AMPING UP COLLECTABILITY IN A DOWN ECONOMY: COLLATERAL, LIENS, AND OTHER LEGAL MANEUVERS Presented at the PEARL Conference – April 2009 Alan M. Mirman Mirman & Bubman, LLP Woodland Hills, California

TOUGH ECONOMIC TIMES  Bankruptcies and uncompleted projects;  Credit tight even if money is cheap;  Some percentage of write-offs is standard -  Not as crucial in a good economy;  Several % difference in collections impacts bottom line;  May need to spend more focus, if not more $$ to improve -  Plan ahead;  Improve documentation;  Allocate responsibilities including follow up.

Rx IN A DOWN ECONOMY How to stay healthy:  Avoid risk;  Follow PEARL standards;  Pay attention to details;  Stay awake during this presentation!

Evaluation Implementation Review STEPS TO IMPROVED COLLECTIONS

Increased write offs? Are problems external or internal? DDue to sales to non-creditworthy customers? DDue to offsets, quality control or other problem? DDue to disputes or lack of enforceable paperwork? Whatever the answer, look at the causes: lack of know-how; inadequate staffing; lack of management attention; salespeople on commission.

If you haven’t undertaken this evaluation, ask yourself:  Do you have the tools to do so: in house accounting, outside accountant, consultant;  If you choose not to examine, then choice is clear: live with diminished returns;  Focus on collectability issues: Break down top five collection problems; Chart the causes; Goals: - fixing the current problems; - avoiding future problems. Manage the situation with good information and game plan

UNDERSTAND YOUR RIGHTS AND HOW TO IMPROVE THEM  Read the terms and conditions;  Require Guarantee/Letter of Credit/Bond;  Security interest in the goods: Obtaining a security interest Perfecting a security interest  Mechanic’s lien rights.

INTERNAL CONTROLS TO EFFECTUATE A PLAN System in place with chain of command for strengthening rights and reporting problems:  Has credit been checked?  Were T&C actually sent?  Were conflicts between PO and invoice identified and resolved?  Is documentation in order?  Were liens filed and properly served?

Follow up:  Quarterly review: is this working?  Attack existing problems:  Identify ongoing problems and evaluate potential “fix”  Have lien periods expired?  Has written demand been made?  Has change order procedure been followed? How to deal with negative results and find solutions

Often Ignored Remedy for Sellers: RECLAMATION  Federal statute - 11 U.S.C. § 546(c).  If you sell goods and the buyer files bankruptcy you may be able to recover your goods if you act quickly.  Make written demand for the return of the goods within 45 days after the buyer receives them.  If buyer files bankruptcy, you have 20 days after the bankruptcy was filed to make your demand.  If buyer or bankruptcy trustee do not return the goods, file an action in bankruptcy court as soon as possible. If successful, the costs involved in the action are recoverable against the bankruptcy estate.  This is a right to be exercised with speed, or not at all.

Get out of jail card #1: DIDN’T GET A CHANGE ORDER? CCourts generally enforce Change Order clauses, which normally require advance approval; EExceptions normally rely on whether Owner had timely notice, and induced contractor to do the work; SSome exceptions: OOral Waiver of clause requiring a writing; EEstoppel – promise to pay; reliance by contractor; UUnjust Enrichment – if coercion, fraud, mistake or request; MModification by performance – oral change order is deemed executed.

Get out of jail card #2: DELAYS JEOPARDIZE PAYMENT?  Did you give written notification to party that hired you?  Steps to protect rights:  Check your subcontract to see if it incorporates claim procedure from prime contract;  Keep a separate claim file;  Document all extra costs;  Channel communications through one person;  Document and confirm relevant conversations.  Avoid waiver  Demand adequate assurance of payment.

Get out of jail card #3: INCOMPLETE OR INCORRECT PLANS?  Implied warranty that plans and specs are accurate and sufficient (US Supreme Court case – Spearin Doctrine): “If the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications”  Exceptions:  If contractor doesn’t follow the incorrect plans and specs;  Whether a reasonably competent contractor would have discovered the error;  Whether the contract provides that contractor assumes the risk of errors;  Failure to make required site visit that would have revealed error.  Broad clause that owner is not responsible because actual conditions may be different than on plans is not as likely to be enforced.