Avoid costly mistakes in lien filings

Mechanic’s liens serve as a legal tool for both contractors and subcontractors. Their purpose is to establish security interest in a property’s title to ensure payment, so it is essential to be thorough when filing. One small mistake can cost you the right to enforce payment rights.

Why it matters: One of the most common errors among contractors and suppliers is misidentifying the property owner and/or the general contractor (GC) on a lien claim. When your customer’s company name changes, immediate action must be taken.

What they’re saying: “Many years ago, I did a lot of work in the international space using letters of credit (LCs),” said Scott Michelsen, CCE, ICCE, director of credit & collections at Pave America (Warrenton, VA). “In my experience, if you did not have everything correct, the letter of credit was legally worthless, leaving you with no legal rights. In a very same manner, if you do not have the name and address of the property owner and business exactly correct, your lien is likely legally worthless.”

The risk of filing a lien with an incorrect company name is even more prevalent in businesses that undergo a merger or acquisition. When a preliminary notification is served in states where required, the notification must be sent using the exact corporate legal name. Here’s a common example: A DBA, or “Doing Business As,” is a legal designation that allows a business to operate under a name different from its registered legal name. It is also known as a trade name, fictitious name or assumed name. Including the DBA is important because it represents the party that is setting the preliminary notice which sends money down through the ladder of supply. This is key for credit professionals who use a third-party processor when filing a lien.

“Including the correct company name on your preliminary notification and on the mechanic’s lien is important from a legal perspective and a psychological perspective,” said Chris Ring of NACM’s Secured Transaction Services. “From a legal standpoint, if the preliminary notification is challenged because the corporate legal name is wrong, then it often makes the lien invalid. From a psychological perspective, the preliminary notice should include the trade/dba name. For example, if the company legal name is XYZ Company, but the trade/dba company name is ABC Company, the notice should be served as XYZ Company, dba ABC Company.”

Creating a standard process is the best strategy to combat small mistakes when filing liens. Filing your preliminary notice properly and timely and progressing to enforcement within the timeframe permitted by the state’s law are standard practices when enforcing a lien.

“The situation is always escalated when you have to enforce your lien through a court process or foreclosure,” said George Demakis, credit manager at Scafco Corporation (Spokane, WA). “There’s always an opportunity to dispute your lien if you’ve used incorrect information. Any time you are going to be in front of a judge opposing other attorneys, they’re going to use everything in their power to try to set aside your lien. If you’ve used the incorrect company name, that is the perfect opportunity for them to set that aside.”

The bottom line: To ensure the validity and enforceability of a mechanic’s lien, it is crucial to correctly identify the property owner and general contractor and promptly update any changes in company names.