Month: April 2017

Do The Right Thing / Get Screwed Anyway: Secrets of Bonding #144

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You performed professional quality construction work, billed the general contractor and got paid.  Done deal. Now, three years later you get a letter from some attorney demanding that you return the funds!  Are they insane?  This is a horrible threat that you cannot avoid.

Situation:

  • Spiffy Construction, Inc. was a subcontractor on an unbonded project. They billed their client “Gigantic General Construction” for work completed in October: $262,800.
  • The invoice was reviewed and approved. Gigantic sends Spiffy a check for $262,800. Awesome!
  • Spiffy deposits the check. All the funds are used to pay bills and upgrade equipment.
  • The next monthly requisition for November is held up and ultimately never paid to Spiffy. Gigantic then declares bankruptcy.
  • After incurring legal expenses, Spiffy is ultimately forced to write off this receivable. It has a severe impact on the company – but they manage to survive.
  • Three years later Spiffy receives a letter from an attorney demanding that they return the last payment. The attorney says failure to return the funds can result in a “preferential lawsuit.”  What the heck is going on?!

This is not an imaginary scenario.  It is based on true facts.  This happens all the time and can be very bad for the defendant (Spiffy aka the creditor.)

What is a Preferential Payment?

When a business declares bankruptcy, the court reviews payments made to creditors of the company in the period immediately preceding the bankruptcy to determine if any were (in the court’s opinion) inappropriate. They want to determine if any creditors were given extra favorable “preferential” treatment at the expense of others.

In our example, Spiffy was paid less than 90 days prior to the BK declaration, so the trustee is attempting to claw back the funds to be distributed as THEY see fit.  Keep in mind, everything that happened prior to the demand letter was normal and legal.  Spiffy did the work, billed the GC and got paid.  Period, end of story. However, it’s not be the end of the story…

The trustee will attempt to prove that the payment received was more than would have been allowed if made through the bankruptcy proceedings. That’s bad because Spiffy collected the full amount they were owned, but in a BK, creditors are typically paid less than 100%.

Spiffy is now forced to pay a second round of legal fees to defend this claim. If they lose, they may be required to return the last payment they received. Add this to the final payment they never received and had to write off.  This situation keeps getting worse. 

What are some remedies available to companies caught in this untenable position?

Examples of Defenses to a Preferential Payment Claim

  • Substantially Contemporaneous Exchange – this means the payment and delivery of product or services happened at the same time, such as a COD payment. A payment by check may also be included in this category if it cleared promptly.
  • New Value – If a $100 account receivable was collected during the preference period, then an additional $75 AR was billed but not received, the preference amount could be claimed to be only $25, not $100.
  • Floating Lien – This is a creditors security interest in present or acquired assets such as accounts receivable. The creditor would need to show that their collateral position has not improved during the preference period.
  • De Minimus – Means debts that are too small to include in the BK analysis.
  • Ordinary Course of Business – There is a history of accounts receivable showing invoices and payments with that debtor / client. The amount owed was in line with prior transactions.

Conclusion

The last example, “Ordinary Course of Business” may be the most natural response for Spiffy Construction and other contractors.  However, in order to raise this defense, the creditor must have appropriate records.  Copies of contracts, invoices, AR schedules and bank statements are critical documents.  Good record  keeping is needed with an efficient means of storing and retrieving the data, in this case three years after the original transaction.  Without it, defendants like Spiffy have little chance of defending such claims.

Sometimes you do the right thing, but you get screwed anyway.  At least now you know about the danger, protective actions you can take and potential legal defenses.

Reminder: We are not attorneys and are not intending to give legal advice.  For that, call your ATTORNEY.  For a bond, call us!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #143: Surety Bonds and Brain Surgery

Steve GoliaLeave a comment

Your doctor says “You have a problem.  We need to call in a specialist.” How do you determine who to call? What do you expect from the specialist? The choice could not be more critical.

We are faced with important decisions every day.  And there are plenty of people trying to influence the outcome.  You need the skills to sort through the “BS” and make the choice that is most beneficial to you. 

Here is an example you have seen in many different forms:

“Our doctors have over 25 years experience”

What exactly does that mean?  You could select that firm and get a doctor with ONE year of experience.  They may have 25 doctors, each with one year in the saddle. Ugh, how misleading!

Another example:

“Dr. Mavromoustafakis has specialized in brain surgery since 1980.”

OK, Dr. Mavromoustafakis  has over 25 years experience as a brain surgeon.  See the difference?

Next question: Does the difference matter?

To answer that, think about why expert help was required.  If there is a special need, and an experienced, expert problem solver is desired, then… Yes! 

That’s how it works with brain surgery and also surety bonds.  Some situations are more complicated.  They require unique solutions and strategies.  The key may be to know a special underwriting technique, or procedure.  The surety business is all about people and their expertise. So your best problem solvers have many years under their belt and a deep understanding of the process.

Conclusion
Surety Bonds: They’re not brain surgery.  But when you need expert assistance, real experience does matter. Pick up the phone and take advantage of our long devotion to this one product. 

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding # 142: Make Bid Bonds Great Again!

Steve Golia1 Comment

You used to love them.  They were so easy.  Now they are in dollar amounts and percentages, sometimes with a limited maximum value.  They can be electronic or digital.  Sometimes a letter is required instead.  Sometimes nothing is required instead! There may be a single or annual charge for it or maybe it is free! It’s outta control…

So here is your chance to catch up with everybody’s favorite: The fun and fascinating world of Bid Bonds.

The Basics
These instruments accompany a contractor’s proposal during the acquisition process for a new project.  This is routine on public work, such as federal state and local municipal contracts.  The procedure may also be used on private projects at the contract owner’s discretion.

The bond guarantees that, if awarded, the bidder will sign the contract, furnish the required Performance and Payment Bond, and commence with the work – or – pay the difference between their bid and the next higher bidder (subject to the maximum dollar value of the bid bond.)

Cost
Usually free although the surety is entitled to charge for them.  Typical charges could be an annual bid bond service fee or a per bond charge.

Underwriting
The decision to issue the bid bond is based on the underwriter’s willingness to provide the related P&P bond, because that is the real money transaction. The decision is NOT based on the dollar value of the bid bond.  Rely on the fact that the underwriter will not provide the bid bond if they do not feel they can support the final bond.

Bid Spreads
If the bidder is more than 10% below the next bidder without a plausible explanation (we have a special machine,  already have materials, are already working next door, we’re super fabulous, etc.) the surety could decline the final bond, resulting in a bid bond claim.

Alternative Forms of Security
In addition to a bid bond, proposals may also be secured using a cashier’s check or irrevocable letter of credit, depending on what the project owner (Obligee) is willing to accept.

Percentages
The Invitation or Bid Solicitation describes the proposal requirements.  It will state if a bid bond is required and the amount.

The bond value is often expressed as a percentage. Example “20% of the attached proposal amount.”  This is convenient because the underwriter doesn’t want to know the actual bid amount (to preserve the bid confidentiality).  It is the best way to express the exactly correct amount when typing the bond in advance.

Capped
Because the percentage bond actually has an unknown dollar value at the moment it is executed, language is sometimes added establishing the most it can be worth (to prevent a wildly high amount the underwriter didn’t expect).  Example, “10% of the attached bid, not to exceed $100,000.”

Fixed Penalty
“Bond Penalty” is the term used to express the bond dollar value.  A fixed penalty bond has a stipulated amount, regardless of the bid.  Example, “Maximum bid bond amount required: $20,000.”

Surety Letter
Some owners choose to require a letter from the bonding company, but no bond. Federal projects are handled this way at times.  The letter talks about how much they love the client and the contracts they are willing to bond.

Consent of Surety
This letter is the surety’s written promise to issue the P&P bond if the contract is awarded.

Electronic
A scanned copy (pdf) of the executed bond may be acceptable for an online bid.

Digital
Some state departments of transportation use this.  The surety registers with the obligee in advance and the bid bond is “filed” online using a unique identification number.

No Free Lunch
If you default (cause a bond claim), the surety will come after the contractor, it’s owners and spouses for recovery.  Remember: Bonds are not insurance.

Funky Land
Now some of the weird stuff:

  • You may encounter a bid bond requirement, but no final bond (P&P bond) to follow
  • Can also have the opposite: No bid security required but a final bond is needed
  • No! You are not required to use the same surety for the bid and final bonds – although the bid bond provider fully expects to write the final bond and may hunt you down and kill you. (Just kidding!!!)
  • Yes! If you obtain a bid bond under the promise to provide collateral, you are allowed to get the final bond from a different surety that is not demanding collateral. (But you face the hunt and kill thing again)
  • When you acquire a project using a Consent provided by ABC Surety (their promise to provide the bond upon award of the contract), you are not prohibited from taking the final bond from XYZ Surety. However, good protocol dictates that you remain loyal to those who enabled you to acquire the job (meaning ABC).

Make Bid Bonds Great Again
So there you have it.  These instruments are fussy and sometimes complicated.  It is imperative that they be executed correctly and filed on time or it can cause the bid to be thrown out (loss of contract.)  This always makes people very crabby (Read as: LAWSUIT).

The key is to review the written bonding requirements as described in the bid advertisement. Use any mandatory bond forms that are stipulated and double check the correct execution and typing of the document including name spelling, job description, project identification details and the correct bid bond amount.

Now that you know, you can start to love bid bonds again!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)