eNews June 27, 2019
In the News
June 27, 2019
Two bills were proposed in the Texas State House, and one in the Louisiana House, that would alter the process of filing liens in each state. The Texas bills never made it out of committee, while the Louisiana bill was signed into law by Governor John Bel Edwards on June 11.
Louisiana House Bill 203 began as a multi-year cleanup effort to remove the conflicts and ambiguities created by amendments to the state’s Private Works Act throughout the last 40 years, said Kurt Sorensen, CCE, CEW, CICP.
“Essentially, this is not a huge change to lien law in Louisiana. It does some small things like strengthen the bond requirements, but primarily, it leaves things status quo, but in a more logical and easier to understand format.”
One exception, however, is that for a lessor of movables in Louisiana, the new legislation gives some relief from the previous overly burdensome requirements. Under the previous legislation, a lessor had 10 days from the day machinery is first supplied to provide the owner and the general contractor (GC) with a copy of the contract, signed by the customer, otherwise lien rights would be lost. The new legislation only requires the lessor to give general notice to the owner and GC when they are supplying rentals to a customer on a job within 30 days of delivery to preserve all lien rights, or they can preserve lien rights going forward from the date a notice is sent. The lessor must also respond to a request by the GC or owner to give exact details of what is being rented.
In Texas, House Bill 589 was a “complete overhaul of the current Texas Property Code,” said Randall K. Lindley, a partner with Bell Nunnally & Martin LLP. Under this law, subcontractors and suppliers would “be required to send notices out on every project they worked on,” Lindley said. This contrasts with current law, which only requires a notice be sent out if a creditor has an unpaid invoice.
“Legally speaking, this notice of furnishing would act as a condition precedent to having any lien rights in Texas. As a result, subcontractors and suppliers would be required to send notices out on every project they worked on as opposed to only the projects where they had an unpaid invoice,” Lindley said. “Practically speaking, being required to send notices on every project would be extremely burdensome to many NACM members. Therefore, we were against HB 589.”
The second bill, House Bill 3498, modified existing Texas Property Code. It eliminated the preliminary notice letter requirement and it removed provisions requiring “statutory retainage” and “owner liability,” according to Lindley.
Due in no small part to a strong NACM lobbying effort and almost a dozen NACM members showing up in Austin, Texas, to testify against them, neither bill made it out of the House committee hearings.
—Christie Citranglo, editorial associate
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Large, late-paying firms in the United Kingdom are in for a rude awakening, following the latest in a series of proposals from Minister of Small Business Kelly Tolhurst to government officials on behalf of the country’s small suppliers. At the forefront of Tolhurst’s proposals is that large businesses pay fines should their payment to small suppliers be late. According to Accountancy Daily, plans are underway to bring Tolhurst’s proposals to fruition.
Since 2008, the U.K. has addressed late payments using the voluntary Prompt Payment Code (PPC) administered by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy and Industrial Strategy (BEIS), their website states. Companies that sign the code agree to “pay suppliers on time, give clear guidance to suppliers and encourage good practices.” Most importantly, companies also agree to pay 95% of their supplier invoices within 60 days, with hopes that their payment practices will progress to fall within a 30-day payment period.
News outlets recently reported the government is planning to put the Small Business Commissioner’s Office and its commissioner, Paul Uppal, in charge of the PPC, in addition to adding stipulations, such as Tolhurst’s recommended fines. However, the PPC’s 60-day payment rule will remain intact. No official legislation regarding late payments has been introduced.
“The clampdown on late payment will see an extension of powers for the Small Business Commissioner with proposals for mandatory reporting of information and disclosure of payment terms and practices, financial penalties and binding payment plans for large businesses found to operate unfair payment practices,” Accountancy Daily reported on June 19. “Under the proposals, which will be put out to consultation, company boards would be held accountable for supply chain payment practices for the first time and audit committees will have to report payment practices in company annual reports.”
The U.K. government’s efforts to combat late payments is nothing new. Accountancy Daily acknowledged a recent U.K. government survey on prompt payments from 300 respondents, 97% of whom said they experienced late payments from suppliers and claimed the issue hasn’t made any progress since 2016.
FCIB’s International Credit and Collections survey in March for the U.K. concurs with the ongoing payment issues expressed by Tolhurst and the Small Business Commissioner’s Office. No respondents reported any decrease in payment delays, while a quarter of respondents said payment delays were increasing. The majority of payment delays were attributed to billing disputes and cash flow issues; however, some companies experienced issues with their customers’ payment policy or willingness to pay.
“We have noticed a cultural tendency to pay late on terms, [up] to 90 days late with unsubstantiated dispute and/or no explanation,” one respondent said, as others offered advice on receiving payment from U.K. businesses.
“Contact [customers] proactively to ensure they have the invoice and are processing payment,” a respondent suggested.
—Andrew Michaels, editorial associate
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After more than a decade of issues, a Kansas City, Kansas-area mixed-used project is back up and running. Construction equipment and workers were back at the site of Mission Gateway earlier this month, states the Shawnee Mission Post (Post). Over the years, plans for a two-story Walmart, Sprouts Farmers Market and Toby Keith’s restaurant and bar were slated for development. Project developments began in the early 2000s; however, years after the initial 2008 completion date, not much has changed.
The $200 million project was recently in the news for unpaid bills. Mechanic’s liens from Penny’s Concrete and Aluma Systems Concrete were filed for nearly $200,000 and $220,000, respectively. The first was filed in mid-March and released roughly one month later, the Kansas City Business Journal reported. The other was released on May 1. According to the Post, three contractors filed liens totaling $3.6 million for unpaid work. One of the developers said in the article the three contractors were paid and the liens were released. Interestingly enough, one of the project’s contractors (also named by Penny’s Concrete in its lien filing), Neighbors Construction, filed an almost $1.5 million lien in January. Accu-Crete filed a nearly $2 million lien in February, the Post states.
Suppliers lower down the construction supply chain should not let the large dollar amounts fool them. It is still important to follow, with strict adherence, the mechanic’s lien statutes spelled out in each state’s code. There is no requirement for a preliminary notice on private, commercial projects in Kansas; however, NACM’s Secured Transaction Services suggests serving one 45 days from last furnishing to prompt payment.
Suppliers and subcontractors must follow a similar, yet different, procedure compared to contractors. A lien statement must be filed within three months after last furnishing; served “personally” to any owner, holder of recorded equitable interest and any party obligated to pay the lien; mail a copy to the aforementioned parties; and post a copy of the lien statement on the premises in a conspicuous place if an address of any of the parties is unknown, according to Kansas statute.
Suppliers and subcontractors can also take advantage of extending their lien timeframe with the notice of extension. If done correctly, it will lengthen the time to file a lien statement from three months to five months as long as the notice is filed within three months of last furnishing in the office of the clerk of the district court of the county where the project is located, and it is mailed by certified and regular mail to the general contractor, while a copy is mailed to the owner, if known, by regular mail.
—Michael Miller, managing editor
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The Essential Financial Education, Inc. decision gives creditors another factor to consider before filing an involuntary petition. Ultimately, Essential Financial Education, Inc. provides a reason why, with proper planning, filing an involuntary petition could be a good collection tool for creditors.
Involuntary Bankruptcy Petition Requirements
Under §303 of the U.S. Bankruptcy Code, creditors can file an involuntary bankruptcy petition under either Chapter 7 or 11 against a debtor who has more than 12 creditors if they meet three criteria:
- There must be three or more petitioning creditors;
- Each petitioning creditor must hold a claim against the debtor that is neither contingent as to liability or the subject of a bona fide dispute; and
- The claims must aggregate at least $15,325 more than the value of any liens held with respect to the debtor’s property.
If the petitioning creditors meet the threshold criteria and the court determines, after an evidentiary hearing, that the debtor is not generally paying its debts as they become due, the court will enter an order for relief and the bankruptcy case will proceed just as if a voluntary petition had been filed.
Creditors should know, however, that there is a significant caveat to this simple test. Pursuant to §303(i)(2) of the Code, if the court dismisses an involuntary petition after a determination that it was filed in bad faith, the court may impose sanctions on the petitioning creditors.
The Bankruptcy Court Ruling
Essential Financial claimed that its involuntary petition should be dismissed because it had been filed in bad faith. In essence, it claimed that the petition was nothing more than an extension of pre-bankruptcy litigation between Essential Financial and one of the petitioning creditors. The bankruptcy court disagreed.
After an evidentiary hearing, the bankruptcy court held that the bad faith necessary to support dismissal of an involuntary case rests on a finding that a petitioning creditor “acted with wrongful motives, wrongful objectives, or both.” The Fifth Circuit has characterized bad faith, for the purpose of evaluating involuntary petitions, as those “motivated by ill will, malice or for the purpose of embarrassing or harassing the debtor.” Further, many courts have adopted the presumption that a petitioning creditor “acted in good faith” in filing an involuntary petition. The court found that the petitioning creditors all had valid claims against the estate and that permitting the Chapter 7 liquidating trustee to evaluate the scheduled and filed claims, along with the propriety of Essential Financial’s pre-petition transactions, was in the best interest of all creditors.
The bottom line is that in the Fifth Circuit creditors must clearly and carefully examine their motives before filing an involuntary petition. Involuntary petitions serve a legitimate purpose—where the purported debtor is suspected of transferring assets or preferring other creditors—but using an involuntary petition for an improper purpose—such as, for example, attempting to gain an advantage in pre-petition litigation—may carry severe consequences in the form of sanctions. Proper planning and a calculated, strategic approach are strongly recommended.
Reprinted with permission.
Paul Hammer, Esq., is a senior attorney in Kane Russell Coleman Logan’s Chambers ranked Bankruptcy, Insolvency & Creditors’ Rights Practice Group, based out of Houston, Texas. He has a national practice and has represented debtors, lenders, lessors, trustees, creditors’ committees, investors and other constituencies in distressed situations in an array of transactions, work-outs and litigation, including PROMESA, the largest restructuring in history. He is ranked by Best Lawyers in insolvency and creditors’ rights matters.
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