Protecting Your Contract Receivables:PA Mechanics Lien Law

and Payment Bond Claims

Introductions

Michael Hoffner• McKonly & Asbury

• Partner

• mhoffner@macpas.com

Thomas Williams• Reager & Adler

• Attorney

• twilliams@reageradlerpc.com

When it Comes toProtecting Your Receivables

Be a Smarty and Don’t be Tardy

Old Receivables Definitely Do NOT Get Better with Age

Invoice

Date: 10/30/17

To: Slow Pay, Inc.

Labor & Materials: $10,000

Due Upon Receipt

Old Wine Old Receivables

vs.

Time flies when you are seeking payment from Customers

• Delays in invoice creation and submission process• Contract payment terms with built in payment delays• Excuses• Stiff arms• Radio silence• Fabricated justifications for withholding payment

What to do When Payment is Late? • Contact experienced counsel sooner rather than later.

What Remedies Can I Assert?• Contractual• Statutory• Common Law

Question: Are there dispute resolution processes required in my contract?

What is a Mechanic’s Lien?

• Claim securing priority of payment• For value of labor and materials• Lien against land and building

– In Rem vs. In Personam

Mechanic’s Lien

Matternas v. Stehman, 642 A.2d 1120 (Pa. Super. 1994)

The mechanics’ lien law is “intended to protect theprepayment of labor and materials that a contractor

invests in another’s property, by allowing the contractor to obtain a lien interest in the property involved.”

A Mechanic’s Lien is NOT an exclusive remedy

A mechanic’s lien claim is only one of many potential remedies for non-payment

Includes any building, structure or other improvement erected or constructed on land, together with the fixtures and other personal property used in equipping it for the purpose for which it was intended.

IMPROVEMENT as Defined by§1201(1)

Exempt Project/Property

• Mechanic’s Lien Only Available on Private Project/Property

• Unavailable for Publicly owned Project/Property

Who can be a CLAIMANT?

• Contractor• Subcontractor• Sub-Subcontractor• Suppliers

What may NOT be included in the Mechanic’s Lien claim?

• Attorney’s fees

• Interest

• Non-permanent fixtures

• Costs not related to the improvement

FILING AND PERFECTING

a Mechanics’ Lien

§1501 - 1503

*Unforgiving Statute*

Strictly Interpreted

§ 1501(b) Subcontractor’s

Subcontractors (and suppliers)must provide formal notice to the owner of their intention to file a

mechanics’ lien at least 30 days prior to filing the lien.

NOTICE REQUIREMENTS

§ 1501(c): NOTICE MUST INCLUDE:

• the name of the claimant;• the name of the person with whom he contracted;• the amount claimed to be due;• the nature and character of the labor or materials furnished; • the date of completion of the work: last day of work or supply• a description of the property claimed to be subject to the lien.

§ 1502 (a):Filing The Claim

Claimant must file a mechanics’ lien within six months after the completion of the work.

So when does the clock start?

FILING DEADLINE

§ 1503: The claim must state:

1) Name of claimant, and whether he files as a contractor or subcontractor

2) Name and address of the owner;

3) Date the work was completed;

4) If filed by a subcontractor, the name of the person with whom he contracted, and the dates on which notice of intention to file a claim was given;

§ 1503 continued . . .

5) If filed by a contractor under a contract for a specific sum, an identification of the contract and a general statement of the labor or materials furnished;

6) In all other cases a statement of the kind and character of the labor or materials furnished, and the prices charged for each;

7) The amount claimed to be due; and

8) A description of the improvement and the property claimed to be

subject to the lien.

Waiver of Lien Rights Prohibited: Section 1401(b)

Waiver of right to file mechanic’s lien(or Stipulation Against Liens) is against public policy and unenforceable/void on commercial (non-residential) projects …

UNLESS a Payment Bond is provided

Perfecting Your Mechanic’s Lien

• Serve the Mechanic’s Lien Claim on the Owner within 30 days of filing the Claim; and,

• File Proof of Service of Lien Claim within 20 days of service

CONTESTING a Mechanics’ Lien

• rule to file a Lien under § 1506;

• preliminary objections;

• defend the action;

• set-offs; and

• discharge the lien with bond or cash (commonly referred to as bonding off the lien).

Preliminary OBJECTIONS

• Exemption or immunity;• Claimant is not in the class of persons permitted to file a mechanics’

lien;• There was a lawful and enforceable waiver of liens;• Claimant failed to comply with statute.

DISCHARGE THE LIEN under§1510

Any party can request discharge of the lien where a sum equal to the lien or double in the form of a surety bond is deposited with the court for application against the amount found to be due to the claimant.

And Just When You Thought You Got It Down…

More Stuff to Remember

Introducing the

State Construction Notices Directory

42 Pa. C.S. §501.1

Why did the Pennsylvania legislature add the Directory to the Mechanic’s lien Law?

Is this change unique to Pennsylvania?

What does the Directory do?

Owner Requirements- File Notice of Commencement

Subcontractor Requirements- File Notice of Furnishing

Contractor Requirements- No Directory Requirements… but…- Place Notice of Project on Directory for owner

- Place/Post Notice “conspicuously” on Project site - Include Notice in Contractor’s Subcontracts

Optional Filings in Directory

• Owner = Notice of Completion

• Subcontractor = Notice of Nonpayment

Important

Timing for Filing on the Directory

Owner – Notice of Commencement• Prior to commencement of labor, work, or furnishing of materials

for a Searchable Project.

Subcontractor – Notice of Furnishing• Within 45 days after first performing work on jobsite, or providing

materials to the job site.

Filing Requirements Apply to“Searchable Projects”

New Construction or Alteration Projects costing more than

$1,500,000

So do I need to enter information on the Directory for All of my projects?

How Do I Get to the Directory?

http://www.scnd.pa.gov

The directory was created by, and is hosted by, the Pa. Department of General Services.

Also link to the Directory by accessing the Pa. Department of General Services’ web page at

www.dgs.pa.gov.

Click on – State Construction Notices Directory under “Public Links” on landing page.

Do I Have to Pay to Use the Directory?

Owner – Notice of Commencement filing fee:

$72.00

Subcontractor – Notice of Furnishing - $0

Accessing Directory for Information - $0

Receiving Notices from Directory - $0

Consequences of Not Filing Notices

• Owner – No requirement that subcontractors file Notice of Furnishing so Owner will remain in the dark as to subcontractors, sub-subcontractors and suppliers with potential Mechanic’s Lien rights.

• Subcontractors – Forfeiture of right to file a Mechanic’s Lien claim.

* Note: Owner or contractor may not require or request that subcontractor not file Notice. (Or mislead subcontractor that Project is not a searchable Project)

Additional RequirementOwner Notice Posting Requirement

• Owner must “conspicuously” post a copy of the Notice of Commencement at the project site (until project completed).

• Must be posted before physical construction begins.

How do I Find Out if the Project I am/will be Working on is a “Searchable Project?”

1. Ask Owner2. Ask Contractor3. Review the Contract 4. Look for Notice posted on Project site5. Access the Directory and search by:

a) Countyb) Owner namec) Address of Projectd) The unique Directory Project number

Important Note

The Amendment’s new requirementsDo Not affect or do away with the existing subcontractor

notice requirements for perfecting a mechanic’s lien. Subcontractors must still comply with the Notice of Intent to

File a lien requirement in the law.

Waive Lien Rights…Or Have Lien Stricken By Court

So, How Many Ways Can I Mess This Up???

Asserting Payment Bond Claims

• Public Project Bond Requirements• Performance Bonds – Protect Owner• Payment Bonds – Protect Subcontractors and Suppliers• Contractors must furnish bonds

Federal Project Bonds

• Miller Act (40 U.S.C. §270(a), et seq.)• Little Miller Act (8 P.S. §191)• Projects over $5,000.00

Who is protected by bonds?

• Subcontractors• Sub-subcontractors• Suppliers

All are potential “Claimants”

Notice Requirements

• If Claimant does not have a contract with the contractor who provided the payment bond, it must provide written notice to the contractor within 90 days from the date of last work or last day materials were supplied.

• Notice to be sent by registered or certified mail.

* Suggest sending copy to owner and bonding company as well.

Turn Over All Stones for Potential Payment Remedies

Private Project Bonds• Bonds may be required by private project owners too. • Always check this possible remedy.

Statute of Limitations for

Bond Claims

ONE YEAR

Extent of Surety’s Liability

Or What Can Unpaid Sub or Supplier Get?

• Payment for labor and materials provided• Exclusions:

• Lost profits• Negligence damages• Attorney Fees• Delay Damages

Golden Nuggets

• Ride herd on accounts receivable• Note critical dates for statutes of limitations• Obtain copy of all bonds• Do not attempt to assert claims without assistance from

experienced counsel

Financial Reporting Considerations

Reflecting Contract Receivables in Financial Statements

Overview

• Accounting / Reporting for Delinquent Payments• Why Does it Matter?

• Evaluating Contract Receivables• Mechanics Lien / Payment Bond

• Impact on Unbilled Revenues

• Consideration of Impact on Payables

Why Does it Matter?

• Fiscal Planning• Cash Management Considering At-Risk Customer/Owner Receivables

• Transparency – users of the F/S need to know exposure• Full Financial Statements vs. Internal Reporting

• Bonding / Banking Implications

• Subcontractors

• The Rules• Impairment of Receivables

• Contingent Losses

• Disclosures

Why Does it Matter?

• The Rules• Requires recognition of a loss when BOTH of the following conditions are met:

• Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired at the date of the financial statements

• The amount of the loss can be reasonably estimated.

• When both conditions are met – a “Loss from Uncollectible Receivables” should be accrued and reported.

• Disclosures: If no accrual is made for a loss contingency because one or both of the conditions above are not met, should disclose:• The nature of the contingency• An estimate of the possible loss or range of loss, or statement that such

an estimate cannot be made

Evaluating Contract Receivables

• General Procedures• Evaluation of specific at-risk contract receivables

• Consideration of general risk / reserves

• Considerations for Receivables Subject to Filings• Remember – Probable and Reasonably Estimable

• Were all steps properly followed to secure lien rights? • Remember: “Unforgiving Statute – Strictly Interpreted”

• If YES – likely NOT a probable loss, consider Disclosure

• If NO – determine any other remedies, likely PROBABLE LOSS – record provision

• Earlier identification of exposure = easier conversation with stakeholders

Evaluating Contract Receivables

• Other Financial Reporting Considerations• Impact on Unbilled Receivables

• Impact on Other Project Billings – Same Owner / Prime

• Adjustments to Subcontract Payables? • Consider Pay When Paid clause w/ your subs when you conclude you might not get paid

• Going-Concern Considerations

Questions?

Michael Hoffner• McKonly & Asbury

• Partner

• mhoffner@macpas.com

Thomas Williams• Reager & Adler

• Attorney

• twilliams@reageradlerpc.com

Building SuccessfulEmployee Relationships

A Cornerstone to Fraud Prevention

and Risk Management