United States: Ohio Molder Moldbuilder´s Lien Laws: How To Protect Your Outstanding Account Receivables

One of the best kept secrets in the tooling industry is an Ohio law that grants a lien to molders and moldbuilders for services performed related to dies, molds, patterns and forms. Ohio Molders Lien Law is provided in Ohio Revised Code §§ 1333.29 through 1333.31 ("Molders Lien Law"), and the applicable provisions that outline Ohio Moldbuilders Lien Law ("Moldbuilders Lien Law") are located in Ohio Revised Code §§ 1333.32 through 1333.34.¹ These provisions provide molders and moldbuilders with a unique statutory right to protect their outstanding accounts receivables.

To understand what rights and protections are afforded molders and moldbuilders under the Ohio lien laws, you must begin with the cast of parties that factor into this lien scenario. Under Ohio law, a molder is defined as an entity that uses the die, mold, pattern or form to manufacture, assemble or fabricate plastic, metal, paper, china, ceramic, glass or rubber products. A moldbuilder is defined differently under the Ohio Revised Code, and the distinction is important in terms of how the law is applied. A moldbuilder is an entity that fabricates, cuts, casts or designs molds for the plastic industry or for the metal forming industry. A moldbuilder does not include any entity similarly described as a molder for the purposes of the Molders Lien Law, unless the person also engages in the activities described therein. A customer is generally any entity that engages a molder or moldbuilder to fabricate, cast or otherwise make a die, mold, pattern or form.

An entity that qualifies under Ohio law as a molder or moldbuilder no matter the industry, has the added protection of having a statutory lien perfected either by possession or by filing a UCC financial statement, that is superior to all other creditors, including secured creditors (who take subject to it). These liens secure a molders or moldbuilders right to full payment by a customer for whose benefit the mold/die, etc is utilized.

Molder v. Moldbuilder

The Molder

A molders lien is dependent on physical possession of the dies, molds, patterns or forms, notwithstanding the fact that the molds are likely to be owned by a customer. The lien secures full payment of what the customer owes the molder for the fabrication, repair or modification of the die, mold, pattern or form. Under the Molders Lien Law, a mold is the only collateral that secures a molders right to full payment by a customer. Simply put, the molders lien under the Molders Lien Law is a possessory lien that has priority over other security interests in the subject mold/die. Therefore, in order to maintain the statutory lien (and priority status) a molder must not give up possession of the subject die, molds, patterns or forms. Relinquishing possession grants a secured creditor and other lien holders priority (over the molder) on the subject mold.

Before a molder can enforce its rights under the Molders Lien Law, there must be a period of nonpayment by the customer. If a molder is unpaid for at least 60 days from the date payment becomes due from the customer, a molder may send a final notice for payment to the last known address of the customer. The Ohio Revised Code deems this notice as "final," which is a misnomer because it is the only written notice that is required from the molder. The notice must contain: (1) an itemized statement of the amount due; (2) a description of the die, mold, pattern or form being held; and (3) an explanation of the repercussions of the customer failure to pay within 30 days of the notice being sent. The continued noncompliance of the customer to not pay the invoice arms a molder with the right to enforce its lien by either: (1) continuing to retain possession and commence a civil action to enforce a molders lien and a judgment to sale the die, mold, pattern or form; and/or (2) continuing to retain possession until the customer pays the amount due. If a molder decides to sell the die, mold, pattern or form, any excess proceeds of the sale after satisfaction of the outstanding debt must be paid to the customer.

In 1987, the United States Bankruptcy Court for the Northern District of Ohio addressed the Molders Lien law, wherein Judge Speer held in favor of the molder, and in doing so, stated:

In re Flue Gas Resources, 77 B.R. 628, 631 (Bankr. N.D. Ohio 1987) (citations omitted). Judge Speer enforced the premise of the Molders Lien Law, that a lien is only effective so long as the molder maintains physical possession of the mold.

A customer is left with little recourse under the Molders Lien Law. A customer has a limited right to obtain possession of the mold during the pendency of a civil action by either (1) depositing with the clerk of the clerk, the amount due to a Molder (plus the cost of notification and amount sufficient to cover the civil award should a Molder prevail) or (2) a bond covering the same amount.

The Moldbuilder

The Moldbuilders Lien Law, grants a moldbuilder a lien on all molds it produces and on all proceeds from the subsequent transfer of the same, until a moldbuilder is paid in full. The amount of the lien is the amount the customer or molder owes a moldbuilder for the fabrication, repair or modification of the mold. The Moldbuilders Lien Law gives the moldbuilder recourse against the customer and the molder that may have engaged the moldbuilder to create the subject mold.

Notably, the lien attaches when the mold is delivered from the moldbuilder to the customer. It is important to understand that a moldbuilder retains the lien even if it is not in possession of the mold for which the lien is claimed.

To perfect the aforementioned lien, a moldbuilder must file a UCC financing statement, which also constitutes notice of the lien. The priority of a perfected Moldbuilders lien is determined at the time the lien attaches (in this instance when the mold is delivered). The first lien that attaches to the mold/die has priority over liens that subsequently attach. Therefore, if there are two competing moldbuilders liens, the first to attach pursuant to the Moldbuilders Lien Law is the first filed. The filing of the UCC financing statement constitutes constructive notice of the lien, and results in the moldbuilders lien having first priority position against secured lenders and other creditors of the customer. A moldbuilder should be aware that failure to timely file the financing statement will jeopardize its priority status, allowing other creditors liens to attach to the mold prior to the moldbuilders lien attaching.

In order for a moldbuilder to enforce its lien, it must provide written notice to the customer and molder indicating the lien is claimed, providing the amount a moldbuilder is owed, and making a demand for full payment. By complying with these requirements and customers and molders continued failure to pay, a moldbuilder has the right to: (1) enforce the right to possession of the mold by judgment, foreclosure or any available judicial procedure; (2) commence a civil action in a court of common pleas to enforce the lien, including an execution sale; (3) take possession of the mold, if it can be done without breaching the peace; or (4) sell the mold in a public action. Notwithstanding, no auction or sale shall be made or possession shall be obtained in violation of the customer or molders rights under applicable patent, bankruptcy, or copyright laws.

A moldbuilders lien remains as a valid security interest on the subject mold until the earlier of: (1) full payment due it for the mold; (2) the customers receipt of a "verified statement" from a molder that a molder has paid the amount for which the lien is claimed; or (3) the financing statement is terminated.

Ohio Moldbuilders Lien Law provides an added blanket of protection to moldbuilders. In particular, the law provides that any provision of a contract that waives a moldbuilders right under Ohio law is void and unenforceable as against public policy. In addition, any provision of a contract requiring the application of another state rather than the Ohio Moldbuilders Lien Law is void and unenforceable as against public policy. These provisions become increasingly important in a business transaction that involves an Ohio Moldbuilder and an out of state customer, who fails to pay and attempts to circumvent a moldbuilders rights under Ohio law.

Conclusion

Know your mold. It is very important molders and moldbuilders make themselves aware of the aforementioned provisions, to assist in gauging their future business relationships with customers. These provisions provide molders and moldbuilders with a unique statutory right to protect their outstanding accounts receivables. The Molders and Moldbuilders Lien Laws provide a means for molders and moldbuilders to enforce a customers payment obligation for work performed in an easier and less expensive manner. The same laws present a cautionary tale to all financial institutions and ultimate customers. Specifically, financial institutions that may be in a financial relationship with the customer need to pay special attention to the aforementioned Ohio laws. Usually as part of the loan agreement/security agreement with the customer, a financial institution will receive security in and liens on all or substantially all of customers assets, which often times includes the aforementioned molds. In a great many instances, those same security documents provide that an attachment of a lien on the subject collateral (in this instance the mold) is a breach of the financial documents. Notwithstanding, the statutory liens granted molders and moldbuilders upon perfection, by physical possession or filing of a UCC financial statement, may render the financial institutions security interest in the subject tool in second position to a molder and/or moldbuilder. Customers may find themselves without the equipment they contracted with a molder as an effect of their nonpayment. Moreover, they may be in breach of the terms of their loan agreement/security agreement with the bank or financial institutions because a Molders and Moldbuilders lien may trump the bank or financial institutions lien on the subject collateral.

Footnote

^{1. Michigan law, as well as other states, also provides protections to molders and moldbuilders. See Mich. Comp. Laws § 445.611, et seq.; Michigan Comp. Law § 570.541, et seq. The applicable provisions provide molders and moldbuilders with a lien on the die, mold and form for the full amount due for the completed service related to the same. Id.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.