November 11, 2010
*************
*************
Question:
************
Ken,
Obviously repossessing equipment is not the first goal. It is actually very likely a lose-lose scenario since costs will be incurred taking the equipment. While these costs are recoverable under your contracts, that former customer is likely judgment proof…i.e. insolvent.
My question is what are your thoughts on property lien filings. I’ve used these in commercial scenarios with a good deal of success. Typically a great deal of the value of the alarm system is made part of the real property of the building or home in the wiring. Other components usually qualify as fixtures. The property lien is effective because it often reaches into the interests of several parties who hold interests in the building. The property lien can also be filed late in the process for a lump sum of value based upon receivables. So, I’m interested in your opinion on the value and differences between a UCC filing and a property lien.
Thank you for your newsletter as it is a valuable insight into many facets of the industry.
Best,
David J. Coughlin, Esq. | Corporate Counsel, Contracts/Risk Manager
G4S/Touchcom
******
Comment
********
Ken,
at one time we had a client with the same issue’s and when we ask our attorney’s about going in and picking up the system he advised in doing so 2 items we had needed to look at. One once you remove the equipment (plus your cost in labor) you can’t get the full amount owed because you removed the equipment. Second now you have equipment that is used and can’t resell as new so now you don’t get the full value had you sold the customer a new system. Just some food for thought.
Norm/Security Alarm
*******
Answer:
**********
The "property lien" you refer to is a Mechanic's lien, at least that's what it's called in New York. It creates a lien against real property and is available when the mechanic has contributed either labor or material to the improvement of real property. In New York you file a Notice of Mechanics Lien in the County where the real property is located. You have 8 months from the last day labor or material was supplied for commercial property and 4 months for residential property. The process is probably similar in other states.
The filing of a Notice of Mechanics Lien often violates provisions of other agreements, such as mortgages and leases, and therefore when a lien is filed there is impetus to resolve the lien issue, either by payment, bonding or otherwise removing the lien. The lien may be less effective against a home owner, at least initially, because unless the home owner is considering refinancing or selling the real property the lien can be ignored. In New York a mechanic lienor has one year to commence an action to foreclose the lien; it's an expensive lawsuit and not one that is generally taken unless the amount owed is substantial and the equity in the property sufficient to pay the lien. Lien's come behind filed mortgages, tax and judgment liens of record.
The UCC option is a simpler process. It can be filed on line with the department of state. Cost is around $7. It creates a lien against the personal property identified in the financing statement [the UCC-1]. The filing of this lien will prevent a sale of the personal property to another. The remedy to pursue to enforce the lien is replevin, which means commencing an action in equity to recover the actual equipment.
My contracts give the alarm company the right to file a UCC. I've discussed this option in several articles which can be found at http://www.kirschenbaumesq.com/emailarticles.htm
One of the problems with filing a Notice of Mechanic's Lien is that the alarm contracts generally describe the alarm system and equipment as personal property, not to be considered real property or a fixture attached thereto. There is a reason for this. Some states restrict or prohibit the enforcement of the exculpatory clause, limitation of liability clause or indemnity clause in contracts in connection with the improvement or maintenance of real property. Alarm equipment has been deemed to be personal property, and its characterization as such in the alarm contract has no doubt helped in that regard. While you probably can't contract that an apple is an orange, you can agree to something that is otherwise unsettled or not clear. Many types of fixtures have that kind of ambiguity and contract terminology should help.
All in all, collection of debt when the subscriber defaults is something you should pursue; it's not easy and it's not a uniform procedure everywhere. Your success will depend upon the facts [how you've performed your obligations under the contract], your written contract, your persistence and your collection attorney's abilities. One other component - lots of luck.
I generally will not recommend filing a Notice of Mechanic's Lien unless the amount owed is significant [tens of thousands] and there is equity in the property or we know that a default will occur in other documents - such as a tenant in a mall, or where the property is about to be sold.
I do recommend that the UCC-1 be filed as soon as the subscriber falls into default. It's cheap and easy enough to file. It might make a difference if the subscriber files bankruptcy or is trying to sell. It will also affect the subscribers credit, which may also be incentive enough to get you paid.