In the News

October 24, 2019

 

Mechanic’s liens in Virginia are changing slightly, but credit managers shouldn’t be too worried. Enacted and effective earlier this year is a more detailed form or Memorandum for Mechanic’s Liens established within the Code of Virginia.

New to the memorandum is: “If any part of the amount claimed is not due as of the date of this mechanic's lien, identify the date or event upon which it will be due and the sum(s) to which the due date(s) or event(s) apply,” states the law. Also new is that addresses of the property owner and the lien claimant must be included in the memorandum. Both changes were made to the memoranda for general contractors, subcontractors and sub-subcontractors.

Going unchanged is Virginia’s 150-day rule. “The lien claimant may file any number of memoranda but no memorandum filed pursuant to this chapter shall include sums due for labor or materials furnished more than 150 days prior to the last day on which labor was performed or material furnished to the job preceding the filing of such memorandum,” according to § 43-4.

“I don’t really think it affects the 150-day rule,” said a local attorney, comparing the new changes to the memorandum to the 150-day rule. “You can only claim things that are 150 days prior to last work, which is tricky because if you’re still working and you haven’t been paid and it’s 150 days, every extra day you work, you shave off a day’s work at the beginning.”

Not much will change for the attorney and his clients, however. The status quo won’t shift one way or the other. “You can only get a mechanic’s lien for work that’s been done,” he said. There are scenarios when the new memorandum change could come into play; if work or materials are furnished but the money isn’t due yet. One example is the pay-when-paid clause in the contract if such a clause is present. “If my client is owed $150,000 and there’s a pay-when-paid clause … I’m still filing my lien even if the general contractor doesn’t get paid.”

Rather than leave a portion of money out because it is not due yet because of time limitations in the contract, the attorney is of the mindset that if the money is due, you should probably lien for it. The best thing to do is look at it on a case-by-case scenario to determine what work has been done.

Financial institutions will view credit risk in a whole new light as early as this December when the Financial Accounting Standards Board (FASB) begins implementing its new Current Expected Credit Losses (CECL) model. Under the revamped accounting standard, credit reporting agency Experian reported, CECL will require businesses to keep more data to estimate and measure credit losses for loans and debt securities, effectively eliminating the current Allowance for Loan and Lease Losses (ALLL).

According to the U.S. Office of the Comptroller of Currency, CECL was introduced in June 2016. CECL will first impact businesses that file with the U.S. Securities and Exchange Commission (SEC) in fiscal years and interim periods beginning after Dec. 15, 2019. Public businesses that do not file with the SEC must use CECL in fiscal years and interim periods beginning after Dec. 15, 2020, while non-public businesses must do so in fiscal years beginning after Dec. 15, 2021.

“CECL is considered one of the most significant accounting changes in decades to affect entities that borrow and lend money,” Experian states. “Preparing for and implementing CECL will compel financial institutions to think about credit risk in new and more timely ways and to either recalibrate existing models or develop new ones. Critical components to manage during CECL implementation include data preparation, loan segmentation, methodologies selection and process validation.”

Since CECL requires the storage and calculation of more data, Experian states the change will have a significant impact on financial institutions’ accounting, modeling and forecasting. The credit reporting agency predicts credit unions and small lenders may encounter some difficulties because they did not save and/or store data that is now required for CECL calculations.

SAS Insights recommended the following focus points for banks’ successful CECL implementation:

• Solutions with a modular, open design approach that are adaptable to the changing interpretations of the new standards.
• Systems and processes that support iterative development cycles with the ability to revise and upgrade individual model components as new models are tested and reviewed.
• An effective architecture and adaptable framework to include a centralized model library, a common data platform, centralized workflow orchestration, dynamic reporting capabilities, audit support and robust governance and controls.

Pinnacle Agriculture Distribution Credit Manager Kevin Stinner, CCE, CCRA, said CECL is expected to make financial statements more accurate since it is calculating off expected credit losses rather than the actual credit losses as in ALLL. With his particular mix of customers, Stinner isn’t anticipating major changes to his department.

“The biggest changes for the credit department would be assisting the gathering of data; however, if you already do a specific reserve process, you may be able to modify that process to satisfy the requirements of the CECL. It would come down to your business mix and your accounting team,” he said.

Another positive change is credit managers may achieve greater confidence in customers’ financial statements.

“Again, it depends on your customer mix and how much lending and/or leasing they are doing on a regular basis,” Stinner noted.

Filing suit on public construction projects for unpaid balances requires—in every state—a copy of the payment bond. The general contractor (GC) executes this payment bond, and when a creditor approaches the GC for a payment bond, the GC is likely aware of the motivation behind the inquiry. Obtaining the bond as a creditor then becomes difficult.

Payment bonds are not a form of insurance, said Chris Ring of NACM’s Secured Transaction Services, and often the GC has to pay as a premium for the bonds. He said statutory laws do not place harsh penalties on the GC for withholding payment bond information.

“The general contractor can say, ‘I’m supposed to provide it, but I’m just not going to,’” Ring said.

Avoiding the GC’s reluctance to provide a copy of the payment bond can be remedied by serving a written notice to the GC for a copy of the bond—as soon as the project is awarded. For example, if a creditor knows the customer will be purchasing $100,000 worth of two-by-fours for a public project, the creditor should ask for the payment bond upfront. This will give the creditor more security should a claim have to be filed, and it may even encourage the GC to pay promptly.

Asking the correct person for a copy of the bond is crucial, and often, the creditor may turn to the subcontractor (sub) or directly to the GC for obtaining a copy of the bond. If the public project is being built by a large GC talking directly to the GC may not be an option, but asking for a copy of the bond from the sub may be. Ring said in some circumstances, the creditor may have to educate the sub on payment bond rights before obtaining the bond.

Large general contractors can have multiple layers of bureaucracy and finding the right person to speak to at the GC’s office can be daunting. A better tip is to ask for the project manager who has been assigned to that project.

If the creditor still cannot obtain a copy of the bond from the GC or the sub, the creditor can still find it by contacting the public entity commissioning the work.

Getting a copy from the public entity can be difficult when the public entity is a large bureaucracy.  Ring said the procurement officer will have the copy of the bond. If not the procurement officer, Ring then recommends asking the architect—should there be one on the project—or the civil engineer.

The last hurdle is to confront the special logistical issues in filing a lien against a pipeline. If the lien claimant is a subcontractor, it must first determine to whom it must provide notice of intent to file a lien. Does the Lien Law require a subcontractor to notify each and every parcel owner of its intent to lien? Under the Lien Law, subcontractors must provide notice to the “owner” at least 30 days before filing. (49 P.S. § 1501(b.1)). There are no reported cases on this issue and recent lien claimants have provided notice to all the parcel owners. We believe, however, that it should be sufficient for subcontractors to provide the 30-day written notice solely to the pipeline owner, because the lien is against the pipeline owner’s interest in the pipeline (generally an easement), nothing more.

The Lien Law also requires that the claimant provide “such description of the improvement and the property claimed to be subject to the lien as may be reasonably necessary to identify them.” (49 P.S. § 1503(8)). In view of the many hundreds of parcels involved and significant potential for error, practitioners must engage a title company to search and provide copies of all records related to the pipeline owner’s property interests in the relevant counties. The title company’s costs for this search alone, could be tens of thousands of dollars. Once the recorded instruments are received, each record must then be carefully reviewed to determine which documents are related to the pipeline and which are not. This review will be time-consuming and costly.

In a recent case, a subcontractor successfully filed liens in four counties and secured full payment in excess of $4 million for a pipeline project that spanned four Pennsylvania counties: Berks, Dauphin, Lancaster and Lebanon. The title search revealed a total of 814 property documents, at a cost of over $12,000. In this matter, the time limits imposed by the Lien Law and the large volume of documents required costly expedited review and collation of the property records and other information needed for the lien. Significant time was also spent in drafting the lien and formulating supporting exhibits.

Once the lien and its relevant exhibits are drafted and compiled, the last logistical hurdle is filing. In Pennsylvania, not every county has adopted electronic filing. Practitioners must first confirm whether the court requires paper or electronic filing, along with any special rules for documents that are substantially larger than normal. The property records will contain maps, drawings and/or photographs which significantly increase the electronic size of the documents. Whether a county requires electronic or paper filing, each presents its own challenges. As to electronic filing, each county limits the size of files for submission to the court. Some, like Berks County, have file size limits as low as 10 megabytes. Depending on the number of property documents, a claimant could have at least 20 separate 10-megabyte files to upload. Even with electronic filing, hard copies must be served. The hard copies may consist of multiple reams of paper. For counties without electronic filing, the copy, service and mailing fees would be twice the costs for electronic filing.

At present, there are no reported cases identifying restrictions on mechanic’s liens against pipelines. To date, liens have been filed and contractors have been paid. Until the courts rule otherwise, the decision to file a mechanic’s lien on a pipeline, therefore, is more a question of cost and logistics than of legal entitlement. Assuming that the contractor can meet the other requirements of the Lien Law, the issue of whether to file comes down to a cost benefit analysis. If the benefits outweigh the costs, then filing a mechanic’s lien on a pipeline is currently achievable.

Part I of this article was published in last week’s eNews on Thursday, Oct. 17.

Reprinted with permission from the Aug. 20, 2019, issue of the Legal Intelligencer, © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Peggy Underwood and Rachel E. Jeanes are attorneys with Horn Williamson assisting clients at all stages of the construction and litigation process, representing general contractors, subcontractors, owners, developers and suppliers involved in both public and private construction projects throughout the Mid-Atlantic region. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it. or at 215-987-3800.