Preserving and Executing Lien Rights Leads to Prompt Payment

Contractors and suppliers have a remarkable collections remedy at their fingertips: the mechanic’s lien. But as we’ve (and countless others @constructionlaw @timrhughes @myconstructlaw @matthewdevries) have warned a thousand times…the lien laws vary state-by-state, and they are highly complex.

Preserving those lien rights by promptly and properly filing a preliminary notice, notice to owner, or other type of required construction notice is critical. Thereafter, timely recording your mechanics lien or public bond claim is also critical.

With all the legal complications and technicalities, some contractors and suppliers may wonder whether the mechanic lien is worth all the trouble?

Yesterday, Walter Duke at the Texas Construction Law Blog may have tendered an answer to this question. His post, 4 Practical Steps to Help Ensure Prompt Payment, does a great job of focusing the non-payment issue onto four practical efforts. One of those four important steps? You guessed it…the mechanics lien.

Here is the praise Walter gives the mechanic lien in his post:

Mechanics liens are one of the easiest ways to ensure payment on a construction project, and yet they are one of the most commonly botched practices among contractors. All other tricks for getting paid on a project rely on the willingness, ability, and legal obligation of another party to pay up. Liens, on the other hand, place your remedy in the land and its improvements (which, in theory, always have intrinsic value).

I thought this was a nice concise summary of why the mechanic lien is so powerful, and so frequently works. Rather than regurgitating Walter’s post here, take a look at it on his blog in full to see more of his thoughts on mechanic liens, and the 3 other practical steps to help ensure prompt payment.

This article was originally posted on Zlien’s topic-specific Construction Lien Blog.

New Retainage Rules in Louisiana Protect General Contractors

As pointed out last month by our friends at the Louisiana Construction Law Blog (Blogspot), Louisiana just passed new retainage rules that became law on August 15, 2010.    The act (SB 218) amends the Private Works Act to add §9:4815, requiring property owners to place “retainage” in escrow accounts.

It’s a remarkable change of the status quo in Louisiana, and from my perspective, good news for general contractors (and really anyone else furnishing labor and/or materials).

What The New Rule Requires

So, what exactly changes with this new rule?

We’re all familiar with the concept of retainage:   money withheld from a prime contractor by the property owner until the completion of work.   Before this law, property owners were responsible for holding the money and disbursing it when contractually required.   As every contractor knows, this leads to the owner dragging its feet in releasing the retainage and motivates the owner to figure out ways to hold onto the cash.

The new law changes these circumstances significantly, by requiring the property owner to deposit the retainage amounts withheld into an interest bearing escrow account, and into the control of an independent escrowing agent.

Earned interest accrues in favor of the contractor, and the money is released by the escrowing agent pursuant to requirements of the statute.  If there’s a dispute between the owner and general contractor, the money is preserved as security pending the outcome of litigation.

When The New Rule Applies (and Doesn’t Apply)

The retainage requirement applies to all projects over $50,000.00 that are not:  (i) a single or double family residence; or (ii) classified under a list of specific industries (see list of industries in quote of legislation below).

This means the retainage law will apply to nearly all commercial projects, and all multi-unit (3+) residential construction.   The law applies to private projects only, and not State or Federal projects (which are governed by separate laws).

Who is Protected?

Well, the law itself only positively affects the property owner and the prime contractor.   Largely, therefore, the law is designed to protect general contractors by ensuring the retainage money is available when due.   Just as the construction lien will act as security, so too will the escrowed retainage.

But, does this protect the subcontractors and suppliers on a project?    The short answer is “no.”   The long answer is closer to a “yes.”

While the retainage money is not held in escrow for the direct benefit of the subcontractor, the general contractor has a duty to pay subcontractor and supplier accounts once the money is made available (and there are misappropriation laws to this effect).   There’s an additional practical benefit.  Since many sub and general disputes are rooted in a dispute with the property owner, this new law may reduce the owner/GC disputes, and thus reduce the GC/sub disputes.

Interesting Questions

Finally, I’ll leave you with some interesting questions that may arise in the coming years about this new retainage law:

(1)  What is the enforcement mechanism? As written, the law requires escrowing of retainage funds, but there is no penalty if a property owner doesn’t do it.   In all likelihood, this means the general contractor will be required to insist on compliance.  When competing with other general contractors for business, it may be tough to make this a staunch requirement.

(2)  Will Subcontracts Intervene to Claim the Money? Subs/Suppliers do not directly benefit from the new retainage rules.  However, if the subs / suppliers know that money is there, and they have a claim on it, can they intervene in any dispute between the owner and prime contractor to make a claim on the money?   Can they get an attachment or sequestration on the funds pending the dispute between them and the general contractor?

(3)  Interest Accrues to the Subcontractor? And perhaps the most interesting question concerns the interest on retainage.   Previously, the property owner benefited from the retention of funds.  Now, the general contractor benefits from fund retention.   Are subcontractors or suppliers entitled to their proportionate share in the accrued interest?

The Law Text

Here is the new law’s text, in full.   Enjoy.

§4815. Escrow of funds due under contract; procedures

A. When, under the provisions of this Part, a contract in the amount of fifty thousand dollars or more is entered into between an owner and a contractor and if in accordance with the terms of such contract funds earned by the contractor are withheld as retainage by the owner from periodic payments due to the contractor then such funds shall be deposited by the owner into an interest bearing escrow account. The provisions of this Section shall not apply to a contract for a single family residence or double family residence. The provisions of this Section also shall not apply to a contract for the construction or improvement of the following types of industrial facilities that are, or will be, engaged in activities defined or classified under one or more of the following subsectors, industry groups, or industries of the 1997 North American Industry Classifications System (NAICS):

(1) 22111 electric power generation; (2) 321 wood products manufacturing; (3) 322 paper manufacturing;(4) 324 petroleum and coal products manufacturing; (5) 325 chemical manufacturing; (6) 326 plastics and rubber products manufacturing; (7) 331 primary metals manufacturing; (8) 562211/562212 hazardous and solid waste landfills; (9) 422710 bulk stations and materials; (10) 486110 crude oil pipelines; (11) 486910 refined petroleum products pipelines; (12) 486210 natural gas pipelines; (13) 486990 other pipelines; (14) 211112 natural gas processing plants.

B. An escrow account under the provisions of this Section shall be located at a qualified financial institution and shall be under the control of an escrow agent. The escrow account and escrow agent shall be selected by mutual agreement between the owner and the contractor.

C. Upon completion of the work that is the subject of the contract, the funds, including any interest located in the escrow account shall be released from escrow under the following conditions:

(1) If there are no existing claims by the owner, the whole amount shall be paid to the contractor within three business days upon receipt by the escrow agent of a written release signed by the contractor and the owner.

(2) If there is a dispute between the owner and contractor and the contract does not provide for binding arbitration of such dispute:

(a) Undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor.

(b) Disputed amounts that are the subject of a judicial proceeding shall be released by the escrow agent within three business days of the receipt of a final order by the court. Upon receipt of the order of the court, the escrow agent shall pay the contractor or owner such amounts as are determined by the court.

(3) If there is a dispute between the owner and contractor and the contract provides for binding arbitration of such dispute, the following shall occur:

(a) Undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor.

(b) Disputed amounts that are the subject of binding arbitration under the contract shall be released by the escrow agent within three business days of the receipt of a final order by the arbitrator who has been selected by mutual agreement between the owner and the contractor. Upon receipt of the order of the arbitrator, the escrow agent shall pay the contractor or owner such amounts as are determined by the arbitrator under the rules as defined in the contract between the owner and the contractor.

D. Receipt by the escrow agent or the qualified financial institution in which the escrow account is maintained of what purports to be a written release signed by the contractor and owner, or an order by a court or arbitrator, shall be a full release and discharge of the escrow agent for transfer of funds to the contractor. Neither the escrow agent nor the qualified financial institution in which the escrow account is maintained shall be held liable to any party based on any claim that the written release is unauthorized, forged, or otherwise fraudulent.

E. Neither the escrow agent nor the qualified financial institution in which the escrow account is maintained pursuant to the provisions of this Section shall have any liability to the owner, contractor, or any other person when complying with the provisions of this Section.

I Didn’t File My Lien On Time…Now What?

Over the weekend, I answered a question over on Avvo.com about mechanic liens that gets asked very often, and I thought it was a good idea to share here.

The question is this: What are my legal rights as a contractor if my lien is not filed on time?

The question was asked related to Washington law, but the answer is applicable around the nation. Mechanic liens are an excellent remedy – and I highly recommend preserving and using these rights when needed. However, they are not a contractor’s only remedy.

What other rights does a contractor have? Take a look at my answer here:

Liens are a terrific remedy for contractors. If you’re unpaid and file your lien on time, you acquire security rights against the property itself and are legally able to file suit against parties who you did NOT contract with (i.e. the property owner, if you are a sub).

However, if you don’t file a lien, you still have plenty of legal rights to recover what is owed to you.

Your rights, however, are exclusively against the party who you contract with. You have an action against them for breach of contract. The period to bring this suit is quite a bit longer, between 3-6 years, depending on the type of contract.*

*This is the statute for Washington. Remember that the statute of limitations will be different depending on your state.

It’s important to contact a great construction attorney to bring a breach of contract suit if you are unpaid, and are too late to proceed with lien rights. Find a construction attorney in your area at Avvo.com.

This article was originally posted on Zlien’s topic-specific Construction Lien Blog.

Remembering Katrina: Stones Taught Me To Fly

Hurricane Katrina delayed my bar results, destroyed my house and changed my plans. It’s hard to believe that 5 years have gone by, and it’s been about that long since I’ve looked at these pictures. They were taken in the months after the storm, when I was starting Wolfe Law Group and getting back on track.

A lot of our family, friends and colleagues have had a very difficult half-decade. Hurricane Katrina’s effects are fading, but they aren’t gone. Just from my own personal experience in the legal profession, I can see the storm’s impact lingering as the subject of on-going litigation.

The city is, however, making it along. And I feel quite lucky to have a great staff, great clients and great family and friends, who without which, Wolfe Law Group could not be the success it is today. Thanks to all of you.

Click on any photo in the main window to see description. For great professional photos, see this story from Boston.com.

Join the Wolfe Law Group Fantasy Football Team

What can we say, being from New Orleans with the Saints as the reigning champions has us all excited about the 2010 NFL Football Season. That’s why we’ve gotten together with our friends at Zlien and set up an NFL Fantasy Football League through Yahoo!

And we’re inviting participation from our clients, colleagues, readers and friends. To sign up, just click on this link and set up your team. You will need to know the password, and the password is “construction.”

I must warn you….the Wolfe Law Group staff not only knows the law, we know football. So be prepared to lose.

Liens Are Just One Way To Collect Debt – Other Best Collection Practices

I love a great article about collection practices. Not only is a topic I’ve written about in the past (see posts from the Construction Lien Blog here, and from the this blog here), but it’s one of the more important topics for those in the construction industry.

Consider the “bad debt calculator” on Construction Indemnity Group’s website. I love this calculator, because it puts the tragedy of bad debt in your face. Take a modest amount of bad debt ($25,000), and a candid profit margin (5%), and you’ll see that it takes $500,000 of revenue to recover the lost income. Amazing.

Last week, Melissa Brumback’s Construction Law in North Carolina blog posted a blog post with “8 Best Collection Practices.” The article does a great job of hitting on the things you can do to minimize your bad debt – and things, that we’ve even said over and over: Be careful when extending credit, have a written contract, and don’t let too much time pass before implementing your collection procedures.

These, of course, are just a few tips. The post does a great job of enumerating each tip and discussing their importance, so there is not need for me to regurgitate it here…just take a look at Melissa’s post for more.

Joint Ventures and Contractor Licensing – Not A Simple Topic

You’re looking to work on a construction project…but you don’t have a license.   Surprisingly, this happens quite often.

Perhaps you’re to the industry, or a company trying to work in a neighboring state to take advantage of an opportunity there.   Before you prepare a bid or sign a contract, the first order of business is getting legal.    And depending on where you are, that usually means becoming a licensed contractor.

When our office is approached with these types of situations, we’re frequently asked if a “joint venture” with a licensed contractor can resolve any licensing deficiencies with the unlicensed party.   The answer to this question depends on where you are, and the circumstances of the project.

In the past, we’ve highlighted Mike Purdy’s Public Contracting Blog (it’s an excellent resource on prevailing wage and public contracting issues – previous posts here).   Last week, Mike discussed this interesting and popular question on the contractor licensing requirements for joint ventures.

His post focuses on Washington law.    In Washington, RCW 18.27.065 provides as follows:

A partnership or joint venture shall be deemed registered under this chapter if any one of the general partners or venturers whose name appears in the name under which the partnership or venture does business is registered.

The key here, as Mike points out in his well-written blog post, is whether the registered member of the venture is in the JV’s name.

Louisiana’s contractor licensing law treats this situation exactly opposite from Washington.    Here is a snippet from the Louisiana State Board of Contractor’s website, on their FAQ page:

I want to do a joint venture with a licensed Louisiana contractor. How does that work?

All parties in a joint venture are required to be licensed at the time the bid is submitted. Each party to the joint venture may only perform within the applicable classifications of the work of which he is properly classified to perform (Section 1103 of the Rules and Regulations of the Board).

So indeed, where you are is critical to the question of whether you can or cannot by-pass contractor licensing or registration requirements by partnering with a registered company.

And this becomes another example of how working on a construction project in one state can be legally much different than working in another state.   What are some of the other examples?    How state laws treat Pay When Paid Clauses, and the different requirements for Mechanic Liens and Preliminary Notices.

Assembly of Good Resources on Oregon Construction Liens

When you’re not paid on a construction project you turn to the Internet to find answers about collections and mechanics liens. In 2010, it’s the natural thing to do. When you’re sick, you turn to sites like WebMD. When you’re not paid, you look to learn about efficient ways to collect, and you turn to sites like this one.

While we work hard to provide great construction and mechanics lien resources, there’s no need for us to be greedy and re-publish every single feature of the mechanic lien laws. There’s a lot of great information on other websites out there, and everyone once in a while, we find it useful to our readers to stop and point to those other resources.

This post does just that, as it relates to Oregon Mechanics Lien laws.

Let’s Start With Me

I know I just talked about not being self-centered when it comes to posting information, but there’s not harm in starting this post with a re-cap of the resources we’ve published here and elsewhere.

– The Lien Law Summary Sheet for Oregon

– The Construction Lien Blog’s posts concerning Oregon

– Avvo.com Legal Guide published by Scott Wolfe Jr. on Oregon Mechanic Liens

– The Northwest Construction Law Blog’s posts on Oregon Mechanic Liens and Construction Lien Laws.

Some Others

– An Associated General Contractors chapter in Oregon has published the Oregon Construction Lien Pamphlet. The Pamphlet does an excellent job of summarizing some of the notice requirements in Oregon, which while not very complex, are very strict. Oregon’s notice requirement is one of the fastest expiring anywhere in the country – while some states allow for 60 day notices (Washington), or 20 day notices (California), Oregon requires the Notice to Owner be sent within just 8 days! So, better be on top of things. This Pamphlet helps.

– I recently came across a service called “Deeper Web? (@about_law)” From how things look to me, this website scans the web for relevant articles and information on a specific topic, and displays all the results in a magazine-like format in one location. I’m not familiar enough with the website to say it works all the time…but, I am impressed with their “Special Report on Oregon Construction Lien Laws.” Some neat things this site links to is the Oregon Contractors Board’s page for consumer help containing information on Oregon lien laws, and a great discussion on LinkedIn on whether a lien can be filed against someone who has filed for bankruptcy.

– No better place to get information on Oregon Lien Laws than from the horse’s mouth. Here, that’s the Oregon Contractor’s Board. Their website has a number of good publications that can help contractors and property owners, but most relevant here is the Construction Lien Pamphlet written “to inform contractors and consumers about Oregon’s construction lien laws.”

This article was originally posted on Zlien’s topic-specific Construction Lien Blog.

Where Have I Been? Fixing Server Problems

If you’re a frequent reader of the Construction Law Monitor (and our other blogs) you may have noticed two things:  (1)  About a month ago, our website went down two or three times; and (2) There haven’t been many posts since then.

Well, that was all GoDaddy’s fault (booooo).   I highly do not recommend their hosting products.   We were a dedicated server customer for over five years, and their responsiveness to the server problems and help with our account was awful.  Enough about them.

We spent the past month moving our sites to the new server.   While it was a long haul, and there were some bumps, we’re happy to be finished with our move.

The blog and website are noticeably faster than before, and I can assure you – the sites will be more reliable than ever.

It’s a shame that the server switch took so much time and energy, and really made blogging and other updates difficult.   But, all is right with the world again, and we’ll be posting more regularly and rolling out some updates to the sites soon.

Stay tuned!

Guest Post on Musings on Avoiding Residential Construction Disputes

A big thanks to Christopher Hill (@constructionlaw) for inviting me to guest post on his Construction Law Musings blog for the fourth time.

The post discussed how to “Prepare For and Avoid Residential Construction Disputes,” and looked at the issue from the perspective of both the homeowner and the residential contractor.  Here is a tease:

Residential construction disputes come in all shapes and sizes, but very typically have one thing in common: they can get very nasty.

This is understandable, especially in today’s economy. The homeowner is spending hard-earned money on something very personal to them, their home. They want it done right. The contractor is working on really tight margins, and with a diligent client.

These disputes can become frustrating legal battles that costs thousands of dollars. And since it’s such a hot topic politically (there is lots of pressure for legislatures to protect against construction fraud), many states have layers of consumer protection laws that are consequential to both the residential contractor and the homeowner.

Read the full post at Chris’ blog, Construction Law Musings.