When Management Objects to Filing a Mechanic’s Lien

Filing a mechanic's lien can be a challenging process. It's a way to try to secure your rights and receivables, and allows flexibility to extend credit you might not typically extend. Several benefits come out of filing a mechanic's lien. Firstly, it helps with legal protection and ensures payment from the customer. Mechanic's liens also benefit subcontractors, customers, suppliers and all parties involved in the project—and can be a great way to maintain your customer relationships.

Before filing a mechanic's lien, consult with your internal business units to ensure all is in order:

1. Distribution: Were there any delays in delivering the product or product damage during delivery? Before filing a mechanic's lien, you must make sure everything functions properly.
2. Customer service: Check with customer service to see if there were any legitimate concerns the customer waged during the process of completing the order.
3. Manufacturing: If your company manufactures a product, check to see if there were any inefficiencies or problems with the product itself. As a wholesaler, you should also check to see if your manufacturer's customer has encountered any problems.
4. Installation: If your company provided the installation, check with project managers to assure there were no installation problems or delays. If your customer provided the installation, consult with your customer and possibly a project manager to assure your materials were installed correctly.
5. Rental equipment: If your company provided construction equipment, ensure the correct equipment was provided and in a timely manner.

So, now that all boxes are checked, you go with your gut and recommend filing the lien, but management overrides the recommendation. What do you do?

When faced with the risk of nonpayment, it's important to document the facts. If the credit department is recommending that a lien be filed, make the recommendation in writing, concisely describing and defending the recommendation. If the recommendation is not approved, ask why. It's important to understand management's concerns, hesitations and appetite for risk. Summarize management's reasons for denying your request to file a lien in writing to create a paper trail as memories fade over time.

As a lawyer, Michael Murray, Esq., associate attorney at Lanak & Hanna, P.C. (Orange, CA) said he deals with management's override to mechanic's liens almost daily. "The concern from the management side with recording a lien is alienating or upsetting a customer, especially if it is a good customer who maybe has not been paid on the project themselves," Murray said. "Recording the mechanic's lien will likely help you get paid, but it could also potentially upset your customer. The owner will get upset with the general contractor, the general contractor will get upset with your customer for not paying you and allowing a lien on the property. There is a delicate balance act between recording the lien and keeping the customer happy."

Some customers are treated differently from a collections perspective for various reasons. For example, if it's one of your largest customers, you may not want to step on toes when filing the mechanic's lien because the customer may think you are too aggressive with collection calls. "If the customer knows everyone, we can't afford to make them mad," said Chris Ring of NACM's Secured Transaction Services. "They could tell everyone else about what we did to them, especially if it's one of our oldest customers. We've been around them forever and don't want to lose them."

However, it is important to make sure all parties fully understand the process of a mechanic's lien and its impact. Management is most likely against the idea because of upsetting the customer and business relationship, but it is a team effort. Usually when conflict arises, it is a misunderstanding on how the lien will impact project players, explained Christopher Ng, Managing Partner at Gibbs Giden Locher Turner Senet & Wittbrodt LLP (Los Angeles, CA). "Typically, management is trying to figure out the pressure points and put themselves in the shoes of a customer they do not want to offend," Ng said. "The mechanic's lien is not a direct attack on the customer. So, when you exercise the remedy of the mechanic's lien on the owner's equity in the project, it allows you to put complementary or additional leverage on the owner. You're working as a team with the subcontractor to help push to get payment."

Interested in learning more? Register for our upcoming webinar on I'm Ready to File a Mechanic's Lien, but Management Is Against It. Let NACM's Secured Transaction Services (STS) be your choice to secure your construction receivables. Our staff, with construction credit experience, will help you maintain your rights.

-Kendall Payton, editorial associate