Construction Law Answers – Getting Collection Calls: What to do when your Subcontractor sells your debt

Question: Should you pay a 3rd party collector?

I’ve been contacted by a debt collection company because it appears a subcontractor has sold their receivables. They want me to pay THEM, but I’m concerned that if I don’t pay the subcontractor directly that person will sue my company, lien the project or make a bond claim anyway. What should I do?

Short Answer: If you pay the wrong party, you will get sued, the project will get a lien, and you will lose a bond claim if any exist. Read on for what to do about that.

Getting Collection Calls and Dealing with 3rd party collectors

Anytime I hear that a third-party stranger has come into the payment discussion, I become very cautious.

It tells me that the subcontractor was likely having severe cash-flow problems and went to a factor to obtain assistance. Factors are the loan shark underbelly of the construction world, and they exist in other business industries as well.

A small business will sometimes, if sufficiently desperate, sell the debt that they are owed for pennies on the dollar, in exchange for short term cash.

Subcontractors, Factoring and the Law

A subcontractor with financial difficulties is probably having those problems on multiple projects throughout its entire business.

And that is significant because the money that a contractor, subcontractor, or material supplier receives is meant to travel down the chain of work. Essentially, you can’t rob Peter to pay Paul.

Unfortunately, even though it is a felony, many companies do it anyway. It’s called misappropriation of construction proceeds under Chapter 713. That Statute deals with construction liens, among other things.
Unfortunately, you can lose your construction license over the issue or potentially be prosecuted.

Many subcontractors will go to a factor or the quasi-loan shark. The factor will evaluate how much that subcontractor has billed to its customers on various projects and other financial obligations carried by the subcontractor.

Generally, the subcontractor hiring the factor doesn’t have much collateral,
so the subcontractor’s only collateral is its accounts receivable claims. And those are attractive to a collection agency because of its potential right to record liens, and its rights to assert bond claims.

The agency, or “factor” will then loan the subcontractor sufficient funds to continue operation with an expectation to return the funds with a premium.

It’s not like getting a bank loan. It’s significantly more costly, and factors, while they don’t break your kneecaps, will destroy your business if you even hesitate to perform the terms of the factoring arrangements. Some even intend to ruin your company and take control of it.

I know this because I’ve represented factors that had that very business model.

Your Rights, Subcontractor Rights and What to Do Next

The answer to whether the factor has any rights to payment lies in the documents between the factor and its customer and Florida’s construction lien law.

The first order of business is getting a copy of all of those instruments.

More often than not, the factor’s customer is not cooperating with the factor at that point. So, who you must pay can become very confusing and lead to mistakes.

It’s very critical at that point that you have competent construction counsel who understands lending and how factoring is very different from lending.
If you pay the wrong party, you will get sued, the project will get a lien, and you will lose a bond claim if any exist.

How to avoid this problem in the future.

Importantly, every time we get a call about this situation, we first resolve the pressing issue, and then recommend to the client a new provision in its contracts that address factoring.

It gives our client better protection and allows us to more smoothly deal with the factoring issue to protect our client and protect its customer upstream, be that the general contractor or the project owner.

In short, if you’ve been approached by a 3rd party collector related to any construction project you should quickly speak to an attorney.

For more information on factoring issues In construction projects In Florida, an initial consultation is your next best step.

Get the information and legal answers you are seeking by calling (727) 787-3121 today.