Service Area: Collection Services

DIP Financing: What Is It? Who Provides It?

Posted on August 17, 2018 by - Credit Risk Management, In Other Commercial Credit News

DIP Financing: What Is It? Who Provides It? What If You Filed a UCC?

DIP stands for Debtor in Possession. When a business files for chapter 11 bankruptcy protection, the existing management or ownership maintains possession and control of its business. However, the bankrupt entity needs financing to keep its business operational throughout the bankruptcy process. One way for a bankrupt entity to obtain cash is through DIP Financing.

Unfortunately, if a business is on the brink of bankruptcy, lenders aren’t usually eager to extend a loan to the business. To be fair, a lender’s hesitation to lend to a bankrupt entity is not unlike my hesitation to touch a hot stove – you know the risk and you know the consequences.

Given the risks of lending to bankrupt businesses, the Bankruptcy Code affords would-be lenders various perks, often including the benefit of a priority security interest.

In his article, DIP Financing: How Chapter 11’s Bankruptcy Loan Rules Can Be Used To Help A Business Access Liquidity, Bob Eisenbach mentions the perk of a priority security interest:

“When the debtor company has lined up a lender, it files a motion seeking Bankruptcy Court approval of the DIP financing. Typical DIP financing terms include a first priority security interest, a market or even premium interest rate, an approved budget, and other lender protections.”

The concept of priority over subsequent creditors may be referred to as a priming lien. Marshall S. Huebner, in Debtor-in-Possession Financing, further advises lenders may “insist on a first-priority priming lien on the debtor’s inventory, receivables, and cash (whether or not previously encumbered), a second lien on any other encumbered property, and a first-priority lien on all of the debtor’s unencumbered property.”

Who Provides DIP Financing?

Does this financing come from a random bank? Not necessarily. In fact, DIP financing often comes from prepetition lenders. According to Market Trends, Recent Deal Terms in Retail DIP Financing, author Jordan Myers refers to this as “defensive” financing.

“Prepetition lenders, rather than new third-party lenders, are a frequent source of DIP financing to retail debtors. They do so, in part, to protect their position against possible priming liens—a practice known as “defensive” DIP financing. “

What About Creditors with a Properly Perfected Security Interest: UCCs?

The American Bankruptcy Institute states a creditor with a properly perfected security interest has priority over DIP.

“…[I]f a secured creditor is perfected as of the petition date, its security interest trumps the DIP, and the estate benefits from the secured creditor’s collateral only after the secured creditor is repaid. However, if the secured creditor is not perfected as of the petition date, then the DIP prevails and the secured creditor shares pro rata with other unsecured creditors.”

Confused? ABI has a bubbly example!

“Consider this hypothetical: Donald the debtor owns a case of fine champagne. Your client, Cartman Corp., just won a lawsuit against Donald. You send out the sheriff to pick up the champagne to satisfy the claim. Under California law, once the sheriff lays his hands on the champagne, you’ve got a lien; other states may date the lien from the time you send your order to the sheriff, or perhaps even from the time you win your lawsuit. To recap: If some secured creditor is perfected before Cartman Corp. gets its lien, then that secured creditor gets first dibs in the champagne. Otherwise, first dibs go to the Cartman Corp.”

Takeaway? While DIP Financing holds significant benefits for the lender, a properly perfected security interest is certainly in a better position than an unsecured creditor. File UCCs!

Serve Pennsylvania Mechanic’s Lien via Sheriff or Publicly Post

Posted on July 30, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Need to Serve a Mechanic’s Lien in Pennsylvania? Be Sure to Serve the Mechanic’s Lien via Sheriff or Publicly Post It

In Pennsylvania, statute dictates a mechanic’s lien be served by a sheriff. If the sheriff is unable to serve the lien, the lien claimant has an opportunity to meet statutory requirements by posting the lien “upon a conspicuous public part of the improvement.” The Superior Court of Pennsylvania says claimants must strictly adhere to statutory requirements.

Mechanic’s Liens in Pennsylvania

Pennsylvania rolled out statute changes the end of 2016. While there were significant overall changes, the statute dictating the service of the mechanic’s lien remained the same.

1502. Filing and notice of filing of claim

(c) Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous public part of the improvement.

“Adult in the same manner as a writ of summons in assumpsit” means sheriff. If the sheriff is unable to successfully serve the mechanic’s lien, the claimant can still meet statutory requirements, by posting a copy of the document on the jobsite.

There are several states whose statute can be quite confusing or convoluted. But, all in all, Pennsylvania’s statute is quite clear: serve the lien via sheriff or post it at the jobsite. Unfortunately, it appears this statutory requirement is frequently managed incorrectly by claimants. In fact, in May, the Superior Court of Pennsylvania heard the appeal of one subcontractor and confirmed the subcontractor failed to comply with statute.

$581,840.39 = the Cost of Failing to Properly Serve the Lien

In Forbes Excavating, LP v. Weitsman New Castle Realty, LLC, Pa: Superior Court 2018, lien claimant, Forbes Excavating, LP (Forbes) filed a lien on 10/28/2016 for a claim of $581,840.39. According to statute, Forbes need to serve the notice of filing upon the owner within 1 month from filing the lien, which would have been by 11/28/2016.

On 11/15/2016, the sheriff attempted service of Forbes’ notice upon Weitsman New Castle Realty, LLC (Weitsman). The sheriff was unable to complete service, because the individual at the address advised it was not the correct address for Weitsman.

This is a portion of text from the sheriff’s affidavit:

[Sheriff Sigler] made a diligent search and inquiry for the within named Defendant [Weitsman Realty] … but was unable to locate them… nor to ascertain the Defendant[‘s] present whereabouts, and I do therefore return the within Mechanics Lien, NOT FOUND.

Reason:

The above address is Ben Weitsman of New Castle, per Ron Saley, general manager there. [Weitsman Realty] is not known there[.]

Once service failed, Forbes could have attempted service again, or it could have posted a copy of the document on the premises in plain view.

On 1/10/2017, service was attempted again, to the same address as before, and was successfully delivered to the office manager at the address.

The Battle of Complaints Ensues

As with most legal situations, there was back & forth between parties. Forbes filed suit to enforce its mechanic’s lien and in response, Weitsman contested, stating Forbes failed to comply with statute. Weitsman argued that Forbes failed to serve a copy of the lien timely and once the document was successfully served, it was given to an “individual who was not authorized to accept service” – the office manager.

Weitsman didn’t need its second argument regarding the office manager, because its first argument was more than enough for the court. However, this was not before Forbes lodged an argument that when the sheriff originally attempted service, the person at the address lied to the sheriff when stating Weitsman wasn’t located at that address.

Forbes claimed “…that Weitsman Realty’s ‘refusal to accept service on November 15, 2016 constituted valid service under Pennsylvania law’ and, thus, it properly served Weitsman Realty with timely notice of the Claim on November 15, 2016.” Forbes further argued that Weitsman was “constructively served;” however, if Forbes had wanted that argument to work, it should have filed an affidavit of service within 20 days from the attempted service of the document. At least, that was what the court said.

“This claim immediately fails because, even if the Mechanics’ Lien Law permitted the type of constructive service [Forbes] advocates, [Forbes] did not file “an affidavit of service of notice, or the acceptance of service” within 20 days of November 15, 2016.”

There are additional technicalities at play, such as when service failed, the sheriff indicated the party was “not found,” not that “service was refused,” indicating there is no way to prove the person at the address lied to or refused to avoid receiving the document. But, technicalities like this were nothing more than another proverbial nail in Forbes’ coffin.

Despite the drama with service by sheriff, Forbes did have another option: Post. Document. At. Jobsite. Forbes wasn’t without options when original service was unsuccessful, Forbes just failed to execute the options.

The Court’s Parting Advice

Statute is to be strictly interpreted & failing to follow the law means failing to secure a mechanic’s lien. Must be a painful $581,840.39 lesson.

“…this Court specifically held… the service requirements under the Mechanics’ Lien Law are not subject to the doctrine of substantial compliance — and that they must be strictly construed. Appellant’s claim to the contrary is thus meritless…”

Mechanic’s Liens and Bond Claims are a Right

Posted on July 27, 2018 by - In Other Commercial Credit News

Mechanic’s Liens & Bond Claims are a Right, Not a Blanket

If you have supplied materials or labor to a construction project, you have a right to be paid. If you have complied with the state’s statute, you have a right to file a mechanic’s lien.  You can’t see my face, but right now I am fired up!

Fired up over a right to lien? Not exactly.

Truth is, I read a great article this week, but the title of the article initially bothered me: “Lien and Bond Claims: A Subcontractor’s Security Blanket.”

The title bothered you? Yes, and I think it’s because I immediately pictured Linus, famous Peanuts’ character, helplessly clinging to his blanket for solace. That’s not what mechanic’s liens and bond claims are. They aren’t a weakness we cling to, hoping for payment!

Mechanic’s liens and bond claims are built on a firm foundation of law and the law is representative of strength, and if used properly, you will protect your Right. To. Be. Paid!

Pardon me as I step off my soapbox.

A Little Dramatic, I Know

Before my little soapbox moment, I did say “I read a great article this week.” And that is the truth. In his article, Marc J. Felezzola Esq., of Babst Calland, discusses the common mistakes made by subcontractors when trying to secure mechanic’s lien/bond claim rights.

Before he dives into the pitfalls, the attorney provides an overview of the rights afforded to those furnishing to private and public construction projects. As I read further, breezing through the general information on liens and bonds, I see it.

Security.

And then I realize, Felezzola isn’t using the term “security” in a weak manner. Rather, he reminds me that “security” is protection, safety or, as Google puts it, “the state of being free from danger or threat.”

“Thus, generally speaking a subcontractor or material supplier (collectively, a “subcontractor”) always should have security for the work it performs. For a private project, that security comes in the form of a mechanic’s lien. For a public project, the security generally comes in the form of a payment bond.”

Felezzola’s Warnings

Felezzola warns would-be claimants of the importance of complying with preliminary notice requirements and subsequent lien and bond claim requirements, and, he further cautions about waiving claim rights within a contract:

“Blanket lien waivers are enforceable in approximately 20 states, and in those states, signing a subcontract with a blanket lien waiver will automatically deprive a subcontractor of mechanic’s lien rights all of its work. Thus, in states where blanket lien waivers are valid, subcontractors who sign contracts containing them will have no payment security for their work unless the project is bonded.”

Another piece of advice? Don’t assume a payment bond has been issued on a public project. Yes, in most states, there are statutory requirements for contractors to obtain proper payment bonds. However, as Felezzola points out, there aren’t always consequences for folks that fail to obtain a bond.

“…[A]lthough all states have some law requiring prime contractors to post payment bonds as security for subcontractor work, not all of those laws provide consequences in the event the prime contractor does not actually post a payment bond. For example, although Pennsylvania law requires payment bonds for all public projects, the law provides no penalty in the event the prime contractor simply fails to post the requisite payment bond, and Pennsylvania courts have held a subcontractor has no redress against the government for failing to ensure the required bond was posted. Thus, at least in Pennsylvania, a subcontractor working on a public project may find itself working without payment security despite laws requiring payment bonds.”

As a best practice, always obtain a copy of the payment bond BEFORE furnishing or at the time you sign the contract.

A Security Blanket It Is

Felezzola is right. Liens and bond claims are a security blanket for those furnishing to a construction project. Just be careful; the security blanket only exists if you take the proper steps to secure your rights. If you fail to take the proper steps, that strong security blanket will quickly become a useless wet blanket.

Waiving Bond Claim Rights Under The Miller Act

Posted on July 20, 2018 by - In Other Commercial Credit News

Are You Waiving Your Bond Claim Rights Under The Miller Act?

If you furnish to a federal construction project, and your contract includes a provision for claim resolution outside of the Miller Act, are you prohibited from pursing a claim under the Miller Act? Are you waiving your rights? Short answer: No. Unless…

Miller Act Statute

The statute for federal projects is relatively straightforward and applies to all states; meaning unlike state statutes which vary, federal statute is the same across the board. U.S. Federal projects in foreign lands may also fall under the protection of the Miller Act.  Those furnishing to a federal project are not required to serve a preliminary notice, but a bond claim should be served with 90 days after the date of last furnishing, and suit should be commenced within one year after the date of last furnishing.

Typically, the general contractor is required to obtain a payment bond if the construction contract exceeds $100,000. And, would-be claimants can request a certified copy of the payment bond from the contracting agency.

3133. Rights of persons furnishing labor or material

(a) Right of Person Furnishing Labor or Material to Copy of Bond. – The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond…

Waiving Rights in a Contract

If your contract calls for alternative dispute resolution or waives rights in lieu of action under the Miller Act, does this mean you have lost your rights under the Miller Act?

This is a hot topic in construction: waiving rights to mechanic’s liens and bond claims. Some statutes clearly define whether rights are waived or if the waiver of rights is enforceable, while others are clear as mud. Fortunately, for federal projects, it’s not overly complicated. Yes, rights can be waived; however, the waiver must be in writing and it can’t be executed until after the claimant has completed furnishing.

3133. Rights of persons furnishing labor or material

(c) Waiver of Right to Civil Action. – A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is-

(1) in writing;

(2) signed by the person whose right is waived; and

(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.

Earlier I said that federal statute is the same in all states, and while this is true, the courts hearing federal cases may not make the same decisions. So, when I say “Yes, rights can be waived” I’m taking statute at its word – no gray area. But, as you know, in construction credit, there is a LOT of gray area.

Christopher M. Horton, associate with Smith Currie, recently wrote an article, Does the Miller Act Trump Subcontract Dispute Provisions? In his article, Horton discusses a few examples of different states and their stance on whether a contract can prevent someone from pursuing a Miller Act claim.

“…[C]ourts have considered whether subcontract provisions requiring exhaustion of dispute procedures prior to initiating a Miller Act suit conflicts with the waiver provisions of the Miller Act. Only a few federal courts have addressed this issue… (D.C., Maryland, Nebraska, New Jersey, Pennsylvania, Virginia), have found that such provisions are unenforceable and do not require dismissal or stay of a Miller Action lawsuit.

A minority of courts (Louisiana, California, and Hawaii) have upheld dispute exhaustion provisions and entered dismissals or stays of Miller Act. Contrary to the decisions referenced above, the courts rendering these decisions based their rulings upon the fact that the provisions at issue included express language that required a stay for Miller Act claims pending exhaustion of the dispute procedures…. The subcontractor’s Miller Act remedies remained intact pending exhaustion of the contractual dispute procedures.”

OK, so, perhaps my statement about federal statute being clear was a tiny bit inaccurate — turns out, it can get quite muddy. Though, it seems, at least based on Horton’s article, that courts may allow claimants to pursue a Miller Act claim even if alternative dispute options are identified in the contract.

Best advice? Before you sign the contract, carefully review it with legal counsel. Do not blindly sign a contract, assuming it will all pan out.

Unsecured Creditors in Retail Bankruptcy Lose Out

Posted on July 16, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

The Importance of Being a Secured Creditor in Today’s Retail Climate

In today’s highly credit-based economy, the looming threat of debtor bankruptcy is more prominent than ever.  A number of well-known retailers, such as Bon Ton, Toys R Us, Nine West and Winn Dixie, have recently succumbed to insolvency, leaving their creditors in a vulnerable position.

As a creditor, it is important to ask yourself “In what ways can our company mitigate risk in today’s volatile credit environment?” To answer this, let’s tackle two key questions:

  • What is the difference between a secured & an unsecured creditor?
  • Do secured creditors actually get paid more in the event of customer bankruptcy?

Secured vs Unsecured

It’s essential to start by understanding the fundamentals; specifically, the difference between a secured and unsecured creditor.

A secured creditor has a security interest over some or all the assets of its debtor. A security interest can be obtained through prominent credit tools such as Mechanic’s Liens, Bond Claims and UCCs (just to highlight a few). In the event of the debtor’s bankruptcy or default, secured creditors:

  • Have payment priority over their unsecured counterparts
  • Are in the best possible position for getting paid

An unsecured creditor is a party who extends credit without a collateral security. If the debtor files for bankruptcy, it’s only after the claims of secured creditors are satisfied that the unsecured creditor will receive payment.  Oftentimes, those who fall under the unsecured creditor group collect very little money, if any, from the distribution of assets.

While the bankruptcy code is fairly complex, and insolvencies vary case by case, here is payout priority in its simplest form:

Payout Priority in Chapter 11 Bankruptcy

  1. Secured Creditors (e. creditors who have a perfected security interest)
  2. Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (e. creditors without a security interest)

Secured Creditor Success Stories!

In recent bankruptcy news, Rue21, inc. ET AL., a specialty fashion retailer of girls’ and boys’ apparel, filed for protection under Chapter 11 of the U.S. Bankruptcy code.  This was largely attributed to a challenging commerce environment characterized by increased pressure from competitors, changing consumer tastes, and an under-performing online presence.

When Rue21 filed for bankruptcy protection on May 15, 2017, it had just over $300,000,000 in assets, and nearly $700,000,000 in liabilities.  Obviously, there were not enough funds to pay all creditors their owed amounts, however, in this case and many others, the secured creditors were first to get paid.  With this particular example, under the Rue21’s reorganization plan, secured creditors recovered 100 percent of the allowed claims while the unsecured creditors only recovered about 3 percent.

We see a similar scenario play out with Katy Industries, a leading manufacturer, importer, and distributor of commercial cleaning and consumer storage products, who filed for bankruptcy on May 14, 2017. The company was unable to meet the obligations of its creditors, with nearly $56 million of debt! In this case, secured creditors recovered the total amount of allowed claims (100 percent) while unsecured creditors faced a recovery rate of only 9.6 percent.

As with many other things in life, when it comes to debtor bankruptcy, not much is guaranteed. However, case after case we see secured creditors having payment priority and receiving greater funds than unsecured creditors.  Simply speaking, the bankruptcy laws require that secured creditors are paid first; take the steps needed to secure your rights!

Residential Construction Projects and Mechanics Liens in New Jersey

Posted on June 29, 2018 by - In Other Commercial Credit News

Residential Projects & Mechanics Liens in New Jersey

Mechanic’s Liens on Residential Projects Differ from Liens on Commercial Projects in New Jersey

New Jersey is one of 17 states with mechanic’s lien statute specific to residential projects. In New Jersey, a residential project is defined as one – two – or three-family residences or a residential unit within a real property development (i.e. condominiums). If you are furnishing to a residential project in New Jersey, read on!

Compare & Contrast | Commercial & Residential

To secure your lien rights on a New Jersey residential project, you must file a Notice of Unpaid Balance and Right to File Lien within 60 days from last furnishing materials or services.

This is different from commercial projects, where a Notice of Unpaid Balance and Right to File Lien may be filed. For commercial projects, if the Notice of Unpaid Balance and Right to Lien is filed, the lien when later filed would have priority over conveyances after the filing of the notice.

Back to Residential: The Notice of Unpaid Balance and Right to File Lien should be served upon the owner or community association, prime contractor, and subcontractor, along with a demand for arbitration, within 10 days from filing the Notice of Unpaid Balance and Right to File Lien.

Wait, submit for arbitration? Yes! In his article, Filing a Residential Construction Lien in New Jersey, Paul W. Norris states the arbitrator will then determine whether a lien can be filed.

“At the arbitration hearing, which must be conducted within 30 days of the filing of the Demand, the arbitrator will decide whether the lien claim meets with the requirements of the New Jersey Lien Statute. If so, the arbitrator will grant the lien claimant the ability to file the lien claim with the county clerk.”

What is the Arbitrator Looking for?

As provided by New Jersey statute, the arbitrator will decide whether the Notice of Unpaid Balance and Right to File Lien was drafted and served in compliance with statute, the validity of the lien claim amount, the validity of liquidated/unliquidated setoffs or counterclaims and the arbitrator will decide the allocation of costs for arbitration. (See 2A:44A-21 (4) Legislative findings, additional requirements for lodging for record of lien on residential construction)

Did the Arbitrator Approve?

If the right to lien is granted by the arbitrator, you must file the lien within 10 days from the date of the arbitrator’s decision. Fail to file the lien within 10 days? According to Norris, “If the lien claim is not filed with the county clerk within 10 days of the arbitrator’s decision, the lien claim will be deemed invalid.”

Statute is quite clear:

  1. J. 2A:44A-21 (8)   Upon determination by the arbitrator that there is an amount which, pursuant to a valid lien shall attach to the improvement, the lien claimant shall, within 10 days of the lien claimant’s receipt of the determination, lodge for record such lien claim in accordance with section 8 of P.L.1993, c.318 (C.2A:44A-8) and furnish any bond, letter of credit or funds required by the arbitrator’s decision.  The failure to lodge for record such a lien claim, or furnish the bond, letter of credit or funds, within the 10-day period, shall cause any lien claim to be invalid.

Did the Arbitrator Determine the Notice is “Without Basis?”

It’s in your best interest to ensure all statutory requirements are met for the Notice of Unpaid Balance and Right to File Lien, otherwise, you will ‘pay the piper.’

According to N. J. 2A:44A-21 (12), claimants who fail to comply with the notice requirements and/or serve/file the notice without basis “…shall be liable for all damages suffered by the owner or any other party adversely affected by the Notice of Unpaid Balance and Right to File Lien, including all court costs, reasonable attorneys’ fees and legal expenses incurred.”

Just another reason to be careful and cautious when protecting lien rights!

Adjudication and Ontario’s Construction Lien Act

Posted on June 22, 2018 by - In Other Commercial Credit News

Adjudication and Ontario’s Construction Lien Act

As you are likely aware, the first wave of amendments to Ontario’s Construction Lien Act go into effect in July 2018 and the second wave debut October 2019. We’ve released several blog posts and a whitepaper on the amendments, which can be read here, and in today’s post we are going to continue the discussion on adjudication.

What is Adjudication? Like Arbitration… Only Different

Alike, yet different. Adjudication and arbitration are similar, in that the disputing parties agree to seek resolution from an impartial third party. But, there are some differences.

One difference? Time. Arbitration can go on for quite some time, but adjudication has strict time provisions.

According to an article by Sahil Shoor and Neil S. Abbott of Gowling WLG, the adjudicator has 30 days from receipt of necessary documentation to render a decision. If, after 30 days, the adjudicator needs more time, an additional 14 days can be granted to the adjudicator by the Authority.

“Within five days of the selection of the adjudicator the party who started the adjudication must provide a copy of the contract in question, and any documents the party intends to rely on to the adjudicator. The adjudicator must release his/her written decision within 30 days of receiving the documents. The adjudicator can request up to 14 additional days, but the adjudicator’s request can be refused by either party.”

Not only are the timing provisions strict, the decision made through adjudication is enforceable by the courts. If adjudication has been requested, it will extend the lien deadline to whichever is later, the standard lien filing period or 45 days from the date the required documentation is provided to the adjudicator.

The Powers that Be

In an earlier post we reviewed who can be an adjudicator but didn’t go into much detail on the powers held by the adjudicator. In their article, Shoor and Abbott, provide a healthy list of powers, though last on the list pretty much sums it up:

  • Make directions respecting the conduct of the adjudication.
  • Take the initiative in ascertaining the relevant facts and law.
  • Draw inferences based on the conduct of the parties to adjudication.
  • Conduct an onsite inspection.
  • Obtain the assistance of a merchant accountant, actuary, building contractor, architect, engineer, or other person in such a way as the adjudicator considers fit to enable him or her to determine better any matter of fact in question. The adjudicator may fix the remuneration of the expert and who will pay it.
  • Make a determination of the adjudication.
  • Any other power that may be prescribed.

What Can be Adjudicated?

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 proposed change order(s), disputes that are the subject of a notice of non-payment, retainage/holdback, and any other matter that the parties to the adjudication agree to or that may be prescribed.

It’s important to note, only one issue can be adjudicated at a time. However, if a party wishes to consolidate two or more issues under one adjudication, the party can submit the consolidation request via notification to all parties involved, including the adjudicator.

Commence Adjudication

Much like the mechanic’s lien process, there are steps to commencing adjudication. Shoor and Abbott advise adjudication can only take place between parties within direct contract of one another, adjudication must start prior to contract completion, and the party requesting adjudication must provide notice to other parties.

What should be included in the notice? According to Shoor and Abbott, the notice should include: “names and addresses of the parties; nature and a brief description of the dispute, including details respecting when and how it arose; nature of the redress sought; and name of a proposed adjudicator to conduct the adjudication.”

In addition to notifying other parties, the requesting party should also “provide a copy of the notice in electronic format to the Authority.” – Adjudications Under Part II.1 of the Act, O Reg 306/18

Can You Say Adjudication Three Times Fast?

Shew — I don’t know that I’ve used so many variations of “adjudicate” in one post! But, it’s necessary because adjudication is an important aspect of the amendments to Ontario’s Construction Lien Act. Adjudication will be an option for contracts entered on or after October 1, 2019.

If all goes to plan, adjudication should prove to be a quick, beneficial dispute resolution process!

Value of Salvaged Materials Increased Contract Amount

Posted on June 8, 2018 by - In Other Commercial Credit News

Project Contract Amount Increased, Based on the Value of Salvaged Materials

Can the resale value of salvaged materials from a demolition site be included in the total contract amount and subsequently be lienable? According to one legal decision, yes.

New Jersey Construction Liens & Salvaged Material

New Jersey is an unpaid balance lien state, which means the construction lien is generally limited to the unpaid portion of the general contract. Here’s a statute snippet:

N.J. 2A :44A-9 Amount of lien claim.

a. The amount of a lien claim shall not exceed the unpaid portion of the contract price of the claimant’s contract for the work, services, material or equipment provided.

And the lien fund shall not exceed:

(1) in the case of a first tier lien claimant or second tier lien claimant, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim;

For example, if the general contract is for $100,000 and the owner has paid the general contractor $25,000, the lienable balance is $75,000. Or, if the general contract is for $100,000 and the owner has paid the GC in full, there are no lienable funds.

But, what happens to potential lien claimants when the terms of the contract include the general contractor paying the owner for the opportunity to demolish a generating station? The GC paid the owner (I know, it seems a little backwards; generally it’s the owner paying the GC). Do lienable funds exist? If lienable funds exist, where do they come from?

In Salvaged Materials to Pay Lien Claimants, author Patrick Johnson reviewed a New Jersey Appellate Court case, where the general contractor agreed to pay the owner $250,000 to demolish a generating station and, in return, the general contractor would have rights to the salvaged materials, which it could resell for a profit.

The general contractor hired a subcontractor & the subcontractor hired two sub-subcontractors. Unfortunately, the subcontractor failed to pay two of its sub-subcontractors and the sub-subcontractors filed liens for over $300,000 each.

The owner didn’t exactly “owe” the general contractor any money… which means, no lienable funds, right?

Enter the Value of Salvaged Material

The owner & general contractor argued the contract had been paid in full, leaving no lienable funds. Although, there was an allegedly unapproved change order for $52,000 outstanding.

Of course, the subcontractor argued the outstanding change order for $52,000 counted as lienable funds and should be used to satisfy the two $300,000+ liens filed by the sub-subcontractors.

Then, the sub-subcontractors argued the value of the material removed from the site should be considered as part of the overall contract.

What is the value of that removed material?

Apparently, the subcontractor removed material valued at over $2,000,000 from the demolition site. And, according to Johnson, the court held that the removal of this material increased the value of the property, thus becoming a part of the contract.

“The appellate court resolved the issue in the subcontractor’s favor holding that the salvage value did make up part of the contract price.  The transfer of title by NRG constituted a prepayment to Werner and was thus excluded from reducing the lien fund.  Instead of transferring title to the salvaged material upfront, the Court reasoned that NRG could have transferred title to Werner incrementally as the project progressed.  The court found the legislative intent was to prevent an owner from enjoying the benefit of labor and materials without paying for them.  The Court held the salvaged materials increased the value of the property and, therefore, they were an essential component of the “payment” under the NRG-Werner contract, even though it was non-monetary consideration.”

Essentially, the original contract amount of $250,000 + the value of the removed materials of $2,000,000 = the lienable funds.

What This Means for Contractors Involved in Site Demos

Johnson recommends “all parties involved in a demolition project should use caution when structuring payment terms under a contract to take into account non-monetary consideration that could be constructed to be part of the lien fund.”

Keep this in mind as we enter the unfortunate tropical storm season and demolition work becomes more prevalent.