Assignment of Lien Rights
Often, a contractor or subcontractor will assign his or her lien rights on a particular job to a building material supplier or other creditor as a form of collateral. Assignments are frequently used but have significant limitations. Unless an assignment is used in conjunction with a UCC-1 Financing Statement, it is not perfected and may not be enforceable.

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Bankruptcy
Insolvent customers generally choose to file bankruptcy under one of three chapters of the Bankruptcy Code: Chapter 7, Chapter 11, or Chapter 13. Chapter 7 involves liquidation and closing of the business, while Chapters 11 and 13 authorize the financial reorganization of a corporation (Chapter 11) or an individual (Chapter 13). Liquidations may or may not include distributions to creditors, depending on whether there are assets to sell or recover. The bankruptcy trustee, who is appointed with the approval of the bankruptcy judge, has control over the sale of the debtor’s assets and must obtain court permission before taking action. Secured creditors have first rights to claim the debtor’s assets or the proceeds of the sale of the assets. Then, if there is anything left, the unsecured creditors’ claims will be paid, in whole or in part. Debtors in bankruptcy must list all their creditors and financial obligations in the court papers in order to be able to discharge their debts. The creditors, on the other hand, must file a proof of claim with documentation of the balance owed to them. A 341 hearing, named after Section 341 of the Bankruptcy Code, is held in the bankruptcy court after the bankruptcy filing to give creditors an opportunity to question the debtor on topics such as the debtor’s business plan going forward, the current and future leadership of the company, and how the debtor’s assets were handled prior to the bankruptcy. It also gives creditors an opportunity to object to certain of the debtor’s proposals, such as how much the debtor plans to pay creditors each month, or the proposed sale of certain assets. Be sure to read about preference claims in the FAQ section below.

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Bid Proposals
Simply put, a bid proposal is a contractor’s work estimate, similar to a quotation by a building material supplier. But bid proposals and quotations are more than simple estimates. They can and should include terms, restrictions, an expiration date, and provisions for venue, jurisdiction, and the recovery of fees and interest in the event of a lawsuit. They should specifically reject the imposition of liquidated damages. They are valuable and important documents and should always be given in writing. Generally speaking, it is better to perform work or supply materials using your bid proposal or quotation as the contract document.

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Main Contract (also called the General Contract or the Prime Contract)
This is the contract between the owner of the project and the general, or prime, contractor. It will include references to the project specifications, the project schedule, the payment and performance bonds, default provisions, payment terms, requirements for change orders, and so forth. If the owner drafts the contract, then the general contractor should have a contract specialist or attorney review it for objectionable terms and conditions. If the general contractor drafted the document, then the owner should have someone review it. We cannot overstate the importance of having an attorney review contract documents prior to commencement of work. Many, if not most, construction disputes could be avoided with adequate contract review. Levy • von Beck & Associates provides this service to many of our clients on a regular basis.

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Bond Claims
Virtually all public agencies require that the general contractor post a payment and performance bond as part of the bid documents. The payment bond acts as security for unpaid labor and materials suppliers. Potential claimants against the bond include subcontractors, suppliers, equipment lessors and vendors, professional service providers, and sub-subcontractors. The performance bond protects the owner in case the prime contractor defaults or is fired before completing the project. It also protects the owner it the work must be repaired. Only the owner can file against the contractor’s performance bond. These bonds are often required on private works projects as well. A claim against a payment bond tends to be a more attractive remedy than filing a lien claim, which is against the project itself and the real property on which it is built. Bond claims tend to be less expensive to file and don’t require the claimant to obtain a title report. Best of all, with a bond claim there is generally an adequate fund, so you don’t have to worry about the first secured lender foreclosing its lien interest and extinguishing the claims of the subcontractors or suppliers.

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Bonding Around a Lien Claim
A properly perfected lien claim attaches to the real property that is identified in the lien. This means that the property owner cannot refinance or sell the property without taking care of the lien. In many states the owner or general contractor can, however, purchase a bond worth 150% of the lien amount and file it with the recorder’s office. This will have the effect of removing a lien from the title. Many contractors and suppliers view this as a bad development, because it may relieve some of the pressure on the owner to resolve the lien claim quickly. Thus the property owner or the general contractor may threaten to bond around the lien, in an attempt to pressure the claimant to settle. In reality, however, bonding around the lien, or getting a lien discharge bond, is often good for the lien claimant, as a bond may provide a faster and less expensive legal remedy.

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Change Order Requests
Also known as C.O.s, change order requests have long been the cause of construction disputes and the reason for expensive litigation. Why? Because change orders are often performed without written authorization, regardless of the terms of the contract. Later, the owner denies having authorized the work, or disputes the invoice amount. Despite the hassle of completing the paperwork and seeking approval, no contractor, subcontractor or supplier should furnish additional labor or materials without getting prior written authorization. Contractors should have their superintendents or project managers keep change order request forms handy at the jobsite.

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Credit Application Agreements
A credit application is the underlying agreement that establishes the seller’s terms and conditions of sale, expectations for payment, default provisions, exclusions of liability, etc. It is a legally binding contract that, among other things, identifies the customer (buyer) as a sole proprietor, partnership, limited liability company or corporation; requests credit references; and may include a personal guaranty. It also must comply with The Federal Equal Credit Opportunity Act. There are countless credit application templates available, but it is imperative that the form and terms be specific to your company needs. For example, some credit applications include a granting clause that sets up the credit application as a type of security agreement. Most credit applications also include default remedies that define the creditor’s right to recover attorney’s fees, collection costs and court costs if a collection action becomes necessary. The credit application should include terms that require the buyer to notify the seller in writing within a specific time frame if the goods are defective or non-conforming, if the billing is inaccurate, or if the buyer incorporates or otherwise changes its legal status. Levy • von Beck & Associates has assisted many clients in the development or revision of credit agreements. We can also provide clients with sample credit agreements

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Debtor’s Examination
A debtor’s examination, also known as an examination of judgment debtor, is a post-judgment remedy available to a successful plaintiff. It is a process whereby the debtor is required to reveal his assets, which may include bank accounts, real property, cars, jewelry, receivables, equipment, etc. The statements are taken in the presence of a court reporter and often form the basis for post-judgment action. The examination cannot take place, however, until a creditor has filed suit and obtained a judgment against the debtor, and the debtor has failed or refused to pay the judgment.

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Deed of Trust
Deeds can form an excellent source of collateral, either pre- or post-transaction. Often, a customer requests credit beyond acceptable limits, so the seller, or building material supplier, requests a deed of trust on real property to secure the transaction in advance. This same tool can be used on a post-transaction basis if the customer cannot pay and requests extended terms. It is an excellent source of tangible collateral although the seller should always determine the available equity in the property and the seller’s position on the title. There is no point in choosing this tactic if the debtor has little equity in the property or if there are prior secured parties that would negate your collateral. Also, remember that a deed of trust may be invalidated if the husband and wife do not both sign it.

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Detrimental Contract Terms
All construction contracts are written for someone’s benefit. If the general contractor drafts a subcontract to be signed by his or her subcontractors and suppliers, then the document has almost certainly been written for the sole benefit of the general contractor. If the owner drafts the construction contract, it has almost certainly been written for his or her benefit. Make no mistake, contracts are not written for the benefit of all parties. Many contracts include onerous and extremely risky terms and conditions. For example, a subcontract might read: “All terms of the main contract apply and incorporated herein.” This short sentence can mean that if the contract between the owner and general contractor includes a provision for liquidated damages at $1,000 per day, then the subcontractor consents to the same provision, even if the subcontractor has never seen the general contract, and even if the words “liquidated damages” are not mentioned in the subcontract. Or, the main contract might state, “The contractor is responsible for performing all necessary work to complete the project even if the work is not specifically referenced in the bid documents.” This could obligate a subcontractor to perform unanticipated work that was not included in his or her bid. These examples demonstrate some of the reasons to have a knowledgeable construction law attorney review your contract documents before deciding to accept the contract and move forward.

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Foreclosure Deadlines
Perfection of lien rights is usually a three-step process: sending a preliminary notice, filing the claim, and foreclosing the claim. Foreclosing a lien claim means that an attorney files a lawsuit in court that validates the lien and ultimately gives the lien claimant the authority to sell the property and use the proceeds to pay the lien claimant, and possibly other lien claimants as well. A foreclosure deadline means that the lien claimant must file his or her foreclosure lawsuit within a certain period of time or the lien will be extinguished. The deadline varies by state and can range from 60 days to 2 years. Clients can review our lien summaries for these deadlines. Remember that states can modify perfection requirements such as foreclosure deadlines, so it is important to keep current references if you are not one of the firm’s clients.

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Garnishments
This is usually a post-judgment collection remedy. There are two types of garnishments: bank garnishments and wage garnishments. Each should be handled by an attorney. Bank garnishments are very effective in states where a private process server can serve the garnishment. They are less effective in a state that requires service by the sheriff’s department, as there is no ability to control when the garnishment arrives at the bank. Wage garnishments are also effective, but can be more time-consuming and expensive, as they only attach to a portion of the debtor’s wage, and must be refiled and re-served periodically, unless the debtor agrees to an ongoing garnishment arrangement. If the debtor quits his or her job during the course of the garnishment, then the creditor must locate the new employer and file and serve a new garnishment.

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Lien Claim Deadlines
As stated in the discussion above pertaining to foreclosure deadlines, most states require a preliminary notice, followed by a lien claim, followed by a foreclosure lawsuit. A lien deadline is a prescribed period of time that a subcontractor, supplier or other provider of services, equipment or materials has to record the lien. It varies by state and can be tied to the claimant’s last date of work or delivery, or to the completion of the entire project. Regardless of what date the state uses for its deadline, remember that holidays and weekends are included. If the deadline occurs on a holiday or a weekend, be sure to file your lien claim BEFORE that date. If you file late, you lose your right to lien, and cannot recover it. Use it or lose it, as the saying goes.

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Lien Claims
A claim of lien is defined as the statutory right to satisfy a debt out of certain property owned by the debtor. Let’s narrow down the definition to fit the construction trade. As you know, construction in the U.S. is generally funded on credit. Very few contractors can consistently make their payroll or buy materials with cash reserves, and most do not want to use their credit line. After all, borrowing money to make payroll and buy materials cuts into the bottom line. As an alternative, every state permits contractors and suppliers, at some level, to protect their investment by filing a lien claim against a project on which they work. The lien then “attaches” to the real property, and the owner will not be able to sell or refinance the property until the lien is removed from the title. If the owner does not try to clear the title, the lien claimant can ultimately force the sale of the property. A properly perfected lien claim can thus secure your receivable and help avoid potential write-offs. However, proper perfection of a lien claim is not a walk in the park. Lien claims require specific elements, such as legal descriptions and tax parcels, and frequently a verification and a notarized signature. Every state requires different elements and strict compliance. We recommend outsourcing this task to an entity that will backs its work and who has the experience and knowledge to do it right the first time. Levy • von Beck & Associates is such a firm.

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Liquidated Damages
LDs, as they are commonly called, refer to contractual remedies in the event of a breach of contract, such as a delay in the project. The contract usually sets them at a specific rate, which is typically upheld if the actual damages would have been extremely difficult to ascertain and the amount of the liquidated damages is reasonable.

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Payment and Performance Bond
These are bonds required by a property owner or a public agency as protection for subtrades and suppliers, in the case of a payment bond, or protection of the owner or agency, in the case of a performance bond. Each is generally in the amount of the 100% of the general contract. The payment bond provides an excellent form of security for a subcontractor or supplier on a project.

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Pay-when-Paid and Pay-if-Paid Contract Terms
Many subcontracts contain pay-when-paid or pay-if-paid provisions. They are intended to shield the general contractor from responsibility if the property owner fails to timely pay the contract balance or for change orders. These terms are enforceable in some states but not in others. For example, they are considered a violation of public policy in California and Washington and may only serve as a basis for delaying payment, not avoiding it altogether. However, subcontractors and suppliers should never accept these terms in a contract. Consult with your attorney, but definitely strike them out of the subcontract.

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Preference Claims
Preference claims are to bankruptcy filings as a large bill is to a bad meal. They add insult to injury. A preference claim is notification by the debtor’s attorney that you, the creditor, must give back a payment received during the 90-days preceding the bankruptcy filing. Preference claims are on the rise because more attorneys are now willing to handle lower claim amounts. In the past, trustees were only concerned with claims of $7,500 and above. Now, even $750 preference claim notifications are common. The good news is that there are defenses, and a knowledgeable creditor’s attorney can help you avoid the claim or reduce it substantially. For example, if you can demonstrate a contemporaneous exchange of value, you can use the exchange to offset the claim amount. Also, payments made within the “ordinary course” of business cannot be preference claims. Don’t assume that initial notification by the court means you will ultimately have to pay.

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Preliminary Notice Deadlines
Many states require a potential claimant to send a preliminary notice, which may be a 20-day preliminary notice, a notice to owner or contractor, a materialman’s notice, a notice of identification, or some other notice. The deadlines for delivery of the notice vary from state to state, and you need an accurate and current reference to obtain these deadlines. If a notice is required, you must have it in the hands of the necessary party or parties within the statutory deadline. Clients can check the Lien Summaries on our website for these dates.

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Purchase Money Security Agreement
Before or after a seller/creditor records a UCC-1 Financing statement, he or she can request a UCC-11 search to determine if there are other prior secured parties. If you have furnished inventory to a customer, you can send a letter to a prior secured party with rights in similar collateral, to put that party on notice that you intend to take first position with respect to the specific inventory and proceeds thereof that you sold the customer. This gives you a purchase money security interest (PMSI) in the inventory. A PMSI is an excellent credit tool for sellers of inventory.

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Recovery of Interest and Attorney’s Fees
The ability to recover attorney’s fees, or interest at the standard 18% rate, or some other specified rate, depends on whether the customer has signed a credit agreement, bid proposal, or quotation that provides for recovery. It isn’t enough to send a customer invoices or statements that call for recovery of fees and interest at 18%. The customer must actually sign a document, which is generally one of the three listed above. However, recovery of attorney’s fees or interest from the property owner during a lien foreclosure is permissible in some states.

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Retained Percentage
The retained percentage is a percentage of each draw request that is held back by the owner from the general contractor or by the general from a subcontractor until the project is completed and accepted. The percentage can range from 5% to 15%. The amount is determined by the contract.

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Security Agreement
A security agreement is a document wherein a seller takes a security interest in a customer’s products, inventory, receivables, equipment, or other assets. If the transaction involves a loan, then the term “seller” is replaced by “lender” and “buyer” is replaced by “borrower.” The security agreement forms the basis of the collateral agreement, and contains default and remedy provisions. It is the backbone of a UCC-1 filing. Without an executed security agreement, a UCC-1 is worthless.

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UCC -1 Financing Statement
A UCC-1 Financing Statement is a public filing notifying any interested party that the creditor has taken a security interest in the assets of a customer. The security interest can be broad-based and include accounts, inventory, equipment, intangibles, contracts, etc., or it can be narrowly defined to include only one asset or class of assets. The filing requirements were modified by recent amendments to Article 9. Use of an outdated form, or filing a form in the incorrect jurisdiction, can prevent the enforceability of a UCC filing. It is generally considered an effective credit tool and remains in force for a period of 5 years, although a continuation statement can be filed if done within the 6-month period before the expiration date.

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Waiver of Lien Rights / Good and Bad Forms
There are countless variations of lien waiver forms. Some are clear and concise while others are lengthy and difficult to interpret. Generally speaking, there are 4 types of waivers: conditional and unconditional progress waivers, and conditional and unconditional final waivers. Progress waivers are signed during the course of the project, and indicate that the claimant is giving up rights through a date certain in exchange for payment for goods and services through a specific date. These differ from final waivers, which are given at the end of a project, or at the end of a supplier’s or subcontractor’s involvement in a project, and indicate that the claimant has been paid in full for the entire project, and is waiving all current and future lien rights pertaining to that project. Conditional waivers indicate that the claimant is waiving its lien rights as to the amount of the progress payment or as to the entire project, PROVIDED THAT something else occurs – usually that the claimant receives the payment in question and that the payment clears the bank. Unconditional waivers waive all lien rights for the referenced period as of the time they are signed, regardless of whether the signor receives the promised payment, or if the payment clears the bank. It is imperative that the contractor, subcontractor or supplier executes the correct form of waiver. We also recommend that you sign your own waivers and avoid executing forms supplied by other parties on the project. The California statutory waiver forms provide an excellent template if you do not have one as a reference. Levy • von Beck & Associates can also furnish waivers for clients.

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Conclusion

We hope you have found this information helpful, and that you will feel free to contact us with any questions you may have.

The above information is provided as a courtesy to existing clients and visitors to the Levy • von Beck & Associates, P.S. website. It is intended as a general guideline, and not as a replacement or substitute for legal advice. Levy • von Beck & Associates recommends that the reader consult with legal counsel before making any decision that could impact creditor rights. Clients and prospective clients may contact Levy • von Beck & Associates directly for a consultation. Levy • von Beck & Associates, P.S. neither assumes nor accepts liability for any direct or indirect loss sustained by a client or visitor to this site who relies on the information provided without directly consulting legal counsel.

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