Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts - Webinar

This is part four in our Arizona lien law series:

1. Arizona Preliminary 20-Day Notices, Lien, and Bond Claim Refresher (with Pro-Tips)

2. What Happens After I Record My Mechanic’s Lien in Arizona? How Do I Get Paid?

3. Lien Waivers in Arizona – Be Careful What You Sign

4. Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts

Recap of Previous Parts in Series

The first article in this series is Arizona Preliminary 20-Day Notices, Lien, and Bond Claim Refresher (with Pro-Tips), and in that article the various remedies available to those in the construction world in the event of nonpayment in Arizona was discussed. The fact that lien and bond claims are two of the most effective remedies available were discussed as well as the importance of serving 20-Day Notices in Arizona.

If anything is taken from these articles, it is extremely important to understand the need to take away the importance of serving 20-Day Notices.

The contents and time frames associated with serving the 20-Day Notice and mechanic's liens were also discussed. The limits on those, the time for recording, and the time for suing on liens were mentioned. Finally, Miller Act bond claims were touched upon.

The second article is What Happens After I Record My Mechanic’s Lien in Arizona? How Do I Get Paid? Serving liens, lien discharge bonds, time frames, and details of suing to foreclose on a lien in Arizona were discussed.

Lastly, recording a Lis pendens was discussed and how it is necessary when you sue to foreclose on a mechanic’s lien.

The previous article, which is part three, is Lien Waivers in Arizona – Be Careful What You Sign. Lien waivers in Arizona, how they are a creature of statute, and how in order to be effective they must substantially comply with the statutory forms. We talked about the four types of lien waivers – the conditional progress waiver, the unconditional progress waiver, the conditional final waiver, and the unconditional final waiver.

The article ended with a list of do’s and don’ts relating to lien waivers, the most important of which is not to sign an unconditional waiver whether progress or final, unless the corresponding payment has been made, and it has cleared.

Avoid Getting Burned Twice by a Bad Check or Credit Card Chargeback

It is bad enough when you receive notification from your bank that a check you receive from a customer or client has bounced.  

a. Don’t sign unconditional lien waiver unless corresponding payment clears

That situation can be infinitely worse if you also come to realize that you have inadvertently waived potential claims to recover the sums due that relate to that check beforehand. And that can happen if you sign an unconditional lien waiver.

This could be either at the time you receive a check or after you receive a check, but before that check has cleared.  

That leads to the most important rule to avoid getting burned twice by a bad check or a credit card chargeback. That is to never sign an unconditional waiver of lien whether it is a progress or final waiver unless and until it is confirmed that the corresponding payment has cleared.

The reason why not signing an unconditional waiver until payment clears is so important, is because the unconditional waiver contains very broad waiver and release language. Below are some pertinent portions of that.

b. Unconditional Waiver and Release on Progress Payment

Here is a sample Unconditional Waiver and Release on Progress Payment form:

The first paragraph has very broad waiver language. And further down is the notice, which is required to be in all unconditional waivers in Arizona.

c. What happens when you sign unconditional waiver immediately before payment clears

In the situation that happens all too often in the construction world where a party up the stream in the project, requires you to sign or requests you to sign an unconditional waiver immediately in exchange for receiving a payment, or requires you to return an unconditional waiver shortly after you receive a payment before the check has cleared, if you receive payment, you sign the unconditional waiver you are giving up any claim for payment and any rights to assert a mechanic’s lien, state, or federal statutory bond right, private bond right, and any claim for payment.

You are waiving all of this and if the check bounces, you have waived all of those claims. That will just add insult to injury since you will receive notification that the check bounced and you have to deal with the fees and charged associated with that. But if you sign the waiver, you did not properly sign a conditional waiver, and wait for that check to clear, you have likely given up rights in that situation that could really affect your ability to recover.

You would have a bad check claim in that situation when the check bounces under Arizona bad check statute. However, that can limit the scope of your recovery in terms of the parties you can pursue. Part of the reason that mechanic’s liens and bond claims are so effective is they broaden out the net you can cast in the sources of recovery you have.

d. How to recover payment

If you are a subcontractor on a project and you are in contractual privity with the general contractor, if you have a mechanic’s lien, you can potentially recover against the owner. So if the contractor is in financial peril, then you have another source of recovery. It is the same thing with a payment bond claim and in that context, it is the same situation. You are a subcontractor on a project and you have a relationship with the general contractor. That general contractor posts the payment bond.

Well now you have two sources of recovery – the general contractor, and you have the surety that posted the bond. So, if you sign an unconditional waiver before your check clears and you waive mechanic’s lien rights or bond claim rights, you have effectively narrowed the source of recovery that you have associated with the debt that has not been paid as a result of the bad check.

e. How to handle credit card payments and chargebacks

This also brings up the topic of credit card payments and chargebacks. The time frame typically is 10 to 14 days for checks to clear with the bank. The time frame associated with credit card chargebacks is far longer. Depending on the situation it can be as long as 60 to 120 days. It is unwise to accept credit card payments in the construction arena. But if you do, those unconditional waivers associated with those payments should not be signed until that time frame to make a chargeback has lapsed.

f. Credit card payments and lien rights

Another problem with credit card payments in the construction arena is the interference it has with lien rights. In previous articles in this series, we talked about the timeframes that contractors and suppliers have to record mechanic’s lien. Essentially, you have 120 days after project completion and project completion can be defined a number of ways. It can be 120 days from last work, 120 days after last work, or 30 days from when the certificate of occupancy is issued.

So effectively, it is 150 days or it can be up to 120 days. Completion would be 60 days after work, from when work was last performed, and then you have 120 days after that. So it depends on the circumstance but it can vary from 120 to 180 days. And if a Notice of Completion is recorded on the project, it is shortened down to 60 days.

If the deadline to make a credit card chargeback is 120 days, then your lien rights may lapse or be about to lapse if a client or customer makes a chargeback close to 120 days, and it may ultimately affect your ability to timely record a mechanic’s lien for those sums. So it is better to stay away from credit card payments  

g. Conditional Waiver and Release on Progress Payment

Below you can see the difference between the previous unconditional and the below conditional waivers. Below is the conditional waiver on progress payment and the language talks about the waiver being effective when the check has been properly endorsed and has been paid by the bank on which it is drawn. That is when the waiver becomes effective, and it is how things should work. This is why you sign unconditional waivers unless and until the check or payment has cleared.

A.R.S. § 12-671 – Arizona's Civil ‘Bad Check Statute’

Let us now dive into Arizona’s civil bad check statute which can be found in A.R.S. § 12-671.  

a. § 12-671(A)

It is worth noting that Arizona also has a criminal bad check statute that is located at A.R.S. § 13-1807 and that statute provides that a person commits issuing a bad check if the person issues or passes a check knowing that the person does not have sufficient funds in or on deposit with the bank or other drawee for the payment in full of the check as well as checks outstanding at the time of issuance.

And pursuant to that statute, issuing a bad check is a Class I misdemeanor. Issuing a bad check in an amount of $5,000 or more is a Class VI felony. If the person fails to pay the amount of the check including accrued interest at the rate of 12 percent per year and any other applicable fees pursuant to the statute within 60 days after receiving notice under that statute.

So that is the criminal bad checks statute. But the civil bad checks statute is what we need to discuss in this article.

The statute subpart A provides:

The takeaways from this subpart are important to focus on. In the first line, the lien ‘with intent to defraud’ means that under the bad check statute, you have to establish an intent to defraud. Notoriously with fraud claims and other claims that are predicated upon such an intent, those can be difficult to prove. But the statute takes care of that and allows for prima facie showing. This helps make these claims not as onerous as some other fraud type claims.

The second part is that the person who issues the check will be liable for twice the amount of such check or $50, whichever is greater. So the statute provides a penalty for those who issue bad checks to be liable for twice the amount of the check.  

b. § 12-671(C)

The next subsection of § 12-671 is subpart C. It provides:

As was discussed in subpart A, intent is difficult to prove. Subpart C here is the provision that allows this prima facia case to be established. Prima facie is just another way of saying that it is sufficient to establish a face to raise a presumption unless it is disproved or rebutted. So basically, it shifts the burden of proof to the issue of the bad check to prove that that did not have the intent to defraud.

With respect to the bad check statute, you can create this prime facie case and shift the burden, if after the check bounces, you provide notice to the issue of the check, and within twelve days they do not make good on their bad check.

c. § 12-671(D)

The next section of § 12-671 is subpart D. The main take away here is two-fold. It is the notice that a formal protest or insufficiency of funds that you receive from your bank will be admissible in the action as proof of presentation, nonpayment and protest, and shall also be prima facie evidence of the insufficiency of funds with the bank, which is another component of a bad check claim.

d. § 12-671(E)

The last section is § 12-671(E) and it focuses on the notice mentioned above in subpart C.

Steps to Take When Presented with a Bad Check in AZ

What do you when you are presented with a bad check?  

a. Provide immediate written notice to the maker

Well the first thing you want to do is immediately provide written notice to the maker of the check. Pursuant to subpart E of § 12-671, you want to send a written letter via certified mail return receipt requested to the maker of the check at the address listed on the check.

The sooner you do that, the sooner is starts the 12-day window where the maker can either pay the check r the rebuttable presumption or prime facie evidence of intent to defraud is established.

b. Retain the notice of formal protest

Second, you want to retain the notice of formal protest or the notice of insufficiency of funds you receive from your bank. Make sure you store that away for subsequent use if you have to file a bad check lawsuit because that will be proof admissible as proof of presentation, nonpayment, and protest, and it will be prime facie evidence of the insufficiency of funds  

c. File suit

Lastly, if you cannot get things resolved, the next step would be to file suit under § 12-671 and seek twice the amount of the bad check together with costs and attorney’s fees.  

Remedies/Recourse if Presented with a Bad Check or Credit Card Chargeback

The potential remedies that those trying to collect down construction debts will have, can get confusing. The universe of remedies that those in the construction arena have and how those work together or are different in certain respects.

a. Bad check claim

If you have a bad check claim, if you have not signed an unconditional lien waiver and inadvertently waived your other claims for payment.

b. Underlying breach of contract and/or open account claim

If your check bounces because you have not been paid, you still have your underlying breach of contract, or open account claim depending on the nature of the agreement that you have with the party upstream who you are looking to get paid from.  

c. Mechanic’s lien or bond claim

You would also have your mechanic’s lien or bond claim in the event that you have not waived those claims with a lien waiver and in the event you have taken the proper steps to preserve those, that is, served a preliminary 20-Day Notice, and in the content of bond claims which if you are required to serve a 90-day post completion notice.

d. Unjust enrichment claim

As you do not have an unjust enrichment claim, alternatively likely that if the contract between the party you are in privity with is somehow deemed unenforceable, Arizona allows for an alternative unjust enrichment claim which is an equitable claim saying you delivered materials or provided services and should be paid for those services.

You can assert that claim against the party of your imprivity also in the context of a situation where an owner has not paid at all or paid anyone for your work or materials. You may have an unjust enrichment claim against them even though you are not in contractual privity. So all of those would be claims that you could bring in a lawsuit and you also would have administrative remedies potentially available.  

e. ROC No-Pay Complaint – A.R.S. § 32-1154(A)(10)

Again, that is provided that they have not been waived and those can look like an ROC No-Pay Complaint, the basis for which is set forth in A.R.S. § 32-1154 810 which is another way to potentially pursue recovery against a debtor. The ROC cannot technically award money. But it can suspend a contractor's license for failure to pay in certain situations.

So, that would not be part of a superior court lawsuit that would be part of an administrative claim a separate remedy, and those can be pursued on a dual track.