Service Area: Collection Services

Carefully Review Settlement Agreements

Posted on March 12, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Carefully Review the Settlement Agreement & Be Prepared to Accept the Terms of the Agreement

In Degraw Const. Group, Inc. v. McGowan Bldrs., Inc., 2017 NY Slip Op 32080 – NY: Supreme Court 2017, parties executed a settlement agreement, which in addition to a payment settlement, required the parties to release one another from further claims. Despite the agreement, the subcontractor filed mechanic’s liens and attempted to proceed with suit. Much to the subcontractor’s dismay, the court upheld the terms of the settlement. The subcontractor’s liens were void and the subcontractor had to pay damages to the general contractor.

Some Background

McGowan Builders, Inc. (McGowan) was the general contractor for two projects: YMCA of Greater New York (YMCA Project) and Nan Shan Development of CPC Queens Senior Center/Day Care Center (Nan Shan Project). For both projects, McGowan hired subcontractor Degraw Construction Group, Inc. (Degraw) to construct concrete foundations, walls and floors.

As with many construction projects, disputes arose. To resolve the disputes, McGowan and Degraw executed a settlement agreement, “Agreement for Termination for Mutual Convenience and Mutual Release.” The settlement agreement dictated that McGowan would pay $150,000 in installments to Degraw, and that both parties agreed to a “mutual release.”

According to the court opinion, the mutual release specified that “[McGowan] and Degraw agree that upon full performance of their obligations hereunder, any and all claims that could have been asserted under the YMCA Subcontractor Purchase Order and the Nan Shan Subcontractor Purchase Order shall forever be released…”

Essentially, the parties agreed the $150,000 would settle debts and the parties agreed they would forfeit further mechanic’s lien actions.

In a Tennis Match of Correspondence

In what can be best described as a tennis match of correspondence, the parties served up letters & responses.

First up, McGowan notified Degraw it would not remit further payment, as McGowan had discovered defects on the YMCA Project. (Until this time, McGowan had paid $100,000 of the $150,000 settlement.) The terms of the settlement agreement had a clause for ‘latent defect claims’:

“[R]elease each other from all potential claims against each other on the YMCA and Nan Shan projects except for claims arising from latent workmanship defects and claims arising from Degraw’s indemnification obligations…”

Unsurprisingly, Degraw then sent a demand for payment & advised it would pursue all remedies, including a mechanic’s lien against the projects, if McGowan did not remit payment.

McGowan served back, reminding Degraw of the terms of the settlement agreement: “The lien claims that you are threatening to file on these projects are contrary to the express terms of the Settlement Agreement. Any sum that may be claimed to be due in a lien filed on either project will be completely arbitrary because the Settlement Agreement does not allocate the principal amount of the settlement and/or the current unpaid balance of $50,000 between the YMCA and the NAN Shan Projects.”

And, of course, McGowan’s correspondence wouldn’t be complete without a subtle jab “As previously advised, if you are foolish enough to file a lien on either the Nan Shan or the YMCA project swift action will be taken to obtain a Court Order for the discharge of such lien(s)…”

Degraw Serves Up Liens, McGowan Counters with Discharge Bonds

Despite the terms of the settlement agreement, Degraw filed two mechanic’s liens. The lien on the YMCA Project was filed for $214,590.46 and the lien on the Nan Shan Project was filed for $87,096.01.

McGowan, in turn, obtained discharge bonds for both liens.

Degraw proceeded with suit to enforce its liens, and McGowan filed a motion to have the liens declared as barred per the settlement agreement, to have the lien amounts declared as willfully exaggerated, to recover damages and to have Degraw’s suit dismissed.

The Court’s Findings

  • Liens Barred Based on Settlement Agreement: The terms of the settlement agreement were clear. When the parties executed the agreement, they waived the right to proceed with further claims. Therefore, Degraw’s liens were unenforceable.
  • Liens Willfully Exaggerated: Simple math confirms the liens were exaggerated. The agreement was for $150,000, of which $50,000 was unpaid. The liens were filed for a total of $301,686.47.
  • McGowan Recovers Damages: Because the liens were in violation of the settlement agreement and willfully exaggerated, McGowan was the prevailing party & was awarded $25,645 in damages.
  • Degraw’s Suit Dismissed: If there was still any question regarding the validity of Degraw’s liens, let the court’s final finding end it – the liens and suit were dismissed.

The Takeaway

Settlement agreements are not uncommon in the construction industry. We often assist with exchanges of release of lien for payment. But, it’s imperative for parties that execute an agreement to understand that the agreement may be enforceable, just as with any other contract. Review the terms of all agreements, and as a best practice, seek legal guidance before signing anything!

Is “Final Payment” Written on the Check?

Posted on March 9, 2018 by - In Other Commercial Credit News

Is “Final Payment” Written on the Check? Consider it Final and Paid.

In a recent Mississippi case, one general contractor argued that a payment it received from the owner did not satisfy the total claim amount. The check the general contractor received and subsequently deposited included the phrase “Final Payment.”

The general contractor attempted to recover the remaining balance owed and ultimately, the general contractor proceeded with suit to recover unpaid monies. Amidst litigation of additional issues, the court had to determine whether “Final Payment” written on the check operated as an accord-and-satisfaction of the claim.

Unfortunately for the general contractor, by depositing the “Final Payment” check, they accepted that payment as payment in full and were barred from further recovery.

What is Accord & Satisfaction?

Essentially, accord and satisfaction is synonymous with paid in full. According to the court opinion, Mississippi statute dictates that accord and satisfaction exists if:

  • Something of value is offered “in full satisfaction of a demand” – i.e. the check
  • The offer is “accompanied by acts and declarations [that] amount to a condition that if the thing is accepted, it is accepted in satisfaction” – i.e. the phrase “Final Payment” on the check
  • “The party offered the thing of value” must “understand that if he takes it, he takes subject to such conditions” –  i.e. understand the meaning of “Final Payment”
  • The party accepts the item and/or offer –  i.e. depositing the check

Based on the four parameters, as you can see, the court determined the payment the general contractor received, did qualify as accord and satisfaction.

“However, Mississippi law is clear that, despite whatever contentions a party may make to the contrary, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment.”

But, But, But…Final Doesn’t Really Mean Final

This case was recently reviewed by attorney, Matthew Devries in “Paid in Full” Wives’ Tale True? When Endorsing A Check, Yes Ma’am!. In his review, Devries states “The contractor conceded that it cashed the check but argued that it repeatedly asserted to the owner…that it did not consider the “final payment” to be final and that it would continue seeking the remainder of what it was owed.”

For whatever reason, it reminds me of the cliché, “You can’t have your cake and eat it too.” The contractor can’t cash a check, marked as final payment, and then continue collection efforts. Perhaps it’s that pesky word “final” that was getting in the way.

Be Careful!

Checks are monetary agreements and should be treated with care. As a former bank employee, I can tell you there are guidelines for accepting & depositing checks (albeit, they may not always be enforced or followed).

For example, the payee line on the check must match the deposit account name, if you write “for deposit only” on the check you can’t get cash back from the deposit (must be a separate transaction), and post-dated checks can’t be tendered until the specified date.

If you receive payment, and there are conditions or terms within the payment, seek a legal opinion before accepting the payment.

Properly Perfected UCC and Repossession

Posted on December 18, 2017 by - UCC Financing Statements

Can a Properly Perfected UCC Really Give Me the Right to Repossess?

Yes, a properly perfected security interest and proof of debtor default may afford you the right to repossess the collateral. Today’s post reviews a recent case that demonstrates the power of a properly perfected UCC.

In CNH INDUSTRIAL CAPITAL, AMERICA, LLC v. T & P FARMS, LLC, Dist. Court, ND Mississippi 2017, the court granted the Secured Party the right to repossess its equipment because it had 1.) proven the debtor defaulted on the contract and 2.) properly perfected a security interest through UCC Financing Statements.

Background: The Contract, The UCC-1s & The Replevin

In 2015, the debtor, T & P Farms, LLC (T & P) purchased over $1M in farming equipment from Medlin Equipment Company of Mississippi County (Medlin).

According to the court opinion, there were 4 pieces of equipment sold, and each sale was “…evidenced by a Retail Installment Sale Contract and Security Agreement.” (3 of the 4 sales were addressed in the replevin action.)

Included in the contract, aside from the security language and terms of the sale, was a clause regarding debtor default: “the seller has the right to ‘take possession of all Collateral, without notice or hearing…’” and Medlin assigned its interest in the equipment to CNH Industrial Capital America, LLC (CNH). Subsequently, a PMSI filing was properly perfected, by CNH, for each sale/contract.

By the end of 2016, the debtor had stopped making the agreed upon monthly payments and in May 2017, CNH filed a replevin action.

What is Replevin Action?

Wex Legal Dictionary defines replevin as the action used by creditors to repossess collateral from debtors in default. “A writ authorizing the retaking of property by its rightful owner (i.e., the remedy sought by replevin actions).”

The rules of replevin may vary by jurisdiction and this case looks to Mississippi statute (Section 11-37-101 of the Mississippi Code). According to the court opinion, a replevin action requires a declaration under oath to include:

(a) A description of any personal property;

(b) The value thereof, giving the value of each separate article and the value of the total of all articles;

(c) The plaintiff is entitled to the immediate possession thereof, setting forth all facts and circumstances upon which the plaintiff relies for his claim, and exhibiting all contracts and documents evidencing his claim;

(d) That the property is in the possession of the defendant; and

(e) That the defendant wrongfully took and detains or wrongfully detains the same

The Secured Party Prevailed

When a replevin action is filed, the party filing the action needs to prove their right to repossess the collateral. In this case, the Secured Party filed the action, then the Secured Party proved its properly perfected security interest as well as the default of its debtor.

“A plaintiff in a replevin action establishes the right to immediate possession by demonstrating a default on a purchase contract and a perfected security interest in the collateral.”

The debtor is afforded an opportunity to defend against the repossession. The debtor asked the court to consider equitable defense (a defense based on fairness, not law), based on the debtor’s need for the equipment to maintain his business and support his family.  The debtor further added he should not have to pay for the equipment, because the equipment was faulty.  Unfortunately, the debtor’s defense wasn’t persuasive enough.

“While a rule of equity may play some role in this determination, such as where a party claims an equitable lien in the subject of the action, T & P has not cited, and this Court has not found, any authority which supports the proposition that a possessory interest in collateral may be equitably created by either the condition of collateral unrelated to the existence of a default or the need for continued possession.”

CNH properly perfected its security interest and successfully established the debtor’s default, therefore, the court granted CNH the right to repossess the equipment.

UCC for the win!

Despite Disputes, Release Retainage

Posted on September 29, 2017 by - In Other Commercial Credit News

In Tennessee, Retainage Must Be Released within 90 Days, Despite Disputes

Retainage is a familiar term in the construction industry: Retainage is an agreed amount of a contract price that is retained by one party from another, with an assurance that the party will be paid once the job is completed.

Retainage is common in construction contracts and is generally between 5%-10%.

For example, the owner may withhold 5% of the contract amount, then, once the project has been completed/accepted, the owner will release that 5% to the general contractor. Retainage is sometimes viewed as a bit of an insurance policy, or more aptly, it is leverage.

“…[T]he sole purpose of withholding retainage is to protect the project, so that if there is a dispute with the contractor, whether it is defective/incomplete work, or the project is late—assessment of delay or liquidated damages—retainage can and will be withheld from the contractor, used as leverage.” – David Taylor, author of What Lenders Need to Know

Many state statutes specifically address retainage. For example, Texas statute states the owner should withhold 10% retainage.

Sec. 53.101.  Required Retainage

(a)  During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:

(1)  10 percent of the contract price of the work to the owner; or

(2)  10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.

In Tennessee, according to What Lenders Need to Know, retainage cannot exceed 5%, with a deadline provided for the release of the retainage. Per Taylor, retainage must be released within 90 days from substantial completion.

Taylor reviewed and addressed a specific Court of Appeals case which bucked the status quo on the release of retainage.

I admit, I would have assumed that releasing retainage would be conditioned on acceptance. Essentially, if the owner isn’t happy or if there is a dispute, the retainage would continue to be withheld until all issues are resolved.

Well, you know what happens when you assume…

Taylor states “The Court of Appeals ruled that, regardless of what the contract says about an owner withholding retainage, even if there is serious defective work which far exceeds the retainage amount, retainage must be released to the contractor within the 90-day period.”

Wait, does this mean what I think it means? Yes, Taylor warns “[B]e aware that even if there is a failed project, caused by the contractor, withheld retainage may have to be paid to that contractor.”

Now, this is based on a case in Tennessee, and, as you know, all states are different. But let it serve as a reminder to ensure familiarity with statutes for the states in which you furnish & if you are ever in doubt, seek a legal opinion.

NCS can help – contact us today!

Timely Amend Your Proof of Claim

Posted on August 11, 2017 by - In Other Commercial Credit News

Need to Amend the Proof of Claim? Here’s a Tip, Don’t Wait 7 Years

We’ve discussed bankruptcy proof of claims before, but today we are reminded just how vital accuracy is when filing a proof of claim.

In Delaware Court Shuts Down Creditor’s ‘Unreasonable’ Motion to Amend its Proof of Claim, author Aditi Kulkarni-Knight discusses a recent bankruptcy decision.

Here’s a quick breakdown (oversimplification) of the decision. The debtor filed for bankruptcy protection in January 2009 and the court set the bar date for September 30, 2009. The creditor filed their initial proof of claim timely, in the amount of $21,281. Then, in November 2016, the creditor filed a motion to amend its claim to add a co-claimant and to increase its claim amount to $81 million.

(The increase in claim amount was because the creditor wanted to “convert its claim for contractual royalties to a claim for more than $81 million of alleged copyright infringement damages.”)

The Claim Amount Increased by 363,438%. Whoa!

Unsurprisingly and as you can imagine, the court denied the creditor’s request. Asking to amend your claim 7 years after the bar date & increasing your claim amount by 363,438% seems unreasonable to me too!

I read a lot of case law. While it’s usually fact based with rare anecdotal bits, occasionally a judge tells it like it is – this is one of those cases.

“the court stated, ‘the law is clear: ignorance is not a sufficient reason to permit amendment’ Additionally SNMPR was represented by counsel when it filed the Claim, and ‘lawyers are charged with knowing the law.’”

(I admit it, when I read it, I absolutely chuckled “Ooooh, burn!” at my desk.)

It’s True, It’s Ridiculous

The judge is right, of course, improperly completing a proof of claim and wanting to fix it 7 years later is ridiculous. The creditor had months to properly review their claim and complete the document.

As a best practice, Kulkarni-Knight recommends due diligence.

“The case serves as a warning to creditors and creditors’ counsel alike when filing proofs of claim. Courts may be unwilling to allow amendments to proofs of claim when (1) a considerable amount of time has passed since the bar date, (2) the amended amount of the claim far exceeds the original amount of the claim, or (3) the amendment changes the substantive nature of the claim. Creditors and their counsel must ensure that proofs of claim include as much detail as possible at the time they are filed, that the amount sought is accurate and supported by appropriate documentation, and that all legal bases for the claim are asserted. While a motion to amend may be necessary in light of newly-discovered evidence, creditors and their counsel can avoid such motions by doing their due diligence and legal analysis before they file their proof of claim.”

Contact NCS with questions!

Can a Mechanic’s Lien Be Avoided in Bankruptcy

Posted on August 4, 2017 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Can a Mechanic’s Lien Be Avoided in Bankruptcy?

This should come as no surprise: mechanic’s lien and bond claim rights vary by state. Right? We remind you of this frequently. (It’s the reason that resources like The National Lien Digest are so important.) It turns out, the time and information requirements for lien filings aren’t the only part of the lien process that is state specific.

According to an article from Robinson + Cole, The Enforceability of Mechanics’ Liens in Bankruptcy is Dependent on State Law, whether a lien can/can’t be avoided in bankruptcy is also state specific.

“In a recent decision, the Third Circuit Court of Appeals held that a mechanic’s lien filed by an unpaid supplier against a construction project, after the contractor through whom the materials were furnished filed for bankruptcy protection, was voidable. However, the Court noted that this doesn’t apply if applicable state law permitted the lien to relate back to a date prior to the filing of the petition. Under the laws of most states, perfected mechanics’ liens do in fact relate back to the first day on which the lienor furnished labor, materials, or equipment to the construction project.”

The referenced case involves an unpaid supplier who filed a mechanic’s lien, in compliance with New Jersey statute.

The contractor, who had failed to pay the supplier, filed for bankruptcy protection. Naturally, the supplier took steps to enforce its mechanic’s lien, but the contractor filed a motion claiming the supplier’s suit to enforce the mechanic’s lien was a violation of the automatic stay.

Unfortunately for the supplier, the trial court, and subsequently the appeals court, agreed with the contractor, and the supplier’s mechanic’s lien was invalidated. However, as the trial court pointed out, a lien may sometimes survive a bankruptcy, depending on the date the lien relates back to.

“[T]he result would have been different if applicable state law provided for the mechanics’ liens to relate back prior to the filing of the bankruptcy petition. …[T]he filing of a mechanic’s lien by a subcontractor did not violate the automatic stay provision because, under Pennsylvania law, the date of filing the mechanic’s lien related back to ‘the date of visible commencement upon the ground of the work of erecting or construction the improvement.’ New Jersey law contained no such provision; therefore, the mechanic’s lien was effective only as the date of filing.”

If you have concerns about a project you are furnishing to, or a party within the contractual chain filing bankruptcy, you may want to take an extra step and confirm statutory guidelines for the date to which the lien relates back.

Four Signs Your Customer May Be in Financial Distress

Posted on July 31, 2017 by - Credit Risk Management

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.

#1 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. Check out this testimonial:

“The customer business standing with each State is one early red flag signaling that something could go wrong with collecting accounts receivable. Using the service NCS has been providing, our company has already identified two accounts with open credit limits which could have resulted in material losses.

One of the accounts identified had $100,000 open credit limit and open accounts receivable. NCS notified us the account had fallen inactive with the State. Subsequent conference calls with our customer’s CFO found the customer was “very close to running out of cash and it is unlikely to be funded further by outside investors.” Given such dire status provided verbally as well as the State standing, we reduced the limit to $0.” — Credit Manager, currently utilizing NCS’ Corporate Monitoring

#2 Pay-When-Paid

The dreaded contingent payment clause. 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.

#3 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. Empty or broken promises don’t pay the bills!

#4 Silence

Silence is golden — unless you have a toddler or a customer with past due invoices.

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.

Bonus! Part of knowing your customer, is also knowing who they do business with. If your customer’s biggest customer has filed for bankruptcy protection, it could easily impact your customer’s cashflow.

What Can You Do?

We’ve previously covered some tips on handling past-due receivables. Tips include closely monitoring open invoices (don’t allow days beyond terms to get out of hand), trying various methods of contact (phone, email, letter) stopping by their office (if able) to review credit reports and carefully looking for recent collection placements/judgments.

Lastly, stop extending credit. Don’t expose your AR to any unnecessary risk. If your customer isn’t paying their bill, then don’t give them the opportunity to make the debt worse.

3 in 3 Bankruptcy Proof of Claim

Posted on March 22, 2017 by - Credit Risk Management

3-in-3 Topic is Bankruptcy Proof of Claim

Today’s 3-in-3 features Danielle Moon. Read on to learn more about the ABCs of a Bankruptcy Proof of Claim.

What is a Bankruptcy Proof of Claim?

Danielle: A bankruptcy proof of claim is a form used by the creditor to indicate the amount of the debt owed by the debtor on the date of the bankruptcy filing.

Typically, creditors receive a notice from the bankruptcy court advising their debtor has filed for bankruptcy protection with instructions for filing a proof of claim and the deadline for filing.

What Should Creditors Be Aware of When Filing a Proof of Claim?

Danielle: You always want to file your proof of claim using the full balance, both secured and unsecured, on all projects or open accounts. Often, we see creditors filing a proof of claim for the amount on a specific job that is past due or in collections.

Always double-check that you file your proof of claim correctly. Make sure the secured and unsecured amounts are identified properly.

Be aware that mechanic’s liens, bond claims, UCCs and judgments may allow you to file a secured proof of claim, putting you in a better position to get paid.

Is There a Deadline to File Your Proof of Claim?

Danielle: Yes. You must consider your deadline or the bar date. The bankruptcy courts will typically set a date by which time a creditor’s proof of claim must be filed, commonly known as the bar date.

The bar date can be found within the bankruptcy notice or, if it’s set at a later date, within the docket report of the bankruptcy.

The court will send a notification on the bar date to all creditors that are listed in its original petition, and the proof of claim must be filed in the same court in which the bankruptcy case was filed.

3-in-3 Takeaways

These are all great tips to consider when filing a bankruptcy proof of claim.  Know your ABCs!

  • Always include the entire amount you are owed on the proof of claim.
  • Be sure you correctly complete and file your proof of claim.
  • Consider the deadline, aka the bar date, and file your proof of claim on time.

Remember that errors and inaccuracies may affect the validity of your proof of claim. Don’t take that risk.  NCS can help you. We can file the proof of claim on your behalf.