Service Area: UCC Services

Supply House? You Can Use the UCC to Get Paid

Posted on July 21, 2015 by - In Other Commercial Credit News

Supply House? You Can Use the UCC to Get Paid

By John Allen Waldrop III, Commercial Lawyer

Supply houses often overlook a powerful tool at their disposal when trying to get paid.  They are often so focused on preserving lien and bond rights that they forget about the power of the Uniform Commercial Code (UCC).  The UCC can be a faster and more effective collection tool, when used correctly.

Collection and Repossession

Direct collection and repossession are two quick and powerful remedies that can be found under Sections 9-607 and 9-609, respectively.  Section 9-607 permits the creditor to collect money directly from third parties that owe money to the debtor.

In construction lending, this means that a Supply house can appeal directly to the owner or general contractor for ANY money owed to a subcontractor when that subcontractor is in default with the Supply house.

Repossession under 9-609 allows the creditor to recover the collateral when the debtor is in default as long as they do not breach the peace.  Thus, the Supply house can pick up material from the job site in whole or partial satisfaction of the debt.

Repossession can occur before filing suit with or without the debtor’s consent or when the debtor is in default. Timing can be critical if a debtor is insolvent.

Purchase Money Security Interest

Another benefit of using the UCC to get paid is that a Supply house can create a “Purchase Money Security Interest” (PMSI.) Under applicable law, a PMSI is a super-priority secured position.  This means that the Supply house’s interest will trump the bank’s senior lien holder position even though the bank may have filed its mortgage before the filing of the UCC by the Supply house. In a bankruptcy or insolvency situation, this can be a powerful tool to maximizing the recovery.

How to Create and Perfect the Security Interest

The process to create and perfect the security interest is easy.

First, the Supply house can include security interest language in its standard credit application. Then, upon signing of the credit application, it can then file a form, known as a UCC-1, in the appropriate jurisdiction.

The forms must be filed properly, but there is an easy and cost effective solution to minimize the risk of errors by using a reliable provider.

NCS is a leading provider of secured financing services in North America. They can make sure that the forms are filed accurately, timely and in the right location, which are critical components. They will even remind you when it is time for renewal. After using their services for over ten years, I have found them to be “easy to do business with” and reasonable in their pricing.

UCCs Are a Powerful Tool

A sale is not a sale until the money is in the bank.

Construction lending at all levels within the supply chain requires the use of best practices to be successful. The UCC can be a powerful tool, when used correctly, to manage risk.

For credit professionals managing a portfolio of contractors and subs in the construction industry, a relatively small investment in a UCC program can yield a huge return.

About the Author

John Allen Waldrop III is a commercial lawyer with over 20 years of experience.  He served for over 15 years as in-house counsel for a leading national wholesaler of materials in the construction industry where he provided counsel to the credit department.  The contents of this article are for general information purposes. It is not intended as “legal advice” and does not create an attorney client relationship with any of the readers. Mr. Waldrop received no compensation or other consideration for providing this article. For follow up questions, Mr. Waldrop can be reached at johnallenwaldrop@gmail.com.

Complying with the Michigan Notice of Commencement

Posted on July 13, 2015 by - Mechanic's Liens & Bond Claims

Did I Comply with the Michigan Notice of Commencement?

We have previously discussed “substantial compliance” with regard to mechanic’s lien and bond claim statutes. In states with Notices of Commencement, complying with the preliminary notice requirements can (not always, but can) be a bit easier. Typically, the Notice of Commencement contains the vital information necessary for inclusion into the preliminary notice.

The Contents of a Typical Notice of Commencement

Generally, you’ll find the following information within the Notice of Commencement:

  • Property description
  • Name & address of property owner
  • Name & address of the prime contractor
  • Name & address for the designee or contract manager
  • Name & address for surety, lender or other interested parties

Now, please don’t take this to the bank – because, although there are statutory guidelines to Notices of Commencement, they are not all the same. Some folks don’t complete them, others may include more or less information and others may have incorrect information.

That said; let’s take a look at an unpublished case brought before a court of appeals in Michigan.

Serve the Notice upon Required Parties

In Rogers Excavating, Inc. v. Mana Properties, L.L.C., the appeals court was tasked with determining whether or not Rogers Excavating substantially complied with Michigan statute with regard to the Notice of Furnishing.

Rogers Excavating was hired by a construction manager for excavation work on a property owned by Mana Properties, LLC. Rogers Excavating’s contract was direct with the owner, Mana Properties, and the construction manager (McQuillan) signed the contract as a witness. Rogers Excavating served their notice of furnishing upon the owner (Mana Properties) and the construction manager (McQuillan).

Later, after Rogers Excavating had already begun work, Mana Properties, LLC filed a Notice of Commencement and listed a title company (Fidelity) as their designee, not the construction manager.

When Rogers Excavating remained unpaid, they filed a lien and suit to enforce their lien. Mana Properties, LLC argued that the lien was unenforceable because Rogers Excavating did not serve the notice upon the designee, as listed on the Notice of Commencement.

The appeals court determined that Rogers Excavating, Inc. did, in fact, substantially comply with the statutory guidelines for the notice of furnishing, and permitted enforcement of the lien. (Not only was it determined that Rogers Excavating substantially complied with statute, but Rogers Excavating’s contract was direct with the owner – Mana Properties – and no notice was required.)

What the Court Says

“MCL 570.1109(1) provides, in part, that “[a] contractor is not required to provide a notice of furnishing to preserve lien rights arising from his or her contract directly with an owner or lessee.” Given our ruling that a valid and enforceable contract existed between Rogers and Mana, a notice of furnishing did not have to be served by Rogers…

… MCL 570.1109(1) requires delivery of a notice of furnishing to a designee and a general contractor. And a designee is simply a “person named by an owner or lessee to receive, on behalf of the owner or lessee, all notices or other instruments required to be furnished under” the CLA. MCL 570.1104(2). Considering the evidence that Carroll Rogers delivered the notice of furnishing to McQuillan and the owner itself, Mana, there was substantial compliance with MCL 570.1109’s notice-of-furnishing requirement. The trial court’s ruling to the contrary was error.”

Shew!

Fortunately in this case, the notice of furnishing was not required based on the contractual relationship, and the court upheld that the notice served was substantially compliant with Michigan statute. But this should still serve as a reminder that it’s important to follow statute and comply as indicated – doing it right the first time around could save you significant time & money.

Sometimes Substantial Compliance is Enough

Posted on July 7, 2015 by - Mechanic's Liens & Bond Claims

Turns Out, Sometimes Substantial Compliance with Mechanic’s Lien Law is Enough

At NCS, we constantly stress the importance of complying with each state’s mechanic’s lien and bond claim laws. In fact, we recommend conservative adherence to the statutes, as it is generally better to be early as opposed to late (generally – there are ALWAYS exceptions).

“Wait, what?”

For example, if a mechanic’s lien deadline is determined by the date of completion, NCS would recommend you calculate your lien deadline based on your last furnishing date, because you may not know the completion date – and if you are relying on a date you don’t know… well, hopefully I don’t have to complete that thought.

While it is imperative to follow a state’s laws, I was recently reminded that sometimes, “substantial compliance” is enough to protect your rights.

“I’m sorry, what? Substantial compliance?”

Yes, as I have previously mentioned, in the land of mechanic’s liens, the gray area is a minimum of 51 shades (get it, 51, like the states + DC? No, no, not the book).

Mistakes happen – best efforts are made, and an Indiana appeals court recently decided that best efforts were enough to recover through the mechanic’s lien process.

Indiana: Creditor’s Name on the Prelien Notice didn’t Match the Creditor’s Name on the Lien

In Von Tobel Corp. v. Chi-Tec Construction & Remodeling, Von Tobel Corp. supplied materials to Chi-Tec Construction & Remodeling. Von Tobel Corp. served a prelien notice and identified themselves as “Von Tobel Home Center, Inc.” then, when Von Tobel Corp remained unpaid, they filed a lien and identified themselves as “Von Tobel Corporation”

Chi-Tec Construction claimed that Von Tobel Corp.’s lien was invalid, because “Von Tobel Corp.” did not serve a prelien notice – “Von Tobel Home Center, Inc.” served a prelien notice. The appeals court sided with Von Tobel Corp. and granted the validity of their lien, because Chi-Tec was arguing based on a “hypertechnicality”.

From the Appeals Decision

“(We) reject[ed] the idea that our entire mechanics’ lien statute must be strictly construed with such hypertechnicality so as to frustrate the remedial purpose of the legislation…

The perfection and enforcement provisions of the statute should be fairly and reasonably construed and applied so as to afford materialmen and laborers the security intended upon substantial compliance with statutory requirements, keeping in mind the need to afford reasonable protection to the rights of other parties who may have acquired an interest in the party…

Here, the degree of non-compliance with the letter of the statute is minimal…

The variance between the name set out in the Pre-lien notice and that contained in the Lien Notice was minimal, did not undermine the statutory policy concerns regarding notice, and did not cause prejudice to the property owner or any third party.”

Ultimately, the owner knew that “Von Tobel Home Center, Inc.” and “Von Tobel Corporation” was the one and the same, and that “Von Tobel et al” provided materials for the improvement to their property, which means, Von Tobel et al should have been paid for their services.

Now, I must say, even though the appeals court sided with the creditor, the creditor could have eliminated the extra time & money of the appeal if they had correctly identified themselves in the notice from the start. Nonetheless, identifying themselves incorrectly was not a deal breaker – kudos!

NCS recommends conservative adherence to the statutes – what one judge in Indiana rules may be entirely different than a judge in another state!

Include a Proper Estimate in Preliminary Notice

Posted on June 30, 2015 by - Mechanic's Liens & Bond Claims

California Case Highlights the Importance of Including a Proper Estimate in Your Preliminary Notice

It’s likely you have read this (or heard this) more than once from NCS: “Statutory requirements for preliminary notices differ for each state and serving a preliminary notice may be the first step in securing mechanic’s lien rights.”  

We’ve previously discussed common mistakes with preliminary notices, and one of those common mistakes is leaving vital information off of the notice (i.e. neglecting to list the claim or contract amount, forgetting to include the material description, etc.).

Make Sure the Contact Amount Is a “Proper Estimate”

In Rental Equipment, Inc. v. McDaniel Builders, Inc., 91 Cal. App. 4th 445, 109 Cal. Rptr. 2d 922 (2001), the creditor remembered to include the contract amount, however, the amount listed was not a “proper estimate.”

In Rental Equipment, Inc. v. McDaniel Builders, Inc., the Second District Court of Appeal, Division 5, examined the requirement that a preliminary notice (in California) must include an estimate of the value of the materials or services provided.  The court looked to the meaning of the word “estimate.”

Rental Equipment, Inc. rented equipment to a subcontractor on a private project. Rental Equipment, Inc. sent out two preliminary notices, known as Preliminary 20-day Lien Notices, which both estimated the value of the rental equipment in the amount of $10,000.

The project was never completed, and the subcontractor did not pay Rental Equipment, Inc. Rental Equipment recorded a mechanic’s lien in the amount of $160,000, and later filed to foreclose on the lien.

The district court held the preliminary notices were fatally defective because the value of the lien was significantly higher than the estimate listed on the notice.

Then the Appeal

On appeal, the court upheld this decision for the following reasons: the estimate provided in a preliminary notice does not have to be exact; however, it cannot be based on merely a guess and the estimate must be derived by rational analysis.

Since the $10,000 estimates were not derived by “rational analysis”, the notices were fatally defective and the judgment in favor of McDaniel Builders, Inc. was affirmed.  Rental Equipment, Inc.’s failure to comply with California’s mechanic’s lien statutes caused its mechanic’s lien to be unenforceable.

Rental Equipment, Inc. should serve as an important learning lesson for all contractors, subcontractors, materialmen, and equipment providers: even a small mistake in a preliminary notice can greatly hinder your chances of recovery. If you are ever in doubt, seek a legal opinion.

Failure to Name True Owner Invalidates Lien

Posted on June 8, 2015 by - Mechanic's Liens & Bond Claims

Colorado Court Finds Failure to Name True Owner Invalidates Lien

The Colorado Court of Appeals, Division II, answered “When a party fails to name the true owner in the notice of intent to file a lien, what happens to the validity of the mechanic’s lien?” 

The Case

In the case of Moore Electric Company v. Ambassador Builder Corporation, plaintiff-appellant Moore Electric Company provided electrical work pursuant to a contract with Ambassador Builder Corp., defendant-appellee, also known as Ambassador Homes, Inc. Moore was not paid for its work and subsequently filed two mechanic’s liens encumbering multiple properties.

In the first mechanic’s lien, Moore listed Ambassador as the prime contractor as well as owner of eight properties identified in the lien.  The lien was mailed to Ambassador, as the owner or reputed owner of the properties.

In the second mechanic’s lien, Moore named Ambassador and Joe DeMarco, the sole shareholder of Ambassador, as the owner of the listed properties, which included DeMarco’s personal residence which Moore had performed work on.  The lien was again served on Ambassador.

When filing the liens did not prompt payment, Moore filed suit to foreclose its mechanic’s liens on a total of 10 properties, naming Ambassador and the record owners of the liened properties as defendants. Several of the liens were dismissed before trial and once at trial, a judgment of dismissal was entered as to all defendants except Ambassador.

The court found that Moore’s notices of intent to file mechanic’s liens were defective because the true owners of the properties were not named in the notices.

The Appeal

On appeal, the court addressed the sole issue of whether Moore complied with Colorado’s statute governing the notice of intent. Colorado’s statute provides that in order to preserve any lien for work provided or materials furnished, there must be a notice of intent to file a lien statement served upon the owner or reputed owner of the property at least ten days before filing the lien statement.

C.R.S. 38-22-109. Lien statement (3) In order to preserve any lien for work performed or laborers or materials furnished, there must be a notice of intent to file a lien statement served upon the owner or reputed owner of the property or the owner’s agent and the principal or prime contractor or his or her agent at least ten days before the time of filing the lien statement with the county clerk and recorder.

“Reputed owner” is defined as one who has to all appearances the title to, and possession of, the property.

Moore argued that Ambassador was the reputed owner because it paid the bills, supervised construction, and performed every task an owner would.  Therefore, according to Moore, notice of intent served upon Ambassador was proper.

The appellate court, however, disagreed.

The court found that Ambassador’s actions were consistent with that of a general contractor and did not, in and of itself, indicate ownership.

Further, Moore’s claims of Ambassador’s ownership are refuted by the record in which there are copies of recorded warranty deeds by which Ambassador transferred ownership to private owners prior to the filing of the notices of intent.  Accordingly, by the time Moore filed the notices, the true owners were readily ascertainable.

Since Moore failed to comply with the statutory requirements set out in § 38-22-109(3), C.R.S.1973 (1981 Cum. Supp.), it failed to meet its burden of proving its right to a mechanic’s lien. Moore’s fatal mistake cost it a mechanic’s lien that would have encompassed several properties.

Although Moore believed it was in compliance with statute when it served notice upon the entity it believed to be the owner (and which up until shortly before the filing of the notices was the owner) the Colorado court was unforgiving.

This case is hardly an anomaly.  Courts across the country generally impose stringent requirements on those seeking mechanic’s liens, holding liens unenforceable where even seemingly minor mistakes were made.

Takeaway

Carefully review statute, ensure proper parties are notified in the proper format and if all else fails, seek legal guidance!

Debtor’s Business and Your UCC Filing

Posted on June 2, 2015 by - UCC Financing Statements

Your Customer is Selling Their Business, What’s in Store for Your UCC Filing?

Businesses are bought and sold every day, sometimes without any consequence to creditors/vendors. Unfortunately, that is only sometimes. One of the primary reasons businesses are sold is due to fiscal distress, and the sale of the business is “simply” a way to escape the debts owed. (I use the term “simply” loosely – selling a business, especially a business with multiple vendors etc., is difficult – think of selling a home… times 100.)

How Can They Escape?

An unfortunate and common consequence of these transactions is that the buyer may require language within the sale that relieves them of any responsibility for the previous business owner’s debts. Erasing the debt linked to the business becomes a condition of the sale.

If They Can Escape the Debt, How Can a UCC Possibly Help?

Your UCC filing acts as a lien on the business, therefore, before title passes from one party to another, the lien should be acknowledged & either settled or renegotiated. Check out this success story:

A UCC Success Story

USF has a long time customer with several restaurants. The customer is a high volume account with annual sales exceeding $2M. The credit worthiness of the customer remains unknown as the division does not have financials, only their payment history.

The Credit Team pursued UCC’s on all locations to help mitigate risk last year. We were notified that the customer was selling a location which at the time had an AR in the mid six figures, all of which was past due. After their attorney did their due diligence they noticed a lien on the business which prompted a call from the seller inquiring about the UCC. Around the same time the attorney reached out and asked what was needed to lift the lien. The answer was simple, a lump sum check for the entire balance of $154,000. The sale took place and our Credit Manager was contacted by the attorney who had the check in hand for the full amount. Had we not had the UCC filing in place we would not have received this payment and very likely, only cents on the dollar.

The end result was a very good month for the division from a performance perspective based on this recovery. This success paid for the cost of filing previous UCC’s and future UCC filings for years to come. This was definitely a win when looking at the cost benefit/ROI for securing our receivables with the UCC process and utilizing the services of NCS.  – Division Credit Manager, US FOODS BALTIMORE

Use Your Spidey-Sense

OK, so you may not have a “spidey-sense” (perhaps you do – who am I?) but there are services available to monitor various aspects of your customer’s business, which could provide you with alerts to potential danger.

  • UCC Filings: file UCCs on your customers. We have previously discussed that these are harmless documents for your customer, but invaluable to you as a creditor.
  • Corporate Monitoring: enlist a service to monitor the incorporation activity of your customer. In the event your customer’s incorporation expires or is terminated, you will be notified & can take appropriate action immediately. (NCS offers corporate monitoring, take a minute to read this client perspective.)
  • Credit Reporting: this should come as no surprise – it’s incredibly important to know whether or not your customer is overextended. High debt to income ratios should be treated cautiously, as well as vague credit histories.

When in Doubt – Shout it Out!

No, you don’t have to actually shout, but if you have any concerns about your customer & their working capital or abilities to pay their debt with you, ACT. Make inquiries on the account and monitor the payment trends, reduce credit limits, require monies up front – whatever it takes to reduce your risk.

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

RUG: Secured Transactions in Mexico

Posted on May 13, 2015 by - UCC Financing Statements

Secure Your Receivables in Mexico via the RUG

Historically, Mexican companies have had difficulty securing financing from foreign banks, primarily due to concerns about the reliability of the laws governing secured transactions.

The Mexican government recognized the need to alleviate those apprehensions and set forth goals to create a mechanism that allows public disclosure of security interest and to establish priority rules for debtors.

In September of 2010, Mexico instituted amendments to their secured transaction law. These amendments better aligned Mexico’s secured transactions with U.S. Uniform Commercial Code – Revised Article 9 and Canada’s Personal Property Security Act.

A properly perfected pledge (in the U.S. & Canada this would be the security agreement), protects the creditor against third parties that claim an interest in the collateral, allows the creditor to foreclose on the property and apply all proceeds to the outstanding debt, and grants preference against a bankruptcy trustee and all other creditor types including tax claims.

The filing system in Mexico is called the RUG (Registro Unico Garantias Mobiliarias – Unified Registry of Moveable Property Collateral) and RUG filings are in place for 12 years.

There Are Three Ways to Pledge Collateral Under the RUG

  • Ninguno: all products that are to be sold by the debtor (similar to the PMSI in Inventory filing under UCC/PPSA)
  • Todos los bienes de la empresa: all assets currently owned (similar to Blanket or Basic filing under UCC/PPSA)
  • Bienes específicos: any specific asset that can be identified (similar to a PMSI in Equipment filing under UCC/PPSA)

Compliance with the RUG

  • The debtor must sign three documents (must be written in Spanish):
    • A non-possessory pledge, which is similar to a security agreement under the UCC & PPSA
    • A credit application, which is specific to the RUG filing process with Mexican law governing
    • A promissory note, which elevates the security interest to an executive proceeding if there is a default, and provides stronger remedies for the creditor
  • The secured party will need to authenticate the identities of the debtor by ensuring a Mexican notary public is present at the time the documents are signed.
  • The secured party must verify the debtor’s correct legal name, by requesting the debtor provide a copy of the articles of incorporation, as well as provide their The Federal Tax Registration and electronic registry number.
  • The completed pledge agreement, signed by both parties and notarized should then be recorded in the public registry by a Federal Notary.

NCS Is Here to Help

If you would like to begin securing transactions in Mexico, please don’t hesitate to contact us! NCS can provide all necessary documents and assist with the execution of a RUG filing.