Don’t Let Your Mechanic’s Lien Expire

One of the most useful collection mechanisms available to contractors is the mechanic’s lien. I have previously talked generally about what a mechanic’s lien is and how your attorney goes about drafting and recording it. Getting the lien recorded against the recalcitrant homeowner’s property is not the end of your duties, however.

A mechanic’s lien encumbers the property you performed work on, but only for a limited amount of time. You have only six months from the last day of work to get a lawsuit filed to foreclose it. The last day of work is not necessarily the day the job passes inspection — it is more likely the last day your crew legitimately “put hammer to nail” on the property subject to the lien as part of the same job. You did remember to have your crew write down that date so you could record it in your customer files, right? Until this six month deadline runs, your lien is enforceable.

If the homeowner tries to sell or refinance the home while the lien is enforceable, the title company will likely notice the lien and ask for a payoff figure before the transaction can close. Some title companies will still ask for payoffs to clear liens that are stale or have expired, just to be safe, but some will simply ignore a stale lien.

To be safe, don’t let your lien expire. Within the six months, hire an attorney and start a lawsuit. It has to be filed in a particular kind of court in a particular jurisdiction, and you need a special document called a “Notice of Lis Pendens” drafted and recorded, as well. I will discuss some of the details on this issue in future blog posts.

This post does not constitute legal advice. If you need legal advice, please contact our office to set up an appointment.

Preventing Your Salespeople From Changing Your Contract

Many companies, particularly contractors, use independent contractor salespeople to market themselves to the public. This can be a cost-effective way of doing business, but is laden with pitfalls. The one I wanted to focus on today concerns controlling what exactly your salespeople are doing and promising in the field on your behalf.

An independent contractor is, by definition, more independent than an employee. That does not mean you have no influence whatever over what he or she does, of course. The foundation of a good independent contractor relationship is a contract that clearly spells out the duties and obligations of the contractor and the business. Does your salesperson just get a signature on a customer contract, or are they also expected to organize subcontractors, collect money for the job, or other tasks? Is there something in writing to which your office staff can refer to figure out what the contractor is supposed to do as opposed to what the office is supposed to do?

Telling the salesperson what her authority is may not be the end of the story. You should communicate this to the customer as well. This can happen in the contract that you allow the salesperson to distribute. Your customer contract, for example, can explain whether or not the salesperson have authority to sign contracts for your company. It can (and probably should) explain that the salesperson has no authority to vary the terms of the agreement, such as price, and no modification to the contract is effective unless made in writing signed by your company and the customer. If you do not warn customers that the salesperson does not have this authority, they might defend against a collection action by arguing that it appeared the salesperson had authority to change your contract — even if your contract with the salesperson forbid them from doing so!

Even if you carefully define the salesperson’s duties and warn the customer about what the salesperson cannot do, you still must be vigilant about what the salesperson is doing in the field. Are they creating a paper trail that a wily customer will use to try and get out of paying you? Are they cutting deals (such as paying the customer’s deductible) that are going to cause a problem with the insurance payment? Particularly if they get paid on commission, the salesperson might have an incentive to sweeten a customer’s deal in unlawful ways without your knowledge. You may wish to hire a law firm, like ours, that offers classes to your contractors and employees on a regular basis to remind them of what they cannot do.

This post does not contain legal advice. If you need legal advice, please contact our firm to schedule an appointment.

So You Messed Up Your Mechanic’s Lien

If you are in business long enough, it is going to happen. Perhaps you did not get information to your collection attorneys on time. Maybe you miscalculated the last day of work and missed your deadline. Perhaps the lien is in the wrong name, or wrong amount.

For these or many other reasons, you may find that you cannot enforce your mechanic’s lien (or that it is unwise to do so). In this case, you are not necessarily without options. Your right to collect against the non-paying homeowner under your contract remains intact. If you are a subcontractor, your Trust Fund remedies against the general contractor might still be available. You can also attempt to collect under theories of unjust enrichment or others that do not necessarily rise and fall with the validity of the lien. That is, if the homeowner owes you money, you can sue on the contract independent of the mechanic’s lien itself.

Of course, without a lien, you are typically in the same position as a credit card company. You are an unsecured creditor. The biggest difference between suing the homeowner individually on the contract and suing to foreclose your lien is basically the time it takes you to get to the property. If you successfully foreclose a lien, you typically get a judgment for foreclosure immediately upon judgment and you can begin foreclosure proceedings. The case might also be more limited, letting your attorney move it more quickly through Court. Without the lien, it might take longer to get to a judgment, and then you have to perform collection activity after the judgment to finally attach the house and foreclose. Even worse, if you have no lien or lis pendens on file during the lawsuit, the property might be sold to someone else before you get to a judgment!

Depending on the facts of the particular collection, our firm has many ways to keep you and your collateral protected during the proceeding. Whether you can use these protections — and whether there is actually enough value in the collateral to make it worthwhile — are important questions we can only answer after a consultation. So, while nothing in this post is legal advice, you can contact us to set up a meeting to discuss your situation if you need legal advice.

Keeping the Mechanic’s Lien Alive

If you have properly recorded a mechanic’s lien, you have a lien against the property. However, you need to take additional steps after recording the lien, or your rights go away by operation of Colorado statute.

In Colorado, no mechanic’s lien can encumber a property longer than six months after the last day work was performed on the property. To keep your lien alive beyond this point, you need to start a lawsuit to foreclose the lien in the Colorado courts. You also have to go back to the Clerk and Recorder’s office and record a notice that the lawsuit has been filed on the lien. Attorneys (still in love with latin) call these notices “Notice of Lis Pendens.”

The Lis Pendens document is not itself a lien on the property. Instead, it is notice to the world that there is a dispute pending over who owns the property. In this case, it tells people that you are foreclosing your mechanic’s lien. The owner is still technically free to buy and sell the property, but he or she will find it very difficult to find a buyer. That is because the new buyer will be bound by the lawsuit, and will lose the house if you win the foreclosure! Similarly, title companies and lenders typically will not help someone buy a house stuck in a lawsuit over ownership.

There are times where, due to mis-communication or clerical error, your staff will not get a mechanic’s lien filed on time. This is particularly true where you do not have corporate or collection counsel handling these issues. In that case, all is not necessarily lost. You still have options, and a good attorney can even show you how to go after the value your company has sunk into the house even without a mechanic’s lien. I will talk about this issue in future blog posts.

Collecting from Your Customer’s Insurance Companies

From roofers to chiropractors, many professionals sell services to customers with the understanding that the customer does not have the money to pay today, but will pay once an insurance company gives them an award.  By their very nature, these kind of insurance claims tend to involve a lot of money.  Sometimes, the customer’s temptation to put the money to other purposes is too much.

We have seen many situations where the customer, after getting service, simply decides not to turn over the insurance proceeds. This is particularly true today, where unemployed customers might be desperate to save their homes or cars from repossession, or, they need a new car, a new refrigerator, or a vacation.  When this happens, what can the company do to collect?

The insurance company may not help you; it usually has no direct obligation to you, the contractor, doctor, or other professional.  It only has a contract with its customer.  Once it issues a check to the customer, the insurer will typically wash its hands of the situation.  It may not even talk to you at all.

So, what do you do?  You always have options, including suing your customer.  But, it’s best not to have the problem to begin with at all.  Some companies have had an attorney draft their contracts in such a way that there is a remedy under the contract for non-payment.  For example, medical provider’s contracts can require the patients’ attorneys to commit to turning over funds received from an insurance company or face their own liability.  A contract can contain instructions directly from your customers to their insurers regarding your payment.  We also draft contracts for construction contractors that set up a “trust fund” in favor of the contractor.  Remedies need to be set up before you get into trouble.

In future blog posts, I will discuss some of the other big advantages you can garner from proper contract planning, including options to multiply the damages you can recover against recalcitrant customers, or even prevent a customer from dodging your debt by filing a bankruptcy.

This post provides general legal information, but does not constitute legal advice.  If you want legal advice specific to your situation, contact us to set up a consultation.