William G. Fig
503.243.1656
 

Getting Paid: Practical Collection Alternatives

October 2017

William G. Fig
503.243.1656

 Published in the Oregon State Bar Construction Law Newsletter
October 2017

There are few things more frustrating to a client than not getting paid for the services and/or goods it provides to a customer on a project. It is especially frustrating when the amount owed may be fairly modest, thereby making it difficult to economically justify collection action.  Nonetheless, multiple, small delinquent accounts can add up to a hefty sum and affect the client's cash flow, which necessitates a plan of action.  This article discusses collection options to consider to help your client obtain payment from a delinquent customer.

The Construction Lien

When a construction project is involved, the first thought is recording/foreclosing a construction lien on the client's behalf. The obvious initial consideration is whether the client has preserved its lien rights under ORS Chapter 87 et. seq. In other words, were the required pre-lien notices sent in a timely manner to the correct parties, and did the client record its lien properly and in a timely matter? However, these questions should not end your initial inquiry. Of vital importance, especially where a modest sum is at issue, is whether the client has the right to seek its attorney fees as part of its lien claim. The risk of paying twice (or more) of the amount of the original debt because of an attorney fee claim often becomes the tail that wags the dog, i.e. it is the type of additional economic leverage needed to settle small-dollar claims. Attorney fees may be recoverable in a lien foreclosure action. ORS 87.060(5).  However, the right to fees is not "automatic," and there are several traps and pitfalls that can result in the client having a valid lien claim, but no right to seek attorney fees, see e.g. ORS 87.027, 87.039(2), and 87.057(3). Thus, whether the client has a right to recover attorney fees may determine whether pursuing the lien claim is worthwhile. Even if a right to recover fees exists, it is equally important to determine the priority of the client's lien claim vis a vis other encumbrances. In Oregon, it is possible for a construction lien to have "super- priority," meaning it has priority over an existing encumbrance, i.e. a deed of trust. However, that is not always the case! Under ORS 87.025(6), a lien relating to an alteration or repair does not have super-priority over an existing encumbrance. Moreover, under ORS 87.025(3) and (4), an otherwise super-priority lien may become subordinate to the mortgagee's interest.  Foreclosing a lien that results in the client taking the property subject to an existing encumbrance may have little to no value to the client. This is especially true when the lien is for a modest amount or the amount of the preexisting encumbrance is significant.

Attorney Fee Statutes

Next, in the alternative or in addition to a lien claim, the client should consider a breach of contract claim and whether the client's claim falls under ORS Chapter 20 et. seq. ORS 20.082 allows the prevailing party to recover attorney fees on a breach of contract claim under $10,000 where the contract is silent as to fees. This includes written and oral contracts. The statute requires that the client make written demand for payment on the delinquent customer at least 20 days prior to filing suit (for us old timers, yes, it used to be 10 days). ORS 20.080 provides a similar remedy for tort claims under $10,000, but requires 30 days' notice. Like a lien, these attorney fee statutes can increase the economic risk to the delinquent customer associated with litigating a claim, which may prompt payment by an otherwise uncooperative customer.

CCB Claims

If the delinquent customer is a contractor registered with the Oregon Construction Contractor's Board ("CCB"), the client may be able to recover from the surety bond the contractor is required to post with the State. ORS 701.131 et. seq. sets forth the requirements and time deadlines for asserting a claim against a contractor's CCB bond. A key prerequisite of a CCB claim is sending the contractor a notice of the claim and a demand for payment as required by ORS 701.133.  The CCB does not adjudicate complaints/claims.  Thus, in order to ultimately reach the bond, you must file suit in state Circuit Court, obtain a judgment against the contractor, and timely tender the judgment to the CCB. The recovery available from the bond depends on the type of project, the contractor's certification, and the "type" of claimant (recovery from a bond can vary significantly - between $3,000 to $75,000; see ORS 701.084). The bond also provides an easy source for recovery for all or part of the judgment debt. Importantly, the existence of an unpaid judgment against a contractor suspends the contractor's CCB license, which effectively puts him/her out of business - powerful incentive for a viable contractor to pay up, even on a small claim!

The Personal Guaranty

Hopefully, the client has a clear and concise written agreement with the delinquent customer setting forth the terms and conditions that govern the services and/or goods it provided to the customer. Also, make sure to inquire whether the client has a written guaranty of the principal of the delinquent customer guarantying the obligations of the customer to the client. Like an attorney fee claim, a personal guaranty, which puts the individual's assets at risk, can provide significant leverage to settle a claim and, therefore, significantly enhance the chance of a successful collection of the debt.

Is the Juice Worth the Squeeze?

Before the client undertakes collection action against a delinquent customer, a discussion should be had whether it is "worth it." In other words, is the account a "problem account" that has a heightened risk of a claim being asserted back against the client? If so, it may be better to forego a collection action and "hold" the balance owed on the account as potential leverage, or an offset, in any future action against the client.

For professionals, on most delinquent accounts, it is likely best to wait to pursue a collection action until the statute of limitations on a negligence/malpractice claim has run. In Oregon, the statute of limitations on a negligence claim runs several years before the statute of limitations runs on a breach of contract claim. Filing a collection action after the statute of limitations on the negligence claim has run should reduce the professional client's potential exposure to such a claim.

Show Me the Money!

Once a court enters a judgment against the delinquent customer, absent another source of recovery (e.g. a CCB bond) the most popular and usually most cost-effective collection tool is a writ of garnishment under ORS 18.600 et. seq. A writ of garnishment, generally speaking, typically allows money to be taken from the delinquent customer's bank account or paycheck to pay the amount owed to the client. In Oregon, an attorney may issue a writ of garnishment. Writs issued to banks are particularly effective because the writ reaches all of the debtor's accounts in Oregon at the garnished bank. The issuance of a writ of garnishment, whether successful or not in "hitting funds," often persuades a customer with assets to pay the debt to avoid further collection action. Of course, if the delinquent customer has no assets, the judgment may not be collectible. The old adage is true – you can't get blood from a stone

William G. Fig is a partner in Sussman Shank LLP's litigation and construction practice groups.  Contact him at 503-227-1111 or wfig@sussmanshank.com.

Related Practice Areas

Construction
Litigation

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