eNews August 8, 2019

In the News

August 8, 2019

Changes to Construction Laws Passed in Indiana

Secure Your Credit Department Before Using Real-Time Payments

District Court: Miller Act Outranks Arbitration

Creative Legislative Solutions to Bond Off Mechanic’s Liens

Changes to Construction Laws Passed in Indiana

The 2019 Indiana legislative session brought several changes to the construction industry, namely in the realm of anti-indemnity, bonds, management and environmental regulations. With the passage of the four acts, creditors working in the construction industry will need to think differently about how to file claims against bond procedures and about customer payments.

Indemnification in the state of Indiana will be loosened under Senate Enrolled Act 230, which makes indemnification between the general contractor and the property owner—should the subcontractor get injured on the job—more difficult. Construction or design contracts are still not required to have an indemnity clause, should a worker get hurt on the job, be a victim of fraud, etc.

With less acceptance of indemnification, the afflicted party should then be able to sue all parties involved, incurring more costs, meaning less available money in the accounts of customers who need to pay creditors.

“Indemnification is allowed, and they’re trying to push that away,” said Chris Ring of NACM’s Secured Transaction Services. “If there’s an indemnification clause involved, that indemnifies the general contractor and property owner, depending on how far the indemnification goes down. Then it’s that worker’s ability to get money for their cause.”

Public–private partnership (P3) project regulations on how bonds are handled and required in the state were modified. Prior to enactment of House Enrolled Act 1374 on June 30, bonds on P3s were not required. The new statute mirrors the Little Miller Act in Indiana, shifting the burden away from creditors who may need a bond claim but are unable to obtain one.

A payment performance bond must now be in place on any P3 job that falls under the bill of operate transfer criteria, which loosely translates to most construction projects.

“Now the assurance is there,” Ring said. “The general contractor had the option before to put the bond in place, or not. If they didn’t put a bond in place, then it was OK because they had the option. Now they have to place a bond.”

Acts 230 and 1374 both bar the most direct consequences on construction creditors, but Acts 1214 and 1266 also affect creditors, albeit more indirectly. 

Act 1214 officially enforces an off-the-books rule prevalent in Indiana construction projects relating to the construction manager as a contractor. Prior to this act, the general contractor had the option to prequalify that a subcontractor was qualified to do the work. Now, pre-qualifications are mandatory, which means subcontractors have “a more rigorous hill to climb, potentially, before they’re allowed to set foot on a project,” Ring said.

Act 1266 loosens environmental restrictions on construction projects related to erosion and sediment control. Instead of builders being beholden to environmental permits related to erosion and sediment control, builders can now choose to either cut costs on projects or take precautions to lessen the impact of the projects on the communities where the projects are located.

⁠—Christie Citranglo, editorial associate

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Secure Your Credit Department Before Using Real-Time Payments

Real-time payments (RTPs) make way for real-time concerns, especially in the credit department. At first glance, the idea of receiving instantaneous payment from a customer seems like wishful thinking on behalf of credit managers, some of whom have dedicated years of their time chasing after late payments. Faster payments aren’t necessarily a bad idea, but payment service providers (PSPs) and financial institutions alike are encouraging business-to-business credit professionals to educate themselves on the proper security measures before they implement RTP technology.

As businesses consider RTP implementation, it is essential for all parties, including credit managers, to understand faster payments can make it increasingly difficult to catch fraudulent transactions. Think of it this way: In the world of Looney Tunes, Wile E. Coyote dedicates all of his time toward catching the Road Runner. Because the Road Runner is so fast, Wile E. Coyote has only a limited amount of time to plan and build his traps in an attempt to catch his foe. For credit managers, Wile E. Coyote is the business’ RTP security software and the Road Runner is a fraudulent transaction.

“Security will remain a key requirement for growth as real-time and instant payments proliferate across Europe and other markets,” the PYMNTS.com May 2019 “Smarter Payments Tracker” report states. “As fraudsters become bolder and begin looking for larger paydays, though, keeping 20-second transactions safe and secure could be more difficult than it seems.”

With RTPs now possible, PSPs are taking the initiative to combat fraudulent activity. For example, Nucleus Software, a lending and transaction banking software provider, recently updated one of its software programs that specifically handles RTP fraud. According to the company’s press release, a new version of its transaction banking solution, FinnAxia 6.5, was launched July 24 and uses “real-time [artificial intelligence]-enabled anomaly detection capability, which enables financial institutions to detect fraudulent and duplicate transactions early and proactively act on them.”

The updates also include a real-time tracking feature for transactions. In the press release, Nucleus Software CEO Ravi Pratap Singh said technology such as FinnAxia 6.5 is important in a day and age when corporate customers expect “instant access to transaction information.”

The Federal Reserve is also climbing onboard the RTP train to secure such speedy transactions. Earlier this week, the Fed announced its plans to speed up the business payment process with its FedNow Service that will “enable the near-instantaneous transfer of funds day and night, weekend and weekdays…” The service is expected for release in 2023 or 2024 and will not only improve payment speed, but also securely.

“With a Federal Reserve real-time retail payment infrastructure, the funds would be available immediately—to pay utility bills or split the rent with roommates, or for small business owners to pay their suppliers,” Federal Reserve Board Governor Lael Brainard said in a press release on Aug. 5. “Similarly, getting immediate access to funds from a sale in order to pay for supplies can be a game changer for small businesses, potentially avoiding the need for costly short-term financing.”

Available to all banks, the press release states, the service “would increase competition, decrease market concentration, and provide a neutral platform for innovation.”

—Andrew Michaels, editorial associate

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District Court: Miller Act Outranks Arbitration

Owners, contractors and even subcontractors create contracts that best suit their own needs to protect themselves as much as possible. Often, a little tidbit or special circumstance is built into the contract that can cause the other parties to miss or incorrectly execute the provision. This was seen recently between a contractor and subcontractor on a federal project; however, the subcontractor followed the U.S. Code rather than what the contract stipulates—ending up in court.

In early summer 2016, ARGO Systems, LLC was awarded the prime contract by the U.S. government for construction at the Fort Meade Department of Public Works Building in Hanover, Maryland. Hanover Insurance Company issued a payment bond for $6.9 million. Baltimore Steel Erectors subcontracted with ARGO for steel fabrication. Within the subcontract it states, “all claims, disputes and matters in question arising out of or relating to this Agreement or the breach thereof … shall be decided by arbitration,” according to the U.S. District Court for the District of Maryland. Baltimore Steel claims it is owed more than $150,000 for completed work and timely filed suit under the Miller Act in August 2018.

If a subcontractor goes after the bond, that helps the material suppliers, said former credit manager Connie Baker, director of operations for NACM’s Secured Transaction Services. This should give the supplier a heads up as well to watch the 90-day bond claim filing window under the Miller Act.

“Every person that has furnished labor or material in carrying out work provided for in a contract for which a payment bond is furnished under … and that has not been paid in full within 90 days … may bring a civil action on the payment bond for the amount unpaid,” states the District Court citing the Miller Act.

According to analysis from the District Court, subcontractors can sue the surety without including the contractor as a defendant, and “the Miller Act confers a right to sue on the payment bond ‘independent of any right to sue the contractor.’” The District Court also determined in its opinion on July 23 that an arbitration agreement between the contractor and subcontractor cannot be enforced by the surety.

A party with a direct contract relationship with a subcontractor and not the prime contractor has 90 days from last furnishing to give a written notice to the contractor, and civil action in U.S. District Court can be brought after 90 days from last furnishing but no later than one year after last furnishing.

—Michael Miller, managing editor

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Creative Legislative Solutions to Bond Off Mechanic’s Liens

While there may be legal penalties for filing improper or exaggerated liens, when a lien is filed, it causes a ripple effect “upstream.” First, it is almost certainly a violation of the owner’s mortgage. The failure to pay that led to the lien is a default under the owner/contractor and contractor/subcontractor agreement. It makes no difference if the lien is legitimate or not, because once filed, it is a cloud on the title and will delay or preclude refinancing, sale or the approval by a lender of the owner’s next construction draw (which can then delay payment and cause more filed liens).

Most states have statutes that allow such liens to be “bonded over,” but that means going to a surety company for the bond, which may require full cash collateral. Bonds not only cost money, but also absorb bond capacity that is then no longer available for other projects until the liens are released. If an owner has to bond off a lien, it normally does not have a relationship with a surety company and has to go through a complete financial disclosure process to qualify for a bond. Finally, some states (Texas and Arkansas, for example) mandate that the amount of the lien bond has to be twice the amount of the filed lien. Obviously, such a requirement can cause serious issues particularly where the underlying lien is arguably invalid.

What if there is an existing payment bond already in place for the project, normally provided by the prime contractor (the costs of which were passed through to the owner)? That bond does not prevent the filing of liens, but simply gives the lien claimant another “legal” way to try to get paid. Most claimants will make a formal claim against the bond but also assert liens. One answer to the bond question is: Most states should follow the lead of Tennessee, which allows a copy of an existing payment bond, if it meets certain criteria, to be filed of record in the same place as the filed lien, and the filing of the bond automatically “discharges” the lien of record, just like a separate filed lien bond. No separate lien bond from a surety is needed. While the underlying dispute must still be resolved, at least the cloud on the title to the real property of the project is removed. The owner is happy. The payments continue to be made. The claimant is normally very happy to now be able to sue on the payment bond. The Tennessee statute is located at T.C.A. 66-11-142(b).

If your state does not have such a statute, consider “lobbying” for a change. The local chapters of the various construction trade associations, such as ABC [Associated Builders and Contractors] and AGC [Associated General Contractors of America], may be willing to provide legislative support.

Reprinted permission.

David Taylor, Esq., is a partner in the Nashville office of Bradley Arant Boult Cummings and chairs the firm’s award-winning construction group. David has a national construction practice representing all participants in the construction industry and is recognized as one of the leading construction lawyers in Tennessee and the Southeast.

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