Liens - how they work

I work for a lighting company. We are a manufacturer’s rep, which means that distributors and contractors order through us. We had one company that was over $50k past due, but they needed to order more product. We refused until they were current and also told them that we would be filing a lien on the new purchase order as well.

They came current and we filed the lien, then I ordered the product and invoiced them. They are now close to $50k past due again on this job, only this time we have a lien. How does that exactly work? I called for payment and they said something about getting payment from their customer and then they’d be able to pay us, but I thought they couldn’t get payment unless we signed some sort of paper saying they paid us in full.

So I guess I’m confused as to how a lien works and how we are protected and guaranteed our money. Does anyone have any working knowledge of liens?

Are you sure you’re talking about a lien?

A lien is generally filed against real estate or titled property, like a car. It doesn’t in any way guarantee payment, it just keeps the owner from selling the property by encumbering the title. For example, if I had a contractor remodel my kitchen and then refused to pay him, he could then file a lien against my house. The lien acts as his claim against part of the value of the house, but that claim cannot effectively be enforced until I try to sell. A title search would show the lien and I would not be legally able to complete the sale until the lien was satisfied.

A don’t see how a lien would work unless the asset is titled or deeded in some way. I’m not sure how one could place a lien on a purchase order unless you mean that your customer’s client was to make payment directly to you until the PO was paid, then your customer could collect the remainder.

Also, depending on the wording and nature of the lien, after a period of non payment, you can move forward with a lawsuit which will then validate the lien and a payment will the be court ordered. If payment is then still not rendered, a forclosure could then take place.

I’m pretty sure that’s what they’ve been calling it around here. And if that’s the case, that hardly seems fair to the end user (who is not the one that owes us money). I wonder if there are different kinds of liens.

You (the OP) is probably talking about a mechanics’ lien. As the supplier of materials that are installed into buildings, your company might be entitled to a lien against the real estate on which the buildings stand.

Mechanics’ liens are created by statute. The rules governing their creation and enforcement vary widely from state to state. There can be a lot of technical requirements. Accordingly, I would strongly suggest that you do not rely on anything said here. Instead, talk to a lawyer in your state who can fill you in on the local requirements and help you pursue your contractor.

The only other type of lien that might apply here would be one created in the lighting fixtures under UCC Article IX, but there are problems with using that route if the lights are installed in someone’s building (or are resold by your debtor.)

(Usual disclaimer: Although IAAL, I’m probably not licensed in your state and cannot provide legal advice there. This is general information and not meant to be specific legal advice for you to rely upon. See a lawyer licensed in your state for that.)

Yes, I think it is a mechanics’ lien. That sounds familiar. And I’m not the one that will be handling the lien if the owner decides that we are never going to get paid by our customer. I was just wondering how it works - I mean if we file the lien on the real estate where our material is, that doesn’t exactly do anything to make our customer pay since why should they care if we’ve got a lien on property that isn’t theirs.

I was just wondering why would get a lien, why it appeased the owner enough to go ahead and order new product for a customer that’s already proven difficult. The property is a church, and I can’t see us going after them.

Because the property owner shouldn’t pay the contractor until all the lien claimants are paid. If he does, he does so at his own risk, and may have to double-pay. (Of course, he would then chase the contractor for reimbursement.)

It’s the same concept that would come into play if you bought a house without making sure the seller’s mortgage was paid off. If you fail to do so, the house you bought remains subject to the mortgage lender’s claims. (A mortgage is a type of lien.)

I am a contractor, and not a lawyer. I happen to know the laws in my state that govern liens quite well. (in fact better than my lawyer, and rely on a different lawyer who specializes in such matters when needing lien advice)

The statutes governing liens in your state can vary widely. In Ohio, I can file a lien very easily.** But**…if I have not “perfected” the lien by following a very specific set of time sensitive filing requirements the lien can be removed fairly easily. (by the property owner)

For 50K it is incumbent IMO that you go see lawyer immediately. To give you just one small example I need to file the lien within 75 days(on a commercial job) from the last time I provided material or labor to the job site or my right to lien may be lost. During the course of the job, starting at the very beginning, I am required to provide very specific documents in order to protect my right to lien. You might reasonably ask…How do I know at the beginning of the job that I won’t be paid at the end? The answer: I don’t. The law requires me to treat everybody fairly and that assumes that all of them won’t pay. They all get the filings. If I was doing a job for Mother Theresa she would get a request for the Notice of Commencment, file a Notice of Furnishings etc.

Sounds confusing? Good! If you’re in the business of providing credit, which is exactly what you do (did) you should know (or someone in your office should know) the specifics of the lien laws in your state. That goes for your current heartburn, but you should also establish a very specific protocal for protecting your lien rights and follow them on every job. (We do them for every job above $10,000)

I did a job a few years back and the general contractor went bankrupt. Of 14 contractors, 4 filed liens. Three liens were removed by the property owner. My lien was the only “perfected” lien. I absolutely refused to remove the lien. We were owed $106K and I settled for $100K. We were the only contractors to be paid more than a few cents on the dollar. Our backoffice processes on lien protocal saved us $100K.

Go see your lawyer, and if he/she doesn’t practice in that area, get a different lawyer who is knowledgeable in that area.

That’s my .02¢

Good advice. The exact time limits are different in Illinois, but meeting those deadlines is just as critical. It’s probably the same in whatever state the OP is from.

Actually, there is a thing called a security interest, which is a kind of lien. You can take a security interest in just about anything. Security interests are governed by Article 9 of the Uniform Commercial Code

But it does seem like we are talking about mechanic’s liens in this case. They get very complicated. Talk to a lawyer who does a lot of them.

And this from the OP:

How does that exactly work? I called for payment and they said something about getting payment from their customer and then they’d be able to pay us, but I thought they couldn’t get payment unless we signed some sort of paper saying they paid us in full.


A couple more practical things…(and I am NOT a lawyer, and my experience is in Ohio…)

The sort of paper you’re referring to is called a Lien Waiver, Release of Lien, or Lien Release. What happens in practice is this:

Assuming the church hired a general contractor (which based on the sums involved would be typical) before the end user (church) pays the GC’s bill they require a Lien Waiver that stipulates that the GC has paid all of the subcontractors and materialmen. (That’s you) The GC signs, and by doing so is stipulating that anyone who is owed money, and who may have a reason to file a lien, has been paid. He is further relinquishing his right to file a lien for that portion of the job.

Does he know that all subs have been paid? Sure he knows. He’s the one who’s hired the subs! Does he know if all of their materialmen have been paid? Nope. So, he continues the process by requiring all subcontractors to sign Lien Waivers when he disburses the monies he’s received from the end user. By signing, the subcontractor is stipulating that all subs of his and materialmen who may have an interest in filing a lien, have been paid.

Do GCs and Subs sign Waivers that stipulate that all subs and materialmen have been paid when they haven’t been paid? All the time. That’s because many companies don’t have the capital necessary to pay the subs/materialmen up front and need that payment to pay them. (Which is what your electrical contractor is telling you) But a responsible GC/Sub turns around and uses the proceeds from that “draw” check and pays the subs/materialmen immediately. Is it criminal to sign a waiver that states you’ve paid when you haven’t? Talk to a lawyer but in my experience it is. When companies are in trouble, they often sign Lien Waivers and have so many other bills that they can’t possibly pay everyone that should be paid. It’s often strong evidence of a death spiral.

Your electrical contractor (I presume it’s an electrical contractor) will care becuase it will damage his reputation and other GCs and end users will not work with him. Further, he risks being sued by the person who he has a contract with. Typically the property owner will be upset and go after the GC. (Not your electrical guy, as the end user has no contract with them) The GC will then go after your electrical guy. It’s a domino effect.

A lien will not guarantee payment. And I hate to say this but it doesn’t surprise me that a church went ahead and ordered more material. They are NOTORIOUS for not paying, or running out of money. Pastors typically act as their own GC and they’re usually not good at it. And, a lien is usually a problem when title is transferred. (i.e. sold) Churches are long time owners and might be comfortable with a lien on the property. They’re not going anywhere.

File the lien if you can. Another practical approach that often works is to make contact with the GC and the end user, putting them on notice that you are out there (Ofetn GCs don’t know if materialmen are not being paid) and that you intend to file a lien. that gets things moving quickly from my experience.

The other thing that I would suggest, and is usually more effective than liens, is when notifying the GC/end user that you’re not being paid, request that future draw payments be made in “joint-check.” Neither the GC or end use can pay you directly with the electrical contractor’s (EC) draw money. They don’t have that right. However, thay can protect their interests and the threat of a lien by issuing a check made out to both you and the EC. That way, the EC can’t take the check and not pay you.

One last caution…If contractor is willing to sign a Lien Waiver fraudulently, it’s easy to endorse a check with your signature. If the GC or end user agrees to issue joint checks, insist that they be done at their office. You can meet there, and the EC endorses the check and hands it to you. The GC cuts numerous checks and the joint check issued to you is for the specific amount you’re owed. If the EC is owed other money it comes in another check.

Nothuing I said here may be practical or legal in your state/circumstance. See a lawyer for sound advice. Make sure it’s a lawyer who works in the construction business.

That makes .04¢

Raindog knows his stuff. Good, practical advice there.

Thanks Random

Thank you, Raindog, that’s exactly the type of information that I was looking for. Fortunately, I don’t have to do any more than make a phone call to our customer to find out about payment - all the lien stuff will be handled above me. I was just curious as to how it ‘protected’ us, and it seems it doesn’t really.