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Don’t Let This Happen to Your Preliminary Notices!

The following was first posted on our blog in 2011. It is as relevant now as it was 8 years ago. This is a true story and it can happen to you if one of these behaviors finds it’s way into your Preliminary Notice processing: Carelessness or Ignorance. All to often we hear from customers who may have prepared their own preliminary notice or had it prepared by a service who uses a “cut and paste” process for preliminary notices.

“Don’t let this happen to your preliminary notices”.

Case Study: Breach of Contract & Foreclosure of Mechanic’s Liens

Improperly Served Preliminary Notices Cost Client More Than $50,000

Properly executed Preliminary Lien Notices would have saved our client significant legal fees and allowed them to collect on unpaid receivables.  Following the 20-day notice requirements is critical to a successful and enforceable mechanic’s lien, stop notice, and/or payment bond claim.

Background

Cummins & White, LLP, represented a commercial sprinkler supply company (Plaintiff) in litigation brought against property developer, Lennar Homes of California, American Contractors Indemnity Company, La Costa Verde, Inc., and an individual (Defendants).  The commercial sprinkler supply company has been serving the landscaping industry for more than 30 years from multiple locations throughout California.

In 2009, the sprinkler supply company entered into an agreement with the property developer’s subcontractor, La Costa Verde, Inc., to provide irrigation and landscaping materials for a new housing development in the San Diego area.  The company furnished materials and services between October 2009 and February 2010, and provided invoices for payment.  When payments were not received, the company recorded two separate mechanic’s liens and subsequently sued Lennar Homes and its subcontractor, claiming breach of contract and requesting foreclosure of the mechanic’s liens.  Damages sought totaled more than $65,000.  The mechanic’s liens were processed by company employees and served from corporate headquarters.

Legal Defense

In 2011 (two years after supplying the materials), the sprinkler supply company retained Cummins & White to proceed with foreclosing on the mechanic’s liens.  After careful review of the case, attorneys Jim Wakefield and Charles Murawski advised the company that there might be issues with the way the mechanic’s liens were processed and recorded.

The Defendant’s legal team also found similar issues with the mechanic’s liens and filed a motion for summary judgment to have the case dismissed without further action.  The issues raised in connection with the mechanic’s liens were pursuant to California Civil Code Section 3097.1(c) and included claims that the sprinkler supply company:

  • Did not serve the Preliminary Notices with affidavits of proof of service.  Subsequently, the person who served the Preliminary Notice was not available to testify that she had complied with the code.  Therefore, the company was unable to conclusively prove that the Defendants were served in compliance with the code.
  • Sent the Preliminary Notice to an incorrect address.  Therefore, the Defendant was never served.
  • Specified that materials supplied were for specific units instead of the entire track of homes.  Therefore the company had to provide proof that those materials were actually used within or for the specific property units.  This was not possible.
  • Sent one Preliminary Notice for two defendants (La Costa Verde and Lennar Homes).  In practice, each Defendant must be served separately under its legal name and proper address.

Result/Implication

The judge agreed with the Defendants, citing that the sprinkler supply company had not satisfied the prerequisites to the validity of a mechanic’s lien.  Based on the company’s failure to properly execute the Preliminary Notices, it was unable to collect on outstanding balances rightfully owed and incurred significant legal fees in trying to collect.

Cummins & White regularly handles mechanic’s lien cases, which are typically easy to prove, especially for companies that supply products, such as electrical, plumbing, and landscaping suppliers.  If the supplier upholds its end of the agreement by supplying products, defendants typically do not have any legal reason not to make payment.  However, a simple mistake made in filing a Preliminary Notice could be very costly.

Many companies choose to handle Preliminary Lien Notices in-house in order to save the costs of hiring a professional lien processing company.  However, when the company employees do not address details, this could end up costing a company a lot more than it ever imagined.  The State of California requires strict compliance with Civil Code Section 3097, and by failing to meet even one criterion, a company permanently risks the ability to collect for materials supplied.

The statutory prerequisite for an enforceable mechanic’s lien, stop notice, and/or payment bond claim is the presentation of a valid 20-day preliminary lien notice.  If you fail to meet the statutory requirements relative to the form of the notice, timing of the notice, and service of the notice, your lien, bond, and/or stop notice claim may be denied.  As a result, following the 20-day preliminary lien notice requirement is critical to a successful claim.

Using a secured interface

Is you’re confidential customer information being digitally compromised?

 

Paper forms, Word documents, Fax machines, are just about gone from today’s business environment. The internet has now all but commandeered the way companies connect with each other. eMail, file transfer, web forms, apps have pretty much replaced the old way of doing business.

The new choices are faster, easier, more convienent and also subject to being electronically compromised. To avoid this vulnerability, smart businesses are using secured, encrypted websites and communications tools like “Exchange Server”.

If your business is relying upon outsourced services like CRM. It is wise to make sure that everything you do, which involves the exchange or sharing of confidential customer information, is done so in the safest digital environment available.

We at CRM want you to know that all of our online service:

  • crmlsi.com
  • crmlienservice.net
  • eSystems
  • eGreenies
  • eRequest1
  • eTransfer

even our 50 state guide (which does not require the sharing of any confidential information) are completely encrypted using authorized and signed, SSL (Secured Socket Layer) Certificates. This layer of digital protection allows you to be confident that your information, while being entered, transferred or returned from CRM is completely safe from the prying eyes of scammers or even worse, your competitors.

To learn more about how your customer information is protected, contact CRM Lien Services, Inc. “Serving Industries that build America” for over 30 years

Proof of Preliminary Notice Delivery

When will you need “PROOF” that your preliminary notice was not only served but also received, by an authorized representative of the entity named in the notice?

So it looks like the operative word here is “PROOF”. However, it is not. The truth be told, the operative word is “When”. When might you be asked to prove that the entities named in the preliminary notice actually received the notice? Because most preliminary notices completely satisfy the statute as long as the notice is served within the time frame and by a method, approved within the statute. Then why require “PROOF” of receipt? Because most Mechanics Lien Statutes ( which differ than the Preliminary Notice Statute) require that you not only prove that you served the preliminary notice, but also prove that the entity being served did in fact receive it.

Confused?

Here is the bottom line: Most, perhaps as many as 99%, of all preliminary notices, do not result in supporting a Mechanics Lien. The preliminary notice usually is released or reaches the end of it’s life when the job is completed and some time has passed (usually 90 or 120 days). If your company serves many preliminary notices during the course of a business year, and only a handful become needed to support a mechanics lien. Why spend a considerably higher amount for Certified Mail Return Receipt, or FedEx, or Process Server, or other delivery methods allowed within the statute. When less than 1% of your preliminary notices result in a Mechanics Lien?

Some may answer that the 1% risk far out ways the extra cost for being secured on each and every served preliminary notice. This is surely one way to evaluate the risk. However, when we return to the original operative word; ‘When”. We find that the “When” can easily, and very cost effectively, be satisfied by securing “Proof of receipt” anytime up until 24 months, after the notice was served.

So one may subject themselves to being penny wise and dollar foolish by paying 10% to 20% more for every preliminary notice served during the course of the year. Or you can afford the same level of risk, and obtain a “Proof of receipt” on any job, which is lasting longer than 20 months, and be ready to advance your Mechanics Lien with legal copies of all the signatures required to make your Mechanics Lien ready for court.

If you need a solution to maximize this process, we recommend the CRM “eAlert Unlimited” service along with our request for “Proof of receipt”.

To learn more, just click on the eAlert Unlimited image below:

Never miss another Mechanics Lien DEADLINE

Confusing a Lien with a Prelim

So what’s the difference?

Here is a simple analogy:

Let assume that you want to see the latest summer blockbuster movie before it is out of the theater and only available on DVD or Streaming. You make plans to go to the theater on Saturday night. You arrive at the theater, parking is free and now you proceed to the box office. What happens next?

  1. You show them your prepaid ticket on your iPhone or
  2. You buy a ticket which is your admission into the theater to view the movie.

Here’s the analogy: The ticket (which you paid for) is your “Prelim” while the “Movie Viewing Experience” is your Lien.

So you need a ticket to see the movie the same way you need a prelim to have the right to file a lien.

Therefore, a prelim, or pre-lien is NOT the same as a lien.

Once you have clarity on the purpose and scope of these two very different documents, your ability to protect your job related accounts receivables will become a whole lot easier.

Another way to remember is:

  1. A prelim SECURES my RIGHT to file a lien
  2. A lien SECURES my job related unpaid accounts receivables.

Now the kicker: You must take one of the following three actions before either of these documents will result in collecting your job related accounts receivables:

  1. Sign a release of your lien in exchange for payment in full from the entity named in your lien.
  2. Negotiate payment terms and refile an extended lien.
  3. Have your attorney use the lien as a basis upon which to file a foreclosure lawsuit against the property named in your lien and collect the amount claimed in your lien from the proceeds of the sale of the property.

This is a very simple yet accurate summation of the prelim/lien process. However, there are variables that can affect any of these conditions:

  1. Timing (time to serve your prelim, time to record and serve your lien, and time to commence a foreclosure lawsuit).
  2. Not all states require a prelim (check the CRM 50 state guide)
  3. You must be legally eligible to claim a lien (A contractor with an expired license, may not be able to claim a lien)
  4. Not every state offers the option to extend a lien.

Need more information on these and other options for methods to secure your job related accounts receivables?

What do we mean by “going the extra mile?”

How? How is CRM doing more without raising their rates or adding for extra charges?

Be certain of one thing, when the research is completed on your preliminary notice, and two or more reputable sources have been used to confirm the location of the Lender, or the Owner, or the General Contractor, and after your preliminary notice is served on the entity at the verified location, and USPS returns the service to CRM stating the address is invalid, Now What?

Should we just ignore it? Should we take the position that an attempt was made according to the requirements of the state statute so nothing further needs to be done? Perhaps just take the returned service and attached it to the original file in order to prove service was attempted but not completed because: “The Owner, Lender, or GC” moved and their new address was not available at the time the research was conducted.

We could just come back to you and report that service was attempted and should be valid to support your lien rights, perhaps request that we attempt a second service at an add on fee. But that would not, in our business model, qualify as “Going the extra mile”. It would be more of an excuse and a compromising delay of time.

So when this occurs, and it surely can, CRM will automatically perform a second search and locate any new mailing address, and RE-SERVE the notice at NO ADDITIONAL CHARGE to you.

Why?

Because simply complying with the statute does not put the notice infront of the entity that will ultimately be preparing your payment, or at the very least, influencing your payment. You are using our service to protect your lien rights and to GET PAID FASTER!

At CRM this is a commitment. It is part of our culture. Time is of the essence, and delays in processing may not only compromise your lien rights, but they can also slow up your payments.

Not acceptable at CRM and for that reason alone, We do

GO THE EXTRA MILE!

Ask others about their experiences using CRM. You will not find a more dedicated business partner who really cares about protecting your accounts receivable.

For more information:

Stop Date – a moving target

When do your Lien Rights begin to wind down?

Most states, not all, have statutory conditions which offer a subcontractor or materials supplier 90 days from last supplying or last performing work on the project, to record and serve a mechanics lien. This should be easy to track. However, for many it is not. Why? Because stuff happens. You know what I am talking about: High order days, Exchanges, New Accounts, Sick Days, the whole enchilada. It’s called business. Thank God we have it. But at times it can be overwhelming.

You may ship materials to a project on day 1 and be finished. Naturally this means that you have 90 days from day 1 to record and serve your mechanics lien. But what happens when on day 32 the same customer orders another shipment for the same job? The simple math is:  you now have 122 days from day 1 to record and serve your mechanics lien. And should the same customer place another order on day 67 . . . I think you get the picture.

Your Stop Date or Last Furnishing Date is always subject to being a “Moving Target”

As long as that target continues to advance, you have a longer time to concern yourself about filing a lien. Bottom line is that you will always have 90 days from the date you last supplied or performed work. (Of course we are referring to states were the statute allows 90 days) So the challenge with the Moving Target is: How do you track it?

One of the best answers we can provide is:

 

 

 

Using eAlerts Unlimited and the eAlerts Reporting Process, you will have one of the most efficient tools for keeping track of this moving target. It does require a little work on your behalf. (Upon receiving your eAlert Report, you will need to check your clients job accounting file and note any new shipments, or workorders.) However, the report will guide you through every open Preliminary Notice, sorted by job site and your customer, and allows you to simply jot down the most current ship/work order dates on the report, then email the eAlert Report along with your updated status, back to CRM.

Once your review with updates of the eAlert Report is received, your moving targets will be indexed and your ongoing reports will be one of the most useful accounts receivables management tools in your credit and collections toolbox.

For more on eAlert Unlimited, select the image above.

Making sense of Texas Retainage Notices

So the law reads that your “Notice of Retainage Agreement” must be served not later than the earlier of:

The 30th day after the claimant’s agreement providing for retainage is completed, abandoned or terminated. or the 30th day after the date the original contract is terminated or abandoned.

So what is being implied:

  1. The owner of the property will comply with the law and retain 10% of the monies as proposed in the General Contractor’s Contract.
  2. If you are the original contractor and possible a first or second tier subcontractor or materials supplier, you are automatically subject to this retainage condition.
    1. To further protect your earnings, it may be wise to have your client sign a contract which includes a retainage agreement which stipulates the exact amount you are agreeing to have withheld until retainage is due and payable.
  3. To be in compliance with the time allowed for you to serve a “Notice of Contractual Retainage” you must be aware of when you finish on the job and also when the general contractor finishes on the job. If you finish before the general, then you have 30 days from the date you finish to serve your notice. However, should the general contractor complete the project before you. (This may be theoretically impossible. But there could be a situation where your work may include some punch list items being addressed after the general has already signed off on the job.)

In either case the best strategy is to serve your “Notice of Contractual Retainage” as soon as you start. In Texas, the amount to be retained is 10% and you should be able to determine this amount on the day you start. So why wait, and run the risk of missing the opportunity to protect your Retainage? This could be your whole profit or a large part of it. To have it victimized by missing a due date is ridiculous. Keep in mind, the timelines listed above are deadlines. There is nothing to prevent you from serving earlier.

Keep in mind! The unpaid balance due you for the 90% of the work is separate from the 10% withheld retainage amount. You may NOT include retainage in a mechanics lien for the unpaid balances earned through the base contract, unless you are able to file a mechanics lien after all terms have been satisfied and all or part of your contract remains unpaid. However, should the terms for the retainage be unsatisfied at the time to bring your mechanics lien forward, you will need to file a mechanics lien for the unpaid contract and upon satisfaction of the terms for the retainage agreement, perhaps a second mechanics lien for the unpaid retainage

Don’t let your Retainage be compromised. You will need to serve this notice to protect your Retainage. So better to act sooner than later.

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Why can’t I lien my customer?

Seems like a logical assumption. You provided materials or services to your client and they have the ultimate responsibility to pay you. So why can’t you put a lien on them?

The answer is a little complex but I will do my best to clarify. The primary concept you will need to wrap your mind around is:

Mechanics Liens may only be placed on REAL PROPERTY

 

Now chances are that your agreement with your customer is that they pay you by cash, check, or some sort of transfer of money into your account. You cannot put a lien on money* so there is no mechanism for you to put a lien on your customer.

However, your customer does have an obligation to pay you. So when your customer decides not to pay you, the best option is to consider filing a “Breach of Contract” Lawsuit. or if the amount owed is within the limits allowed by the local “Small Claims” Courts, then consider filing a “Small Claims” action. This is surely a method available to you to secure your unpaid balance. However, these options may cost much more than the cost to place a mechanics lien on the REAL PROPERTY you helped to improve.

So, while a mechanics lien may not be used against your client. It can, and should be used, to secure the amount due to you from your client because the “FINAL BENEFICIARY” of the materials or services you provided is the Owner of the Real Property.

So the next most asked question is: Can I do both?

Can I lien the job and file a Breach of Contract Suit against my customer? Yes you can. BUT!

There is always a “but”. You may only collect once for the amount due to you. You cannot collect twice for the same balance due.

So we get down to asking: What is the wisest business decision?

My thinking is to file the mechanics lien. Why? because chances are that your customer is not paying you because they have not been paid for the work they performed on the same project in which they hired you. So if they were paid, the breach of contract suit becomes more strategic. But if they are still waiting to be paid, then the mechanics lien may be your most efficient method.

This subject can get a lot deeper depending on many different conditions which may exist. But to answer the question: Why can’t I lien my customer? this should provide you with a good understanding.

One last point. The mechanics lien can be a little tricky. It must be done properly to have any real impact. Make a small mistake and the time and money you invested in your mechanics lien may be easily squandered. Unless you are experienced in the preparation of mechanics liens, we recommend you consider using CRM Lien Services as your professional resource for this process.

(* you cannot lien the money your customer owes you. However, in some cases it is possible to put a lien on the money which is being used to fund the project – see Stop Notice or Lien on Funds)

I filed my lien . . . now what?

This is a very common question once a mechanics lien has been filed and served. The most important thing to consider is that your recorded mechanics lien: “Is not an end in itself”.

Most states offer two distinct options for a recorded mechanics lien. Some offer a third option which will be covered later. The first thing to be aware of is the “Life Cycle” for your mechanics lien. In many states the mechanics lien will become invalid 90 days after it has been recorded. Meaning that all of the time and expense you incurred to protect your lien rights and file your lien, will go down the drain on the 91st day. Why?  . . . because you must take action to advance your mechanics lien.

The most common action is to release your mechanics lien. This is the least expensive and is required if within the 90 day life cycle of your mechanics lien, the property owner has paid you for the full amount, or an amount which you have agreed to settle your claim of mechanics lien. Of course this action, releasing the lien, is only a viable action if you are paid. Should you not be paid, you must present your mechanics lien to a licensed attorney and have them begin a “Foreclosure Lawsuit” before your mechanics lien expires. This can be expensive. However, you may be able to capture your expenses should you win your case in court and request the judge allow recovery of your expenses in addition to the amount claimed in the mechanics lien.

Remember Option #1 Release of Lien (inexpensive), Option #2 Foreclosure Lawsuit (expensive)

Now there are some states, California for example, which offer a third option.

Option #3 Extend your mechanics lien.

This option buys you time (as much as 270 additional days) before you must start foreclosure. But the Lien Extension will cost you the price of a new mechanics lien. While the lien extension is designed to lengthen the time allowed to settle the claim, it must be agreed to and signed by both the claimant and the owner. Set terms for payment of the claim must be declared in the lien extension. And the claimant may advance the mechanics lien to foreclosure anytime during the extension if the terms of repayment are breached.

Not all states have this option but for those that do, it presents a very affordable and secured method to collect on your mechanics lien claim while holding the property in a collateral position.

Now with all of that said, be aware of the 91st day! Your mechanics lien, if left without action for 90 days, will become invalid and a cloud against the title of the property will be created. Your mechanics lien must be removed, with prejudice, when requested by the owner. It makes no difference if you have been paid or not. You are only allowed a limited period to take action with your mechanics lien. Should you let this time slip by. You will be literally up the creek without a paddle.

Have questions? Call us. We can help.

If my customer serves a prelim will I be covered?

My customer, who is a local distributor of roofing materials, served a prelim on a job and I will be supplying the roofing materials to the job and invoicing my customer. Am I protected under his prelim?

Short answer is ABSOLUTELY NOT and there are many possible reasons why you are not protected.

To start, the property owner has the ultimate responsibility to become liable to all who participated in the project who have a Right to Lien as evidenced in the most current state statute. When the statute demands that all who may be able to claim a lien must first notify the owner with a properly prepared notice. Then this means you, not your customer.

It is also possible, as in this example,  that you may be providing materials to another supplier who in turn is supplying to the job. This would be viewed as a Transfer of Inventory even if you shipped the materials directly to the job.

Many other conditions could impact your ability to have a Right to Claim a lien on a project. It is always best to request a prelim from CRM on or before the day you ship materials or start to work on a project. Let CRM conduct the research and make certain that you have a properly prepared and served notice to secure your Right to Lien.

There are many examples of conditions, which could exist, which may impact your Right to Lien. From a suspended or delinquent Contractors License to a misrepresentation of your business entity by failing to properly state your legal business identity on your contract or your clients order for services.

Keep in mind. This whole process of serving notices is driven by strict compliance with the laws that govern improvements to real property. Something as simple as forgetting to use “Inc.” after your company name when your are in fact an incorporated business, may invalidate your notice. Don’t take chances. When you have an experienced company like CRM prepare your notices, you may expect them to “peel back the onion skin” and look for all of the details, which those who may want to invalidate your Right to Lien, are hoping you overlook.

Here is the bottom line! When you have true lien rights to protect, you do not want to make a simple mistake that could cost you your lien claim after you have spent a ton of money to enforce your claim. Silly things like

  • Claiming a lien right or a lien under a business name of which you have no right to lien. (That is why CRM request that you enter into a “Service Agreement” with CRM.  This allows CRM to confirm that the notices we serve for you will actually protect you because you proper business identity is listed in the notice)
  • Or trying to claim a mechanics lien for the sale of some services or materials that could not be substantiated as having improved Real Property. ( Example: If you rented a Forklift to a job, you may protect the “RENTAL INCOME” earned on the Forklift ONLY IF the Forklift was used to help improve the Real Property. If the Forklift was used to unload tractor trailers of materials or supplies used in the business operations of the company whose property was being improved, then the rental income was earned but DID NOT help to improve the value of the real property.
  • Staying with the Forklift example: What if the Forklift is DAMAGED on the job? What if the cost to repair the Forklift is $10,000.00? Should you include the cost to repair the Forklift in your Lien? Most likely not. Why? The damage to the Forklift should be covered by Liability Insurance. (The Rental Industry usually refers to this as “Damage Waiver” Insurance.) So an insurance claim for the damages should be filed and this transaction should not be part of your claim for a mechanics lien.
  • Another scenario is when a Materials Supplier is supplying materials to someone else who has contract “to supply materials” to the project and they claim their right to lien for materials that you supplied. They are protected, you are not protected! If you try to claim a lien right it will be disqualified even if you delivered the materials to the job as a service to your Materials Supplier Client who ordered the materials from you. (Perhaps you should have sold the materials under a “Joint Check” agreement. This would help your protection if your client must go to court to collect on the materials you supplied.

There are many conditions which could surface in any business transaction. To be safe, we encourage you to use a service who ask the right questions and understands what it will take to make sure your notices do the job you expect them to do. To learn more about preliminary notices and other methods for securing your job related accounts receivables.

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