Where’s the Money From? Simple Question to Saves Lien Rights on Credit Accounts

By: Jared W. Heald, Esq.
Hendrick, Phillips, Salzman & Flatt, PC,
Atlanta, Georgia

In the current economic recession, materials suppliers are continually having to write-off bad debt as their credit-account customers continue to default on making payments for materials, file for bankruptcy, or simply close the doors.

When faced with such a situation, those suppliers who have protected their lien rights can take solace in the fact that while their customers may be going out of business, the supplier can look to the owner of the real property into which their goods and materials were incorporated for payment. However, a little-known nuisance in Georgia law may operate to erase suppliers’ lien rights without their knowledge.

As a prerequisite to preserving lien rights, Georgia law requires suppliers, who provide goods to a customer on more than one job pursuant to a credit-account, to make a reasonable effort to ascertain the source from which their customers received the funds being paid to the supplier so that the supplier is able to properly allocate the payment. Georgia law requires the supplier to ask its customer where the money being used to make payment on the credit account originates. In the absence of an inquiry, a supplier runs the risk of waiving its lien rights.

Georgia law does not permit a material supplier to blindly allocate a customer’s payment to the delivery of choice, which understandably is often the oldest delivery still on the books, even if the customer consents to the allocation. The following example will demonstrate this rule of law in action and explain why the inquiry is crucial.

Supplier is in the business of selling masonry products on credit to approved customers. Masonry Contractor is one such credit-account customer of Supplier. Masonry Supplier is awarded a contract on two projects, Y and Z. Supplier provides $20,000.00 in goods to Masonry Contractor at Project Y on August 15th. Supplier provides $30,000.00 in goods to Masonry Contractor at Project Z on September 15th. Supplier tracked the provision of supplies to the two projects using separate account ledgers.

On November 1st, Masonry Contractor makes payment to Supplier in the amount of $20,000.00. Supplier, unaware of its duty to make an inquiry regarding the origins of the monies being paid to it by Masonry Contractor, applies the payment to Project Y for two reasons: first, the payment received from Masonry Contractor matches the dollar amount of goods sold to Project Y; and, second, Project Y’s account was the oldest outstanding delivery to Masonry Contractor. Unfortunately, shortly thereafter, Masonry Contractor does not make further payment to Supplier and is rumored to be going out of business

On December 1st, Supplier files a claim of lien on Project Z for the $30,000.00 of goods supplied to Masonry Contractor for use on Project Z. Upon receipt of a copy of Supplier’s claim of lien, the Owner of Project Z challenges the validity of Supplier’s claim of lien. Owner Z argues that Supplier was paid $20,000.00 for materials supplied to Project Z making Supplier entitled to a $10,000.00 claim of lien on Project Z only. Owner Z can prove its position because Owner Z has banking records from Masonry Contractor and itself showing that the November 1st payment to Supplier was made out of funds received from Owner Z. Under Georgia law, Owner Z wins and Supplier is only entitled to a claim of lien against Project Z in the amount of $10,000.00.

The end result is that Supplier has been fully paid for the $30,000.00 worth of materials supplied to Masonry Contractor for Project Z, but has not received any payment for the $20,000.00 worth of materials supplied to Masonry Contractor for Project Y.

As all suppliers who have had the unfortunate mistake of being involved in litigation realize, the Court’s finding in favor of Owner Z against Supplier does not occur until many months after Supplier has provided materials to either of the projects in our example meaning Supplier cannot place a claim of lien on Project Y to try and secure payment for the materials provided to Masonry Contractor at Project Y. Had Supplier asked Masonry Supplier, “Where’s the money from?” this unfortunate consequence could have been avoided.

While this is illustrative example of this Georgia rule of law is simplistic, it helps explain the real pitfall faced by suppliers who fail to make the proper inquiry – the loss of lien rights through expiration of time because of an erroneous belief of payment on the project. Obviously, in the common business practice, where a supplier provides goods to a customer at dozens of projects at the same time, the realities of tracking payments received on a customer’s credit account back to the appropriate project is much more difficult and time consuming on an accounting department or accounts receivable manager. However, if a supplier wishes to have the ability to counter this unique defense available to an owner to defeat a supplier’s claim of lien, the supplier must have made the appropriate inquiry.