Service Area: Notice and Mechanic’s Lien Services

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.

The Importance of Filing Your PMSI Timely

Posted on April 27, 2015 by - UCC Financing Statements

The Importance of Filing Your PMSI Timely: When is a Purchase Money Security Interest (PMSI) Perfected?

A PMSI is considered fully perfected once you:

  • have the debtor sign and date the security agreement/credit application
  • verify the debtor’s correct legal name and state of jurisdiction through the articles of incorporation or driver’s license
  • file the Financing Statement
  • complete a UCC-11 search in the state of jurisdiction and all states to which the secured party is shipping
  • notify all previous secured parties

The typical perfection process time can take 3 to 4 weeks.

Why Would a PMSI Perfection Be Delayed?

There are many factors that can cause the delay of a security interest’s perfection. Factors such as:

  • if the state of jurisdiction does not offer online filing (i.e. the jurisdiction only accepts entries via fax or mail)
  • if the filing includes an attachment, such as an additional collateral description, and the state does not permit the online filing of attachments
  • if the UCC search website is not through the security interest filing date (i.e. today is 04/01/2015, but the state has only filed records through 02/01/2015)
  • if several previous secured parties need to be notified and there is a delay in verifying receipt of the notification letters or if those parties are located in a different country

The Date of Perfection

Once a PMSI is fully perfected, your collateral will be secured as of the date of the filing or the date the agreement was signed, whichever is later.

Example of Perfection

Any inventory that the debtor takes possession of before the date of perfection may not be protected by the filing. This is because you are not considered a secured creditor until perfection which is achieved by completing the steps listed above.

For example, you and your customer signed a security agreement. Some time passes; now your customer has an outstanding balance of $100,000.00 and you decide to file a PMSI. Because you filed a PMSI and followed all the steps for perfection, you believe you are now a secured creditor, so you extend an additional $50,000.00 to your customer. Unfortunately, you are only considered secured for the $50,000.00 your customer acquired after the PMSI was perfected, leaving the $100,000.00 unsecured.

Had you, the creditor, filed the PMSI when the original $100,000.00 agreement was signed, the full amount ($150,000.00) would be considered secured by the Purchase Money Security Interest filing.

Don’t Get Hit By Preference

Another important reason to file a PMSI as soon as you receive the signed security agreement/credit application is to proactively protect yourself, in the event your customer files for bankruptcy protection.

Let’s say you discover your customer is intending to file bankruptcy in the next month and you are not a secured party. Unfortunately, it’s too late to file the PMSI as security because there is a 90 day preference period regarding all security interest filings and bankruptcy. Any security interest filed within 90 days of the bankruptcy being filed will be dismissed as a preference and not considered as part of the bankruptcy proceedings, leaving you as an unsecured party.

Best Practice

Always file your PMSI at the time the security agreement is executed! Remember the UCC has no impact on your customer’s credit or day to day operations. Only impact is if they file bankruptcy then you are a secured party.

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 Yourself before You Release 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.

The Benefit of UCC Filings

Posted on March 24, 2015 by - UCC Financing Statements

The Benefits of Secured Transactions and Article 9 of the Uniform Commercial Code

The subjectivity in evaluating credit worthiness magnifies the need for credit tools. Article 9 of the Uniform Commercial Code provides an opportunity for trade creditors to collateralize or “secure” their goods and/or accounts receivable utilizing the personal property assets of their customer.

Sounds Like a Big Deal!

Not really. From your customer’s perspective, a UCC filing is practically irrelevant, unless there is a bankruptcy. In addition, the filing never costs the debtor a dime… ever. A Security Interest or UCC filing simply elevates the status of your receivable and/or inventory/equipment to that of a secured creditor.

How Does It Work?

In a bankruptcy, all creditors are split into two classes: secured and unsecured.

  • In a Chapter 7, secured creditors are paid first in the order the UCCs were filed; unsecured creditors split what is left over on a pro-rated basis.

A UCC filing ensures you are a secured creditor and therefore in the best possible position to get paid. In addition, a Purchase Money Security Interest filing provides the priority right of repossession of your inventory or equipment at default or bankruptcy. You define default in your security agreement.

  • In a Chapter 11, all secured creditors have the same status providing substantial leverage over the unsecured creditors as it relates to leveraging liquidation.

The UCC process is a cost-effective solution for securing your inventory, equipment and/or receivables, especially important in today’s fragile economy.

Your customer’s only involvement in the process is signing a security agreement. This agreement or contract may be a stand-alone document or can be added to a standard credit application or other document. When your customer signs a security agreement, the UCC-1 perfects or records the security interest. A security interest collateralizes your company through equipment, inventory, the proceeds from the sale of your inventory, and your accounts receivable. Once the filing is completed, it protects all transactions for five years. Protect your bottom line as a secured creditor.

Types of UCC Filings

In an earlier post we discussed the differences between Blanket Filings and PMSI Filings; however, there are additional UCC filings.

  • Consignment sales: Goods sent to an agent for sale with title being held by consignor until a sale is made.
  • Bailment: Goods, which will be processed or improved in some manner, delivered in trust for a limited period.
  • Tooling: Tools provided to an outside manufacturing company in order for that company to provide a finished product for sale.
  • Warehousing Situations: Stocked goods or inventory held at a third party location.
  • Installments/Promissory Notes: Payment for a debt made in intervals.

How Do You Begin?

Determine when and where security is applicable in your business. For example, your company may deem filings are necessary for all customers with credit lines higher than $10,000.

Once you have set an account threshold, begin implementing the UCC filings by having your customer sign a security agreement. The best time to have your customer sign the agreement is at the time of contract and it’s a best practice to include the security agreement within the terms of your loan or credit application.

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.

Top 5 Mistakes in Security Agreements

Posted on March 11, 2015 by - UCC Financing Statements

UCC Filings: Top 5 Mistakes in Security Agreements

In an earlier post we discussed the art of drafting a perfect security agreement and today we’d like to discuss the common mistakes in security agreements.

1. Incorrectly Identifying the Debtor

How difficult is it to identify the debtor aka your customer – significantly more difficult than it should be. The greatest obstacle with identifying your customer is ensuring you have the correct spelling of their corporate legal name – not their DBA or trade name. Leaving off “Inc.” or “The” can deem a filing seriously misleading & subsequently unenforceable.

Always review the Articles of Incorporation to confirm your debtor’s name.

2. Omitting Debtor’s Address

Remember, omitting information is just as fatal as listing the information incorrectly. Make sure you correctly identify and list the corporate address of your debtor.

3. Date, Date, Date

Don’t lose rights because you forget to list the date or you list the wrong date. In a recent case the lender lost its secured position (on $1,100,000.00) because the Security Agreement was dated December 13th and the Promissory Note was dated December 15th. Due to the discrepancy the court held that there was no perfected security interest.

Don’t go it alone!

A best practice in drafting security agreements (or any document for that matter) is to have someone else review the document. In grade school we had proofreading buddies – just because we aren’t in grade school anymore, doesn’t mean we should stop taking advantage of another set of eyes.

4. Authorized Signatures

First, make sure the agreement is signed. Second, make sure the person signing the document is permitted to sign the document. Because a security agreement is part of a consensual process, it’s imperative that the parties signing the document are authorized to do so.

5. Don’t Forget the Granting Clause

The granting clause actually grants the security interest, so do yourself a favor and confirm it is written into the agreement! In fact, without the granting clause, the security agreement isn’t actually a security agreement.

When in doubt, seek a legal opinion.

Request a review of your security agreement to ensure the necessary parts are in place & accurate. Drafting a security agreement does not have to be difficult, but it does need to be perfect – that’s why it’s called a “perfected security interest” when you become a secured creditor. Don’t lose your security because you didn’t perfect the security agreement.

Utah’s State Construction Registry (aka SCR)

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

Preliminary Notices: Understanding Utah’s State Construction Registry (aka SCR)

Securing mechanic’s lien and bond claim rights, in the state of Utah, begins with the preliminary notice.

“A person who desires to claim a construction lien on real property shall file a preliminary notice with the registry no later than 20 days after the day on which the person commences providing construction work on the real property.” (UT Title 38, Chapter 1a, Part 5, Section 501)

Since 2005, Utah has managed preliminary notices, notices of commencement and notices of completion differently than the majority of states. In Utah, these notices are housed, online, in the State Construction Registry (SCR).

What is the Utah SCR?

“SCR” stands for State Construction Registry. It is an online database for required notices for commercial, public & residential construction projects. Filing notices with the SCR increases visibility of all parties within a contractual chain.

The National Association of State Chief Information Officers (NASCIO) may have said it best, when they referred to the SCR as a bulletin board:

“…an online project “bulletin board,” providing full disclosure to property owners, contractors and other interested parties, of people providing goods and services to a construction project… to implement an efficient and standardized system for protecting lien rights…”

Who Benefits from the Utah SCR?

Quite frankly, the simple question is who does not benefit from the SCR – and the answer to that is no one. All parties benefit from the SCR:

  • Owners – the SCR provides information on all parties furnishing materials/labor to their real property.
  • Contractors/Banks/Title Companies/ Architects – the SCR provides information on all parties that are furnishing materials/labor to a project.
  • Subcontractors & Suppliers – the SCR provides information on all parties that are furnishing materials/labor to a project.

Hmm, noticing a trend? As well you should! The SCR provides a clear picture of when a project begins, who will be participating in the project and when the project ends. The SCR can provide transparency – the lack of which is one of the most frustrating obstacles in protecting mechanic’s lien rights.

Not Just for Preliminary Notices

The SCR website also provides email alerts to participating parties, notifying them of changes to the preliminary notice and when a notice of completion has been filed.

Technology + SCR for the Win

In the age of smart phones, Utah capitalized on the opportunity to put those smart phones to work. A QR Code is generated for each notice filed with the SCR. Notices are often posted at the jobsite, which can make connecting to the SCR as simple as a click on your phone.

From the SCR website:

“SCR QR Codes will save you time because you won’t have to find and write down all of the job information: Owner, Original Contractor, Job Address, County and Parcel Numbers…If the SCR filing is posted on the job site, everyone working on the job would be able to scan the QR code and use the correct job information in their Preliminary Notice without having to type it in again.”

Is It Really that Easy to Post a Notice to the SCR?

If, through due diligence, you obtain the Tax ID# (private project) or the SCR# (public project) from the building permit, or from the person with whom you contracted, posting the notice on the SCR is a simple process.  If the Tax ID# (or SCR#) is not obtained prior to posting your notice, the process becomes more complicated.  Research may be required in order to determine the correct Tax ID#/SCR#.  The SCR provides an excellent search engine by which this information may be found, but without the exact Tax ID#/SCR#, it can sometimes be challenging to link to the correct project when multiple listings are posted.

Need help? We’re here for you!