GETTING NEW BUSINESS is always a challenge, so when the phone rings and you are asked to work for a new customer, your first instinct is generally not to send an inquiry about its corporate status to the secretary of state. Yet, if there is a problem down the road about getting paid, such a check is one of the things you will wish you had done earlier. The reality is that for many reasons, it often turns out that the person you did business with was not the one from whom you needed to have a commitment.
First and foremost, as any residential plumber knows, just having one spouse sign a contract will not get you lien rights in some states (or at least require a lot of proof in others). If property is owned "jointly and severally," the rights of one who has not consented to the improvements can't be impaired without his consent.
Second, in some states you won't have lien rights at all if you were not dealing with the owner, or if you were more than one or two steps removed from dealing with the owner. The same holds true for payment bonds rights on some public projects.
Third, if you are required to send lien notices to an owner and you name the wrong entity, you may lose rights that you would otherwise have.
Fourth, many tax-increment and other government financing arrangements now require property to be publicly held, even though the public owner has no responsibility for the debts being incurred by the "lessee."
Whenever possible, get the signatures notarized.
There are serious issues now in commercial work. To have lien rights — or even the right to sue — in most states you need to be dealing with the owner or someone who is authorized to bind the owner. There are plenty of occasions where the person you are dealing with actually believes that he is authorized, but just because someone says that he is the owner gets you nowhere, as agency cannot be proven by the word of the agent. Partly because the laws have become more complex and partly because real estate structuring has become so convoluted, sometimes you would have better luck unravelling "The DaVinci Code" than finding the true owner of a city high-rise building.
You have to be diligent, since many entities have similar-sounding names, but that "Inc." or "LLC" or "LLP" makes all the difference in the world when one denies responsibility for the debt incurred by another. And, reluctant as I am to sound like a cynic, there are, in fact, many people who set these entities up with deliberately similar names to lull people into overlooking these distinctions and to get them to do business with a worthless shell company.
So, what can you do?
- Refusing to do business with anyone you haven't known since grade school can help you avoid collection problems, but it does tend to limit your business opportunities.
- Requiring credit information, with bank and trade references, can give you comfort.
- Running an ownership and encumbrance report before you start work will tell you who owns the property and what kinds of mortgages and judgments there already are against it. An O&E can reveal by whom you need to have your contract signed and whether that entity is in financial trouble already. An O&E will cost you — typically $150 and up — and it could take several days to get the results from a title company. It may be impractical to make such an investment.
- Another option is to check with the secretary of state (now you can do much of this online) as to: if such a firm exists; how long it has been around; and who its officers and directors are, so that you can have some sense of weather the people you are dealing with are who they say they are. If you are in doubt about a new entity, you can ask for the contract to be with an entity that you feel has more assets.
- You might ask for corporate or personal guarantees of people or firms that you think are connected through similar sounding names. This won't get you lien rights but might get you something much better — payment without need to resort to liens.
- When you are dealing with someone representing your customer, make sure that you insist they the person sign and print his name clearly, and his title.
- Whenever possible, get the signatures notarized so that there will be no denying a signature later.
- Add a sentence to your form requiring the person signing to certify that he is authorized to sign it on behalf of the company. (This won't bind the company but could set the signer up for personal liability, or even fraud, if the representation is untrue and you relied on it to your detriment.)
- If the job is big enough, it may be worthwhile to ask for a corporate resolution showing that the person you are dealing with is in fact authorized to bind the company.
- It sure makes sense to think through these options with your attorney and financial advisers before you have to take a loss to learn the hard way.
- Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421/4800, e-mail to [email protected]