In just two construction business bankruptcy filings from January 2022, 80 separate contractors were not able to secure their right to full payment leaving millions of dollars of construction debt unsecured.
The construction industry is volatile: 97% of surveyed construction professionals reported experiencing stress due to cash flow and payment-related issues and as a result, bankruptcies are unfortunately a common occurrence.
With over $3.3 million in debts to 51 separate contractors, Floridas Performance Paving Sealcoating & Maintenance filed for Chapter 7 bankruptcy late last month. Additionally, the recent collapse of solar firm Midwest Wind and Solar, which put dozens of contractors at risk, provides yet another example of the significant challenges construction businesses face.
But the bankruptcy filings of both Performance Paving and Midwest Wind and Solar reveal some concerning similarities: In both cases, the companies assets were not enough to pay off their liabilities, and the entirety of the creditors debt was listed as unsecured.
Mechanics liens are a valuable tool contractors can use to secure debt. However, they by contractors affected by this bankruptcy and there isnt a simple answer as to why.
Levelsets 2021 Construction Cash Flow & Payment Report found that only 71% of surveyed construction professionals reported filing a mechanics lien last year.
While this statistic has improved from just 58% in 2020, it still leaves almost a third of contractors who have not used a mechanics lien to enforce their right to payment.
Matt Viator, construction attorney and senior Legal Associate at Levelset, suggested the reasons for this may be varied.
5 years experience
Why arent contractors using mechanics liens? Viator suggests its usually for one of the following reasons.
In many cases, contractors may simply be unfamiliar with the process of filing a mechanics lien, said Viator. Even if they are, they may avoid it for some reason perhaps they think its too complex, or they are just a bit old school.
To be fair to contractors, filing a mechanics lien, while in theory a straightforward process, can be challenging to get right. The location and type of project can change the rules of the lien, and making a mistake can be incredibly costly even a small error can invalidate a contractors right to payment.
If contractors believe the risk or complexity of filing a mechanics lien is too great, they may be content to wait and hope for a natural resolution to payment issues.
Unfortunately, waiting too long to secure the right to payment can put contractors in a difficult position. Taking a contractors word that payment will come can be risky, according to Viator.
If a contractor is promised payment and strung along for too long, they can miss key deadlines for filing a mechanics lien, said Viator.
Contractors dont have forever to file a lien: While the deadlines vary by state, contractors generally have three months to a year after work completion to file.
Many states require a preliminary notice to be submitted prior to filing a mechanics lien. These are typically required to be submitted towards the beginning of a project, and if a contractor fails to do so, they will probably lose their right to submit a mechanics lien later on.
But in 2021, only half of contractors reported filing a notice on every job (up from just 29% in 2020).
If a contractor didnt file a mechanics lien, its possible they were late to submit the required notices, or never sent them at all, said Viator.
Preliminary notices are an effective tool to mitigate payment risk, but whether or not to submit a preliminary notice can be a tough decision for contractors.
Some contractors may think filling a preliminary notice will upset other parties, said Viator. They might also choose not to send notices unless theres actually a payment issue at hand.
To make things more problematic, notice laws vary by state and can be quite restrictive in Florida, for instance, a contractor has just 45 days from the start of a project to submit a preliminary notice.
Some contractors may also believe they never had any lien rights in the first place, said Viator. They may have misunderstood the rules or contract, or thought there was an enforceable No Lien Clause.
Whatever the ultimate reason for not filing a mechanics lien, contractors do themselves a major favor by factoring in notices and mechanics liens in their payment processes. Mechanics liens, which are for the most part bankruptcy-proof, allow contractors to secure their debt and protect their right to payment.
Whether or not the dozens of creditors involved in the bankruptcies of Performance Paving and Midwest Wind and Solar will be able to collect payment in full is unclear.
In both cases, liquidated assets will not be enough to make up for the liabilities. If the remaining unsecured debt is discharged, creditors may simply be out of luck.
Learn more: How to Protect Your Payments When Dealing with a Construction Bankruptcy
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