Credit professionals find “pay-if-paid” clauses within contracts, especially construction industry-based ones, to be quite the headache at times. It’s why keeping a mindful eye on them ahead of time (re: before granting credit to a would-be debtor) is so important.

Greg Powelson, director of NACM Secured Transaction Services (STS), which administers the Mechanic’s Lien and Bond Services division, has long argued that taking “I’ll pay when [or if] I get paid” as an answer to a collections attempt or something in a contract as “crazy” and unacceptable. Powelson reminded creditors of the importance of reviewing terms to find such unacceptable clause inclusions.

“It’s always scary when court decisions against 'pay-if-paid' are revisited, and it always has to be fought. They’re going to use it again [if a debtor succeeds in getting previous court decision overturned],” he said. “Regardless of enforceability, it’s important to review purchase orders and subcontracts and crossing these terms out of the contract. These kinds of things simply must be identified before extending credit.”

It speaks to the difficulty of navigating the mechanic’s lien process without the potential for a costly gap for businesses extending credit. “Because of the unique nature of mechanic’s lien statutes, all sorts of issues come up from time to time that make things more difficult than they have to be,” Powelson said. “Even if something is unenforceable in the end, credit managers could find themselves expending legal fees to support a position already well-supported by case law.”

It's worth noting the "pay-if-paid" fight is on again, right now in the 10th Appellate District Court of Appeals in Ohio (see tomorrow's eNews edition for more on this story at www.nacm.org).

-Brian Shappell, CBA, NACM staff writer
 

Several years in the making, the UCC Filing Service went fully live online this week, joining the Mechanic’s Lien and Bond Services under NACM's Secured Transaction Services umbrella.  The service provides the means to mitigate the risk of debtor nonpayment for businesses that sell or finance various types of personal property under UCC’s Article 9, as well as those that lend the labor, materials and other services under state law. The purpose, at its simplest level, is to help creditors become a secured party as an investor, thus putting them in the best possible position to get paid. Remember: secured creditors get paid out 100% (if money is available) before unsecured creditors get one cent, per bankruptcy law. This is increasingly important in areas such as construction as the domestic economic recovery, already sputtering, is threatened by ongoing and new threats, such as gridlock in the U.S. Congress.

Powelson noted that getting involved with UCC filings is not difficult when using a service providing the know-how. He recalled a colleague in Texas who, after years of “me badgering him to protect himself,” made a UCC filing about six month before a major customer filed a massive, $40 million bankruptcy. The colleague’s business was paid nearly 100% of what it was owed, unlike unsecured creditors who received pennies on the dollar.

“That filing cost him $82 and took about one hour to complete,” Powelson said. “With getting paid what he was owed, he joked that the program already paid for itself ‘for about the next 2,200 years.’ I think there are a ton of credit managers who just aren’t sure about the process and perceive it as very cumbersome. The process can be somewhat easy, actually. But sometimes you’ve got to get crushed or really kicked in the teeth and have your boss say, ‘we can’t do this anymore. What could we have done to protect ourselves?’ before you make the move.”

- Brian Shappell, CBA, NACM staff writer

A number of states have made small yet important changes to their mechanic’s lien statutes in the early weeks of the summer of 2012. However, the biggest construction-based buzz centers on the slew of changes in California, with the majority of them taking effect July 1.

In California, like in DC in early June, changes went into effect that loosened lien requirements allowing them to now be filed prior to the completion of a project, noted Greg Powelson, director of NACM’s Mechanic’s Lien and Bond Service (MLBS). While no specific alteration was earth shattering, the combination is important and ones “we all need to digest,” as Powelson characterized them.

“The reality is it’s a bunch of small changes, but credit managers who are not up to speed on the changes could lose their rights. In California, they think their change was a big deal because the entire statute was re-codified on July 1,” he said.

A list of changes in California, as well as new wrinkles in Washington, DC; Indiana and Iowa are available in this week's eNews and, in even more detail, by visiting MLBS' web site at http://www.nacm.org/construction-liens-mlbs.html.

-Brian Shappell, CBA, NACM staff writer

It seems to go without saying that information is perhaps the best weapon a credit manager can have in ensuring payment in virtually any industry. It would also seem that most would take getting accurate and useful information would be treated as importantly. But often, it isn't even in situation where it screams out as a necessity (Re: legal documents and statutes).

 

During a Credit Congress session with Greg Powelson, director of the Mechanics Lien & Bond Service, and Karen Hart Esq., of Bell Nunnally, pounded home the need for credit professionals to not just do homework (a common theme at Credit Congress...see previous story), but to do it the right way.

 

Powelson noted that he is often approached by clients who e-mail him articles talking about laws and statute new or analysis they found on some random Internet site that are out of date or are simply not accurate, and maybe never were.

 

“There's a reason free stuff is free a lot of the time. There's no obligation to keep it up to date,” Powelson said.

 

Hart quipped that credit professionals need to be sure to go to reputable sources, such as Westlaw, or perhaps “pulling the books”/hard copy for the statutes.

 

“Laws are changing quickly; legislatures are active. Just because it is on the internet doesn't mean it's right,” Hart said. “It might be. But the minute you have a problem, it's going to cause you a lot of heartburn.” In short, it's worth doing things right early in a process, even if that means having an attorney looking at a contract in many instances, whether a one-off or a standard document.

 

-Brian Shappell, CBA, NACM staff writer

A recent “friends of the court” brief on the part of the American Subcontractors Association and its Minnesota affiliate/chapter is seeking to overturn an appeals court decision that could leave subcontractors in a precarious spot.

A recent appeals court decision in Engineering & Construction Innovations, INC. v. L.H. Bolduc Co. Inc has overturned a previous district court and jury decision that barred a general contractor from shifting liability for damage caused during a project. The subcontractor in question alleges it had no part in the damage. ASA noted that a jury found the general contractor at fault for the damage, to a pipeline.

ASA is now urging the Supreme Court of Minnesota to uphold its interpretation of the state’s anti-indemnity law in order to protect subcontractors from such liability.

"Engineering & Construction Innovations, Inc., v. L.H. Bolduc Co., Inc. is one of those unfortunate cases where there’s damage during construction, everyone runs from liability, there’s litigation, and there’s no real clear cut answer as to who should or who is going to pay for the repairs,” said Greg Powelson, director of NACM’s Mechanic’s Lien and Bond Service (MLBS). “It doesn’t surprise me that the prime tried to push down liability, but I think the case [appeals court ruling] will be overturned. I don’t think it would be a surprise to anyone if, in the end, the subcontractor is not held liable for damages it didn’t’ cause. I believe, at the end of the day, logic and cooler heads will once again ultimately prevail, and the prime will have to pay for the damage.”

Brian Shappell, NACM staff writer

Bucking recent trends both nationally and within the state, Oklahoma has simplified its Mechanic’s Lien statute. One expert says its a case of common-sense prevailing and hoped it is a harbinger of similar changes to come in other states in upcoming months and years.

Senate Bill 277,  signed into law by Governor Mary Fallin on April 6, 2011, became effective Tuesday and changed the threshold for a notice to a value of $10,000. It also repeals the pre-notice requirement for notice on residential property -- the 75-day from last furnishing is now effective for both residential and commercial. Greg Powelson, Director of NACM’s Mechanic’s Lien and Bond Services, hailed the move as "a real victory for suppliers and sub contractors.

"The Oklahoma statue has been difficult to manage for years," he said. "For the first time, suppliers and subcontractors know their deadlines and have consistency.”

(Note: More on this story in Thursday's NACM eNews).

Source: NACM staff

During its 2011 session, the Virginia General Assembly passed two important changes to bond and claim requirements on Virginia Public Construction Projects, according to Greg Powelson, president of NACM’s Mechanic’s Lien & Bond Services (MLBS). House Bill 1951, effective July 1, raised the minimum amount required for bid, performance and payment bonds; the new minimum contract amount increased from $100,000 to $500,000 for non-transportation construction projects. “If the bond requirement is waived on projects between $100,000 and $500,000, the prospective contractors must be prequalified,” said Powelson.  “This means that subcontractors and vendors on non-transportation construction projects under $500,000 should not assume that a bond is in place and should investigate that issue before agreeing to payment and credit terms.”

Senate Bill 1424, also effective July 1, reduced the time within which lower tier subcontractors and vendors must provide notice to the contractor, from 180 days to 90 days. Therefore, any claimant that has a contract relationship with a subcontractor or vendor, but no contract relationship with the contractor may only pursue a payment bond claim if it first gives written notice to the contractor within 90 days from the day on which the claimant performed the last of the labor or furnished the last of the materials for which it claims payment.

To learn more about this change, and to stay up to date on any future changes to state construction and lien laws, visit MLBS here.

According to Greg Powelson, president of NACM’s Mechanic’s Lien & Bond Services, the New York State Legislature is considering a bill that would allow suppliers and contractors to file a mechanic's lien for retainage within 90 days after the date that the retainage was due to be released. The bill passed the assembly on May 3, 2011 and has been delivered to the Senate for consideration.

“This is an amendment that will be a welcome addition if passed,” said Powelson. “Currently, suppliers and contractors must file their lien on the project regardless of whether the retainage is all that is left within the current strict statutory time frames (4 months for single family dwellings and 8 months for all other private projects). The lien can often create problems for the supplier or contractor that is still on the job because the owner will demand removal of the lien even though the lienor had no choice but to lien or waive its lien rights. This new statute could allow the unpaid supplier or contractor to continue to wait for retainage without risking waiving his right to lien.”

To get news like this and even more up-to-the-minute updates on construction and lien law, check out MLBS here.