Subcontractor sold their receivables to a financial services company who is trying to collect from us

7 days ago

​We are general contractor. One of our subcontractors sold their receivables (invoice) to a financial services company. It looks like the subcontractor is really suffering and may be filing for bankruptcy soon. However, the financial services company is trying to get collect on the receivable from us. They (financial services company) just filed a UCC Financing Statement. In the past few weeks we were issuing joint checks to the subcontractor and their supplier. The financing company is asking us to remit all payments to them. Who do we pay? Does the financing company have rights against us if we didn’t pay them? Does the sub have rights against us if we pay the financing company? What’s the effect of the UCC statement and/or does the financing company somehow have the subcontractor’s lien rights to protect them?

CEO Mobilization Funding
1 review

There are a few questions here so I will try and address them all but in order of fact first.

  1.  Are you sure the subcontractor SOLD their receivables or did they just default on a loan?  this is important to know because if they really sold their receivables to a Factoring company than you would have been provided a Notice of Assignment (NOA) signed by the subcontractor and delivered to you directly.  If the subcontractor defaulted on a loan or other type loan, like a Merchant Cash Advance (MCA), then the MCA (financial services company) is trying to collect on the receivable due to the default.  If you are not familiar with what an MCA is and how it can impact a subcontractor in construction there is a good article you can read via this link, https://mobilizationfunding.com/2019/08/15/the-guide-to-merchant-cash-advance-loans-mcas/. 
  2. The UCC financing statement is used to let the world know that there has been a lien filed against the company for some purpose.  This is NOT necessarily a bad thing as it could simply be for a bank loan, piece of equipment, or the receivables of the business and the lien is typically filed at the time the loan or agreement is signed.  It is important to know that the financial services company must have a Security Agreement that details the specifics of what they have been given the right to lien. You can ask for the Security Agreement and the financial services company should provide it to you if they have noticed you of their lien.
  3. Regarding your question of who do you pay? – This completely depends on whether or not you have been provided with a Notice Of Assignment and the subcontractor has sold their Invoice (otherwise known as factoring) AND if you executed some type of verification document directly to the factoring company – this could be by email or written.  If you have not done either of those things then your contract language with the subcontractor is what you would be governed by in our experience.  Best to consult your attorney here as I don’t have all of the facts and are just making assumptions based on what you state in your question. Either way, the ONLY thing that would likely remove your ability to pay what is needed per your subcontract agreement would be if you signed something with the factoring company.
  4. Financing companies typically do not have lien rights on a construction project
  5.  Next Steps if I was in your shoes:
    1. Find out exactly what the financial services company has a lien for and get a copy of the security agreement to accompany their UCC
    2. Determine if someone in your company agreed to anything from the financial services company directly
    3. Determine if the subcontractor actually is working with a factoring company or an MCA company, my bet is it is an MCA based on what you are saying.
    4. Consult your attorney and then make the best decision.

My strong bet would be you have the ability to pay the subs, suppliers and vendors to protect your project.  Any of the money after making the payments to the suppliers and other subs that may be owed to the subcontractor would then be in question or fall to the subcontract agreement. You have the right to protect your project.  the key thing is to determine if your company signed anything directly with the financials services company.

I hope this helped you!  Have a great week and feel free to reach out directly if you like.

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