Wednesday, September 17, 2008

The mess of mechanics liens

So, Crain's reports today that Teng & Associates filed a $15.6 million mechanics lien on its affiliate's Waterview Tower project. (I wrote about this a couple of weeks ago.)

You may ask, why do this? Remember, Teng and the Waterview owner are legally separate entities. Even though the company and/or its CEO, etc. may have a bundle of cash tied up in this project (I obviously don't know the intricacies of it all), you have to protect yourself here to the extent you can. If the work has ceased and a contractor or sub has not filed a lien for unpaid work within the statutory deadline (90-120 days after the last substantial work, depending on who you are), then you lose your right to file the lien.

So, some might be saying this means the project could be in big, big trouble. I'm not going to speculate on that, except to say that (a) everyone has to wonder aloud about the ability to obtain sophisticated insurance product in this wacky market, and (b) you just cannot predict what lenders are going to do right now.

Absent real proof, I just can't agree with any gloom and doom predictions, at least not yet. For now, I chalk this up to CYA, and if I were Teng's lawyer I would have done the same darn thing. This does not necessarily mean the deathknell of the project. But what if, heaven forbid, the project does go south? You'd want to try to recover some of your fees, which means getting the lien filed. (I'm also not going to speculate as to potential defenses. This isn't the Construction Lawyer's Blog.)

In short: Good dirt lawyers plan for worst-case scenarios. (I know. I am going through one now for a client.) So, plan for the worst, hope for the best and, as Winston Churchill said, KBO. (That's keep buggering on, by the way.)


Thomas Westgard said...

It may not really be Teng's decision in any substantive sense. From the outside, we don't know how a variety of third parties could be affected by the project's collapse. Investors, guarantors, bonding companies, and insurance are four entities that could be affected in ways that aren't obvious on the face of the lien. The lien could be filed to protect their interests, rather than simply Teng's interest.

One other relatively non-obvious consideration is that a perfected lien is a secured creditor in bankruptcy, whereas failure to file the lien leaves you with a contract claim - an unsecured creditor. Secured creditors commonly get 80% recovery (broadly speaking) whereas unsecured creditors commonly get 10% recovery (broadly speaking). I have no inside information, but objectively, Teng is now far better situated to handle bankruptcy by Waterview than they were before filing the lien.

David Stejkowski said...

Excellent thoughts. I thought of the four you did, but not BK. If that happened, Teng gets in line. I'm not a BK expert but I am sure other secured creditors would probably raise some issues, but I still think the CYA theory is a decent one. When a deal like this unwinds, the only certainty is chaos.

I hope they don't get there.