In the News

March 7, 2019

 

The Resilience of Core Values and Their Effect on the Credit Department

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Unpaid vs. Full Price: What’s the Difference?

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A Two-Way Ripple Effect: What Happens When a Sub’s Legal Woes Divert Finances

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You Don’t Have to Be a Mechanic to File a Mechanic’s Lien: Understanding What Types of Services Are Lienable in Connecticut

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The Resilience of Core Values and Their Effect on the Credit Department

Beyond making sound credit decisions each day, the goals and values of a credit department can often become lost in the daily bustle of collection calls and financial statements. But without core values present in the heart of the credit department, accomplishing accurate, consistent work for customers becomes a challenge, if not impossible.

During NACM’s 123rd Credit Congress in Aurora, Colorado, from May 19-22, Director of Credit Management John Markham, CCE, CICP, will lead the educational session titled, “Creating a Values-Based Credit Department.” Designed for leaders of the credit department, Markham’s session will focus on grounding the credit department by creating an outline of core values for the office.

“Who we are is more than just making credit decisions, collecting money fast and keeping our write-offs low,” Markham said. “It’s more about what impact we are making on the company and what we are doing to help lead, rather than the success and goals that we want. How do we serve them best to achieve those goals?”

At his session, Markham will break down the purpose of a values-based credit department, the steps necessary to create these core values, the ability to use core values to recruit and keep new employees, and the process of developing organizational leaders to adopt core values. These values will depend on the culture of each company, and Markham will provide a mockup for credit managers to then adapt for their own companies to implement.

In line with these values, Markham’s session will touch on change in the department—from technological advancements to CFO changeovers—and how despite these changes, the values must remain resilient. Notwithstanding any changes that may occur in the company or in the credit department, having some form of consistency will help make transitions easier, keep customers in the system and keep the office environment healthy.

Each year, Markham said, credit departments undertake new initiatives, new focus areas and new technologies. Values then become ideas that supersede new and local installments, keeping the credit department robust and tenacious.

“The goal is for people to keep their eye on the prize,” Markham said. “I believe, in general, when we make credit decisions, we should be able to weather the storm in good times or bad: A good credit decision is a good credit decision. Knowing that, there are other things we need to be aware of in changing times, but those fundamentals stay the same.”

—Christie Citranglo, editorial associate

Unpaid vs. Full Price: What’s the Difference?

Mechanic’s lien law across the U.S. is a creature of statute, meaning there are specified items within each states’ law (a to-do list) that must be done in order to have any chance of becoming a secured creditor on a private or public, but not federal, construction project.

There are some states where a party with lien rights does everything asked of them and more—crosses all the items off the to-do list as laid out in statute, yet they will not be paid for supplying materials, labor or a service via filing a mechanic’s lien. This multistep process is only part of the solution for unsecured creditors looking to secure themselves on a project.

Knowing the location and type of project are two of the biggest factors when starting the lien or bond process. The location of the project will generally tell creditors which statute to follow, while the type of project (residential or commercial and private or public) will typically let creditors know what type of security they need to file. Among the items spelled out in statute are timeframes for filing certain documents, such as preliminary notices and the actual filing of the lien, as well as what information needs to be included—general contractor name, addresses, supplier name, etc.

Roughly half of the states are what is called “full price balance lien states,” while the rest are unpaid balance lien states. Most states are only one or the other, while some are both depending on the project type (residential or commercial)—construction credit is quirky like that. Arkansas, Colorado, Maine and West Virginia are among those states that could fall into both categories depending on the project type and whether a specific notice is filed.

Unpaid balance lien states limit lien rights to unpaid funds between the owner and general contractor. Conversely, full price lien states do not limit lien rights to unpaid funds between the general contractor and owner, meaning the owner can be subject to paying twice as long as the mechanic’s lien is properly filed.

“Lien deadlines in unpaid balance states are irrelevant,” said Chris Ring of NACM’s Secured Transaction Services. Even if a creditor follows all the steps to file a lien properly within the allotted timeframes as spelled out by law, if the owner has already paid the general contractor, the lien would be wiped out.

Then, there is the gray area of liens on public projects, which typically would be a bond claim rather than a mechanic’s lien. However, several states, including California, Colorado, New York and Washington, allow for a lien on funds rather than the property as is the case with a private project.

—Michael Miller, managing editor

A Two-Way Ripple Effect: What Happens When a Sub’s Legal Woes Divert Finances

Construction projects, large and small, feature a chain of command: general contractors (GCs) at the top, followed by subcontractors (subs) and then sub-subcontractors. As delegations trickle down from the top tiers, each party may be responsible for the actions of those below them, so any problem at the lower level could potentially trickle upward. This was the case with framing and drywall subcontractor RDV Construction (RDV) in California.

According to a February report in the Los Angeles Times, RDV was hired by several GCs, including Westside Contractors Inc., R.D. Olson, Alpha Construction, Carmel Partners and Regis Contractors, for private mixed-use projects. On Feb. 11, it was widely reported RDV did not pay for nearly $12 million in minimum wages, overtime or rest breaks for more than 1,000 construction workers between 2014 and 2017—described by California’s commissioner spokesman Frank Polizzi as “the largest wage theft case in private construction.”

The article proceeds with an interview with David Kersh, the executive director of the Carpenters Contractors Cooperation Committee, who told the L.A. Times the state should hold GCs accountable for the actions of subs. To an extent, Chris Ring, of NACM’s Secured Transactions Services, agrees.

Violations and penalties like this tend to have a trickle-up and trickle-down effect, Ring said, the latter being the due diligence of the property owners and GCs.

“If you’re working with a subcontractor, look at any potential litigation against them before you extend credit,” Ring explained. “It’s more than just a credit report and understanding how their financials are going. What most credit managers do is look at the financial picture, but they may not look at the legalities the subcontractor is dealing with.”

What kind of pending law suits has the sub faced in the past? What suit action are they currently facing? It’s also important to take note of the details behind the suit whether it’s fraud, not paying workers or not being licensed. Suit actions become public record and those public record filings are relatively easy to obtain if you know where to look.

A ripple effect also impacts additional parties on the lower level such as material suppliers, Ring said. While the sub is confronting their wrongdoings via penalty payments, there may not be money left to pay their material suppliers, i.e., “robbing Peter to pay Paul.”

“Fraud really disrupts everything. In [the California] case, the ill-deed was caught,” Ring said. “The sub has to pay out the cash and penalties and they still owe money to people below them. The people below them are waiting for their funds, but they may get paid less or not at all. The trickle-down effect could be that the subcontractors have to pay penalties and to offset those penalties, they attempt to not pay or short pay the material suppliers.”

Knowing the legal standings of potential GCs, subs or sub-subcontractors is one of the many crucial factors to consider before a business relationship begins.

—Andrew Michaels, editorial associate

You Don’t Have to Be a Mechanic to File a Mechanic’s Lien: Understanding What Types of Services Are Lienable in Connecticut

A mechanic’s lien is an extremely effective tool for getting paid on privately owned construction projects. However, not everyone who provides services in connection with such projects is entitled to file a lien. Connecticut courts are routinely asked to decide whether certain types of services are lienable, including landscaping work, snow and debris removal, the provision of rental equipment, and work that is not ultimately incorporated into the liened property. In addition, liens filed by certain professionals are frequently contested in court, including liens filed by engineers, architects, surveyors, attorneys, real estate developers and insurance agents. This article discusses the legal standard for determining whether services are lienable in Connecticut and provides specific examples of both lienable and non-lienable work.

The starting place for determining whether particular services are lienable is Connecticut General Statute §49-33.

Lien rights are governed by statute. Unfortunately, the statute that addresses the types of services that give rise to a mechanic’s lien is not very specific. Conn. Gen. Stat. §49-33(a) defines the persons entitled to file a mechanic’s lien as those who have furnished “materials” or rendered “services” in connection with “the construction, raising, removal or repairs of any building or any of its appurtenances or in the improvement of any lot or in the site development or subdivision of any plot of land. …” So what types of services are included in this statutory definition, and what sort of service-providers can file liens?

To answer this question, it is helpful to look at an earlier version of the statute. Prior to 1974, Conn. Gen. Stat. §49-33(a) required, as a condition of lienability, that the work done be incorporated in or utilized in the building to be constructed, raised, removed or repaired. This meant that many types of services were not lienable, including, for example:

• the installation of fixtures that did not become part of the property;
• electrical work that was not permanently attached to the property;
• the removal of pipe from one building that was not incorporated into the building that was its replacement; and
• the furnishing of materials or equipment that was not shown to have gone into the construction or repair of a building.

In 1974, the legislature extended the reach of a mechanic’s lien to encompass claims for materials furnished or services rendered “in the improvement of any lot or in the site development or subdivision of any plot of land. …” A key purpose of the amendment was to eliminate the requirement that the work be incorporated or utilized in a building and to extend the coverage of §49-33 to two distinct types of services: (1) services rendered in the improvement of any lot; and (2) services rendered in the site development or subdivision of any plot of land.

While the 1974 amendment to Conn. Gen. Stat. §49-33(a) expanded the types of services that may give rise to a mechanic’s lien, the statute still does not provide much guidance regarding the specific types of services that are lienable. Connecticut courts have stepped in to provide more detail.

The next step in evaluating whether work is lienable: the physical enhancement test.

In order to provide more clarity regarding the types of services that are lienable, Connecticut courts have adopted the “physical enhancement test.” Under this test, Conn. Gen. Stat. §49-33(a) extends to services and materials that have enhanced the property in some physical manner, laid the groundwork for physical enhancement of the property, or played an essential part in the scheme of physical improvement.

Per the physical enhancement test, services performed by attorneys and insurance agents, which services are not directly associated with the physical construction or improvement of land, are not lienable. Conversely, services performed by engineers, surveyors, and architects are typically lienable because such services are associated with the physical construction or improvement of land.

Specific examples of services that are not lienable in Connecticut.

Connecticut courts have rejected mechanic’s liens based on the following types of services:

• a supplier who delivered construction equipment to a property, but who could not prove that the equipment was actually used to enhance the property;
• an attorney who provided services in connection with the rezoning of land;
• a real estate developer who provided services in connection with the subdivision of a property;
• an insurance agent who attempted to collect unpaid premiums from an insured subcontractor;
• a professional surveyor who assisted with an appeal of a boundary line dispute;
• cleaning services and hauling away of trash;
• mowing and watering a lawn; and
• cutting and watering shrubs.

Specific examples of services that are lienable in Connecticut.

Connecticut courts have allowed mechanic’s liens to stand based on the following types of services:

• surveying and engineering services concerning site development and the subdivision of a plot of land;
• an architect’s plans and drawings used to secure necessary permits from a town to enable such improvement efforts to occur lawfully;
• repairing a site for construction and roads;
• the services of an architect and engineer in preparing plans for the development of a property, even if no actual construction occurred on the parcel as a result of the plans if the plans were used in applications for zoning or subdivision approvals or other permits; and
• the provision of rental equipment that is actually used to improve property.

Conclusion

A mechanic’s lien is a powerful collection tool that is available to anyone who has furnished materials or rendered services that have enhanced a property in some physical manner, laid the groundwork for physical enhancement of the property, or played an essential part in the scheme of physical improvement.

Reprinted with permission.

Paul R. Fitzgerald, Esq., of Michelson, Kane, Royster & Barger PC in Hartford, Connecticut, practices in the areas of construction and surety law, where he handles a broad range of construction-related matters on behalf of subcontractors, contractors, public and private owners and sureties.