Service Area: Notice and Mechanic’s Lien Services

Your Customer Defaults, Fortunately You Filed a UCC – Now What?

Posted on September 3, 2014 by - UCC Financing Statements

Your Customer Defaults, You Filed a UCC – Now What?

Congratulations, you filed a UCC to position yourself as a secured creditor! Unfortunately, your customer has defaulted on payments. You have attempted to work with your customer regarding their past due account, but they are still unable to meet the commitment – now what?

Any time your customer has defaulted on payments, we recommended you take immediate action to recover the funds; the longer an account remains unpaid, the harder it becomes to collect. A great, and relatively inexpensive, first step is to send a Demand Letter. A demand letter is a demand served upon your debtor, advising legal action may be taken if payment is not received within a specified time frame.

In the event the demand letter does not prompt payment, you may need to proceed with further legal action. Your next course of action is dictated by the type of UCC you filed.

Did you file a PMSI UCC?

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest (PMSI) UCC, you need to determine whether or not you would like your equipment/inventory (aka goods) back.

  • If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets.
  • If you do want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace.

If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

Did you file a Blanket UCC?

If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.

Has your customer filed bankruptcy?

Keep in mind, the bankruptcy court freezes all debtor assets.

  • If your customer filed Chapter 7: File your secured proof of claim, regardless of whether you filed a PMSI or Blanket UCC.
  • If your customer filed Chapter 11:
    • PMSI UCC:  If you would like your goods back and your goods are at your customer’s location, contact the Trustee to repossess. If the Trustee is uncooperative, you may need to take additional legal action.
    • Blanket Filing: File a secured proof of claim and monitor for distribution.

Of course, as in any situation, it is in your best interest to seek legal advice and it is important to remember, a UCC filing is a remedy and not a cause of action in suit.

Liens on Funds, Stop Notices, and Public Improvement Liens

Posted on August 12, 2014 by - Mechanic's Liens & Bond Claims

What Are Liens on Funds, Stop Notices, and Public Improvement Liens?

A Lien on Funds (in some states referred to as a stop notice or public improvement lien) is a tool available in certain states to help stop the flow of funds on a project until it can be shown that you have been paid.

Serving a lien on funds may halt payment to your debtor or to the general contractor, and in some cases can even require the lender to withhold money.

Though the laws vary by state, one thing does tend to be consistent – the lien on funds will likely bring attention to your non-payment situation.

At first, this may seem counterproductive.  You want money to flow down to you, so why would you do something to stop that from happening?

Unfortunately, not all funds continue to flow as they should – especially to those further down the contractual chain.  A lien on funds can make an owner or general contractor aware that your customer hasn’t paid you.

Bringing the issue of non-payment to their attention may be what is needed to shake things up in the chain of supply.

Lien on Funds and Public Improvement Lien

These two are similar – lien on funds and public improvement lien. Typically, it’s a lien against the money owed by the Project Owner under contract with the Prime Contractor.

Stop Notice

A stop notice is a notice to party paying for work of improvement of money due, which can obligate that party to withhold sufficient funds to cover noticed amounts.

Here’s a quick look at which states offer this type of security!

Articles of Incorporation: Not Just for Name Verification

Posted on July 15, 2014 by - UCC Financing Statements

Articles of Incorporation: Not Just for Name Verification

Do you know that if your customer changes their name you must amend your UCC filing or your security is jeopardized? Did you know Articles of Incorporation are required to verify an entity’s legal name and to verify jurisdiction?

Per Section 9-507(c) of the UCC, the secured party has four months to amend a UCC filing when the debtor’s name changes. If the secured party does not amend the UCC filing, the filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change.

Best Practice

Make sure your Security Agreement requires your debtor advise you of any changes to their name, address or organizational structure. It is your responsibility, as the secured party, to ensure the UCC filing is updated and contains the correct information.

You can also utilize resources like our Corporate Monitoring, which will alert you when the State Corporation Division reports a change in your customer’s corporate profile along with decision making information to keep the UCC Financing Statement in compliance with Article 9-507(c).

Articles of Incorporation are not only required under UCC Article 9 to verify the entity legal name, but must also be used to verify jurisdiction.

In this example, the state of Texas is reporting the entity as a Foreign Limited Partnership organized in Delaware. However, if you review the Articles, you will discover the LP is actually organized in California. If the documentation had not been reviewed, the UCC would have been filed in the wrong jurisdiction, consequently there would be no security interest.

Secured Transaction Takeaway: Always review all documents carefully!

Lien Deadlines and First Furnishing, Last Furnishing, and Completion

Posted on July 8, 2014 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Understanding Furnishing Dates and Lien Deadlines: First, Last, and Completion

When securing your receivables through the Mechanics Lien & Bond Claim process, most often, statutory deadlines are dictated by your first & last furnishing dates and/or completion of the entire project. Typically, the first furnishing date will dictate the deadline for the Notice, whereas the last furnishing date will dictate the Mechanics Lien/Bond Claim and Suit.

Let’s Define these Important Dates

First Furnishing is the date on which the claimant first provides materials or performs services on a project. Here are some typical examples of first furnishing:

  • if you are providing only materials, the date the materials first arrive on the job site
  • if you are providing only labor to the project, the date you first arrive on location
  • if you are providing materials and labor to the project, the first date either materials or labor are provided to the job site

Last Furnishing is the date on which the claimant last substantially furnishes materials or performs services on a project. Here are some examples of questionable last furnishing dates:

  • punch list work
  • warranty
  • remediation

The key to last furnishing is that it needs to be substantial.

Completion is the date of fulfillment of prime contract for work of improvement. Completion is typically when the general contract is complete, not necessarily the date your contract is complete. Acceptance is an official act where entry is made in the government records that a public work under contract is completed and accepted.

Let’s See these Dates in Action

In our example, we are furnishing materials to a public project in Arizona. We are shipping our materials over time beginning August 1, 2021 and we anticipate our last furnishing to be October 1, 2021.

Based on our first furnishing date, our Preliminary Notice will be due August 20th, because in Arizona we need to serve the notice upon the prime contractor within 20 days from first furnishing materials or services.

If we aren’t paid in a timely fashion, we may decide to proceed with the Bond Claim and in Arizona, the bond claim should be serve the bond claim upon the prime contractor within 90 days from last furnishing materials or services. Based on our last furnishing date of October 1st, our Bond Claim should be served by December 30th.

In the event the Bond Claim doesn’t prompt payment, we need to file suit to enforce the bond claim after 90 days from last furnishing materials or services, but within 1 year from last furnishing materials or services, which means we would need to proceed with suit by September 30, 2022.

Know Your Dates

Securing your Mechanics Lien and Bond Claim rights begins the moment you enter into a contract to supply materials and/or labor to a project. Make sure you are familiar with the state statute and make sure you know what deadlines lay ahead. Missing a deadline could mean missing your opportunity to protect and collect.

What a Difference a Name Makes: Omission of “Inc.” Left Security Interest Unperfected

Posted on June 30, 2014 by - UCC Financing Statements

What a Difference a Name Makes: Omission of “Inc.” Left Security Interest Unperfected

The proper spelling of a debtor’s name on UCC Financing Statement is currently one of the most fervently litigated UCC issues. The UCC Article 9 registry system is designed to permit creditors to make a security agreement public by filing a UCC Financing Statement. UCCs are indexed by the name of the debtor to facilitate the ability of creditors to search and identify pre-existing security interests.

Even Minor Spelling Differences Matter

Even minor spelling differences in a debtor’s name can result in a creditor’s security interest being unperfected.  The case of Tyringham Holdings, Inc. vs Suna Bros Inc., heard in the United States Bankruptcy Court for the Eastern District of Virginia, demonstrates the impact of something as simple as omitting “Inc.” from the debtor’s name in a UCC filing.

Tyringham Holdings, Inc. (Tyringham) entered into a consignment agreement to hold items of jewelry for Suna Bros. Inc. (Suna). Suna filed a UCC to perfect a security interest in the jewelry in the amount of $310,925.

The financing statement filed by Suna listed the debtor’s name as “Tyringham Holdings.”  The debtor’s actual name, per the corporate certificate was “Tyringham Holdings, Inc.”  Evidence submitted in the case revealed that a UCC search, certified by the State Corporation Commission for Virginia, did not yield the UCC Financing Statement under the name “Tyringham Holdings.”

The court noted the name of a corporate debtor that is listed on a UCC must match the name of the corporation on the public record of the jurisdiction where it was organized. However, the court also conceded that minor errors and omissions in the name do not necessarily mean that a security interest is unperfected.

Substantial compliance with the requirements of a UCC Financing Statement can be sufficient, provided that the name of the debtor in the UCC is not “seriously misleading.”  The court cited similar cases in other jurisdictions that found a debtor’s name is seriously misleading if the standard search logic in the UCC filing office fails to reveal the Financing Statement when conducting a search using the name.

What about Standard Search Logic?

Suna contended that several searches, by private search companies, using the name “Tyringham Holdings” did produce the UCC filing. However, the court rejected this argument because the relevant search is the one conducted using the UCC filing office’s standard search logic.

Suna also contended that the State Corporation Commission’s search logic was faulty because it did not filter out “Inc.” as a “noise word.”  A noise word includes terms like “an,” “the” and other words that are filtered out when searches are conducted.

The court rejected this argument because the filing office’s standard logic did not consider “Inc.” a noise word. Rather, the standard search logic used by the State Corporation Commission specified that “incorporated” be abbreviated to “Inc.”

Ultimately, the court found that the name was seriously misleading which entitled the debtor to sell the collateral unencumbered by a security interest. Although the court acknowledged that application of the filing office’s standard search logic could result in a minor error preventing perfection of a security interest, the court also reasoned that creditors do not face a significant burden by being forced to use the correct name on UCC filings.

Best Practice

Always always ALWAYS review the public organic record for your debtor. Not only will you confirm the company’s corporate legal name, you will also confirm whether or not the company is in good standing with the state.

Oklahoma Case: Lack of Preliminary Notice Leads to Invalidated Mechanics Lien

Posted on June 24, 2014 by - Mechanic's Liens & Bond Claims

Oklahoma Case: Lack of Preliminary Notice Leads to Invalidated Mechanics Lien

Mechanics Lien laws are rarely straightforward and courts across the nation generally require strict compliance to these often complex statutes. The case of Mel Stevenson & Associates, Inc. v. Giles, 2004 OK CIV APP. 96, 103 P.3d 631 (2004), illustrates how a simple mistake, due to confusing language in statute, can lead to losing your mechanic’s lien rights.

In Mel Stevenson, the defendant, Roy Giles, owned and occupied a Newcastle, Oklahoma residence which was completely destroyed by a fire. Giles elected to rebuild the home in the same location and engaged Wes-Star Construction, Inc. to act as contractor. Giles lived in another location while the home was being reconstructed, but kept his mailing address and phone number. Once the home became habitable, Giles promptly moved back.

Giles learned of a special type of roofing offered by Mel Stevenson & Associates, doing business as Spec Building Materials, herein referred to as Spec.

Giles consulted with Spec about their roofing materials and explained to the company the situation with the fire and the reconstruction of his home. Spec provided the roofing materials and windows to the project on account with Wes-Star. During this time, the County Assessor removed the property from the improved tax rolls due to the fire.

Then Spec Wasn’t Paid

Later, a dispute arose between Spec and Wes-Star.  Spec was not paid for the materials it had supplied. It filed a materialman’s lien but did not provide preliminary notice to Giles as required under 42 O.S.2001, § 142.1.2.

In court, Giles claimed Spec’s lien was invalid due to lack of notice.  Spec, on the other hand, urged that notice was not required under Oklahoma law because Giles was not occupying the dwelling.

The court turned to the statutory language of 42 O.S.2001, § 142.1.2. Under this provision, no lien which affects property presently occupied by an owner is enforceable unless written notice was provided prior to furnishing of the materials. The statute sets out the language which the notice must include.

The question then became whether Spec was required to send notice to owner to Giles because he was not currently occupying the home. The court looked to prior case law on the issue and found much dissention on the subject.

Was the Preliminary Notice Really Required?

The court ultimately found the issue turned on whether Giles had begun occupying the property before construction, and therefore his absence was merely temporary, or whether he was deemed to have first occupied the property upon his taking of possession once it was habitable.

The court found that under the circumstances, Giles absence was temporary because he never intended to leave the property permanently.  Thus, it reasoned, Giles was entitled to notice.

The court also found persuasive the fact that Giles stated he was unaware Spec could file a lien against his property in the event of nonpayment by the contractor.  After addressing all issues, the appellate court held Spec’s mechanics lien to be invalid.

In Mel Stevenson, the Oklahoma law concerning the notice to owner was far from clear, given the circumstances of the absent owner and destroyed home.

Best Practice: Better Safe than Sorry!

We recommend serving a copy of the preliminary notice upon all parties within the contractual chain, even when it appears no notice is required. The old adage is true: “better safe than sorry!”

Collateral Description in UCC Filings: a Case from Tennessee

Posted on June 17, 2014 by - UCC Financing Statements

Collateral Description in UCC Filings: a Case from Tennessee

A recent case decided by the Sixth Circuit Court of Appeals, 1st Source Bank v. Wilson Bank and Trust et al., 2013 WL 5942056 (No. 13-5088), provides an example of the importance of properly describing collateral in a UCC filing to perfect a security interest. In the case, the key issue was whether or not the language describing specific heavy machinery and “all proceeds thereof” was sufficient to include the debtor’s accounts and accounts receivable.

What Was Included in the Collateral Description?

In 2004, 1st Source Bank arranged for the lease or sale of certain equipment to K & K Trucking and J.E.A. Leasing (Debtors), which was subject to a security interest that was described in the UCC filing according to the above language.

The terms “accounts” and “accounts receivable” were not included in the description of the collateral. Subsequent to the 1st Source Bank UCC filing, the Debtors entered into financing contracts with a number of other banks.

These other banks, in turn, filed UCCs which specifically included “all accounts receivable now outstanding or hereafter arising” as part of the collateral description.

When the debtor defaulted on the financing arrangements, these banks took control of the collateral, including the accounts receivable.  1st Source Bank objected based on its claimed priority security interest.

What Did the Court Say?

The issue before the court was whether the language referring to “all proceeds thereof” was sufficient to put future creditors on notice that 1st Source Bank held a security interest in “accounts” and/or “accounts receivable.”

Generally, the legal standard for description of collateral in a UCC filing is that it “reasonably identify what is described.”  Courts have interpreted this as meaning that it must be sufficient to create a reason to inquire further about the existence of a security interest in the collateral.

The court addressed the argument that “all proceeds thereof” in the UCC was sufficient to encompass “accounts” and “accounts receivable.” The court noted that Chapter 9 of the Tennessee Uniform Commercial Code (UCC) defines “accounts” separately.

The court determined that the term “proceeds” must refer to something different or the use of the term “accounts” would become superfluous.  The court also relied on the commentary to Article 9 that indicated the term “proceeds” was not to be construed particularly broadly, so it did not make sense to have it include all monies generated by the equipment.

Consequently, 1st Source Bank’s security interest was not perfected with respect to accounts and accounts receivable, providing the other banks a priority status even though their filings were recorded after 1st Source Bank.

Getting It “Just Right” Can Be a Challenge

Because the collateral that underlies a security interest is the key protection afforded to creditors in the case of debtor default or bankruptcy, collateral must be properly described in UCC filings.  The description must be sufficient, to provide notice to prospective creditors of the property encumbered by a prior security interest.

On the other hand, the description should not be so specific and narrow that key forms of collateral are not encompassed within the description in the UCC Financing Statement.  A creditor with a senior security interest can forfeit a priority position when the UCC collateral description is defective.

Notice to Commence Suit and Summons & Complaint

Posted on June 2, 2014 by - Preliminary Notices & Construction Credit

You’ve Received a Notice to Commence Suit and Summons & Complaint

Congratulations! You have taken the proper steps to secure your receivables through the mechanic’s lien process.  You’ve checked The National Lien Digest© to confirm you completed the necessary steps within the state specific time frame.  You properly served your preliminary notice and unfortunately had to proceed with the mechanic’s lien, because you weren’t paid.

While you wait for the mechanic’s lien to prompt payment, you recheck The National Lien Digest, just one more time, to confirm what the deadline is for proceeding with Suit to Enforce the Mechanic’s Lien.
Then… you receive an official document which indicates the deadline to proceed with Suit is different than the deadline you see in The National Lien Digest!

What is going on?!

In many states, the statute provides a remedy for an owner to shorten the deadline for a lien claimant to file suit: the owner can file a Notice to Commence Suit. When properly notified by an owner or the court, any lien claimant who receives a Notice to Commence Suit must proceed with suit by the deadline stated, or they will lose their lien rights. This process allows the owner to “thin out” those who may not have a valid claim.

Another action that can change your suit deadline is when another claimant files suit to foreclose on the property. When filing suit, the plaintiff must notify all other parties with an interest in the property that an action to foreclose is being filed. This filed document is often referred to as a Summons and Complaint.

At first glance, the Summons and Complaint may cause the unwary to believe they are being sued. In actuality, the Summons and Complaint is a legal action which requires all lien claimants to join in the foreclosure action within a specific time frame, by submitting an Answer and Cross Claim.

Frequently an Answer and Cross Claim is required in as little as 20 days from receipt of the Summons and Complaint. If a lien claimant does not respond by the deadline, lien rights may be lost.

When a Notice to Commence Suit or a Summons and Complaint is received by your office, in response to a lien that was filed on your behalf, we recommend taking immediate steps to retain the services of an attorney to protect your rights.