(Published in the Idaho Business Review, April 2009)

  It is getting harder to collect money owed for goods and services provided.  In the construction industry, owners and contractors are finding creative ways to structure payments and "cut deals."  However, there are certain things that you must continue to do to protect yourself and there are certain pitfalls about which every contractor should be aware when cutting deals to get paid.  

You must continue to get personal guarantees from as many people as you can and keep in mind that it is often better to contract with an individual than a business entity.  Also, try to obtain financial information from guarantors and the other parties to a contract; a guarantee from someone with no assets is not helpful. 

Take action quickly as tardy payments often indicate financial distress.  Sometimes creditors hesitate to lien an ongoing project or one that involves someone the creditor knows well.  However, most people understand that you are just protecting your rights and a lien can easily be released once you have been paid.  If you are not the general contractor on a job, it is often a good idea to notify the general prior to filing, but be careful to not wait so long that you lose your lien rights.  

Often, by filing a lien quickly, while there is still money going into a project, the owner and/or lender will have more incentive to make sure you get paid.  Along those lines, it is generally smart to send a copy of your lien to the lender.  A lender may force the owner or general contractor to pay you before they will disburse any more construction funds. 

When contractors and material suppliers are owed money, debtors sometimes offer a promissory note to avoid an immediate collection action or lien.  Be careful before you accept a note in lieu of payment.  Often those signing the notes have little or no assets and even if they have assets when they execute the note, they may have none by the time they default and you file suit.  

As a result, promissory notes aren't particularly helpful unless they are secured by a pledge of assets.  Security can be in the form of a deed of trust/mortgage on real property or a security interest in equipment, investment accounts, or other assets.  However, assets pledged to secure debt may already be encumbered by other security holders and have no practical value as security.  

Additionally, laws related to how to "perfect" or lock-in those security interests are complicated and if not done right, you may end up with no real security.  Information on security interests in real property is available through the county recorder in the county where the property is located.  For other types of property, check the "UCC filings" with the Idaho Secretary of State.  

Accepting a promissory note can void your lien rights because in the eyes of the law it is the equivalent of getting paid.  Additionally, taking a mortgage or deed of trust in lieu of filing a lien almost always pushes you further down the line of secured parties on a piece of real property.  Also, if multiple parties were obligated to pay (such as guarantors) and you accept a note from only one party, you may not be able seek payment from other contracting parties or guarantors in the event you don't get paid in full.  There is also misconception that one can quickly obtain a judgment in lawsuits to collect under promissory notes.  As a general rule, lawsuits to collect under notes get resolved no quicker than any other lawsuit.  

On a related note, every business owner should understand the legal concept of "accord and satisfaction."  Here is one simple example in the construction context.  A contractor and owner agree the contractor will construct an office building for $100,000.  Upon completion, the owner questions the quality of the work and offers to pay $50,000.  To resolve the dispute the contractor agrees to take $50,000 now, with a promise from the owner to pay $25,000 in three months ($75,000 total).  The two write up a document to evidence their agreement.  The owner pays the $50,000 but refuses to pay the $25,000.  If the contractor did not specifically reserve the right to sue for $100,000 in the event the $25,000 was not paid, the contractor may be limited to sue for only $75,000.  

Another classic circumstance in which this arises is when a check or promissory note is received containing the language "payment in full" or some other similar language.  If you have not agreed to settle for a lesser amount than you are owed, review checks and promissory notes carefully.  If the instrument alludes to "payment in full" or something similar, and you accept it, you may be foregoing your right to collect the rest of the debt.  

Get guarantees, use your lien rights and be wary of pitfalls associated with cutting deals to get paid.  Being flexible with your approach to collections can help you make it through lean times but being careless can be detrimental to your business.

 
Jonathan R. Bauer is a partner with the law firm Meuleman Mollerup LLP.  He focuses his practice in the areas of business law (mergers/acquisitions/sales, financing, general corporate counseling), real estate law, and business succession planning.  Mr. Bauer can be contacted at 208.342.6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available at www.lawidaho.com.