Legal costs

You don’t think it will happen to you. A partner wants out and drains the checking account before filing bankruptcy.

A large contractor holds up thousands of dollars of your pay with no remorse.

A business you’ve been servicing for more than a decade starts another LLC and dupes you out of pay.

But you’ve got to consider these worst-case scenarios. Because they do happen – to people like you. “Get an attorney who understands the type of business you are in,” says Matt Caruso, president, Decra-Scape, headquartered in Sterling Heights, Mich. (Caruso was ripped off $10,500 by a contractor who eventually settled on paying 80 cents for every dollar owed.)

And be sure legal contracts are water-tight and leave no room for creative interpretation. The Winlands in Zanesville, Ohio, learned this the hard way when an old partner took advantage of the checkbook.

This month, Lawn & Landscape spoke with three firms who shared how those worst-case legal scenarios can play out in the real business world and how to protect yourself.
 

Lien law and order

The 68-acre outdoor lifestyle shopping complex was complete, tenants had occupied the high-end storefronts and were paying rent. But Matt Caruso, president, Decra-Scape in Michigan, was still waiting for $60,000 owed to him for the expansive hardscaping work his team performed.

“It was disheartening to see people walking in and out of stores knowing that the company was sitting on sixty grand of your money,” he says, noting that the project totaled in the neighborhood of $600,000 and that leftover past-due money was held up in “retention.” Essentially, the company paid 90 percent of every invoice Caruso filed and held the remaining 10 percent until the end of the job.

But there was no check in the mail.

“We got to the tail end of the job, and the payments stopped all of a sudden,” Caruso says, noting that he turned in a pay application for the job because projects of that size require draws for work performed.

Caruso had closely followed the paperwork protocol these large contracting jobs require. Before the start of the job, he sent the client his notice of commencement. And upon completing the job and not receiving that retention pay, he filed a claim on the lien. “Once your last day your labor has touched the ground is over, and after 90 days passes, if you don’t put a claim in on your lien when you haven’t been paid in full, you start to get into some muddy waters,” he says.

Lien laws can get tricky, and Caruso emphasizes that landscape companies that work on large projects like this one with multiple contractor-players involved should “watch their backs” and understand lien law. Otherwise, your company could get duped out of hard-earned pay.

“From a contractual standpoint, (the client) was likely hoping that we were not privy to (the law) and they were hoping to take advantage of us,” Caruso says.

Caruso confronted the client and was invited to their offices to discuss the matter. “I walked into this grandiose conference room and here come all the suits and ties trying to offer me 25 cents on the dollar to go away,” Caruso says of the paltry settlement proposition. He declined. Then he sought further counsel from his attorney.

After back-and-forth negotiating, Caruso eventually settled for 80 cents on the dollar. His attorney suggested that after a yearlong wait, Caruso accept the offer. Otherwise, he’d end up spending that money on attorney’s fees in court.

Caruso lost $10,500 on that job. “That’s not chump change,” he says. But ultimately, given the economic slump and slow pay trend of other clients, he felt he had no choice but to settle.

Lien laws are there to secure a debt the property owner owes to another person – in this case, Caruso. They’re a protection, but only if you use them. “I had all my i’s dotted and t’s crossed, which is why I got paid 80 cents on the dollar eventually,” Caruso says.
 

Partners and crime

When the partner that R.D. Winland started his first landscape company with back in college wanted out, what seemed an amicable request fast rolled into a drained checking account, bankruptcy and three years of stress.

All this happened right before the economy really took a dip.

“I had first rights to buy him out, or we could find someone else to buy him out 50/50,” R.D. Winland says of the somewhat loose partnership agreement that was drawn up between him and his buddy. Winland was the field man, managing operations and delivering the service. His partner was the sales leader who also managed the books.

Before giving the partner an offer, Winland figured out the worth of the company minus its debt. Then, he put an offer on the table. “The next thing I know, I’m being sued,” Winland says. But worse, in the midst of meeting with an attorney to deal with the lawsuit, the partner drained the checking account. There were no check-signing limitations requiring both partners signatures in their casual partnership agreement. That was a big mistake. Winland filed a countersuit that persisted for six months before the partner filed personal bankruptcy. So the case was essentially dropped because the bank takes precedence in situations like this. “We sat there for almost two and a half years waiting for the bankruptcy to go through court, and bank trustees, who oversee the procedure, came to us to see if he could get some assets out of the business,” Winland says.

The trustees determined that the partner indeed had ownership in the company. But they never asked the Winlands to give up any assets. Meanwhile, the partnership was still intact legally. And that is still the case today. “We filed for a dissolution instead of going back to sue him for what he stole,” Winland says. That process is in the works.

In the meantime, Winland faced a credit lock-up when he approached banks to get working capital because of the partner’s bankruptcy state. “No one wants to allow you to have a line of credit to purchase materials that you need to do long-term projects,” Winland says.

So Winland started a new business with his wife, Stephanie, as partner. They realigned their marketing by giving the company a new name but keeping the logo similar to the old one. “We want people to identify with the good things we have done in the past,” Stephanie Winland says. “We are in a small town, so reputation is everything.”

The Winlands communicated with customers about the name change, leaving the partnership battle out of it. “We put a letter out to customers and vendors saying we are realigning our business and marketing efforts to truly describe our line of work (with a new name), and it’s a positive direction for the company,” she says.

The lesson learned, Winland says, is to think twice before you bring on a partner.

Client use and abuse

For 15 years, Lawn Managers in St. Louis, had served as the lawn care subcontractor for a large maintenance firm in town – a several-million dollar outfit that only focused on landscape maintenance. The big firm sold lawn care services to its customers, turned the business over to Lawn Managers and paid Linda Zweifel and her then-partner directly. That business generally amounted to $200,000 in commercial work each year for Zweifel.

Last year, the large firm seemed to be growing exponentially. “They kept getting more and more accounts and having us bid on them and start to service them,” Zweifel says. “I thought it was strange that they were taking on so much work. Then, they started falling behind in payments.”

Lawn Managers’ 60-day payment policy went by the wayside. The big firm hadn’t cut a check for 120 days. Zweifel wanted to stop doing the work – better to lay off a couple of employees than put the business in financial jeopardy. But her partner wanted to keep their guys busy. They continued to do more work, driving the bill owed to them up to $150,000.

Zweifel placed phone calls, doing her best to collect. “They said, ‘We’re having a rough time, we’ll get it to you next year,’” Zweifel says. But by the end of the seven-month season, Lawn Managers was owed $185,000. The big firm would send scant payments of $3,000 here and there, barely chipping away at the balance. Today, Lawn Managers is out $122,000 and that doesn’t count operating costs. Plus, because Lawn Managers runs the business on a cash accounting basis, it couldn’t claim the $122,000 as a loss on their tax returns.

Meanwhile, the big firm had started another LLC, and Zweifel believes its unusual surge in business was an effort to falsely build up revenues in order to eventually sell to a large national company. “They used us for all of their chemical apps, knowing they weren’t going to pay, and they made it look like they had so much revenue going through them and capital to back it up,” Zweifel says.

That big firm is still in business. Zweifel sees the trucks on the road – their old name and logo were removed, but she can see where the signage was stripped from the vehicles. “They are still out there working, even though they ripped us off for $122,000,” she says, fuming.

Lawn Managers took the issue to court and found 10 other companies waiting in line to get their money, too. “There is nothing we can do to retrieve it,” Zweifel says of the money.

Zweifel says the LLC and fast growth were red flags, and Lawn Managers should never have allowed a large customer to run such a big balance. She says there are really no legal repercussions, and so now the focus is on driving the core business, not being a subcontractor for someone else. Lawn Managers is embarking on a website project to enhance its Internet marketing.

The end lesson: Don’t get brushed off by the bigger guy, she says. “A lot of businesses have working relationships with other companies and think, ‘Well, they always paid us in the past. They will pay us,’” Zweifel adds.

The author is a frequent contributor to Lawn & Landscape.