In the News

December 12, 2019

	I. The Risks Associated with Unlicensed Contractors
	II. Delinquencies Improve Across US in Q3

	III. Construction Disputes Are Common but Avoidable
	IV. Will Bankruptcy Preference Lawsuits Decline Due to Statutory Changes?

Unlicensed contractors complete projects each day in the construction industry. While these unlicensed contractors can be capable of producing high-quality work, extending credit to these contractors also comes with a set of risk factors. Should the customer not pay promptly, the risk factors become amplified.

In order for a subcontractor (sub) to have lien rights in some states, the sub must have a valid license. Without a valid license, lien rights can be lost entirely—and a “fair number of states” operate with this restriction, said Chris Ring of NACM Secured Transaction Services. Each state has a different set of restrictions in regard to lien rights with licensed and unlicensed contractors: Washington has some of the strictest laws with unlicensed contractors whereas states like Florida and Georgia operate on a case-by-case basis.

 “It’s a trickle-down effect,” Ring said. “If they can’t enforce their lien rights, then it really puts a damper on their ability to get paid, which puts a damper on the material supplier getting paid.”

In Washington, working with an unlicensed contractor can affect different links in the supply chain. For instance, if the general contractor (GC) is unlicensed, then subsequently the sub and material supplier also lose lien rights. If a GC is licensed but a sub is not, the material supplier and the sub do not have lien rights but the GC does. In the cases of subs being unlicensed with licensed GCs, lien rights are then delegated depending on the status of the sub: if an electrical sub is unlicensed but a plumbing sub is licensed, then the material supplier under the electrical sub will lose lien rights, but the material supplier for the plumbing sub will have lien rights.

Being keen on the exact laws for each state will help reduce any risks associated with unlicensed contractors. In more relaxed states, lien rights may be revoked for projects with unlicensed contractors, but suing can still be an option. In more strict states, rights to sue anyone else in the supply chain—such as the GC—may be revoked as well.

In addition to lien rights being threatened, the construction projects themselves may be in jeopardy when working with unlicensed contractors. Going through the process of acquiring a license helps to assure the contractors are competent and understand what they are doing on the job. 

Although a license does not 100% promise a competent contractor, a license proves the contractor bothered to go through extra steps—on-the-job training, joining a union, paying dues, etc.—to obtain the license.

“Usually a good test if a contractor knows what they’re doing is having that license,” Ring said. “It’s one of the barometers to see if a contractor knows what they’re doing, it’s one of the reasons they’re required to have a license … but it doesn’t guarantee competency.”

Sloppy work from an unlicensed contractor can directly lead to payment issues. If a project needs to be redone because an unlicensed contractor could not properly install electrical equipment or put up a wall, the creditor will likely not receive payment as quickly as promised.

“There’s a risk that is carried when you sell materials to an unlicensed contractor,” Ring said. “If they’re an unlicensed contractor, it can lead to your materials not being installed correctly, which can lead to a payment issue. … And not having a license is not necessarily that they have poor workmanship, but it’s definitely a red flag.”

Credit Congress Is a Golden Opportunity—Don’t Miss Out!

With almost 70 education sessions from which to choose, attending NACM’s Credit Congress is an incredible value and priceless experience for every credit professional!

Here is a glimpse at what you can expect:

• Revenue Recognition
• Why Good Employees Leave ... and How to Get Them to Stay
• Credit Management in Transition
• Building Strong Departments from the Ground Up
• Gambling with the Economy: What Does the Election Mean?
• Managing Construction Credit and the Importance of Obtaining Job Information
• Enforcing Electronic Transactions and Signatures; Navigating ESIGN and UETA
• Are you Confident You’ve Made a Sound Credit Decision?

Please visit creditcongress.nacm.org for more information and to register. We will continue to update the site with additional information on sessions, speakers, exhibitors and much more.

Please visit creditcongress.nacm.org for more information and to register. We will continue to update the site with additional information on sessions, speakers, exhibitors and much more.

Team discounts (5 or more) are also available for larger member companies.

Delinquency rates across the U.S. are on the decline, and credit conditions among small businesses are looking bright. According to the third quarter Main Street Report from Experian and Moody’s Analytics released earlier this month, small business credit conditions are positive—paired with a decent drop in severe delinquencies (91-plus days past due). The 31–90 days past due bucket (moderately delinquent) also saw a modest dip in the third quarter compared to quarter two. The bankruptcy rate remained roughly the same as quarter three 2018 and quarter two 2019.

“Delinquency rates fell across most industries, but agriculture-related industries like construction and transportation had a rough quarter,” states the report. “A rising number of small businesses seeking credit should help to keep performance around current levels.”

Moderately delinquent rates dropped from 1.64% in Q2 to 1.53% in Q3, which “is a series low and shows that small business lending performance has held up nicely, even when faced with flagging confidence among small business owners driven by policy uncertainty,” according to Experian and Moody’s. Meanwhile, severely delinquent rates sank from 3.4% in Q3 2018 to 2.81% a year later, with a brief stopping point at 3.24% in Q2 2019.

“Growth in the number of small businesses seeking credit as shown in our dataset and the Small Business Administration (SBA) loan level data served to drive delinquency rates down and balance growth up in the quarter,” according to the report. “Lagged data coming out from the Bureau of Labor Statistics (BLS) seems to support the notion of a growing number of new businesses who could be pursuing credit, which bodes well for small business lending.”

Across the eight regions, moderate delinquency rates followed a similar pattern: declines from Q2 to Q3. The Far West, Great Lakes, Mideast, Rocky Mountain, Southeast and Southwest each saw delinquencies decline from quarter to quarter. New England and the Plains region had increases in moderate delinquencies. Despite the smallest of increases in New England, the region is considered steady for small business credit performance.

Each region had its own ups and downs within specific industries. The Plains and Great Lakes regions each saw delinquencies increases in construction, transportation and wholesale industries. Construction in the Southeast was also an issue, but only dropped six basis points. “The Southeast remains the region with the lowest moderate delinquency rate in the country and there doesn’t appear to be weakness developing in a meaningful way to derail the region’s position.” The transportation industry in the Mideast was among the strongest recorded, down 28 basis points in the third quarter.

Classes Start Soon—Register Now!

To be the best, you have to learn from the best. Choose from the many 2020 winter educational courses to become more knowledgeable and perform better at your job. Register early and save!

CBA/CBF/CCRA COURSES
Accounting: January 6–April 17, 2020
Business Law: January 6–March 27, 2020
Credit Law: January 6–March 27, 2020

INTERNATIONAL CREDIT
International Credit & Risk Management: January 13– April 10, 2020

Visit www.nacm.org to learn more and register for classes.

Visit www.nacm.org to learn more and register for classes.

Disputes in any profession can be a nightmare because there’s always the possibility it could impact achieving the overall goal. A dispute in the construction industry is particularly bothersome, as there are multiple parties who suffer the consequences, including the owner, general contractors (GCs), subcontractors (subs), and material suppliers. To avoid or overcome disputes requires an understanding of why they happen in the first place and the best course of action if and/or when one occurs.

Construction professionals agree that disputes are possible even before a project begins as well as during and after the project is completed. Contract errors or omissions, failure to deliver work or delayed/late payments are only a few examples; however, international consultancy HKA recently narrowed down the top causes of construction disputes in 2019 in its analysis of claims and disputes. The report reviewed 700 projects in 72 countries, where more than 4,100 causes of disputes were identified in the “CRUX Insight: A Global Sector Market Analysis” report.

In the top-30 causation factors, material suppliers made the list at No. 6 with poor management of subs/supplier and/or their interfaces, followed by materials and/or products delivered late at No. 20, and late appointment of subs/supplier at No. 27.

“Management of subcontractors and suppliers, and their interfaces, is particularly challenging where the success of projects hinges on the integration of complex systems, and the supply chain itself is highly complex,” the report states. “Therefore, it is imperative that all parts of the supply chain have a united understanding of the objectives to be delivered in each stage of design as early as possible, to avoid costly, lengthy rework.”

This idea is further explored with the example of national electrical contractor Power Design Inc. (PDI) and its decision to change its construction management software. Construction Dive reported the announcement in November, revealing that roughly 2,100 users at PDI will switch from PlanGrid to Fieldwire by the end of the year. Fieldwire was brought to PDI’s attention by one of its customers, general contractor Clark Construction Group.

According to the article, Fieldwire allows subs to track quality control issues, inspections, punchlist items, safety issues, Requests for Information (RFIs), change orders, work progress and delays in addition to serving as a communication tool. Brad Moore, PDI’s VDC technology manager, told Construction Dive the tool is a great benefit for subs, despite the notion that “a lot of technology out there seems to be geared toward a GC methodology.”

“The task management feature is more day-to-day driven, less about plan management and more about the actual tasks at hand using plans as a backdrop for that,” Moore said in the article. “We’re a company that really thrives on relationships.”

Since the new platform is designed to improve quality control for subs, both GCs and material suppliers may also see the benefits—therefore, avoiding a potential dispute. The aforementioned HKA report highlighted how some disputes happen due to poor management of subs and suppliers. For instance, if the higher-ups fall flat while managing subs’ interfaces or administering contracts, multiple parties will receive incomplete or inaccurate information. But, if reporting requirements are set, everyone will stay on the same page.

“Relations with suppliers need to be close, open and consistent to minimize the impact of disputes and achieve a successful outcome,” HKA states. “More rigorous planning and project controls are essential but not necessarily sufficient to keep projects on track.”

Managed by Construction Credit Professionals

Construction credit is complicated and time consuming. Let NACM’s Secured Transaction Services (STS) help you reclaim your valuable time and resources for your own projects!  We take pride in handling your projects and we triple check all work for accuracy. 

We have you covered with:

• Notice to owners
• Attorney network mechanic's lien filing service
• Foreclosure or bond suit actions with the attorney who filed your lien
• UCC equipment and inventory filing services
• Demand letters
• Tracking service and more

 Let us do the work and help you navigate the lien and bonds process.

For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.

For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.

When a creditor is the target of a bankruptcy trustee or debtor’s claim to take back money the debtor paid on a legitimate debt prior to the bankruptcy filing, it’s bitter justice. The concept is fair enough: pulling funds back into the bankruptcy estate so they can be redistributed among all to creditors in accordance with the Bankruptcy Code’s priority scheme on a pro rata basis. In practice, though, it’s hard to see the fairness of giving back money you were entitled to receive. Two statutory amendments that will take effect in late February of 2020 have the potential to put a damper on some preference claims.

THOU SHALT VET ALL PREFERENCE CLAIMS BEFORE FILING SUIT

The first Bankruptcy Code amendment places an express duty on bankruptcy trustees and debtors to conduct a preliminary analysis of the merits of a preference claim before filing suit. Under the new law, a preference claim should be pursued only after doing “reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses.”

In theory, the change merely codifies current practice. But for those debtors or trustees who have taken a shotgun approach to asserting preference claims, the change mandates investing time to analyze potential preference claims proportionate to the costs and benefits to the bankruptcy estate, and discourages pursuing claims when defenses are apparent. For example, a trustee might see that the debtor paid a $50,000 invoice two months prior to filing the bankruptcy petition. If a quick review of records available to the trustee would show that the debtor’s payment was in exchange for goods the creditor delivered to the debtor on the same day payment was made, or that the creditor receiving the payment had a long-standing lien on a piece of the debtor’s equipment worth $100,000, then it wouldn’t be judicious to assert a preference claim.

Introducing an express duty on trustees and debtors to vet preference claims should tip the scales against filing some lawsuits. However, the more predictable consequence is likely to be legal disputes over whether a trustee or debtor in a particular case satisfied the duty to conduct “reasonable due diligence in the circumstances of the case,” whether an affirmative defense was “reasonably knowable,” and whether appropriate consideration was given to such a defense before filing suit. The amendments do not establish any remedy for a trustee or debtor’s violation of the new statutory duty, so disputes over the duty may do nothing more than waste time and resources.

IF YOUR PREFERENCE CLAIM IS UNDER $25,000, YOU’LL FIGHT ON MY TURF

The second Bankruptcy Code amendment that will impact preference claims early next year relates to where a bankruptcy trustee or debtor can file suit for claims to recover preferential payments of business debts under $25,000. Under current law, relatively small claims under $10,000 can be filed only in the federal district court for the district in which the creditor resides. If the creditor resides in a district other than where the bankruptcy case is pending, this venue statute renders it more expensive for a trustee or debtor to file small preference lawsuits, which can mean such lawsuits never get filed. Under the new law, trustees and debtors will need to go to the creditor’s home court to file preference lawsuits seeking under $25,000. This change will discourage the pursuit of many small preference claims.

TAKEAWAY

These two statutory changes impacting preference lawsuits are minor creditor-friendly tweaks that will not drastically reduce the number of lawsuits filed. Given popular distaste for such claims, though, any sweetner makes the bitter pill slightly easier to swallow.

Lisa Sumner, a partner with Nexsen Pruet, is a commercial litigator focusing her practice in the areas of bankruptcy & creditors' rights. She is experienced in representing creditors in a variety of cases, including claims of lender liability, fraudulent transfers and breach of fiduciary duty, as well as filing involuntary bankruptcy petitions. Lisa may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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