What Lawyers Wish Creditors Knew About Liens and Bankruptcy.
With so many states and different statutory laws to keep in mind when filing, what are some ways creditors can keep their thoughts more focused, and maybe remember there are different laws for each state and how to deal with that when they're out in the collection world?
Emory Potter: I was once asked to give a presentation in Chicago at Loyola University on a survey of lien laws in the 50 states--it was a disaster. They are so different. There is no way I can give any kind of coaching presentation on 50 different little speed bumps and how they do it. So, the recommendation I would make would be that the members of NACM keep their Manual of Credit and Commercial Laws close to their hearts and divide their credit people up into different states so that one person only has to remember a certain number of states, And since we do have a compendium that gives pretty much an outline of the major issues in regard to material lien law, I think that's the best approach. If anybody tries to master all of it, it's going to make them crazy,
Beau Hays: And all I can do is echo those comments.
With that in mind, how early in the process should creditors be thinking about the lien process and filing liens?
BH: You need to be thinking about filing for a lien when the initial sales decisions are being made. Otherwise, lien rights may be lost entirely. My recommendation is to always pick a dollar figure above which you will follow the lien filing process. Every time you have a purchase order come in for that amount on a project, it immediately gets pushed into the process for making sure the notices are requested and it stays in that lien process.
EP: I would have them remember that if it's a government job, there will also be notice to contractor and notice to commencement issues that can affect your ability to make a claim under a bond. So, they need to take that into account on both private and government jobs.
Is there any one common rule or pitfall you see creditors fall into when it comes to filing liens, and public versus private properties?
EP: One of the biggest pitfalls I see is failure to correctly identify the property in question, Finding out where things are delivered to and where they're picked up from is an essential element of filing the lien. Sometimes when it gets close and it's sent to us and we can't figure out what the exact property is, we take the chance of filing the lien against the wrong property. That may lead to threatening letters and other general problems. That is one thing we run into that gives us problems on this end, in terms of filing.
BH: I would add that believing the customer about who the general contractor and owner on the project is, rather than doing the necessary work to verify that information often leads to a problem where you may not be able to identify the property, or you identify the property and that's not the right owner, As Emory indicated, the essential elements you need for the lien are whose property it is and a description of the property. It's easy for creditors at the point of sale to not have the correct information,
Are there any red flags you can think of that might point to a customer being incorrect about either an address, or a company name or things like that? Or is it kind of more random depending on the situation?
BH: One red flag would be if the names given don't check out in the corporation database for whatever state you're in. As far as the address goes, typically, if you're shipping it, you know what address it's going to. The only question would be: Is it being used there or are they taking it somewhere else? Sometimes the creditors have a problem when they're shipping it to a warehouse and they're not drop shipping materials to a specific location. It's always important at the outset for the sales team to make sure that's good information. One of the things I always say at the beginning of the job is, they'll tell you the truth, unless they're already planning on stealing your product and not paying you.
EP: To add to what Beau said, especially with renters of equipment, a lot of them will use some version of LoJack. They use it in case something is stolen; there might be a problem with moving the equipment from place to place, If the creditor is worried about that, they have tracking information to figure out where the equipment is. We've ended up with a few cases where things have been moved, the equipment as well as the merchandise.
What are some things creditors can do before anything happens, or as they're going through the collection process and working with a customer? Just things that might be able to smooth the legal process down the road.
EP: The first thing to know is your deadlines for that state. I would say that is the most important thing they need to look at. When they get close to that deadline, they should leave enough lead time for the attorney, or whoever is the lien service, to be able to locate and establish everything they need to file the lien. Once the lien deadline is passed, there is nothing you can do.
I want to shift gears now and talk to you about bankruptcy since you deal with bankruptcy as well as liens. What are some signs a creditor can take note of if a company is starting to veer toward the path of bankruptcy?
BH: Some of the best signs that a customer is veering toward bankruptcy are, paradoxically, things that seem encouraging, like if they ask for a larger credit line. Growth is one of the leading causes of bankruptcy. If companies are doing great, they outgrow their ability to make the money to pay for things. In the lien and construction context, it's generally that a customer who was paying 10 days out, or as soon as they got the money from their general contractor--or whatever the existing relationship had been--starts changing. You suddenly discover that a customer who paid like clockwork at 8:25 is now stretching it to 8:35. Those are the kind of red flags that show there is something going on with the debtor's payables.
EP: I think credit managers need to realize the lien is there to protect them from the bankruptcy of their customer, because it gives them rights against the property owner. I would say approach all cases the same whether bankruptcy seems to be coming down the pike or not, You still have to get your lien filed on time, and in a bankruptcy situation, it's even more important.
Before a credit manager begins to panic when a customer goes bankrupt, what are the first steps they can take once they get that news, and how can they still collect their money, if they even can?
BH: The first step in a situation where you might have lien rights is verify that you do have them because the lien in almost every state attaches to the real estate or to funds the owner or general contractor has on hand to pay to the now-bankrupt subcontractor, customer of our client, Those funds, or that property, is not part of the bankruptcy. If you can get a lien filed as Emory said, that's additional protection you can get paid, that you may yet get something out of a bad situation. The other is that there is a provision in the Bankruptcy Code for an administrative claim, in connection with anything sold in the 20 days, prior to filing of the bankruptcy case. So that is always a possibility: Look at what has been sold in the last 20 days because there is the right of "reclamation" for that 20-day window, regardless of anything else about the state of the sale.
Yes, that definitely makes sense, especially for creditors to keep in mind. Just to end off here, on a more general question, what is something you wish creditors maybe knew but didn't have the necessary legal background when they're either filing liens or dealing with bankruptcy claims?
EP: One of the things I would say is now that we're in more of an electronic age, digitize everything so you can send documents over to attorneys and to lien services--all the information in the accounts because there could be something in there the credit manager thinks is unimportant, I think it's better to let us or the lien filing agency sort the wheat from the chaff. Another is to keep in close contact with the customer, So, if you're questioning, "How many days is it, how many days do I have left?" you've got someone with whom you have rapport, You can have them send you a quick email reply so you know where you stand and you don't have to commit all that to memory.
BH: My follow up on is that even in this digital age, the telephone is still the best way to make sure you are on top of your customer. Credit managers need to be ready to just pick up the phone and call and find out what the status is. Any time you get pushback from a customer about those phone calls, I always recommend blaming your lawyer: "My attorney said I need to call and check on my accounts," or something like that. Blame the lawyers: Everybody agrees it's always the lawyer's fault. That way the credit manager doesn't look like the bad guy--while just making sure they aren't losing touch with their customer.
EP: One other thing Beau and I have preached to companies we've spoken with is you want to make sure the sales department and the credit department are talking to each other, Because they often have different goals.... But essentially a sales department's job is to bring in as many sales as possible, and a credit manager's job is trying to stop loss. If we have them talk to each other, then the sales people know what information they need to get at the beginning of a job and know what they're responsible for getting from the customer because they have that face time. That way, the credit department has enough information by the time things start getting bad to be able to figure out what to do.
To listen to the full interview with James W. "Beau" Hays and Emory Potter of Hays Potter Martin LLP, visit NACM's SoundCloud at soundcloud.com/nacm-national.
Christie Citranglo, editorial associate, can be reached at firstname.lastname@example.org.
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|Date:||May 1, 2019|
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