor provided for the particular project. Including a specific project helps alleviate “robbing Peter to pay Paul” (i.e. monies paid are for that particular project).

Applicable only to the products furnished by YOUR COMPANY NAME and as a condition precedent to furnishing said materials for use and incorporation in the aforementioned project, YOUR COMPANY NAME requests that until it is paid in full, all payments made or to be made by PARTY 3 to PARTY 2 with respect to said project, be made payable by check or checks jointly payable to PARTY 2 and YOUR COMPANY NAME. It is understood that all payments shall be timely and in the form of an immediate and unconditional negotiable instrument. Upon issuance of a check by the PARTY 3, it shall be promptly endorsed by PARTY 2 and delivered to YOUR COMPANY NAME. It is understood that this is a continuing Agreement applicable to the original purchase order and the YOUR COMPANY NAME invoice(s) and to any subsequent billing related to this project only.

Identify what actions should be taken in the event one party fails to uphold their end of the agreement. Lastly, include language prohibiting the altering of said agreement and include spaces for all three parties to sign.

Should PARTY 2   refuse to endorse any joint check tendered by PARTY 3, then upon demand by YOUR COMPANY NAME, PARTY 3 agrees to issue a single party check payable to YOUR COMPANY NAME for the amount shown upon the unpaid invoice (s) relating to the goods/materials furnished to and used by  PARTY 2 under purchase order #: __________________________   dated: __________________.
Notwithstanding any additional contract terms that may now or hereafter exist between PARTY 2 and   PARTY 3, this agreement may not be altered or modified without the written consent of YOUR COMPANY NAME or its authorized representative.
This agreement will assist YOUR COMPANY NAME in fulfilling the requirements of PARTY 2 under its contract with   PARTY 3 and is for the mutual protection of each party. In no way should it be interpreted as casting doubt on the ability, integrity or credit worthiness of any interested party. Duly authorized signors should promptly execute this Agreement in the spaces provided below and upon completion, return this original Joint Check Agreement to YOUR COMPANY NAME. An acknowledgment will be mailed to you.

Your Company Name Party 2 Name            Party 3 Name           
By By By
Title Title Title

At-a-Glance: Joint Check Agreement Content Breakdown

  • The name and address of each party associated with the agreement
  • The name/address of the project to which the materials/labor are being supplied
  • The date the parties entered into the agreement
  • The credit terms
  • The steps to be taken, in the event the agreement is not upheld
  • Signatures of all parties involved

Although joint check agreements are an excellent tool for mitigating risk, there are potential pitfalls. Before entering into Joint Check Agreement, or any contractual agreement, it is always best to have legal counsel review the document & its terms.

No Preliminary Notice? No Mechanic’s Lien for You

No Preliminary Notice? No Mechanic’s Lien for You

About 40 states require a preliminary notice be served upon the owner of the property on which the contractor, subcontractor, or materialman is either performing work or furnishing materials.

Each state sets its own requirements for the preliminary or prelien notice, and state statutes are commonly highly specific as to the language required within the notice, the type of service allowed, and the timing provision of the notice.

A failure to provide the requisite prelien notice in a state where it is required can invalidate your mechanic’s lien.

Should Failure to Serve a Notice Invalidate a Mechanic’s Lien?

In a case arising out of the Court of Appeals in Minnesota, the court addressed the issue of whether a failure to serve a prelien notice on the property owner should invalidate a lien where the contractor claimed to be unaware of the true identity of the owner.

In the case of J. Roux Design & Associates, Inc. v. Backes, et al., Dennis Backes sold a property in Minnetonka, Minnesota to Superior Value Homes pursuant to an unrecorded deed, whereby Superior was to design and construct a residence on the property.  Superior entered into an oral agreement with Vogue Design & Realty, Inc. to design and construct the home.

The companies agreed Vogue would hire the subcontractors and Superior would pay them. Vogue contracted with Roux Design to do construction work on the home, and Roux used subcontractors and materialmen to complete the work.

A payment dispute arose between Roux and Vogue, and Roux filed a mechanic’s lien for approximately $26,000. Roux did not serve any prelien notices before filing the lien, nor did it serve the lien statement upon Superior at all. It served the lien statement only upon Backes and Vogue.

Superior sold the property shortly after the payment dispute between Roux Design and Vogue to Ulf and Anneli Henricksson.

Roux Design commenced lien foreclosure proceedings against all three defendants, Backes, Vogue, and the Henrickssons. The Henrickssons filed a third party complaint against Superior for indemnification, making Superior a party to the suit.

The defendants moved for summary judgment, claiming Roux’s lien must be discharged because it failed to file a prelien notice and failed to properly serve the lien statements. The district court granted the motion, finding Roux’s failure to serve the prelien notice on the owner of the property rendered the lien invalid.

“It held that a lack of knowledge as to the existence of an owner does not excuse the contractor from the prelien notice requirement”

Roux Appealed

On appeal, Roux asserted its lien should be found valid because at the time of contracting with Vogue it did not know Superior had an ownership interest in the property.  It contracted merely with Vogue and Vogue held itself out to be the owner.

The court, however, found this argument unpersuasive.  It held that a lack of knowledge as to the existence of an owner does not excuse the contractor from the prelien notice requirement. Roux had a duty to determine the identity of all owners and serve the requisite notice.

Further, Roux was paid by checks bearing Superior’s name. Therefore, a simple inquiry could have lead Roux to the knowledge of Superior’s ownership interests.

Roux’s ability to foreclose on its mechanic’s lien was invalidated due to its oversight concerning prelien notice.

Always review statute and serve the appropriate notice upon the appropriate parties via appropriate service.

Past Due Accounts and Commercial Collections

Collections, Collections, Collections

It doesn’t matter how it’s said or how often it’s said, the word “collections” often elicits a negative reaction. In fact, a cringe followed by an eye roll and loud sigh is one of the most common reactions. This cringe-eye-roll-sigh we experience is typically due to an unfortunate & frustrating experience…

“I have hired collection agencies in the past. They were difficult to deal with, the fees were out of control and our money was rarely recovered.”

What can you do to make the collections process less painful for your credit teams? Why is it important to partner with the right agency? What can you do to reduce the need for collection services altogether?

Before we tackle these questions, let’s define the 3 common steps that lead to a need for collection services:

  1. Extend credit to your customer
  2. Your customer doesn’t pay within agreed upon billing terms
  3. You spend the next few months frustrated over endless phone calls and broken promises

Yes, this is an oversimplification and you don’t need me to tell you the steps, because we (you and I) know you have encountered this time and time again.

What Can You Do to Make the Collection Process Less Painful?

If you find yourself staring at your phone, loathing the idea of calling on past due accounts, make sure you have everything about your customer at the ready, before making the call. Review the history of the account, have copies of open invoices available. Make sure you know whether or not this is typically a slow-paying customer, have they made payment arrangements and failed to keep the arrangements, have you limited their credit because of their inability to pay timely.

It’s also important to not wait until the 11th hour to start contacting your customer, the longer an account remains unpaid, the harder it is to collect. I recommend you make a collection schedule and more importantly, stick to it.

Here is an example of a schedule:

30 Days Past Due

Call your customer and simply ask when you can expect payment for the open invoice

Asking a simple question like Could you please tell me when invoice #4619661 will be paid? is likely to be perceived as a “check-in” call and your customer may provide insight as to why the invoice is past due.

Based on the information your customer provides, you may find the invoice “got lost” or you may find you will need to be more straightforward.

*DON’T let your customer off the phone without getting a firm pay date; setting an expectation and then following through to ensure that expectation is met makes your customer accountable, but it also makes you accountable, which limits the number of accounts that slip through your fingers.

45 Days Past Due

Call your customer, if verbal negotiations are a struggle, send a demand letter

Demand letters can do wonders in prompting payment. Make sure your demand is clear: include the dollar amount outstanding, the date you expect payment and what the consequences will be if payment is not received. (i.e. “If we do not receive the payment within 10 days of receipt of this letter, we will have no choice but to proceed with the next legal action…”)

60 Days Past Due

Call your customer with a final warning; place account with a collections agency

Once the date set forth in the demand letter has come and gone, it’s time to provide one last opportunity to your customer and then place the account with an agency – after all, you have more than one customer to keep tabs on.

The longer an account is held, the less likely it is that it will be recovered. If payment or a payout is not arranged within 90 days, place the claim with a collection agency.

 Why It’s Important to Partner with the Right Collection Agency

Selecting a collection agency is not usually a pleasant or easy process. But, when extending credit, it’s a necessity. When it is time to outsource to a collection agency, make a list of the qualities you would like the agency to have.

For example, some companies are interested in collection agencies that are more persistent, aggressive and forceful, while other companies prefer agencies that adopt a straightforward, professional business-like attitude, with willingness to negotiate.  Or, you may wish to choose an agency that will tailor their approach to your circumstances.

It’s also important to ask about the fee structure and have a clear understanding of the steps the agency will take on your behalf.

What You Can Do to Reduce the Need for Collection Services

The answer to this question is easy: secure your receivables! Utilize the UCC process or the Mechanic’s Lien process to ensure you are a secured creditor. As a secured creditor you have leverage, backed by law, which often makes getting paid easier.

What is a Bond Claim?

A Contractor Supplied a Payment Bond & You Haven’t Been Paid, What’s Next?

You supplied materials to the project, served a preliminary notice as required by statute, have not been paid. Now what?

It’s time to make a claim against the bond. But, what is a bond claim? Whose bond are you going to claim against? Can you only claim against a bond if it is a public project?  These are all great questions!

Before we explore and explain a bond claim, we need to define what a bond is and who the parties within the bond are.

What is a Surety Bond?

The Surety Information Office (SIO) defines a surety bond as “…a written agreement where one party, the surety, obligates itself to a second party, the obligee, to answer for the default of a third party, the principal…”

“Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) is qualified to perform the work and will pay certain subcontractors, laborers and material suppliers”

A payment bond is a surety bond that is issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.  If a subcontractor, supplier or materialman is unpaid for services, they may secure their receivables by serving a claim against the payment bond.

Here is an example of a federal payment bond:

Don’t get confused: a payment bond and a performance bond are two different bonds, though they are often issued together. The payment bond protects you when the contractor fails to pay; the performance bond protects the obligee when the principal fails to perform.

Bond Claims, Explained

A Bond Claim is a written notice informing the prime contractor and/or surety that the claimant (e.g. subcontractor, supplier or materialman) looks to them for payment.  Based on state statute, typically the bond claim must be served upon the general contractor and the surety, however, it is recommended to serve a copy of the bond claim on all parties involved. The more people that know you have not been paid, the more pressure these people will put on the appropriate party to encourage payment.

Frequently, a bond claim notice must be served within 90 days from last furnishing materials or services (e.g. Arizona). However, some state statutes, such as in Colorado, refer the claimant to the terms of the payment bond. (i.e. “Serve the bond claim notice in accordance with the terms and conditions of the payment bond.”)

Are All Contractors Required to Obtain a Bond?

The short answer is “No.”

Each state has its own statute requiring payment bonds on public projects and the Miller Act applies to payment bonds required on federal construction projects. Some statutes may require the general contractor obtain a payment bond on every construction project, and other statutes may only require a payment bond when the total value of the construction project exceeds a certain threshold.

True or False?  Bond claim remedies are only available on public or federal projects.

False! Payment bonds may be required or obtained for any project type. In fact, there are several states that have separate statute specific to bond claims on private projects:  Arizona, Arkansas, California, Florida, Georgia, Kansas, Louisiana, Mississippi, Nebraska, South Carolina, Texas, Utah & Wisconsin.

While a payment bond might not be required by statute on a private project, statute may apply as to the steps required to protect your rights under the private payment bond.  Further, it is possible that a subcontractor may be required, by the owner or the general contractor, to obtain a payment bond on a project!

Best Practice Tips

  • If a there is a payment bond on the project, attempt to obtain a copy of the bond at the time of contract.
  • Confirm the surety is on the Department of the Treasury’s Listing of Approved Sureties.
  • Review the payment bond to ensure you are covered as a potential claimant.
  • Serve applicable preliminary notices in accordance with statute.
  • If you remain unpaid, serve a copy of the bond claim upon all parties.
  • Keep all project documentation in a central location (e.g. invoices, delivery tickets, statement of account etc.)