NACM Southwest members testified last week against proposed legislation that would change mechanic's lien notice requirements and deadlines in Texas during a recent Business and Industry Committee hearing of the Texas House of Representatives.
Although HB2237, sponsored by Rep. Dustin Burrows and Rep. Joe Deshotel (D), aims to simplify and modernize lien procedures, material suppliers who spoke out against the bill argued some of the changes will negatively affect their efforts to get paid.
Of greatest concern is the section that eliminates the subcontractors' and material suppliers' second-month notice to the original contractor. The notice is currently due the 15th day of the second month that follows the month in which work was performed or material was furnished.
"We utilize that second notice as a lever, as a tool to be able to collect the funds that we need to help keep our cash flow," said Jim Davis, director of SSC credit and collections at Lehigh Hanson. Davis said his company sends about 200 email reminders a month that let contractors know the company will be sending a second-month notice. The email reminders alone trigger about 75% of the outstanding funds being paid, he noted.
After the second notice is sent, Davis stated that the company receives 85% to 90% of total funds owed. Kim Lancaster, CCE, CICP and corporate credit manager of Standard Supply, shared similar experiences. In the past six months, Standard Supply has collected $1.4 million just by sending the notice, Lancaster said.
NACM Southwest members further testified that the second-month notice protects the flow of business.
"Our mechanism to help our company with our cash flow and to be able to sell some of these smaller, higher risk companies is our ability to be able to send that second-month notice," said Heather Kimmel, financial services manager at WESCO Distribution.
Kimmel explained that WESCO supports many different segments of business and sells to all levels of contractual chains. So many companies rely on the security of that second notice, she said.
During the hearing, Burrows defended his bill and stated it was not his intent to take away the right of suppliers and others to send the second-month notice.
Randall Lindley, a partner with Bell Nunally, testified as counsel for NACM Southwest. Lindley acknowledged that the bill clears up some inconsistencies, but he reiterated that the second-month notice is a useful mechanism. In addition to supporting collection efforts, it "promotes construction in Texas" because suppliers know they can rely on the notice, which helps them in their credit worthiness decisions, Lindley added.
The second-month notice also provides creditors with "the authority of law," he stated. If it were removed, users of the notice may run into tortious interference claims from general contractors, which would damage relationships throughout the entire chain.
Lindley also argued that a longer lull between notices would slowdown the time in which suppliers get paid and will inevitably result in more liens being filed.
Of the 17 attendees who spoke at the hearing, only three speakers spoke in favor of the bill. In their arguments, they claimed that this bill simplifies and modernizes current law to better support the construction industry.
As of Thursday morning, the bill is still in committee. See the April 1 eNews for more information on HB2237.
-Bryan Mason, editorial associate