Service Area: Notice and Mechanic’s Lien Services

The Importance of Monitoring Debtor Name Changes under UCC Section 9-507(c)

Posted on May 28, 2014 by - UCC Financing Statements

The Importance of Monitoring Debtor Name Changes under UCC Section 9-507(c)

If a name change by a debtor makes a filed financial statement “seriously misleading,” UCC Section 9-507(c) states the financing statement will only be effective for collateral acquired prior to the name change or within four months following the change.

This rule applies even if the creditor has not received actual or constructive notice of the name change from the debtor.

A creditor can prevent a UCC from becoming unperfected on collateral acquired beyond this four month window by filing an amendment to the financing statement with the new business name of the debtor.

The Case

Gugino v. Wells Fargo Bank Northwest (In re Lifestyle Home Furnishings, LLC), demonstrates the consequences of failing to monitor a debtor’s name change.  In Gugino v. Wells Fargo Bank Northwest, Wells Fargo Bank Northwest (“Wells Fargo”) provided a secured loan to Factory Direct LLC (“Factory”) and to perfect its security interest, Wells Fargo filed a UCC-1 Financing Statement.

On May 7, 2007, approximately three and a half years after the filing of the UCC to perfect Wells Fargo’s security interest, Factory changed its name to “Lifestyle Home Furnishings, LLC.”  Factory did not provide notice of any kind to Wells Fargo and because Wells Fargo was unaware of the name change, it failed to amend its financing statement.

Thirteen months after the name change, Factory filed for Chapter 7 bankruptcy protection. The trustee (Gugino) challenged Wells Fargo’s security interest in an adversary proceeding.  The trustee contended that the security interest was unperfected for collateral acquired more than four months after the name change, because the name in the UCC filing was “seriously misleading”.

The court granted the trustee’s motion for summary judgment allowing the trustee to avoid Wells Fargo’s security interest.

The information included in a UCC Financing Statement may change, even after a security interest has been properly perfected, and depending on the nature of the information that changes, a creditor may need to take action to further protect its security interest.

Best Practice

Creditors need to exercise diligence in monitoring debtors for changes of their name and address, not only to maintain a security interest, but because it is imperative to consistently evaluate your risks when extending credit.

The Importance of Proper Service of the Preliminary Notice

Posted on May 20, 2014 by - Preliminary Notices & Construction Credit

Overnight Delivery, Registered Mail, Certified Mail! Oh My!

Contractors, subcontractors, material suppliers & laborers throughout the U.S. & Canada understand the Preliminary Notice is often the foundation for securing Mechanic’s Lien & Bond Claim rights.

Mechanic’s Lien & Bond Claim statutes are quite particular when it comes to preserving your rights. The various deadlines, parties to be served, document wording & even font size can vary by statute.

However, there is one fundamental step that if overlooked, could render your mechanic’s lien or bond claim unenforceable: proper service of the preliminary notice.

Let’s take a quick look at a case that came before the California Court of Appeals.

In IGA Aluminum Products, Inc. V. Manufacturers Bank, 130 Cal.App.3d 699, 181 Cal. Rptr. 859, IGA Aluminum furnished materials & labor to Welch Construction Company.  In an effort to preserve its mechanic’s lien rights, IGA sent Welch a preliminary 20-day notice, as required under California’s Civil Code section 3097.

However, IGA sent the preliminary notice via first class mail.  Civil Code section 3097, subdivision (f), required the preliminary notice be delivered by personal service, certified or registered mail.

The court had to determine whether or not the notice requirement of section 3097 had been met when written notice was delivered by first class mail.  The court found the substantial compliance doctrine to be inapplicable in the case.

It reasoned that when the statutory language is clear, there is no room for construction of the statute.  Section 3097 unambiguously required notice be delivered in one of these ways: by personal service or by registered or certified mail.

Accordingly, under the plain language of the statute, IGA’s preliminary notice was fatally defective.

If IGA had served their preliminary notice as statute dictated, it is quite possible they would have been afforded the opportunity to enforce their mechanic’s lien.

Don’t get caught in technicalities – closely follow the statutorily required methods of service in each state where notices are required.

You Schwinn Some, You Lose Some: File a UCC, Even if It is Temporarily Secured by Possession

Posted on May 13, 2014 by - UCC Financing Statements

You Schwinn Some, You Lose Some: File a UCC, Even if It is Temporarily Secured by Possession

A security interest may be perfected by taking possession of the property that constitutes the collateral; however, this type of security interest is only intended to be short-term.

A case involving Schwinn Cycling and Fitness, Inc.*, is a great example of why you should file a UCC even if your security interest is temporarily secured by possession.

Expeditors International of Washington, Inc. (“Expeditors”), the creditor in this case, shipped goods for Schwinn Cycling and Fitness, Inc. (“Schwinn”), the debtor.

The agreement between the parties indicated that Expeditors had a security interest in all of Schwinn’s property in creditor’s possession, custody and control.

A Few Important Facts

  • Within 20 days prior to Schwinn’s bankruptcy filing, Expeditors had some of Schwinn’s property in its possession & the property was then provided to Schwinn during this same 20 day window.
  • Expeditors did not file a UCC Financing Statement within the 20 days of transferring the collateral to Schwinn.

The Contention

Expeditors contended it had a security interest perfected by possession prior to Schwinn’s bankruptcy petition, so the security interest remained perfected during the pendency of the bankruptcy.

The bankruptcy trustee contended the security interest became unperfected because Expeditors did not file a UCC Financing Statement, making the security interest avoidable in bankruptcy.

The court agreed that under the version of the Uniform Commercial Code in Colorado, where the case arose, Expeditors continued to have a temporarily perfected security interest in the collateral, for twenty days after transferring the collateral back to Schwinn.

However, the court also agreed that after the twenty day window the security interest became unperfected because no financing statement was filed.

Expeditors argued the temporary perfection of its security interest extended indefinitely, because Schwinn filed for bankruptcy during the twenty day window, so the automatic stay froze priority upon initiation of insolvency proceedings.

However, the court indicated that this type of short-term perfection was not intended to continue throughout the duration of a bankruptcy proceeding, which could last for years.

The court distinguished prior cases that involved a bankruptcy filing during the twenty day window. In those cases a UCC had been filed, therefore subsequent creditors could not claim to have been misled by “secret security interest”.

The Best Practice

Generally, a UCC Financing Statement that meets the requirements should always be filed.  The most effective way to protect a security interest is to have UCC professionals prepare a financing statement and comply with other perfection procedures.

Missing Information in Preliminary Notice Invalidates Lien

Posted on April 22, 2014 by - Mechanic's Liens & Bond Claims

No Party Address? No Project Address? No Problem, Assuming You Aren’t Interested in Securing Mechanic’s Lien Rights

The Case: Consolidated Pipe & Supply Company v. Genoa Construction Services Inc., 690 S.E.2d 894, 302 Ga.App. 255 (Ga. App., 2010) 

The Parties:

  • Owner: St. James United Methodist Church, Inc.
  • General Contractor: Genoa Construction Services (“Genoa”)
  • Surety for General Contractor: Westfield Insurance Company (“Westfield”)
  • Subcontractor: Red-Hawk Construction, LLC (“Red-Hawk”)
  • Material Supplier aka Lien Claimant: Consolidated Pipe & Supply Company (“Consolidated”)

The Mistake:

Omission of required information in the Georgia Notice to Contractor

The Consequences:

A claim amount of $109,654.22 and an unenforceable mechanic’s lien

Let’s Dive In

Red-Hawk ordered $109,654.22 worth of construction materials from Consolidated. Unfortunately, Red-Hawk filed for bankruptcy and never paid Consolidated for its materials.

Consolidated filed a mechanic’s lien on the project for the value of its materials plus interest. Westfield, as surety for Genoa, issued a payment bond for the project, as well as a mechanic’s lien release bond to discharge Consolidated’s claim of lien. Consolidated demanded payment from Genoa and Westfield. Genoa and Westfield failed to pay, so Consolidated filed suit.

Genoa and Westfield moved for summary judgment, urging that Consolidated’s Notice to Contractor failed to include certain information required under Georgia law.

Specifically, OCGA §§ 10-7-31(a) and 44-14-351.5(c), require that the Notice to Contractor set forth the name and address of each person at whose instance the materials are being furnished and the name and location of the project. Consolidated listed the debtor & project names, but did not list the debtor’s address or project location.

Consolidated claimed the omissions were immaterial because the contractor knew the location of the project and knew Red-Hawk was working on that project. The Georgia district and appellate courts, however, found the omission to be fatal to Consolidated’s mechanic’s lien. The court held the statute was clear and shall be applied according to its terms.

“…Given that the statutory provisions at issue explicitly stated that the location of the construction project and the address of the entity be set forth in the Notice to Contractor, they are matters of substance; thus, the statutory requirements to include the information may not be disregarded as mere technicalities.18 Because Consolidated’s Notice to Contractor wholly omitted the cited information, it failed to comply with either OCGA §§ 10-7-31(a) or 44-14-361.5(c)”

A mechanic’s lien must comply with the jurisdiction’s lien statutes. Each state has a very specific procedure for perfecting a mechanic’s lien, with numerous deadlines and required forms. Statutes generally set out the language that must appear in your preliminary notice, notice to contractor or notice of commencement, and the notice or claim of lien. Failing to follow the state’s statutes can result in the loss of your ability to use the remedy of a mechanic’s lien. Unfortunately for Consolidated, Georgia requires strict compliance with statutory lien laws.

Don’t lose your rights for failing to meet the state’s technical requirements.