Service Area: Collection Services

When Your Collateral Description Sufficiently Complies with Article 9

Posted on May 17, 2019 by - In Other Commercial Credit News, UCC Financing Statements

Collateral Descriptions Are Tricky! It’s Hard to be Specific without Being Too Specific. Does Your UCC Sufficiently Comply with Article 9?

We know strict compliance with Article 9 is vital in perfecting your security interest. Collateral descriptions can be a tricky business; don’t be too specific or too vague. Fortunately for one creditor, a bankruptcy judge deemed its collateral description as “sufficient”, even though it included a specific address.

What Makes a Collateral Description Sufficient?

According to Article 9-108, a collateral description is “sufficient” if it reasonably identifies the collateral. Whether the collateral is identified by specific listing, category, quantity, or “computational or allocational formula,” it doesn’t have to be perfect, if it’s enough to put other creditors on notice.

“What? It doesn’t have to be perfect?”

Gosh, it’s tough when speaking in terms of perfection. So, I’m calling on author Francis Buckley, Jr. to help me out –

“Fortunately, the policy behind the law governing secured transactions under the UCC explains financing statements are meant to simply provide notice of the transaction and give enough information to subsequent potential creditors that the debtor’s property may be covered by a prior creditor’s security interest. Essentially, a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Oooooh, I like that! “…a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Yes, ideally your Financing Statement should be perfect. But mistakes do happen and while some mistakes are costly, others are forgiven, as is the case in the 8760 Service Group case.

In 8760 Service Group, the secured creditor added what Buckley referred to as an “address restricter,” essentially adding the address to its collateral description:

“All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.”

A subsequent creditor argued the inclusion of an address left the Financing Statement seriously misleading and the security interest unperfected. But Judge Dow disagreed with the subsequent creditor. According to Judge Dow the “UCC does not require a perfect collateral description… only an ‘indication’ of such coverage…”

Here’s an excerpt from Francis Buckley Jr.’s It May Be Foul, But There Is No Harm: Not All Mistakes Have Dire Consequences Under UCC Article 9:

“In an interesting twist, Judge Dow found that the existence of an ambiguity in the collateral description of the financing statement did not prejudice the prior-filed creditor, but instead provided sufficient notice to the subsequent-filed creditor to impose a duty of further inquiry into the nature of the secured transaction covered under the financing statement. Judge Dow pointed out that the court does not employ traditional means of statutory construction in analyzing an ambiguous financing statement because the court does not proceed to interpret the language. Instead, the court inquires whether the financing statement sufficiently describes the collateral such that ‘the subsequent creditor should have been on notice to inquire further into the collateral.’”

Best Practice? Take Your Time & Draft Carefully

Frequently I see collateral descriptions that tend to be a bit more general: “…in all payment intangibles, accounts, accounts receivable owed to ABC Company…” (Unless, of course, it is related to a specific piece of equipment where serial numbers come into play.)

My advice is be careful when drafting the collateral description. Understand that if you include an address, it may be deemed as seriously misleading. Not to mention the potential catastrophe: what if there is no collateral at that address?! If you do include an address, keep tabs on your customer – make sure they don’t move the collateral to another location.

Consignment Creditors, Give Back the Money

Posted on May 10, 2019 by - In Other Commercial Credit News

Sports Authority Consignment Creditors, Give Back the Money!

Consignment creditors in the Sports Authority bankruptcy have been dealt a crushing blow with the Court’s recent decision: Sports Authority was not “substantially engaged” in consignment sales. What does the decision mean? The non-UCC-filing-creditors who relied on the argument that Sports Authority commonly engages in consignment sales are now unsecured creditors.

*womp womp*

Quick Back Story

When Sports Authority filed for bankruptcy protection in 2016, big name creditors (e.g. Nike & Under Armour) with big dollar credit lines (e.g. $40M+) didn’t seem overly concerned with the lack of UCC filings to secure the credit lines.

Two reasons the creditors may have been lulled into a false sense of security:

  1. A classic case of “too big to fail” and
  2. Some experts believed these creditors would successfully retain rights to collateral or proceeds, based on the argument that Sports Authority is commonly known to participate in consignment sales.

We now know, of course, that Sports Authority was certainly not too big to fail. And thanks to the recent bankruptcy court decision, we also know that Sports Authority was not commonly engaged in consignment sales.

What the Bankruptcy Court Said

In its recent decision, the bankruptcy court conceded there is no bright-line rule for determining whether a business is substantially engaged in consignment. However, in previous cases, courts have held that 20% or more of the business’s inventory must be consigned goods.

In this case, it was determined Sports Authority’s inventory was comprised of only 14% of consigned goods.

“…the Debtors never “substantially engaged” in consignment transactions. WSFS and the Debtors stipulated that at no point, pre-or-post petition, did the Debtors’ total inventory include more than 14% of consigned goods.”

“…the threshold for substantial engagement is met only if consigned goods comprise “20% or more” of the value of the Debtors’ inventory.”

“Be a Good Sport and Give ‘Em Back!”

So, What Happens to The Funds Given to Those Consignment Creditors? “Be a Good Sport and Give ‘Em Back!”

OK, sportsmanship isn’t driving this decision, the court order is. In their review of the court’s decision, authors Michael Shiner and Maribeth Thomas, in Protecting a Consignor’s Interests in Retail Bankruptcy, advised that the court ordered the consignors to repay the funds.

“Judge Mary F. Walrath issued an opinion…that requires a consignor of goods to disgorge payments [i.e. repay] received from the debtor after the commencement of its chapter 11 bankruptcy case, with the disgorged funds to be paid to the secured lender.”

Consignment & UCC Article 9

Are you required to file a UCC when selling on consignment? Required, no. Recommended, yes.

Before you opt out of filing a UCC, you should understand what constitutes a consignment under Article 9. Here’s the definition of consignment under Article 9-102:

“Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:

(A) the merchant:

(i) deals in goods of that kind under a name other than the name of the person making delivery;
(ii) is not an auctioneer; and
(iii) is not generally known by its creditors to be substantially engaged in selling the goods of others;

(B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction does not create a security interest that secures an obligation.

Does your transaction not meet Article 9’s definition of consignment?

“If a consignment does not satisfy the requirements of Section 9-102(a)(20), the relationship between the consignor and consignee is governed by common law and the interest of the consignment seller would prevail over the interest of secured creditors.” – Authors Michael Shiner and Maribeth Thomas

Why File a UCC if Selling on Consignment?

Because the law allows you to secure your goods! A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your debtor defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided to the debtor.

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Get Your Head in the Game: File a UCC

If selling on consignment,

  • execute a security agreement and
  • ensure it includes clear identification of inventory,
  • search for existing secured creditors & notify those creditors of your security interest,
  • file the UCC-1 in the appropriate jurisdiction(s) – if possible, and
  • file the UCC prior to the debtor taking possession of the inventory.

We’re here to help!

Here’s Why You Should Hire a Construction Attorney for Construction Litigation

Posted on May 3, 2019 by - In Other Commercial Credit News

Why Hire a Construction Attorney for Construction Litigation?

Excellent question! In today’s post we’ll review a few key considerations when deciding whether you should hire a construction attorney for construction litigation.

Why use attorneys who are experts in construction litigation?

Companies can’t afford to rely on attorneys that “dabble” in construction law. There is too much at stake and the laws are too complex. Make sure your attorneys are experts in construction litigation.

What are advantages of having a construction attorney local to a project?

Mechanic’s lien and bond claim laws can vary drastically from state to state, so having an experienced attorney local to the project is a tremendous benefit. The attorney will know the laws specific to that state and may be near the project and/or familiar with the parties involved.

Should I use a large attorney firm for my construction collection needs?

The presumption by many is that using a large law firm will somehow guarantee better results. This is not necessarily the case. Larger law firms often charge high hourly rates and assign your case to a less experienced associate attorney. Working with a small or mid-sized firm may provide your organization with more legal expertise and a better overall value.

But, That’s Not All!

At NCS, our focus is helping you get paid for materials or services provided. But construction is a massive field and in a recent article from Odin Feldman Pittleman PC, construction attorneys can assist with contract conflicts, alternative dispute resolution, bankruptcy, labor disputes, and insurance issues.

According to Odin Feldman Pittleman PC, this is when you should hire a construction attorney:

“Thanks to their extensive legal knowledge, construction attorneys can make any stage of the construction process easier. You may want to consider employing one at the beginning of a project, when you are applying for a permit or need government approval for a project. Construction attorneys can also help you adhere to local, state, federal, and environmental regulations, preventing easily-avoided disputes.

Contract review and preparation are also key areas in which a construction attorney can be a valuable ally. An attorney can assist in the project planning process, then translate your needs to make that project happen into a clear contract that protects your interests. They may also be able to compile other legal documents to supplement your project or protect it from lawsuits.

Finally, construction attorneys are well versed in labor laws and disputes. They can help you settle cases between employees and employers, whether through mediation, settlement, or litigation. Consider hiring a construction attorney if you are faced with a labor dispute of any kind.”

NCS Can Help!

NCS has a nationwide network of construction attorneys with decades of experience. Our attorneys understand that projects often have extenuating or more complicated circumstances (multiple parcels, multiple owners, complex title searches, condominiums, quasi private/public projects, oil and gas liens, etc.) and may be local to and familiar with these projects.

If you need assistance, contact us today!

Condominium Act Meets Construction Act in Ontario

Posted on April 26, 2019 by - In Other Commercial Credit News

Condominium Act Meets Construction Act in Ontario

Ontario’s Construction Act has been a prevalent topic throughout the last year, and with the second wave of amendments rolling out later this year, the conversation isn’t over! Let’s continue our Ontario conversation today with a quick review of the intersection of Ontario’s Condominium Act and its Construction Act.

In Condominium Construction in Ontario? Unique Challenges Ahead, authors Michael Swartz and Jeff Scorgie, explain how land is held under the Condominium Act and the difference between liening a single condominium unit versus a common area.

Ontario Has Condominium Corporations

Under Ontario’s Condominium Act, when a condominium corporation is registered, the property is comprised of two different types: units and common elements.

Units are typically the individual housing space, and according to authors may also include “…other non-residential types of “units” such as parking spaces or storage lockers. In either event, whether residential or non-residential, each “unit” is assigned its own distinct PIN and is owned or leased exclusively by an individual owner.”

Whereas common elements are any space except the individual units.

“…such as landscaped areas, parking lots, guest suites, recreational facilities, hallways, elevators and foyers… What is important to understand is that the “comment elements” of a condominium are “owned” by all of the units on an undivided share basis.”

Improving a Unit?

It’s imperative to only lien the property improved, therefore, if you furnished to the improvement of a unit, and you are unpaid for furnishings, your lien should be filed on the individual unit. Each unit is issued a parcel identification number (PIN), which identifies the parcel of land and its owner.

Improving a Common Element?

Unlike individual units, the common elements of a condominium do not have PINs. Let’s say you provide carpeting for the building hallways, outside of the individual units. If you are unpaid for the carpeting, your lien won’t be filed against one unit; rather it will be filed against all.

In fact, according to authors, “registering a lien against the common elements requires a lien claimant to list all of the units in the “Properties” section of the claim for lien—thereby liening each unit in the condominium for its proportionate share in the common elements.”

Who Will You Notify of the Lien?

When filing a lien against a single unit, you would notify the property owner. When filing a lien against a common element, you would notify the condominium corporation and ALL unit owners. In an example provided by authors, if the condominium has 200 units with 200 different owners, you must notify all 200 owners. This means you must identify the owners, which let’s face it, could be quite costly (massive title work!).

OK, so what happens if you lien the common elements and individuals want to pay you to have the lien removed from their units? I’ll defer to the experts:

“… under the new Construction Act, an individual unit owner (or an owner of a CEC) can make a motion to court to vacate the registration of the lien as against their unit…. it poses some interesting practical questions for the lien claimant and the other parties in the litigation.  Specifically, if many unit owners vacate a portion of the lien from their individual unit, it could become difficult to track who has paid what amounts into court to clear title.”

My Advice

If you are liening a common element, hire a construction-oriented attorney. You need a legal professional familiar with the law(s) and who can manage payments on your behalf. Don’t try to go it alone!

“Pay-If-Paid” Leaves Subcontractor High and Dry

Posted on April 22, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

“Pay-If-Paid” Leaves Subcontractor High and Dry

An Alabama Court of Appeals has upheld a trial court’s decision: a subcontractor cannot recover its claim from the general contractor’s surety if the subcontract contains a contingent payment clause (pay IF paid). In today’s post I’ll discuss securing bond claim rights in Alabama, explain contingent payment causes, and review a recent Alabama Court of Appeals’ case.

Securing Bond Claim Rights in Alabama

For public projects in Alabama, payment bonds are typically required if the general contract is $50,000 or more. As a best practice, you should always attempt to obtain a copy of the payment bond when you agree to a contract or purchase order.

You are not required to serve a preliminary notice, but it’s a good idea to serve a non-statutory notice to alert parties within the ladder of supply that you are furnishing to the project.

If you furnish to the project and are not paid, you would serve a bond claim notice upon the surety no later than 45 days prior to filing suit. Then, you would file suit to enforce the bond claim after 45 days from serving the bond claim notice, but within 1 year from the date of final settlement. [Ala. Code 39-1-1]

IF and WHEN: Contingent Payment Clauses… if & when…

How quickly two small words can create a payment mess! Pay-if-paid is generally interpreted to mean that the subcontractor will receive payment from the general contractor IF the general contractor is paid by the owner. Whereas, pay-when-paid is interpreted to mean the subcontract will receive payment from the general contractor WHEN (or after/once) the general contractor receives payment from the owner.

The “IF” clause is also known as condition precedent. Payment to the subcontractor is dependent on payment made to the general contractor by the owner.

The “WHEN” clause is viewed more as a timing provision. The general contractor will pay the subcontractor within a reasonable amount of time from when the subcontractor issues its invoices. Payment under this clause is not reliant on the owner paying the general contractor.

Pay-when-paid is more desirable than pay-if-paid, because the general contractor is not relieved of paying its subcontractors under pay-when-paid.

Subcontractor Can’t Recover Claims from Surety

Keller Construction Company v. Harford Fire Insurance Company

  • Subcontractor & claimant: Keller Construction Company (Keller)
  • General Contractor & payment bond obligor: J.F. Pate & Associates Contractors, Inc. (Pate)
  • Owner & payment bond obligee: City of Spanish Fort (City)
  • Surety: Hartford Fire Insurance Company (Hartford)

City hired Pate, and Pate obtained a payment bond from Hartford. Pate hired Keller and the parties executed a subcontract. Under the terms of the subcontract, Pate could withhold retainage from Keller for the same retainage amount City withholds from Pate. Also, under the terms of the subcontract, Keller assumes the risks associated with the City not paying Pate.

Language from the subcontract, in part:

“[T]he receipt by [Pate] of payment from [the city] for the work performed by [Keller Construction] is a condition precedent to the obligation of [Pate] to pay [Keller Construction]. [Keller Construction] further acknowledges that it is assuming the risk of delay in payment or non-payment by the [city] to [Pate]. Both the condition precedent for payment and the assumption of this risk are bargained for considerations in this agreement, without which [Pate] would not have entered into this agreement with [Keller Construction].”

The words “condition precedent” are right there in the contractual language. Not only that, but the language clearly indicates that Keller is aware of and is assuming any of the payment risk. The Court’s opinion states Keller was fully aware of the conditions of the contract and understood the provisions.

Keller completed its work and Pate had remitted payment to Keller except for the retainage amount. Why? Because City did not pay Pate the retainage or the withheld funds. And according to the subcontract, if Pate was not paid by the owner, Pate did not have to pay Keller.

Keller proceeded with a bond claim and Hartford denied Keller’s claim. Hartford claimed it was not obligated to pay Keller, because the surety is only obligated to pay what the general contractor was obligated to pay. In this case, the general contractor wasn’t obligated to pay retainage, because it hadn’t been paid retainage, thus, relieving the surety of any payment obligation.

Keller tried several arguments, all of which failed, including conflicting language within the terms of the payment bond and the terms of the subcontract.

It got a bit muddy, but the gist is the court determined the two contracts (payment bond and subcontract) need to be treated separately as they fall under separate laws. Essentially, you can use payment bond language to override subcontract language.

Takeaway

Payment provisions are often strictly interpreted. If you enter into a contract, make sure you understand the terms of the contract and know that if you execute the contract you are committing to the terms. When reviewing the contract, it’s a good idea to have a legal professional also review, specifically to look for clauses that may jeopardize payment.

Digital Assets a General Intangible under Wyoming’s UCC

Posted on April 12, 2019 by - In Other Commercial Credit News, UCC Financing Statements

Digital Assets Now a General Intangible under Wyoming’s UCC

Wyoming is the first and only state to enact blockchain-enabling laws. It is also the first state to clarify the treatment of digital assets (bitcoin) under the Uniform Commercial Code. The virtual currency is considered a general intangible and the new law authorizes the granting of a security interest.

“AN ACT relating to property; classifying digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as custodians; specifying standards and procedures for custodial services under this act; clarifying the jurisdiction of Wyoming courts relating to digital assets; authorizing a supervision fee; making an appropriation; authorizing positions; specifying applicability; authorizing the promulgation of rules; and providing for an effective date.” – Text from the Sixty-Fifth Legislature of the State of Wyoming, 2019 General Session 

Uniform Law Commission & American Law Institute Have Created a Committee

Although Wyoming is the first state to enact this legislation, other states are in the process of reviewing and drafting legislation of their own. However, the Uniform Law Commission (ULC) recommends states hold off on changes for the time being.

According to The Uniform Commercial Code and Digital Assets: Legislative Initiatives by Edwin Smith, the ULC and the American Law Institute have created a study committee to “…examine whether any amendments to the Uniform Commercial Code (the “UCC”), enacted in all states and the District of Columbia, are needed to accommodate emerging technological developments including digital assets.”

Maintain Uniformity

To maintain the “uniform” aspect of the Uniform Commercial Code, some critical issues need to be addressed. In his article, Smith identifies 3 keys: choice of law, substantive law, and ease of understanding and accessibility.

We’ve previously discussed the importance of governing law within your security agreements, right? Well, that is in line with issue 1: choice of law. Because digital assets don’t have a physical jurisdiction (unless the cloud is a jurisdiction?) who (where?) will determine jurisdiction?

“Addressing the commercial law rules for digital assets requires the formulation of uniform choice of law rules among all states.  Otherwise, results among the states may differ depending on the state in which a dispute arises.  Differing results leads to forum shopping and general commercial uncertainty, creating greater risks among transacting parties, discouraging some transactions, and in any event increasing transaction costs.”

Also, is it better to create new legislation or improve existing legislation? This falls under number 2 on his list: substantive law. The legislation should reduce confusion, not create confusion.

“Providing new legislation where existing law is already adequate may lead to confusion and uncertainty.  Improving existing law will require a deliberative process that integrates the new legal rules into the system without disrupting the rules that have worked well for decades.”

Which goes hand in hand with ease of understanding and accessibility.

“Digital asset legislation that has the effect of modifying the rules of the UCC as, for example, by providing new rules for perfection or priority of security interests in digital assets, will be more difficult for practitioners to find and consider if the new rules are not integrated into the UCC itself.”

Stay Tuned! You may also find a Statement from the Uniform Law Commission, shared via ULC’s Twitter account, to be of interest.

Not-So-Peachy Mechanic’s Lien for One New York Landlord

Posted on April 5, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Not-So-Peachy Mechanic’s Lien for One New York Landlord

According to a recent Court of Appeals decision, enforcing a mechanic’s lien on leased property in New York does not require consent of the landlord. That is, if the lease agreement required the tenant to improve the property.

Lien on Leasehold

Landlord/tenant agreements aren’t uncommon; just drive by any strip mall or shopping plaza and you’ll see oodles of stores operated by tenants that are leasing space from the property owner.

In a lease situation, the property is owned by one party & then a second party leases or rents the space from the owner. When improvements are made to the property, depending on the hiring party (the owner or the tenant), a mechanic’s lien may attach to the property, the leasehold interest, or both the property and the leasehold interest.

For this Court of Appeals case, there is one additional variable to be considered: the language within the lease agreement between the landlord (COR) and tenant (Peaches Café LLC).

In Ferrara v. Peaches Café LLC, Peaches Café LLC (Peaches) hired Ferrara (prime contractor) to perform electrical work. Peaches hired Ferrara because the lease dictated that Peaches would need to improve the property to meet electrical specifications.

“The lease imposed certain construction requirements on Peaches [tenant] for it to operate its restaurant, including adherence to specific electrical specifications. The lease also provided that COR [landlord] approve of any improvements to the premises, that Peaches submit to COR all design plans for the electrical work, and that any improvements made become part of the realty.” – Michelle Cuozzo of Pepper Hamilton LLP

As is common in the restaurant industry, Peaches went out of business and Ferrara was stuck with an unpaid bill of $50,000. To recover the claim, Ferrara filed a mechanic’s lien against the property and eventually filed suit to enforce its mechanic’s lien.

Once suit had been filed, the property owner (i.e. the landlord) moved to have Ferrara’s lien invalidated. The owner argued the lien could only be enforced if the owner expressly consented to the work performed. The court didn’t agree; here’s a recap from Michelle Cuozzo of Pepper Hamilton LLP:

“COR [owner/landlord] argued that a contractor performing work for a tenant can only enforce a lien on the property if the landlord expressly or directly consented to the work performed. The Court of Appeals rejected this argument… [T]o enforce a lien, the landlord must “either be an affirmative factor in procuring the improvement to be made, or having possession and control of the premises assent to the improvement in the expectation that he will reap the benefit of it.” Affirmative acts by a landowner include lease terms requiring the tenant to make specific improvements to the property.”

The lease clearly required Peaches to improve the property to meet the electrical specifications. Plus, the lease included language that the landlord could “retain supervision over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the work.”

Ultimately, the landlord consented to the improvement when it incorporated the requirements within the lease. Thus, the court held Ferrara’s lien to be valid.

Retainage, Payment Bonds, and Private Projects in Texas

Posted on March 29, 2019 by - In Other Commercial Credit News

Retainage, Payment Bonds, & Private Projects in Texas

Private projects in Texas – mechanic’s lien or bond claim? Ordinarily I would say “Mechanic’s lien!” However, that may not always be the case. And be careful, because mechanic’s liens and bond claims are not the same and may require different actions.

Texas Bond Claim

In Texas, a properly recorded payment bond prevents mechanic’s liens from attaching to the property (think “bond off lien”). Author Amy Wolfshohl explains in her article The Often Overlooked Protection Provided By A Statutory Payment Bond Under Chapter 53 Of The Texas Property Code, the payment bond must meet the following criteria.

To provide the protection contemplated by the statute, the bond must:

1. be in the original contract amount;

2. be in favor of the owner—as obligee;

3. have the written approval of the owner endorsed on it;

4. be executed by:
(a) the original contractor as principal; and
(b) a corporate surety authorized, admitted, and licensed to do business in Texas;

5. be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15% of the contract price; and

6. clearly and prominently display the contact information for the surety.

Although the security is different – a payment bond instead of a mechanic’s lien – you protect your Texas bond claim rights similarly to how you would protect mechanic’s lien rights.

Notice of Non-Payment (Commercial): When contracting directly with a subcontractor

– Serve notice upon the prime contractor no later than the 15th day of the second month following each month in which materials or services were furnished.

– Serve notice upon the owner and prime contractor no later than the 15th day of the third month following each month in which materials or services were furnished.

The difference? Also serve the surety with a copy of the notices and subsequent lien. And, be aware, if a payment bond is not properly recorded, you must comply with the terms and conditions of the payment bond when perfecting a claim!

Interesting Fact

Did you know, for private projects in Texas, the owner is required by statute to withhold 10% retainage?

Retainage is an agreed amount of a contract price retained from a contractor as assurance that subcontractors will be paid, and the job will be completed.

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.

(b)  In this section, “owner” includes the owner’s agent, trustee, or receiver.

According to Wolfshohl, if the payment bond is recorded, the owner does not have to withhold retainage.

“If the owner obtains a bond that is consistent with these requirements and records it in the applicable real property records, the owner is relieved of the requirement to withhold retainage and cannot be held liable for failing to trap funds.”

Wolfshohl reminds readers, payment bonds aren’t just good for project owners, they’re good for subcontractors too!

“This is a win-win for owners and subcontractors because the subcontractor’s remedy is not limited to its proportionate share of retainage plus any trapped funds and the owner is not subjected to a multiplicity of often conflicting subcontractor claims if bankruptcy, termination, or abandonment occurs at the prime contractor level.”