Distributors Get Lien On End Users If They Do Not Pay?

A member described the following:

"If we win a big job and need to purchase $70k of equipment then I just call our account rep with the distributor, give them the address of the job, and they set up a separate "project" account with new account number to be used for purchasing any equipment to be installed on that particular project and this doesn't affect the credit limit on our normal account. .... Basically by having the equipment for a given job site allocated in one account with the Owner's address then the distributor has all the documentation they need to secure a lien in the event of non-payment."

I am curious how this works, who and when this is offered.

It seems in this scenario the end user is not consenting to this lien and the lien is not even secured until a default in payment occurs. What is the legal / procedural aspects to this?

Any insights would be appreciated.


I am no lawyer so this is not legal advice and it is worth what you have paid for it. This is just my own understanding of how the system works. In Kentucky anyone who furnishes labor or materials for the improvement of property automatically has a lien on that property (and here I am talking about private property - the law is different for public property). If you are a subcontractor or an equipment vendor (e.g. someone who doesn't have a direct contract with the property Owner) then you must send a notice of intent to acquire the lien to the property Owner within 120 days of last date of work or last date materials were furnished as the case may be. If the debt is not paid (and it is enough to justify hiring an attorney to make it happen) then ultimately the property can be forced to be sold to satisfy the debt. I've never personally had to take it that far however. On several occasions I've sent the notice of intent to acquire the lien and that usually motivates the end user to pay their bill. Once I had to actually go to the courthouse and pay the clerk filing fee to perfect the lien. The end user finally paid their bill after that so I released the lien. Now I'm sure the undisclosed cynics on here will say we just don't have a good relationship with the end user or are rinky dink installers or something like that. More often than not however we are executing as a subcontractor and the Owner gets into a dispute with the G.C. or a different subcontractor over something completely unrelated to our portion of the contract. Then our payment gets held up for no reason, and I have found that the mechanic's lien is a very good way of securing payment in that case. A lien is basically worthless if you don't do your job right because a judge would ultimately throw it out and not allow the sale of the property.

So I would think from the distributor's perspective (perhaps some can chime in here) that having a project account set up with equipment only for a particular job site that this reduces their risk of not getting paid. The preliminary aspects of acquiring the lien (sending the notice and filing at the courthouse, etc) is not expensive at all and has always resulted (for me) in the payment getting sent. Fortunately I've never had to foreclose on a property lien.

"In Kentucky anyone who furnishes labor or materials for the improvement of property automatically has a lien on that property"

Ben, thanks.

I believe what you are referring to is called a mechanic's lien. Anyone confirm / deny, add color to this?

It's just not been clear to be that mechanic's liens are applicable to security projects, though it seems the general principle is the same.

Yes, Mechanics Lien is a common term used to describe this process.

These types of leins generally apply to anything that is permanently installed in a structure and are considered an improvement. Most security/surveillance systems would fall into this category.

I have had to deal with lien releases and other lien issues on many of the security projects I have worked on over the years.

What surprises me is distributors taking the risk. It's one thing for the (local) integrator who is doing the work directly to do so but, if there is a default on payment, it strikes me that the distributor has significant risk / hassle / cost to pursue a lien, yes/no?

Any distributors who provide such a service, please comment.

Distributors are taking the risk anyway whenever they sell a product on credit terms. Knowing where the product got installed at (and thus having the ability to acquire a lien on the property) reduces their risk. Of course it would be a hassle to foreclose on a lien, but they don't have to if they don't want. You can just wait and the lien will sit there on the deed until the property is eventually sold (probably won't be long if the Owner is forced into bankruptcy by other creditors). It just gives more collection options. Whether it is the best collection option versus suing or selling out to a debt collector or something probably depends on the situation. I am a firm believer in the value of liens, however, as just sending that notice has gotten us paid on several occasions.

Like you, I would like to hear from distributors on their experience on this matter.

John,

Like Ben above I am no lawyer but just went through this as a homeowner last year.

I had hired a roofing contractor to to replace shingles on our house (North Dakota). Job was completed and paid in full, shortly afterwards we had a worker along with a friend of his show up at our house demanding to be paid for the work he did. Confused, I explained to him that I don't write his check and that his boss does, at that point he informed me that the people who worked on the project were not employees of the company I had hired but sub-contractors (big problem). Turns out that our contractor did not pay his subs. He further went on to explain to me that I (Keefe) am the one responsible to make sure he and all the other workers get their money. I was extremely confused by the whole situation and told him to give me a few days to get it squared away.

I contacted a lawyer and he explained to me that as a property owner who hires a contractor I am made fully responsible to make sure that all parties involved get paid. If any party involved in the project does not get paid they are entitled to lien my property. It isn't only the workers that I am responsible for but also the distributors (in this case the lumber yard) where the product was purchased from.

This was very troublesome to hear as a property owner because it seems like the law is setup in a way where the property owner is not protected at all. It also adds a burden to the property owner to make certain that a contractors bills are all paid in full. In the end we got it all squared away and to the advice of the lawyer we watched in person as the contractor made payment to the subs involved in the project.

In the security business when we work on large projects we have always had to provide a lien waiver at the end of the project to the contracting company. A few times our distributors have also had to show that there is not outstanding payments on the equipment for that project.

"This was very troublesome to hear as a property owner because it seems like the law is setup in a way where the property owner is not protected at all."

I would imagine it's probably because construction companies and lawyers make bigger campaign contributions than the individual home owner, and I agree it's not fair and not right.

Otherwise, would it be wise and useful then to have any contractor doing work for you to sign your (as the home owner or business owner) contract saying they are responsible for any and all injured parties compensation, and/or get a copy of their insurance policy to sue in case you get unfairly hit with a lien?

This method is typically used by distributors and manufacturers when allowed by law as a courtesy to an integrator who has landed a job that is outside of their normal buying habits or credit line. The integrators are always allowed to use another form of guarantee such as from a bank or credit institution, or pay cash. The goal is to allow them to continue to do their daily sales while working a long project that may require 60+ days of payment terms or an amount 2 to 10x their normal credit. It helps solve a problem stated above when the integrator doesn't want to perfect the lien against a good customer but some dispute with a GC and Owner is holding up payment. It help solve the problem of an integrator who uses a payment for materials for payroll or a vacation. I know, never happens. The other option besides outside funding is to decline the sale and that's bad for everyone.

The specifics of the lien process varies from state to state, but Ben and Greg have done a good of summarizing the basics. Here in Washington, it is very common for suppliers to send out "Right to Lien" notices to property owners when they furnish equipment, materials, or labor for a construction project. This is done routinely without regard to the creditworthiness of any of the parties.

This notice has no power in itself, but serves to forewarn the property owner that someone could place a lien against their property if their contractor(s) don't pay their bills.

Before making final payment to a contractor, the property owner should request "lien releases" from all contractors and suppliers related to his project. This is one checkbox on the project closeout checklist typically used by architects/engineers/consultants.

This worked very well for us. Back in 1999 we landed a huge job for us. It required over 120K of camera equipment - way outside our normal buying limits. To get the equipment, we needed sign off from our bank and the customer. They created the separate account and required a letter of agreement from our customer. It was the first time I had ever heard of such a thing, but it came down very nicely. We got incremental billings as equipment was delivered and made incremental payments to the manufacturer. When we sent a final payment to the manufacturer, they sent a letter of release to both the customer and the bank. I don't recall it being super formal, but those were a little easier ( less lawyerly ) times and I'm sure the paper meant something.

Since then we have grown. That would still be a big job for us, but we now have the resources to handle it without asking the manufacturer.

"To get the equipment, we needed sign off from our bank and the customer."

Chuck, thanks for sharing. This I am familar with and makes sense, since the customer is actively involved.

What Greg, Micheal and Ben are describing go beyond that, in that the customer has not explicitly committed, meaning the distributor / integrator (I would think) would take more work / time / risk in getting paid, if a default occured.

100% True Story.

A friend of mine owns a telecom company, he sould a $50,000 large phone system to a company and was properly paid. Four months later he recieved a court order to return the funds, as the company had filed for bankruptcy, and the court decided the company had improperly paid non secured vendors ahead of others. He lost the equipment too, as they hadn't filed the proper lien paperwork. So the equipment became an asset and was sold at auction to pay secured creditors. This experience destroys the saying, "It's not a sale until the check cashes." So protect your own interests by filing the necessary paperwork in your own state, even if the customer is paying cash.

There's a 90 day look back in bankruptcy cases. Anyone paid during this period is at risk.

Distributors are open to having the PO assigned to them and then paying the delta/profit to the integrator.

High risk scenarios should include a UCC filing which allows the holder to take the equipment back.

Ben Murphy's law also applied daily in Serbia. Know second-hand a few people who got liened on by creditor when they do not pay. Liened on hard.

Interesting the timing in this, as we had our first experiance with this recently as an integrator doing an install, using a new distrubutor who is used to doing this, sent our customer a letter. Let's just say the poop hit the fan. We were very ticked about this because it caused our customer concern and we did not intend for it to happen. The distributor was very good about sending a recind letter and we let it pass as a misunderstanding. But it was a learning experiance and based on these comments, maybe useful in the future.