Service Area: Collection Services

Your Credit Management Arsenal & COVID-19

Posted on March 19, 2020 by - Credit Risk Management, In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

COVID-19 and Your Credit Management Arsenal

If you extend credit, you are vulnerable to risk — whether furnishing to a single construction project or selling on revolving terms. This vulnerability grows exponentially in the midst of tragic events, such as the COVID-19 pandemic. Although economic loss is inevitable, you have the power to mitigate the loss through UCC filings, mechanic’s liens, and a fully loaded credit management arsenal.

Credit Management Requires Innovation

Credit Management isn’t simply about reducing risk. It’s reducing risk while promoting long term growth and improving sales. Now more than ever, credit requires innovation. Fortunately, in the era of Big Data, innovation is at your fingertips.

It is imperative to examine and fully understand the data and the potential implications. Listen to industry experts and analysts; review credit indexes, credit reports and bankruptcy reports, as well as lien filings & foreclosures. It’s vital to analyze the collective opinions and statistics to effectively create a comprehensive credit picture.

Technology and Data Sources that Assist Credit Professionals

Technology has proven to be an immense asset; mining the right data is a challenge faced by many. Credit reports, state and county recording offices, industry trade/credit groups and message boards, and even online reviews provide pertinent information. Keep these in your credit management arsenal —

Credit Reports

Credit bureaus have compiled information relevant to a business’s credit, analyzed the data, and provided it for consumption as a trustworthy recommendation. Credit professionals use credit reports to review an entity’s viability.

Credit reports are likely to include general financials (payment trends, debt to income, outstanding collections/judgments, UCC filings, DBT), though some comprehensive reports provide additional bits of relevant data, such as the entity’s status with the Secretary of State.

Compliance with Secretary of State

A business should be in good standing with the Secretary of State. A lapse in compliance with the Secretary of State can be an early warning sign of an entity’s financial distress, though this information is frequently overlooked. If a corporate search reveals a status of anything other than “active,” it is worth further exploration.

A company’s corporate status could change for a multitude of reasons, including a change in the company name, the dissolution of the company or neglecting to file an annual report or changing the formation type.

Our research discovered, in an average year, 23% of businesses experience a change in their corporate status with the Secretary of State. Of these changes, over 10% of businesses dissolve or close their doors. As we navigate the current crisis, these numbers are likely to increase exponentially.

Industry Trade & Credit Groups

In many instances, your peers could be one of your greatest resources. Although credit-granting processes and credit management have evolved, common issues remain: debtor isn’t paying timely, debtor is providing a “pay-when-paid” excuse, debtor has little credit history, etc. These aren’t new issues for credit professionals and your peers have encountered them time & time again. Take advantage of the experiences of others – of course, please do so at a safe distance! (Too soon?)

Mechanic’s Lien Activity

A review of mechanic’s lien filings may uncover, among other valuable information, significant financial distress. If a business has been party to several mechanic’s lien filings, red flags fly, as this party has been unpaid. Unless they have an abundance of working capital, several filings should raise concern.

Accounts Receivable

Don’t overlook the valuable information within your own accounts receivable (AR) payment trends and behaviors provide additional insights. The trend of accounts 30 days beyond terms (or 60, 90, 120), is an early warning sign of stifled cash flow.

When negative trends appear in AR, it provides an early opportunity to evaluate the collectability of past due accounts. If collection efforts are necessary, creditors should leverage the security of mechanic’s liens and UCC filings.

Keep in mind, trends from AR do not have to be negative to provide valuable information. Data is what you make of it. Positive trends in AR (i.e. fewer clients 30+ DBT) likely correlate to a company’s growth and/or improved working capital.

Competitive Intel

Credit reports and mechanic’s lien activity provide obvious benefits for analyzing credit, but they can also provide valuable competitive intelligence. Know what your competitors are doing. Are they filing UCCs? How much credit are they extending via open and/or revolving lines of credit? Are they filing mechanic’s liens? Are they entangled in mechanic’s liens, indicating money issues?

Bankruptcy Information

In the fall of 2018, retail and restaurants landed at the top of Standard & Poor’s Distress Ratio list: “As of Nov. 15, the retail and restaurants sector has the highest distress ratio at 19.5%, followed by telecommunications at 15.6%.”

Several major restaurant chains and retailers have filed for bankruptcy in an economic boom; imagine what will happen over the next 6 months – 1 year.  Some experts believe the restaurant industry is an early predictor of the overall economy — if restaurants are down, other facets of the economy will soon follow.

Of course, restaurants aren’t the only entities filing for bankruptcy. The healthcare industry is facing the enormous task of caring for those who have fallen/will fall ill. As if caring for the ill wasn’t enough, hospitals were already struggling financially.  There have been nearly 5,000 healthcare industry bankruptcies in the last 5 years. Unsecured creditors have been receiving, if anything, pennies on the dollar – pennies!

Regardless of the economic state of the country, understand and remember that bankruptcy will always be a risk. Do not become complacent. Remain vigilant and take precautions to ensure you are a secured creditor.

Credit Management Arsenal

Credit Management requires an array of accessible resources and considerations. Credit reports should provide a company’s net worth, payment history, likelihood of default, and credit limit recommendations, even UCC filings and collection placements. Periodically review the company’s status with the Secretary of State. Monitor and review mechanic’s lien activity, whether related to your customer, project or competitors. File UCCs on all customers and monitor for bankruptcies.

We are here to help you establish and maintain a successful credit risk mitigation program. I feel like an infomercial when I say this, but don’t wait – you need to get these processes in place now.

We are in this together!

UCC Collateral Description: What You Should Include

Posted on March 16, 2020 by - UCC Financing Statements

What Should You Include in Your UCC Collateral Description?

A perfected security interest is nothing without a collateral description. A properly perfected security interest requires compliance with Article 9, which includes a Security Agreement and the subsequent filing of the UCC-1 Financing Statement with collateral descriptions in both. In today’s post, we’ll review what to include in a UCC collateral description.

What Is a Sufficient Collateral Description According to Article 9?

First, what is collateral? Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

Then, what makes a collateral description sufficient? Article 9-108 provides the following:

(a) Except as otherwise provided… a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

(b) [Examples of reasonable identification.]

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

Watch Out for these Common Collateral Mistakes

Collateral descriptions will vary based on the collateral used to secure the credit; however, there are key pieces of information that are sometimes overlooked or inadvertently omitted.

  • Don’t Forget the After-Acquired Collateral: phrases like “now owned or hereafter acquired” or “now existing and hereafter arising” are technically not required under Article 9, but experts agree it is smart to include the phrasing so as to not limit recovery.
  • Don’t Add Limiting Language: be careful when identifying collateral located at a specific address or acquired within a certain time frame. Adding limits to the language could do more harm than good. (Check out this post for an example of limitation by address.)
  • Say What You Mean, Mean What You Say: be aware of what may or may not be included in “all compassing” phrases such as “all proceeds thereof.” If you expect the security interest to include all accounts/accounts receivable, it’s best to include those terms in the collateral description.

Remember 1st Source Bank?

Remember the 1st Source Bank case? In this case, the key issue was whether the language describing specific heavy machinery and “all proceeds thereof” included the debtor’s accounts and accounts receivable.

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 financing contracts with several other banks. These other banks, in turn, filed UCCs which specifically identified “all accounts receivable now outstanding or hereafter arising” as part of the collateral description.  When the debtor defaulted, these banks took control of the collateral, including the accounts receivable.  1st Source Bank objected based on its claimed priority security interest.

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 “accounts receivable.”

The court determined “all proceeds thereof” did not include “accounts” and “accounts receivable.”

Why? Because “Although the statutory definition of the term ‘proceeds’ appears admittedly broad, accepting [1st Source Bank]’s interpretation of the statute would render the term ‘accounts’—a category defined separately in Chapter 9—meaningless. See Tenn. Code Ann. § 47-9-102(a)(2).”

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.

Collateral is Key

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 of collateral needs to put prospective creditors on notice so that prospective creditors have reason to inquire further about existing security interests. Be careful, there’s a fine line between being too specific and too generic.

Commercial Credit Management Tips for UCCs

Posted on January 27, 2020 by - Credit Risk Management, UCC Financing Statements

10 Tips for Commercial Credit Management of UCC Filings

It’s part two of our three-part series of Commercial Credit Management Tips from NCS. Previously we provided favorite tips for Collections, today let’s review UCCs.

Commercial Credit Management Tips for UCCs

Tip #1: Timely File Your UCCs

You should always file your UCC-1 before you ship goods to your customer. As soon as you have the signed Security Agreement, file your UCC to ensure you’re a secured creditor. To properly perfect your security interest, you must understand the different types of UCC filings and the respective filing deadlines. Failure to meet deadline requirements may jeopardize your position as a secured creditor.

  • PMSI in Equipment (US Filing)– the UCC-1 must be filed no later than 20 days from the date your customer receives the equipment.
  • PMSI in Equipment (Canadian filing)– the PPSA must be filed no later than 15 days from the date your customer receives the equipment.
  • The definition of “receipt” is hotly contested in courts; to be most conservative, NCS calculates based on the date you first shipped equipment to your customer.
  • PMSI in Inventory or Consignment– the UCC-1 must be filed, a reflective UCC search performed, and notification letters should be sent and received prior to shipping inventory to your customer. Shipping inventory before you’ve completed these steps may result in an unsecured status.
  • Blanket– the UCC-1 should be filed prior to shipping goods to your customer.

 Tip #2: The Proper Time to Terminate a UCC Filing

When should you terminate the original UCC Financing Statement? Section 9-513 of the Uniform Commercial Code states that a secured party must terminate a UCC filing within 20 days of a request from the debtor if any of the following exist:

  • There is no obligation secured by the collateral and no indication there will be a future obligation
  • The financing statement covered consigned goods that are no longer in the debtor’s possession
  • The debtor never authorized the filing of the original financing statement

Otherwise, the UCC filing will remain active until the 5-year lapse date. This can cause financial complications between the debtor and their bank. NCS Tip: Terminate your UCC filings in a timely manner.

Tip #3: Understand the Difference Between A Corporate Certificate and Articles of Incorporation

The UCC 2010 Amendment changes to Article 9 regarding the debtor name state that when filing a UCC on a registered organization, you must review the “public organic record” (i.e. Articles of Incorporation) to verify the entity legal name including any amendments and reinstatements.

The state’s public record (Corporate Certificate) is a representation of the public organic record that has been data entered. This is insufficient because there can be clerical errors in the name that could deem the UCC filing seriously misleading and may leave you unsecured.

Tip #4: Monitor for Name Changes

Are you aware that if your customer changes their name you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not amended, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Tip #5: Maintain Priority in Inventory

When continuing a Purchase Money Security Interest in inventory filing, be aware of the requirement to re-notify the previously secured creditors. Section 9-324 of the Uniform Commercial Code outlines the requirements to establish priority in inventory. It states that the secured party must send notification to the holders of any conflicting security interests, and that the holders of these conflicting security interests receive the notification within five years before the debtor receives possession of the inventory. This means in order to maintain priority upon continuation, all previously secured parties will again need to be notified. Failing to do so will jeopardize your priority position in your goods. NCS Tip: Make sure you are searching and notifying when you continue your PMSI UCC Filings

Tip #6: Protect Your Inventory with Warehouse Filings

Are you storing your inventory in a third-party warehouse? If so, you should file a UCC-1 Financing Statement to publicly announce your ownership. Under Article 7 of The Uniform Commercial Code, the warehouseman may have a lien against your inventory. If the warehouseman’s business were to fail, their bank may unknowingly liquidate your inventory. Filing a UCC-1 Financing Statement will let everyone know who the inventory belongs to and keep your interest safe.

Tip #7: When Selling Under Consignment, Review the Secured Transaction Provisions

If you are selling under consignment you may want to review the secured transaction provisions. Consignment falls under Revised Article 9. In order to have priority rights over a previous secured interest, the consignor must now comply with the same rules that apply to a Purchase Money Security Interest in inventory. Meaning, if you are selling under consignment, you must get a consignment agreement signed; file a financing statement; and search and notify all previously secured creditors. If you do not, you risk losing your inventory to previously secured creditors.

Tip #8: When should I file a Fixture Filing?

A fixture is defined as goods that have become so related to real property that an interest in them arises under real property law (Article 9-102[41]). A few examples are gas/fuel pumps, ovens, and external signs. If your UCC Security Agreement calls out “fixtures,” you should consider filing a UCC Fixture. The Fixture filing will be filed at the county level against the real estate and will appear on a title search. This will alert potential buyers/sellers that the debt needs to be paid before the title of the property can be transferred.

Tip #9: Conduct A Reflective Search After Every UCC Filing

Often, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will appear in a UCC-11 search? Each Secretary of State office has their own software to house UCC filings that sometimes can be unreliable or outdated. The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

Tip #10: UCC and Default

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest UCC, you need to determine whether 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.

Backup Documentation Can Make or Break Your Claim

Posted on January 24, 2020 by - In Other Commercial Credit News

Backup Documentation Can Make or Break Your Claim

Never underestimate the value of proper documentation to support your claim! When assisting our clients with claims, we frequently request backup documentation for review. Absent the proper documentation, how can you prove your claim?

Yeah, But Why?

Sometimes we hear, “You don’t need to review my statement of account; I know what I’m owed.” While we certainly don’t want to invade your privacy or second-guess the information you provide, we request the documentation because we want to ensure your claim meets statutory requirements.

Did you know there are states that require copies of open invoices and/or a copy of the preliminary notice to be attached to the lien? Are you aware that some states, like New York, provide that an owner or contractor may serve a Demand for Itemized Statement upon the lien claimant and a formal response must be given within 5 days or the lien may be forfeited?

So, What Kind of Docs Are We Talkin’ About?

Documents may include invoices, statement of accounts, a copy of the contract, bills of lading, etc. Any information that will support your claim. And when I say “any information,” I genuinely mean it. Think about the various forms of communication we have at our disposal – if your customer agreed to a change order via email, print out that email! I’m not an attorney, so I can’t say with certainty that an email communication is admissible, but we have reviewed cases where even text messages have assisted in claims – every little bit helps.

Does It Really Matter?

Yes, yes it does really matter. Not only is it important to have the documentation, it needs to be accurate. Do you remember the Kansas case I reviewed? In that case, a subcontractor filed a mechanic’s lien in the amount of $287,212.28 and included an itemized statement in accordance with statute; however, the itemized statement was for $6,574.69.

Recently, John Lande, author of Want to Foreclose a Mechanics Lien? Get Your Invoices Straight. reviewed a case in Iowa where the claimant’s foreclosure action was dismissed. Why? …. drum roll please… because the claimant failed to provide supporting documentation!

“Olmstead did not get to foreclosure its lien because it sent four different payoff amounts to Otter Creek without providing any supporting documentation.”

See, when the claimant (“Olmstead”) sent four different invoices with four different claim amounts, the property owner requested backup documentation. Instead of providing the documentation, the claimant jumped the proverbial gun and filed a lien, then moved to foreclose the lien. Of course, when the case made it to court, the judge said: if you can’t provide the supporting documentation, you can’t make the claim. Alright, so the judge didn’t say it quite like that, but you get the idea.

Lande warns “[C]ontractors should take time to make sure they know their costs and can support those costs before invoicing property owners. Having accurate invoices will reduce confusion and make it easier to get paid in a timely manner. In addition, having backup material organized will make it much easier for contractors to enforce their rights if they need to.”

Yeah, What He Said!

Maintaining comprehensive and complete records can be a challenge. But, losing lien rights and potential payment security can put a burden on your cash flow.

Louisiana Mechanic’s Lien Changes Are in Effect

Posted on January 20, 2020 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Louisiana Mechanic’s Lien Changes Are in Effect!

It’s 2020 & the Louisiana mechanic’s lien changes are in effect! Last year we touched on a few changes, now let’s take a deep dive and review what you should know about the Louisiana statute changes which became effective 1/1/2020.

Louisiana – Private Projects & Mechanic’s Lien Rights

First up, the filing of mechanic’s liens (or privileges, as they are referred to in Louisiana). When looking at the new Louisiana lien statute, please remember the effective date of the statute may not immediately be obvious, especially for material suppliers and subcontractors who are not on the jobsite:

The old statute applies for all works:
i.   Where a notice of contract was filed prior to January 1, 2020,
ii.   A notice of termination was filed before January 1, 2020, or
iii.  No notice of termination was filed before January 1, 2020, but the work was
substantially completed or abandoned before that date.

The new statute applies for all works begun on or after January 1, 2020, unless a notice of contract was filed prior to January 1, 2020.

An added caveat is that if completion occurred prior to January 1, 2020 and a Notice of Termination was filed on or after January 1, 2020, a general contractor’s lien must be filed by July 31, 2020, and all other liens must be filed by June 30, 2020.

Notice of Contract – Threshold Increased

The requirement for a Notice of Contract to be filed by a general contractor has increased from $25,000.00 to $100,000.00 under the new statute.  If the general contractor does not file a required Notice of Contract, the general contractor will have no lien rights on that private project.

Unsure Whether a Notice of Contract Has Been Filed?

Conservatively, it would be best to follow the guidelines of the old statute if you are unsure whether a notice of contract has been filed, because the notice requirements of the old statute are more stringent than the newly revised statute.

As to determining whether a Notice of Termination was filed prior to 1/1/2020, or whether the work was substantially completed or abandoned prior to 1/1/20, La. R.S. 9:4822(1) provides for service of a notice upon the owner,  prior to the filing of  a Notice of Termination, substantial completion or abandonment, expressly requesting the owner to notify you of the filing of  a Notice of Termination, substantial completion or abandonment.

Best Practice:  Clarify your deadlines!  If in doubt, track your deadlines using the most conservative calculation.

Lessor’s Notice, Relax!

An important component of the new statute is that the Lessor’s Notice, required of those providing rental materials, has been “relaxed.”

The notice no longer needs to be signed by the lessee and the lessor, and the terms of the agreement do not have to be included within the notice.  Additionally, the deadline for the notice has been extended to within 30 days after first furnishing, and a late notice may be served, but the lien when later filed will be limited to those rents accruing after the notice is given.

Further, a general description of the rental materials being provided should be given, but a full description with specificity of the rental equipment being furnished will no longer be required.  However, a written response must be provided to the owner or contractor if that information is requested by them after their receipt of your lessor’s notice.

Great news, right?!  Keep in mind, if the project falls under the old statute, the more cumbersome notice should be served within 10 days from first furnishing, should be signed by the lessee and the lessor, and should include the terms of the agreement.

The new notice should be used only when you are certain that the project falls under the new effective date.

Notice of Lien Rights

For residential home improvements, the template for the Notice of Lien Rights has been modified by the statute that became effective 1/1/2020.

Notice(s) of Non-Payment

The requirement for the 75-Day Notice of Non-Payment has not changed.  The notice should be served upon the owner and the prime contractor within 75 days from the last day of the month for EACH month in which materials were furnished, but within the period in which a lien must be filed.

Mechanic’s Lien Deadlines

As mentioned in an earlier blog, the Louisiana lien deadline is calculated by a combination of varying factors. This may include whether the project is residential, whether a Notice of Contract was recorded, where you are in the ladder of supply, if/when a Notice of Termination is filed, or the date of substantial completion or abandonment of the project.

That hasn’t changed, and the deadlines for filing a lien remain basically the same.  However, the statute under the new effective date provides an end date for the filing.  And, if furnishing to a residential project, serving a final notice of non-payment at least 10 days prior to filing the lien can extend the lien deadline to 70 days, instead of 60 days, if a notice of contract was not recorded.

Notice of Contract was not recorded:

      • File lien within 60 days after a Notice of Termination was filed, or, if no Notice of Termination was filed, within 60 days after substantial completion or abandonment of the project.
      • On residential projects, subcontractors, suppliers and lessors may instead:
        • Serve a final notice of non-payment upon the owner at least 10 days prior to filing the lien.
        • File the lien within 70 days after a notice of termination or substantial completion or abandonment of the project, if no notice of termination is filed.

Notice of Contract was recorded:

General Contractors:

        • File the lien within 60 days after a Notice of Termination is filed, or, if no Notice of Termination is filed, within 7 months after substantial completion or abandonment of the project.

All Others:

        • File the lien within 30 days after a Notice of Termination is filed, or, if no Notice of Termination is filed, within 6 months after substantial completion or abandonment of the project.
        • Serve a copy of the lien upon the owner within 30 days after the filing of a Notice of Termination

It’s a LOT!

Without question, these are some big changes for Louisiana mechanic’s lien filers. It’s important to understand that any time statute changes, there is an adjustment period. Some adjustments will happen during initial implementation, while others may not surface until a dispute reaches the courts a few years from now. While there may be additional changes as we move forward, it is likely these changes will be minor.

If you have questions regarding the changes in Louisiana or how your rights may be impacted, please don’t hesitate to contact NCS.

Commercial Credit Management Tips for Collections

Posted on January 6, 2020 by - Credit Risk Management

10 Tips for Commercial Credit Management of Collections

I’m excited to share some of my favorite commercial credit management tips from NCS. In this three-part series, we will review tips for Collections, UCCs, and Notices & Liens. Up first? Collections!

Tip #1: Up-to-Date Credit Apps Aid in Collection Success

Make sure you have a corporate credit policy in place to update your debtors’ credit applications annually or, at the very least, if/when they request an increase in credit. Companies are often changing names, locations, banks, officers (just to name a few) and, as their creditor, it’s critical to have accurate and current information on hand. Then, in the event your customer defaults on payment, you’ll have a reliable and up-to-date credit application to aid in your collection success!

Tip #2: 9 Documents Every Collection Should Have

Here are 9 documents you should include with any collection placement: copy of the contract or agreement, copy of the credit application, copies of invoices & a statement of account, copies of proof of delivery/bill of lading, copy of the personal guarantee, your customer’s trade references (including bank name, account number, and copies of returned/NSF checks), copies of correspondence & notes (emails, notices, demand letters, documented phone calls), copy of the corporate certificate, and copies of credit report(s).

Tip #3: Pulling a Credit Report for the Correct Entity

It’s vital to obtain the correct credit history and information for your customer. Here are a few key pieces of information that will assist you with pulling credit info on the correct company:

  • Customer’s corporate legal name
  • Customer’s address (or alternate addresses)
  • Customer’s web address
  • Contact info for officers and/or owners of the company

Tip #4: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors want to file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a mechanic’s lien, bond claim or UCC, grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place. Remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Tip #5: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Here are three things to remember when filing a Bankruptcy Proof of Claim form:

  • Be on Time! Too often, creditors miss the bar date to file.
  • Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
  • Secured or Unsecured? That Is the Question! Know whether you are a secured creditor and file properly.

Tip #6: Benefits of Doing an Asset Search Prior to Suit

Typically, once an attorney has filed suit and obtained judgment, creditors look to asset searches to reveal banking information, properties, vehicles, etc. to attach their judgment to. However, there are creditors who run asset searches prior to placing their claims with a collection attorney. Why would they run an asset search prior to suit? Because creditors want to know if it is worth the time and money to file suit, move through litigation and obtain judgment.

An asset search can be run at any time, on an individual and/or a business. It helps to locate addresses & phone numbers and a full-service asset search includes:

  • Employment
  • Business affiliation
  • Vehicle ownership
  • Real property ownership
  • Banking relationships
  • Bankruptcies
  • Liens
  • Judgments
  • Notices of defaults
  • UCC filings

Tip #7: Consider Using a Customized Letter for Collection

Do you have accounts that are past due, but you are not ready to place them for collection? If you are looking for a less aggressive collection tool, talk to us about our flat fee, customizable letter writing series. Our team will work with you to create the perfect series for your needs. We’ve customized thousands of letters for clients over the years. We use that knowledge and experience to create the best letter for your situation.

Tip #8: Be Aware of a Customer Name and/or Structure Changes

Who is your customer? In recent years, we have seen many mergers and corporate structure changes. It is vital for creditors to be cognizant of any debtor name and/or structure changes, especially when utilizing the collection and litigation process. Suing the wrong entity could result in the court case being dismissed and affect any possible recovery.

What is a creditor to do? You could add a clause within your contract/credit application requiring debtors to notify you within 30 days of these changes and consider enrolling your customers in the NCS Corporate Monitoring Program. With the monitoring program, you will be alerted to registered entity changes reported by the Secretary of State Corporation Division.

Tip #9: Personal Guarantees are a great tool, but even better when notarized!

Most credit professionals would agree that personal guarantees (“PG”) are an effective tool used to reduce credit risk. A guarantee can create a sense of comfort with the creditor, especially when the creditor is shipping on an open account with no other security or leverage.

The personal guarantor, who is often an officer of the company, may pay closer attention to debts that are personally guaranteed to avoid personal lawsuits for collection of the debt. Frequently, the personal guarantor will instruct that those debts which are not personally guaranteed remain unpaid.

As a best practice, require the personal guarantee to be notarized to eliminate the personal guarantor’s claim of a forged signature. Also, consider filing a UCC even when a personal guarantee has been issued.

Tip #10: Four Signs Your Customer May Be in Financial Distress

Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress:

  • Change in Corporate Status: Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close.
  • Pay-When-Paid: In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.
  • Broken Promises: This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended.
  • Silence: Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.

The Retail Bankruptcy Apocalypse

Posted on November 15, 2019 by - In Other Commercial Credit News

Run! It’s the Retail Bankruptcy Apocalypse

“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?

Secured Transactions – Even on Consignment

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.

In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.

How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.

But Wait, There’s More!

In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy.  Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips. 

Up first? Recognize the warning signs of default or financial distress.

“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”

Next? Ensure you have established terms & conditions.

“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”

And? Consider withholding shipments until the account is current.

“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”

Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.

Then? Watch deliveries & mind the 20-day clock.

“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”

Lastly? Maintain communication.

“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”

  Questions? NCS can help!

Recap of Changes to Ontario’s Construction Lien Act

Posted on October 14, 2019 by - Mechanic's Liens & Bond Claims

Recap of Changes to Ontario’s Construction Lien Act

Over the last two years we have discussed the changes to Ontario’s Construction Lien Act. Now, with all changes in force, here’s a breakdown of what you should know.

More Time to File a Lien

The first wave of changes went into effect in July 2018 and included changes to the deadline calculations for the filing of a mechanic’s lien or a public improvement lien.

  • File the lien within 60 days from last furnishing materials or services, but within 60 days from the earlier of publication of the certificate or declaration of substantial performance, completion, abandonment or termination of the contract. (Increased from 45 days)
  • File suit to enforce the lien within 90 days from the period in which the lien must be filed. (Increased from 45 days)

The Ontario legislature had earlier provided clarification on whether contracts would fall under old statute or new statute. Would-be-claimants would follow old statute if:

  1. The contract/improvement was entered prior to 7/1/18
  2. Procurement process began prior to 7/1/18
  3. Project is a leasehold interest & the lease was in effect prior to 7/1/18

Essentially, the statutory provisions that became effective 7/1/18 would apply if the contract and procurement process were initiated on or after 7/1/18.

If you aren’t sure whether events took place on or after July 1, 2018, follow the old statute; be conservative in calculating your deadlines. You don’t want to rely on the new 60-day deadline and later find the general contract or procurement began prior to 7/1/18 and that your lien rights should have been secured by day 45. It is certainly better to file a lien early than file a late lien & risk it being unenforceable.

Also of note, as of October 1, 2019, the public improvement lien can no longer be filed against the property of a municipality.  Instead, the public lien will attach to the funds owed by the municipality to the prime contractor.

Requirement for Payment Bonds on Public Projects

While the threshold established for requiring a payment bond on a public project is large ($500,000.00), Ontario statute, effective July 1, 2018, requires the prime contractor to obtain a labour and material payment bond.  A claim must be made within 120 days from last furnishing materials and services, and suit must be filed within 1 year from completion of the project.

All New Adjudication aka Dispute Resolution

Effective for projects procured or entered into on or after October 1, 2019, adjudication is a rapid construction dispute interim resolution process to avoid payment issues that may otherwise result in project delay.

Adjudication is subject to the procedures set out in the contract or subcontract, if they comply with statute.  The party who wishes to refer a dispute to adjudication must serve a written notice of adjudication on the other party and then request adjudication from the Authorized Nominating Authority.  The legislation defines the matters that may be adjudicated as:

  • The valuation of services or materials provided under the contract
  • Payment under the contract, including in respect of a change order, whether approved or not, or a proposed change order.
  • Disputes that are the subject of a notice of non-payment
  • Amounts retained / set-off
  • Non-payment of holdback
  • Any other matter that the parties to the adjudication agree to or that may be prescribed

Hooray for Prompt Pay

Also effective for projects procured and entered into on or after October 1, 2019, and applying to both private and public projects, prompt payment rules will require payment to be made by the owner within 28 days from submission of a proper invoice.

A proper invoice is a written bill or other request for payment in respect of an improvement under a contract between the owner and the contractor, and it is to contain specific information as outlined by the Act or as required by the contract.  Failure to pay the invoice within the stated period will result in an automatic accrual of interest from the date the invoice was to have been paid.

The general contractor must pay the subcontractor within 7 days from receipt of payment from the owner.  And, all parties in the contractual chain below the general contractor must make payment within 7 days from receipt of payment.

If the owner is not going to make payment within 28 days from receipt of a proper invoice, the owner must submit a notice of non-payment to the general contractor within 14 days after receiving the proper invoice.  Similarly, parties below the owner in the contractual chain must submit a notice of non-payment within 7 days from receipt of a notice of non-payment.  The notice of non-payment must provide the reason for non-payment and the amount of any dispute.