Articles of Collections - Part 2

Getting the Money in the Door: Solving the Problem of Collections - Part II

Water purveyors face a myriad of operational issues on a daily basis, from ensuring an adequate supply of water to meeting the increasing number of regulations governing drinking water.  They must manage employees and meet the expectations of their customers, all while operating within the confines of an annual budget driven by a desire to keep rates as low as possible.  Public agencies and mutual water companies do not operate to make a profit, and this makes the need to ensure that bills are timely collected all the more important.  In the current economic climate, however, customers also face tight budgets and have to make difficult decisions about which bills to pay, and which to put off until later. 

 

In the Summer 2014 issue of the California Water Journal, we reviewed the procedures that must be followed before terminating service to a residential customer. While termination of service is usually the most effective means of ensuring payment of outstanding bills, it is not the only tool in the water purveyor’s toolbox.  In this final installment of our 2-part series, we will discuss some other collection procedures available to both public agencies and mutual water companies as an alternative to termination of water service. 

 

Part II:  Alternative Means of Collection 

 

A. Recording a Lien

 

1. Creating the Lien. As an alternative to discontinuing water service, or in conjunction with discontinuance, a water district or mutual water company can secure the amount of any unpaid charges by placing a lien on the real property to which water service is provided.  The lien is created by recording a certificate specifying the amount of the charges and the address of the  relevant property.  The delinquent amount, including interest and penalty, then constitutes a lien upon the real property to which service was provided. 

 

In most cases, a district also has the option of filing a lien against any other real property in the county owned by the person responsible for payment of fees and charges for service.  In this instance, the certificate of lien specifies the amount of charges and the name and address of the person responsible for paymentThe lien has the force and priority of a judgment lien and is effective for 10 years from the date of the filing of the certificate.  Prior to expiration, the district can extend the lien for an additional ten years by filing a new certificate with the county recorder.  The district can continue to extend the lien in this manner for successive ten year periods. 

 

The lien should appear on any title search involving the real property subject to the lien, and should be satisfied out of escrow if the property were to be sold.  The district or water company would also have the option of foreclosing on the lien through a judicial action.  However, the expense of doing so may not be justified by the magnitude of the lien.     

 

If a district or water company elects to implement this procedure, it should first create a system to determine when delinquencies either have reached a predetermined amount, or have continued unpaid for a predetermined period (e.g., 2-3 months).  At that time, the district or company would complete a certificate of lien and record it with the county recorder. 

 

2. Authority for the Lien. A lien can be created by contract, as in the case of a mortgage, or by statute [Civil Code §2881].  In the case of water purveyors, all of the liens discussed are based upon a specific statute authorizing the lien.  Water districts have long had a statutory lien right.  The specific authority depends upon the type of water district [i.e., the statutes for County Water District are Water Code §§31701.5 and 31701.7].  Generally, each district type [county, irrigation, California, etc.] has the statutory authority to either lien the property to which service is provided, or record a judgment lien against the individual responsible for paying the bill. 

 

Mutual water companies followed a more circuitous route.  Historically, the lien right was founded in agreement.  Where the bylaws provide that the company has a lien for unpaid rates, charges and assessments against the property to which service is provided, that constituted, in our view, an agreement between the company and its shareholders establishing the lien right.  In other words, Civil Code §2881 applied, as this was a lien created by contract. 

 

Unfortunately, liens are recorded at the county level, and are therefore subject to scrutiny by each county recorder’s office as to whether the lien is properly based on statute or agreement.  In the past few years, we experienced the refusal of some counties to allow the lien.  In order to solve this problem, we successfully included language in AB 240 establishing a statutory right to a lien, provided that the bylaws authorize such lien [Corps. Code §14304].  It is important, then, for any mutual water company wishing to take advantage of the lien procedure to secure payment of monies due them, to amend their bylaws if necessary to authorize the recording of a lien. 

 

3. Notice That a Lien May be Recorded. County water districts and mutual water companies are required to advise property owners in writing in advance of filing a certificate of lien.  County water districts must give 60 days notice and mutual water companies must give 20 days notice.  We recommend that all purveyors looking to take advantage of the lien procedure provide advance written notice that a lien may be filed against their property.  Often this simple notice prompts payment to avoid the lien. 

 

4. Releasing the Lien. Once the lien has been satisfied, it is important that the water purveyor take the necessary steps to release the lien.  This is done by recording a Release of Lien in the same county recorder’s office where the lien was originally recorded. 

 

5. Effect of a Foreclosure. Foreclosure of the property subject to the water purveyor’s lien against a mortgage or other encumbrance dated prior to the lien acts to eliminate the lien.  A typical foreclosure therefore eliminates the lien and a districts ability to further enforce the lien.  For this reason, some districts elect to use the personal lien procedure, as such liens affect all property owned by the debtor in the county, not just the property to which service is provided. 

 

Mutual water companies, however, still have options in the face of a foreclosure.  While they no longer have the lien to rely on, the new owner [usually the bank] will want water service to continue to the property.  A mutual water company can only provide water service to its shareholders.  Therefore, in order to receive water service, the bank or other foreclosing party must own stock in the company.  Usually, the water company bylaws provide that the shareholder’s stock be forfeited for non-payment of any moneys due the company, and that shares may not be transferred or issued until the stock has been paid in full. 

 

This means that the new owner cannot obtain the share(s) of stock for the foreclosed property until the prior owner’s shares have been brought current.  Put another way, all outstanding charges against the prior share must be paid before a new share or shares can be issued.  Without the stock being transferred to the new owner, the new owner is not entitled to receive water.  Thus, while it is not the responsibility of the new owner to pay the outstanding charges against the prior owner, those charges must be paid before the new owner is entitled to receive water from the company. 

 

This same analysis would apply to the situation where the property is sold and an outstanding bill remains.  The stock cannot be transferred to the new owner until the outstanding bill is settled. 

 

Mutual water companies should have their bylaws reviewed to ensure they include the provisions necessary to empower the water company to enforce its lien and stock forfeiture rights. 

 

B. Other Issues

 

1.Deposits. Districts and mutual water companies may only collect a deposit for residential water service after a determination of creditworthiness has been made.  That means the district or company has 2 choices: either do not collect a deposit at all, or establish objective criteria for determining creditworthiness.  This rule does not apply to commercial accounts, and we would recommend getting a deposit for all commercial accounts. 

 

Should the district or company choose to collect a deposit, it does not necessarily have to subscribe to a credit reporting service, which can be cost-prohibitive.  A simpler, yet equally objective approach is to ask the customer to bring in a 6- or 12-month billing history from their prior service provider demonstrating that they were current over that period.  The time frame does not matter so long as the measure is applied evenly to all residential customers. 

 

Water purveyors should include in their policies a provision that if a customer, for example, bounces a check or incurs a late charge more than once over a 12-month period, the district or company is then entitled to impose a deposit as a condition of continued service.  These rules should be in writing and accessible to all customers.  They can even be put on a website.  Most importantly, they should be applied fairly and evenly to all customers. 

 

2. Bankruptcy. Often when a customer cannot pay their water bill, that fact is an indicator of greater financial problems.  On occasion, those customers will turn to the bankruptcy laws for protection. 

 

Under bankruptcy law, creditors cannot take action to enforce a debt that occurred prior to the date the bankruptcy petition was filed.  Such debts are commonly referred to as “pre-petition” debts.  If the district or company receives notice that a bankruptcy petition has been filed, it should immediately get a meter reading and make an effort to establish water usage up to the date of the filing.  If there is a deposit, that amount should be applied to the outstanding balance due.  Any amount remaining due will be the pre-petition debt owed to the water purveyor. 

 

The bankruptcy notice usually includes a form for filing a creditor’s claim.  It is fairly simple, but if there are any questions regarding the claim form, you should consult a lawyer. 

 

Moving forward from the filing date, the customer will continue to need water service, and the purveyor is obligated to provide that service.  However, the district or water company is entitled, under bankruptcy law, to demand adequate assurance of payment.  In other words, you can get a new deposit for the “post-petition” debt.  Someone who files for bankruptcy is nonetheless required to stay current on post-petition debt.  We would recommend at least 2 months average usage be used as the basis for the new deposit. 

 

Those who have sought protection under the bankruptcy laws are not protected from enforcement procedures being undertaken for post-petition debt.  That means the service provider can impose late charges, schedule a termination of service and even terminate water service, even though the customer is in bankruptcy. 

 

C. Final Thoughts

 

Dealing with customers that are delinquent in paying their bill is one of the least rewarding parts of operating any business.  The good news is that there are many tools available to water purveyors that can make the collection of delinquent bills an orderly and successful process.  The key is to establish policies that are applied consistently.  It is also important to have the appropriate forms available, should you need to use one of the procedures outlined in these 2 articles on collections. 

 

Lagerlof, Senecal, Gosney & Kruse, LLC is prepared to assist you in all aspects of this process should you not otherwise have the resources available to you.  We can prepare policies, rules and regulations implementing collection procedures, and provide you with the forms necessary to follow through on those polices. If you need to request another copy of the first article in this series, please contact us. 

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