Payment Insurance: An Alternative To Mechanic Lien Litigation

Sometimes, you get paid without filing a lien.   Sometimes, you get paid immediately after filing a lien.   We all know and fear those other times, however.   Those times when you don’t get paid and you must file a lawsuit to enforce the mechanics lien.

In the past, we’ve written about a remarkable new insurance product from Construction Indemnity Group:  Payment insurance.

How does it work?   Well, in words, you buy a policy for about $1000, and that gives you $25,000.00 of coverage annually.   If you’re not paid on a project, you file your lien and make a claim.   Construction Indemnity Group will pay the amount you’re owed, and they will go through the mechanics of enforcing the mechanics lien.   You just go about your business.

How does it work in video?!    Construction Indemnity Group just published a short video explaining the service, and I recommend watching it.   Here it is:

Liens Are Just One Way To Collect Debt – Other Best Collection Practices

I love a great article about collection practices.   Not only is a topic I’ve written about in the past (see posts from this blog here, and from the Construction Law Monitor here), but it’s one of the more important topics for those in the construction industry.

Consider the “bad debt calculator” on Construction Indemnity Group’s website.  I love this calculator, because it puts the tragedy of bad debt in your face.   Take a modest amount of bad debt ($25,000), and a candid profit margin (5%), and you’ll see that it takes $500,000 of revenue to recover the lost income.   Amazing.

Last week, Melissa Brumback’s Construction Law in North Carolina blog posted a blog post with “8 Best Collection Practices.”   The article does a great job of hitting on the things you can do to minimize your bad debt – and things, that we’ve even said over and over:   Be careful when extending credit, have a written contract, and don’t let too much time pass before implementing your collection procedures.

These, of course, are just a few tips.  The post does a great job of enumerating each tip and discussing their importance, so there is not need for me to regurgitate it here…just take a look at Melissa’s post for more.

Liens Make Your Payment Problem the Entire Project’s Biggest Problem

When you don’t get paid on a construction project, that is a big problem for you and your company.   But, is it a big problem for the entire construction project?    Not likely.

So, how do you make your problem an important problem to the other players working on a construction job?    With a mechanic’s lien, of course.

The Wall Street Journal recently reported on a mega-project in Las Vegas (the $8.5 billion City Center), and a contractor dispute that is affecting the project’s finances.    There was something really interesting about this report for those of us who follow mechanic lien law and news – and that’s this quote from City Center President Bobby Baldwin, referring to over $500 million in liens filed against the project:

Obviously everybody is concerned about the liens.   They have to be explained in great detail to our residential buyers.

To resolve the concern about the liens, the property owner is slowly paying off all of the subcontractor and supplier claims while they proceed with their dispute against the prime contractor.    Without those liens, those subs and suppliers would have to wait months or years for the main dispute to resolve, and payment to trickle down from the owner to them.   Depending on the size of the contract, that’s something that could cripple their business.

The Wall Street Journal article and construction dispute at the City Center was the subject of a blog post on the Construction Law Monitor, which that blog called a “Large-Scale Example of an Everyday Construction Dispute.”    And that summary is perfectly true when it comes down to mechanics liens.

Regardless of how large or how small the project, mechanics liens creates a problem for the project.   If you’re not paid on a construction project, the best way to make your problem the construction project’s problem, is to file a mechanics lien.

Louisiana Demand Letter Templates

When an account is unpaid and overdue, you do not want to rush into filing a lawsuit. Litigation is an expensive, and oftentimes unnecessary remedy (but, don’t let your claims prescribe). A well-drafted demand letter should be sent to non-paying parties before proceeding forward with legal action.

Although it may be recommended to send a demand letter, it is not a requirement under Louisiana law to establish a commercial debt action (it is in some states). It’s logical, however, that if the debtor may pay within 10 – 30 days of demand, there is little benefit to spending the time and money on initiating a lawsuit.

This post provides a few sample demand letter templates.

In reviewing these templates, it’s important to remember that different situations call for different measures, and specifically that one demand letter may apply more correctly than another.

Furthermore, in certain circumstances (when a check is returned NSF, when an account is an open account, etc.), there are statutory requirements for sending a demand letter in order to qualify for statutory penalties.

The counsel of a qualified attorney is recommended when taking a past-due account to the next level, however, there is some benefit ($$) to sending a demand letter in-house before handing off the reigns to your attorney.

Once you hire an attorney, he or she will likely begin the representation with a new demand letter, but your original letter will not be in vein. The in-house demand letter, when prepared and sent correctly, may qualify you for collection of interests and penalties from the time of its sending, and as mentioned above, may even result in payment. The attorney letter will ensure that the statutory requirements are met, and they are generally more threatening than in-house letters.

Finally, regardless of the correspondence you are prone to send, there are some essential considerations you should have when sending a demand letter.

Be sure to enclose information about the debt with your letter, which may include invoices, estimates, contracts, photographs, etc.

This not only gives creditability to the recipient of your demand letter, showing you are able to prove your debt, but it gives the recipient less of an excuse for non-payment. While not bulletproof, if the matter goes to court and you have a well-written demand letter with documentation proving the debt, you’ll have a better position to argue that the debtor was wrong for not making payment.

From a practical standpoint, there are other things you want to keep in mind. Most importantly, sending a demand letter is of little use unless you can prove it was sent and received.

Send the letter Certified Mail with Return Receipt Requested, and keep track of the Certified Mail Number. Follow-up to ensure the letter is delivered, and if needed, even make an effort to have the letter hand delivered by courier (who should sign an affidavit of delivery).

Not only should you keep proof of the sending of the document, but you want a good and reliable copy of what was sent. If you have a letter and enclosures, mention the enclosures within the letter so you can prove that they were in fact enclosed. Scan a copy of all the documents together with the certified mail number, bates stamp the documents or put page numbers at the bottom of each page (1 of 6, 2 of 6, etc.).

General Collection Letter Template

Contractors seeking to collect amounts owed to it from a property owner should send a basic collections letter. Here is a basic collections letter in Microsoft Word format.

Demand letter on An Open Account Template

If you have an “open account” with the debtor, you will want to send a demand letter substantially similar to the template below. Open Accounts are provided special treatment under Louisiana law, with the benefit to creditors being that they are able to collect interest and attorneys fees as a matter of law.

The critical questions when collecting an open account are: (1) Is the debt an open account?; and (2) Has the creditor taken the correct steps to collect on it, preserving its rights to obtain attorneys fees and interest?

In general, contractors are infrequently able to capitalize on the open account laws in Louisiana, which are more ordinarily preserved to other professions and types of accounts. However, construction material suppliers are frequently able to use the open account laws, and there is clearly some grey area on the issue pursuant to recent Louisiana Supreme Court decisions.

Regarding the second question, the Louisiana Open Account law requires that you send a demand letter before qualifying to collect attorneys’ fees and interest. The demand letter must give the debtor information regarding the debt (invoices, contracts, estimates, photographs, etc.), and it must provide them with a certain amount of time to make payment on the account (30 days).

A demand letter in substantially similar form to the form provided by this post should suffice to start the clock for your company under Open Account laws. Be sure, however, to enclose evidence of the debt with the letter, and to keep documentation to prove that it was sent and to prove exactly what was sent.

Demand on Open Account in Microsoft Word format.

Demand letter on NSF / Dishonored Check

The penalties for writing an NSF check can be severe. If your company seeks re-payment of the NSF check in accordance with Louisiana statutes, it will be positioned to take advantage of these penalties, applying great pressure to the party who wrote the NSF check to make payment.

The following is a sample template letter that may be sent after receipt of a NSF check.

Demand on NSF Check in Microsoft Word format.

Demand Letter Against Contractor Who Misapplied Funds

When a contractor misapplies funds as above discussed, you may send this template letter to put that contractor on notice of its default and to demand payment under the statute.

Demand Against Contractor Who Misapplied Funds in Microsoft Word format.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.

Common Contract Provisions to Avoid and Prepare for Collections

Preparing and signing a comprehensive construction contract is your construction company’s best way to take a proactive approach to collections.

A good contract can help your company avoid collection scenarios by:

• Clarifying the scope of work and its costs, to avoid disputes;
• Stipulating that one party can recover attorneys fees from the other in the case of non-payment, to give your company some leverage against the non-paying party (as above-discussed, the general rule in America is that attorney fees are not collectible);
• Providing for monetary penalties in the case of non-payment to give non-paying parties an incentive to pay on time;
• Providing for the recovery of interest on overdue accounts, to avoid losing interest on money owed to you and to offer non-paying parties an incentive to pay on time;
• Providing for Alternative Dispute Resolution to ensure that disputes over payment are resolved as quickly and inexpensively as possible.

There are many “form” construction contracts out in the market, with the most common form contracts being the contract documents periodically updated by the American Institute of Architects. The Association of General Contractors and ConsensusDocs produce other form contracts.

These sets of contract documents are equal in quality.

They are prepared by and for their respective trades with input from members of the industry and construction attorneys. In general, the documents are comprehensive and completely adequate to meet the goals discussed in this section.

The parties can also alter the contract documents to include extra language establishing an

agreement on issues such as non-payment penalties and alternative dispute resolution mechanisms.

While the industry-standard form contracts are good in many cases, the documents are also long, complex and expensive, and it’s quite clear that they do not meet the needs of every project. The documents might not be affordable to some generals or subcontractors, and the scope of the documents may be too complex for smaller projects. In these situations, contractors, generals and material suppliers will turn to less complex and more custom documents.

The following contract provisions may be incorporated into a construction contract in attempt to avoid collection situations. Contract provisions are indented.

Attorneys Fees Provisions

Recovery of Attorneys Fees
The Parties hereby agree and stipulate that in the event of a dispute, and regardless of whether or not the dispute matures into formal litigation or any alternative dispute procedure, and further regardless of whether or not a judgment is rendered or the matter is settled, the non-prevailing party will pay the attorneys fees and legal costs of the prevailing party.

As previously mentioned, the general rule in America is that each party in a legal dispute is to bear the burden of its own attorney’s fees. In other words, whether you win or not, and whether you’re completely right or not, you’ll likely have to pay your own way through litigation unless you either fall into a small category of cases where attorneys fees are recoverable by law or you stipulate in your contract that attorneys fees are recoverable.

When added to your contract the above provision will do the latter. It’s language aims to accomplish two things: First, to contractually stipulate that attorneys fees are recoverable in the event of a dispute; and Second, to allow recovery of attorneys fees regardless of whether your dispute matures to a lawsuit.

In certain situations, a court may find that attorneys’ fees are not recoverable because the matter did not mature into a lawsuit, or because it was settled instead of fully litigated. This provision makes it clear that the parties intend to pay the other’s attorneys fees regardless of whether or not the matter escalates to any particular level. In other words, you’ll have the legal right to collect attorneys’ fees from your adversary even when you only hire an attorney to send a single collections letter.

Attorneys fees can add up very quickly, and without a provision like this, it will be hard to justify employing an attorney to collect a $5,000 – $10,000.00 account. However, with the ability to recoup some of these costs, the proceeding might be worth it.

Another common dispute over attorneys’ fees concerns the cost of the attorney employed. Did you agree to a $400 per hour attorney, or a $150 per hour attorney? Did you agree to pay an attorney working on a contingency, whereby he or she would receive 33% or more of the debt?

The courts normally resolve this type of dispute by awarding a “reasonable” attorneys fee to the other party. The judge or jury arbitrarily decides what is “reasonable”.

You can seek to limit this uncertainly through contract as well, and perhaps add the following language to your “Attorneys Fees Provision:”

The amount of attorneys fees shall be equal to the amount actually paid or to be paid to the attorney(s) employed by the prevailing party, and shall specifically include compensating that attorney(s) under an hourly fee agreement, a fixed fee agreement, a contingency fee agreement, and/or any mixture of these agreements.

Do remember, of course, that these types of provisions can backfire. If you’re not the prevailing party, for example, you will foot the hefty bill.

Penalties For Non-Payment & Interest

Unlike the Attorneys Fees Provisions, this is a component of the contract that will not likely backfire on you. This provision will only apply to the party who has the duty of making payments to the other party.

These types of provisions can work wonders for your collection practices if employed correctly.

Many construction companies will include them in their contracts, and offer non-paying customers a “last chance” opportunity to pay the bill without the penalties to entice prompt payment. If the non-paying party continues its failure to pay, it increases the amount owed giving your company more reasons to continue its attempts to collect.

One caution in using these types of provisions is that courts will strike them down if they find the provision to be “unjust,” or above a certain legal threshold. For example, if you have a $10,000.00 contract, you cannot make a $1,000,000.00 non-payment penalty. You also cannot charge an absurd amount of interest on an account (such as 50%). There are federal laws that restrict the amount of interest you may charge on an overdue account, and drafting a contract charging more than this amount will be stricken down and read out of the contract by a court.

The following suggested language might be used in your construction contract to provide for a “penalty” for non-payment of an invoice:

The Parties agree that if the [Owner | Contractor | Subcontractor | etc.] fails to make any payments when due, a late payment penalty of ___% of the unpaid amount will be immediately accessed against the non-paying party. Furthermore, the Parties agree that interest will be charged on the unpaid amount in the amount of ___% per annum or the maximum rate allowed under state and federal law, whichever is greater.

Alternative Dispute Resolution Provisions

Perhaps more than any other industry, the construction industry can benefit greatly from the use of Alternative Dispute Resolution programs. Construction projects both big and small are very prone to dispute, and they are usually complex in nature.

The traditional litigation of these claims is lengthy, costly, and heard before a judge or jury with little to no technical knowledge to aid them in understanding the merits of the case.

Accordingly, an ADR option – although still at an expense – will result in a resolution procedure that is faster, less expensive and tried before someone who has construction experience and/or
knowledge.

For these reasons, it’s normally quite beneficial to you to enter into a contract electing to resolve disputes through ADR.

Making this election is quite simple. Generally speaking, to subject the parties to ADR you can simply add a one-line sentence at the end of your contract that provides “the parties will resolve any disputes through arbitration.” The provision, of course, can also get more detailed. It can go into the type of arbitration, the number of arbitrators, the rules governing evidence and discovery, the location of the arbitration, the name of the arbitrator, etc., etc.

One simple, yet complete arbitration provision is as follows:

The Parties hereby agree to resolve all claims and disputes through binding arbitration. The arbitration shall be governed by the Construction Industry Rules of the American Arbitration Association. The parties agree to hold the arbitration in the city where the project job-site is located.

It is also common to require mediation (an informal process whereby the parties attempt to reconcile their differences without the threat of a binding judgment) prior to arbitration (a more formal proceeding that ends in a binding judgment). This is usually more beneficial to those involved in a larger construction project than those in a smaller project, as the extra procedure would come at extra expense. Nevertheless, you would simply add the following sentence before your arbitration provision:

The Parties hereby agree that as a condition precedent to arbitration, they will mediate all claims and disputes through the American Arbitration Association.

Note that you can choose any arbitration provider, but that for the purposes of this Toolkit we have used the AAA, a popular national outfit.

Conclusion

One of your most successful collection practices – smart contracting – requires work before the construction project even begins, and doesn’t seem at all like a “collection practice.”

In reality, however, strong construction provisions can properly position you against your adversaries in the event of a dispute over payment. The better your position, the more leverage you have, and the more leverage you have the easier it is to find success recovering on non-paying accounts.

This article originally published in the Louisiana Contractor’s Collections Toolkit.

Don’t Know Who Bonded A State Or Federal Project? Just ask.

In nearly every circumstance, a general contractor on a federal or state project is required to maintain a bond for the work being performed.   These bonds protect the payment rights of subcontractors, sub-subcontractors and suppliers.    In the event any of these parties are not paid on the project, the unpaid party can typically file a claim against the surety who bonds the project as per the Miller Act or a state’s Little Miller Act.  (Read this great article from Construction Business Owner about bonds, generally).

Claims against sureties are beneficial because:  (1) It can reduce the prevalence of personality conflicts between the unpaid party and the general contractor; and (2) It is a guarantee that at the end of a proceeding, money will be there.

However, you can’t make a claim against a surety if you don’t know who the surety is.   And if you’re not on the best of a terms with a general contractor, you may fear that it won’t reveal the surety to you.

So, this begs the question:  how on earth do you discover the identity of a surety?

The answer is quite simple:  Just ask.  That’s right, just ask for it.

Who To Ask?

Under the Miller Act and most Little Miller Act statutes, the public agency in charge of the project is required to (and quite used to) disclose the identity of the surety to anyone who asks for it.

Using Google, you can generally always find the governing authority.   A governing authority will typically manage its contracts through:

(a) public works department;
(b) new construction department;
(c) purchasing department;
(d) capital projects department; or
(e) facilities department

Most of these governing authorities (almost all) will have a website that gives you some information about their public contracts.   Figuring out which department is in charge of the contract is generally a toss up, so you will likely need to navigate around government websites to find the best possible contact.

How to Ask

As I stated above, agencies are required to disclose the surety on the job….actually getting it, just depends on how difficult the agency will make it for you.

If a governing authority has a website, you will generally be able to find out at least a little bit of information about their projects. If the project is relatively new, they might still have bid postings, pictures, articles and reports posted.

Giving the agency a phone call will usually do the trick, but if you run into trouble, just send a certified letter making the request.  You can even have Express Lien send this notice / request for you.   We’ll even figure out who to contact, saving your company valuable time and energy.

ConstructionLawMonitor.Com: Pay When Paid Clauses and Lien Rights

Our good friends over at Wolfe Law Group (ok, it was me) have put up an article on the trials and tribulations facing subcontractors due to the use of the dreaded “Pay When Paid” clause.

See their article here and how these clauses work.  As a contractor you need to be aware of your right to payment and potential roadblocks on the way to getting paid.

One of the most important defenses to the “Pay When Paid” clause is your right to lien a project, and consequently the owner. Since the owner’s failure to pay the general contractor has caused your inability to recover payment, a lien will allow you to proceed against that party in  a legal action for payment.

Read the article to better understand your rights and the tools you can use to ensure payment. Remember that owners and surety bonds can be reached with a properly filed lien.

Contact ExpressLien.Com in order to protect your right to payment.

Construction Outlook Grim through 2010 – Staying Ahead of Accounts Receivables To Retain Its Importance

Ken Simonson, the chief economist for the Associated General Contractors of America, doesn’t have good news for the construction industry as the challenging year 2009 drags into its 3rd Quarter.

According to Simonson, the commercial construction industry forecast remains grim “at least through 2010.”

For contractors, suppliers, and other construction professionals throughout the nation, this means that good record-keeping and collection practices remain important.

Almost one year ago, Wolfe Law Group posted an article on its Construction Law Monitor after Ken Simonson reported that 2009 would present economic challenges to contractors.

Now more than ever, the article stated, contractors should consider the benefits of a construction or mechanics lien.  The article went on to state:

As soon as the construction project comes to a halt or payment is late, contractors, subcontractors and suppliers should rush to file its construction / mechanics lien to protect its interest in the property. Construction liens are available in virtually every state, and works to transform the project job site as a sort of “collateral” to the contractor for its payment.

The time available to file a construction lien is not indefinite, and the legal requirements should be followed to the letter. However, when filed correctly, a construction lien can help your company recover payment for its project.

Although the stimulus spending will be cause for some optimism in the construction industry, it appears economic struggles will stick around into 2010.    And the recommendations of Wolfe Law Group in 2009 are repeated today.

If your company is awaiting payment, file your lien with Express Lien today.   Lien Smarter…Get Paid.

How Filing A Lien Can Be Helpful on a Bankrupt Project

Let’s face facts:  2009 has not been a great year for construction.

Contractors and Suppliers large and small are facing non-payment scenarios, and sometimes, while waiting for a prolonged payment some are getting feared news:  that the owner or general contractor is filing bankruptcy.

Christopher Hill, a construction attorney in Virginia, just this week published a short and easy-to-read article on JDSupra explaining how Virginia Mechanic’s Liens Survive Bankruptcy.   Mr. Hill summarizes his point with the following:

[I]n today’s climate, contractors should not feel that they are completely helpless in the bankruptcy fight.   Filing a mechanics lien…can put a contractor or subcontractor in as good a position as possible should the owner of a project file bankruptcy.

While the article regards the mechanics lien statutes in Virginia, many other states’ lien statutes operate the same way.

Generally speaking, mechanics lien statutes are written to protect those who contributed to construction projects.   Regardless of what errors in payment occur on a construction project, mechanics liens are the best tool for your company to protect its right to get paid.

But the right doesn’t last forever, and if you file incorrectly, the rules are uncompromising.

Get Started with Express Lien to file your claim of lien, and protect your company’s right to payment.

Lien on Property or Lien on Funds? It’s Two Different Collection Tools

Liens are one of the most powerful collection tools available to workers in the construction industry. Mechanics Liens are inexpensive and hard-hitting, and perhaps one of the most effective ways to collect on non-paying projects.

A properly filed construction lien can affect a property’s title, entangles multiple parties to your dispute, and helps get you paid.  Suppliers, prime/sub/sub-sub contractors and laborers all have the rights to lien a property they performed work on.

Bradley Coxe  Hodges & Coxe, PC law firm wrote some basic information within JD Supra explaining the two broad types of a mechanics’ lien-  the property or funds lien.

Property liens are the most popular and widely used in each state.  The homeowner is responsible for getting the worker paid for his completed job.  This, when filed and recorded correctly within the respective county or parish places a hold on the owner’s land preventing them from selling or turning over until the matter is determined by the courts.

The second type of lien is the lien on funds; which is when the payor, not the owner, is responsible to pay for the work.  Whomever performed work on the property that was not contracted directly with the owner can send a notice to the owner letting them know 1- they have not been paid  and 2- they should not pay whomever is in charge of getting the money (in most cases, this is the prime or general contractor)  The funds that are owed to the general or prime contractor is what has been liened.  If the general contractor has been paid after a notice was supplied to the owner, a sub-contractor can then lien the property.

Lien Smarter….Get Paid.