State Supreme Court Ruling Coming Soon on Risk Transfers to Subs

January 14, 2014

An important ruling in Transtar Electric, Inc. v. A.E.M. Electric Services Corp. on the issue of general contractors (GCs) using "pay-if-paid" clauses to sidestep lien rights and avoid paying subcontractors is expected to be handed down by the Supreme Court of Ohio by spring, sources in the state told NACM this week. Such a case is important to watch because, as NACM Secured Transaction Services' Chris Ring characterized it, such clauses are "a kissing cousin to a no lien contract" and an infringement on subcontractors' rights.

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Editorial: When Surety Fraud Goes Unpunished, Small Contractors Suffer

This email address is being protected from spambots. You need JavaScript enabled to view it., November 13, 2013

The forged Chubb bonds discovered this year provide evidence that the laws allowing individual sureties help criminals steal from the very companies individual surety is supposed to benefit: small and minority-owned contractors. More than 20 contractors have been defrauded of about $3 million by these bonds over an 18-month period, according to a new report on ENR.com .

The alleged forgers didn't bother to show up in federal court in Florida, where Chubb Group has won a civil judgment against them. The two defendants represented themselves to the world through websites as individual sureties.

Individual surety was intended to benefit small and minority contractors that had difficulty qualifying for a surety bond from a corporate surety, which is Treasury Dept.-listed and has substantial assets.

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UCC News Maker - 6th Circuit Appeals Court: UCC Filings Can Come Down to the Lowest Common Denominator

Recently the U.S. Court of Appeals for the Sixth Circuit, in 1st Source Bank v. Wilson Bank & Trust et al. (2013 WL 5942056 (No. 13-5088, Nov. 7, 2013)), ruled that even though a secured creditor had language on their security agreement that allowed them to take a security interest in certain intangible assets (accounts and accounts receivable), because that language did not make its way onto the financing statement, the secured creditor did not have a valid security interest in that collateral. This was a devastating blow to that secured creditor because accounts receivable is often a company's largest asset.

This was a blanket or basic UCC Filing which means the creditor did not have to search and notify previously secured creditors. Taking this example one hypothetical step further, if this had been a trade creditor taking a security interest in inventory through a Purchase Money Security Interest (PMSI) filing, the collateral description would've had to be an exact match on the security agreement, financing statement and search and notification letter. If the trade creditor had listed their inventory correctly on the security agreement and the financing statement, but failed to list their inventory on the search and notification letters, secured creditors who filed before that trade creditor could have argued, and most likely would have won the argument, that the trade creditor did not have a valid security interest in their inventory.

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News Maker – TEXAS

TEXAS – On November 6, 2013 the Texas Supreme Courts heard oral arguments in Zachry Construction Company v. Port of Houston Authority of Harris County, Texas, a case that could have severe ramifications for contractors and subcontractors state-wide. At issue is whether or not an owner can include clauses in their contracts that essentially protect them from ever having to pay delay damages, even when the owner's actions are intentionally or unintentionally responsible for the delay. In other words, the Texas Supreme Court will eventually rule whether "no damages for delay" clauses in construction contracts extend to delays caused, willfully, by the owner. A lower court, the 14th Court of Appeals of Texas, ruled that they did in August 2012: according to the American Subcontractor's Association (ASA), the court found that Zachry Construction Co. could not recover damages related to a delay that was caused by the owner's break of contract because of the presence of a "no damages for delay" clause. The court argued that "parties strike the deal they choose to strike and, thus, voluntarily bind themselves in the manner they choose."

According to Chris Ring of NACM's Secured Transaction Services (STS) "general contractors, subcontractors and material suppliers need to pay particular attention to and support ASA's arguments to overturn the "no damage for delay ruling," for if this ruling stands, an owner has the ability to willfully and negligently delay a project with limited or no recourse from downstream contractors and suppliers."

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News Maker – Louisiana

In J Reed Constructors, Inc. v. Roofing Supply Group, LLC, a split judicial panel in Louisiana's Court of Appeal for the First Circuit has affirmed a lower court ruling that says materialmen must provide notice to the general contractor and owner within 75 days of each month in which product was delivered or else they will lose the right to file a privilege or lien on the material from that time period.

Suppliers will have to file separate notice of nonpayment before 75 days from the last day of the month, every month, in which material was delivered instead of before 75 days from the final day it provided material, as most believed was the intent of existing statute. Both Daniel Lund III, Esq., partner with Shields Mott Lund LLP, and the lone dissenting judge on the panel criticized the ruling as a break from the logical, rational intent of the legislation. However, the other judges' reading of existing statute was consistent with that circuit's reputation of trying to avoid rewriting the law or acting as activist judges, said Lund. In essence, the ruling can be largely chalked up to vaguely written statutory language.

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Amendment to Virginia Mechanic’s Lien Code Approved

The Virginia General Assembly has adopted an amendment to the Mechanic's Lien Code providing that an unlicensed contractor may not claim a mechanic's lien if a valid contractor's license or certificate was required by law for the work performed. The bill also requires that the lien claimant place licensing information on the face of the lien memorandum, including the license number, the date that the license was issued, and the date it will expire, or certify in the affidavit that a license was not required by law for the type of work performed. This law firm did work with lobbyists and industry associations to get a revision that an inaccuracy in the license information on the lien memorandum does not invalidate the mechanic's lien if the lien claimant can otherwise be reasonably identified in the records of the Board of Contractors.

To see the text of the bill as currently drafted and adopted by both the House and the Senate, go to http://lis.virginia.gov/cgi-bin/legp604.exe?131+ful+HB1913S1

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News Makers - Oklahoma HB1087

HB 1087, an amendment to Oklahoma's mechanic's and materialmen's lien statute that provides for a lien filing to include profit and overhead costs, went into effect on November 1, 2013. A filer can now seek "an amount inclusive of all sums owed to the person at the time of the lien filing, including, without limitation, applicable profit and overhead costs." The requirements for filing remain the same.

This provision is the first change in many years to Oklahoma's lien law, and though this is the only change to the statute, the amendment wording has some saying it lacks clarity, leaving the door open for future debate. "I would assume the invoice that a vendor issues to his customer would include his overhead costs and any expected profit," said James Vogt, Esq., managing partner at Reynolds, Ridings, Vogt & McCart PLLC,Vogt. "When the legislature used the word 'including' it seems to confuse the issue. If the legislature had used the word 'and' instead of 'including,' it might be easier for a judge to interpret. I doubt this was reviewed by any lawyer and, as usual, the addition of these few words will probably create more legal work for lawyers."

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News Maker – California, Arizona, Nevada, New Mexico, Washington - Stop Notice Challenge

Mississippi's Fifth Circuit Court of Appeals' decision last month that rendered its Stop Notice statute unconstitutional could very well foster challenges in other states such as Arizona, California, Nevada, New Mexico and Washington that have similar Stop Notice statutes.

"I'm sure some GC will take a shot at it," said James Reed, Esq., partner at Baird Williams & Greer LLP. However, Reed is confident that any challenge would be extremely unlikely to gain traction as most of these states have preliminary notice language (e.g., 20 days in California and Arizona, 31 days in Nevada). This language distinguishes them from the Mississippi statute, which the court ruling noted as having a "profound" lack of procedural safeguards, in an important way. "The basis for the decision doesn't apply in the southwest," Reed said. "I don't see dominos tipping."

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News Maker – Mississippi

The United States District Court for the Northern District of Mississippi has ruled that Mississippi's Stop Notice statue is unconstitutional. The fallout from the decision is unclear, but it could make it more difficult to get lines of credit from suppliers and contractors.

The state's Fifth Circuit Court of Appeals affirmed a 2012 lower court ruling in the case Noatex Corp. v. King Construction of Houston, LLC that the Stop Notice statute, as written, violated the due process of companies. Therein, the court decision released in October included the following:

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New North Carolina P3 Law Includes Payment Bond Requirement

A new North Carolina law (Ch. SL 2013-401) authorizing the use of public-private partnerships and design-build on non-transportation public work in the state includes payment assurances for construction subcontractors and suppliers. The new law, which becomes effective on Sept. 22, 30 days after North Carolina Gov. Pat McCrory (R) signed the legislation (HB 857) on Aug. 23, 2013, requires payment bonds in the amount of 100 percent of the "total anticipated amount of the construction contracts to be entered into between the private developer and the contractors." North Carolina joins a growing list of states that have enacted laws to help assure that subcontractors and suppliers will be paid for work they perform and services they provide on construction components of projects financed through P3s. Depending on how a construction project funded by both public and private sources is structured, the project may be exempt from both payment bond requirements and mechanic's liens, leaving subcontractors and suppliers without payment assurances. In April, ASA unveiled a legislative work kit containing model state legislation to help ASA chapters address the lack of payment assurances for subcontractors working on P3 projects. The legislative work kit is available in the Government Advocacy section of the ASA Chapter Toolbox. ASA is also leading efforts before Congress to ensure that subcontractors and suppliers have the same payment rights on federal projects financed through P3s as they do on more traditional federal projects.

Source: ASA Today, the weekly news bulletin of the American Subcontractors Association

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