Getting Paid Promptly In the Construction Business

If you are a construction contractor, you probably worry about getting paid on time.  After all, you need cash-flow to cover ongoing labor and material costs.

Under New Jersey’s Prompt Payment Act (N.J.S.A. 2A:30A-1 & -2) (the “Act”), in addition to the amount owed under the contract, a prime contractor may be entitled to interest at a rate of prime plus 1%, and reasonable attorneys’ fees and costs, if:

•  the contractor performs (in New Jersey) according to its contract with the owner (such as a landlord, developer, or homeowner);

•  the contractor provides written notice to the owner of the work performed and requests payment pursuant to what the contract entitles the contractor;

•  within 30 days after the agreed upon billing date, and if the owner has “approved and certified” the billing for the work, the owner does not pay the amount due under the contract

(with the exception of certain public entities, the owner is deemed to have “approved and certified” the billing for the work if, after 20 days after the owner receives the contractor’s written notice, the owner does not respond with a written statement of the amount withheld from payment and why);

•  the contract permits a party to resort to alternative dispute resolution (such as arbitration) to resolve a payment dispute; and

•  the contractor successfully prosecutes a lawsuit in New Jersey to collect the amount owed under the Act.

The Act also may permit the contractor, after giving 7 days’ written notice, to suspend performance under the contract if the owner (1) has not made the payment required by the Act, (2) has not provided the required written response, and (3) is not engaged in a good faith effort to resolve the reason for the withholding.

But beware: the Act will not restrict the rights and remedies of a residential homeowner or purchaser with respect to the property being improved.  A homeowner facing a lawsuit under the Act might try to assert a counterclaim under the many consumer protection laws, including the Consumer Fraud Act (a topic I will cover in a future article).

When a Customer Files For Bankruptcy – Part 2

After reading my last article, you might wonder: what about the money owed for goods you sold more than 20 days before the bankruptcy filing? There still may be hope.

First, ask yourself:

• Did the customer receive the goods within 45 days before the bankruptcy? And,

• Did you sell the goods in the ordinary course of your business?

If you answer “yes” to these questions, you should make a written demand for “reclamation” (literally, you are demanding that the goods be returned). If you make this demand soon enough, and if another creditor does not already have a security interest in the goods, you may be entitled to payment for the goods before other, “unsecured” creditors receive anything.

Here is a possible scenario:
On each of June 1, June 21, July 1, and July 11, you sell, on credit, a box of parts to a manufacturer. Each box is worth $10,000. On July 21, you are owed $40,000, and the manufacturer files for bankruptcy.

Provided that you meet the necessary deadlines and substantiate the claim, you may seek payment of $20,000 (the value of the goods sold within 20 days before the bankruptcy filing) ahead of other, “unsecured” creditors.

You may make written demand for “reclamation” of the goods sold within 45 days before the bankruptcy filing, which consists of goods worth $30,000 (but if you recover $20,000 based on the above, this demand cannot recover more than the remaining $10,000).

And, what about the money owed for the goods you sold on June 1st? Unfortunately, you might have to wait with the rest of the “unsecured” creditors for this money. Actually, you could do better than that, but that is a topic for another article….

When a Customer Files For Bankruptcy – Part 1

If a customer files for bankruptcy, will you recover only pennies on the dollar, or, can you collect the full amount owed?  This question weighs on the minds of vendors and services providers when they receive that fateful notice, typically from the bankruptcy court, that a customer has filed for bankruptcy.  Now, let’s try to answer it.  First, ask yourself:

•    did you sell “goods” (rather than only services)?  And,

•    did the customer buy the goods from you in the ordinary course of the customer’s business?  And,

•    did the customer receive the goods within 20 days before the bankruptcy filing?

If you answer “yes” to these questions, and if you have not missed the deadline to file a proof of claim, you may be entitled to recover the entire value of the goods you sold.  If there is not enough money to pay your claim, you at least may be paid before other, “general unsecured” creditors.

The next time you receive a bankruptcy notice for a customer, just remember: you may be able to recover some or all of your claim.