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Construction in Brief: 2014 Volume 1

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Is Newer Always Better? Important Changes in the New Jersey Limited Liability Company Act

By Marian A. Kornilowicz and Alexander F. Barth

On September 19, 2012, New Jersey enacted the Revised Uniform Limited Liability Company Act (N.J.S.A. 42:2C-1 et seq.), colloquially known as RULLCA. Although the new law became effective on March 18, 2013 (the “Effective Date”), it was not until March 1, 2014 that RULLCA controlled or applied to limited liability companies (LLCs) formed prior to the Effective Date. Between the Effective Date and March 1, 2014, RULLCA applied only to LLCs formed during that period or to LLCs that voluntarily amended their operating agreements to specify that RULLCA would govern. Therefore, it was not until March 1, 2014, when the prior act was repealed, that the complete impact of RULLCA applied to all NJ LLCs.

What does this mean to your business? Well, whether you are a new or existing LLC, RULLCA has upgraded and modernized the rules for the formation and operation of LLCs. The key changes can be divided into two categories: those that impact on the formation and governance of LLCs and those that affect the relationships between the members of LLCs.

Formation and Governance of LLCs
There are four important changes regarding the formation and governance of an LLC:

  • Under the prior act, unless specifically stated, LLCs had a limited lifespan of thirty years. RULLCA provides that LLCs, like corporations, now have a perpetual duration unless specified otherwise.
  • RULLCA provides that an LLC’s operating agreement, which governs the rights and obligations of an LLC’s members, may be written, oral or, most importantly, IMPLIED based upon the way the parties have operated the company. This is a crucial change for LLCs without a written agreement, as it allows a court to establish an operating agreement through prior conduct. This can be a positive change or a very detrimental one, depending on what side of a dispute you may be, but it is definitely risky for everyone.
  • LLCs can now file a Statement of Authority with the New Jersey Department of the Treasury, setting forth what individuals or entities can bind the LLC. Filing such a statement can be helpful as it puts third parties on notice as to who can contractually bind the LLC, maintaining control amongst key members and/or minimizing problems with rogue employees.
  • RULLCA makes it easier for an out-of-state entity to domesticate to a NJ LLC and for any entity to convert into an NJ LLC.

Relationships between Members
As for the changes relating to the relationships between the members of an LLC, there are four that can drastically affect how members interact under the new law:

  • Distributions. Unless the operating agreement states otherwise, distributions shall be made on a per capita basis with each member entitled to an equal share of the profits or losses. If an LLC’s current operating agreement is silent on this issue, or there is no written agreement, and the members have not been taking distributions on a per capita basis (but based on percentage of ownership interest, for example), the distributions will have to be specifically addressed or the intent of the parties may no longer be protected by the statute.
  • Voting. Similarly, RULLCA provides that each member shall have an equal vote, regardless of percentage of ownership. It requires that ordinary business matters be decided by a majority vote of the members, with each member having one equal vote, and that non-ordinary matters (mergers, sale of all assets, or amendment of the operating agreement) be decided by a unanimous vote. Alternate voting schemes must be expressly addressed in the operating agreement.
  • Disassociation of a member. Previously, if a member elected to withdraw from the LLC, the LLC was obligated to distribute, in a reasonable time after withdrawal, the monetary value of that member’s interest. With the adoption of RULLCA, a member does not have an automatic right to cash-out his interest in the LLC; but rather, upon withdrawal or disassociation, becomes an economic interest holder with an equity interest but no voting rights.
  • Redress for Oppressed Minority Equity Owners. While RULLCA eliminated the right for a member to withdraw from an LLC at will, it did adopt a statutory scheme, similar to that found in the New Jersey Business Corporation Act, whereby oppressed minority equity owners can seek redress. It also expressly imposed a standard of good faith and fair dealing on the members. So while a withdrawing member is no longer automatically entitled to the value of his interest if he elects to withdraw from the company, a member under RULLCA has remedies if the managers or members in control are acting in a manner to oppress the aggrieved member, and taking actions that were, are or will be harmful to the aggrieved member’s interest. These remedies include seeking dissolution of the company, appointment of a custodian, or requiring the LLC or other members to purchase the interest of the aggrieved member.

While the prior act allowed members to more freely extricate themselves from an investment in a company, RULLCA recognized the crippling effect this automatic right of withdrawal could have, especially where the economic impact of the withdrawal and required payout could prove detrimental to the operations of the LLC. To address this issue while still providing redress for an aggrieved member, RULLCA requires that the aggrieved member establish that he has been oppressed. This is a critical change in how disputes among members may be resolved, and it will take time for the courts to develop a body of case law related to the oppressed minority member provisions. However, the courts will likely look to the case law developed in response to the Corporation Act.

The bottom line is that key changes have been made to RULLCA that impact the formation and governance of New Jersey LLCs, as well as the relationships between the LLC members. If it was not the case before, it is certainly now critically important for members of LLCs in New Jersey, who have not already done so, to negotiate and execute an operating agreement. For assistance with this or if you have any further questions as to how RULLCA now affects your LLC, please contact the attorneys in our Business Practice Group.

Marian is a Partner with the Firm and Alexander is an Associate, both practicing in the Business Practice Group. They can be reached at (215) 564-1700, mkornilowicz@cohenseglias.com or abarth@cohenseglias.com.
 

Public-Private Partnerships: What You Need to Know About this Emerging Trend in Construction

By Catherine Nguyen

What is a Public-Private Partnership?
Public-private partnerships (P3s) are contractual arrangements whereby resources, risks and rewards are shared among partnering public entities (federal, state, or local government agency or authority) and private companies to deliver a service or facility for the use of the general public. Although there are many ways to describe P3s, forward looking definitions of P3s focus more on the partnership and collaborative relationship between the public and private sectors, and less on the mechanics of how the agreements are structured.

How are P3s different from the traditional design-bid-build model?
Unlike the design-bid-build model traditionally used by public entities, P3s are typically based on the design-build model, and can take a variety of forms, such as: design-build (DB), design-build-maintain (DBM), and design-build-finance-operate-maintain (DBFOM). In the design-build model, the private sector partner designs and constructs the public project. The primary advantages to the public entity of the design-build model over the traditional design-bid-build approach are:

  • shifting risk to the private sector partner for design and construction, resulting in a single point of responsibility;
  • increasing the likelihood of cost reductions due to having construction professionals involved in the early stage of design; and
  • increasing the likelihood of shortening the time period for project completion by integrating and overlapping design and construction, instead of the traditional sequential process.

However, in order to maximize the benefit of using an approach premised on one of the design-build models where the design risk is shifted to the private sector partner, the public entity must give up a significant amount of control over the design. This can create tension within a public entity that is used to controlling the design process and can create problems during the project if the scope of the public entity’s input into the design is not clearly articulated in the contract.

The latest DBFOM P3 trend involves agreements where the private sector partner is responsible to design, build, finance, operate, and maintain the public project. This model differs from the basic design-build model in two significant ways: (1) the private sector partner obtains financing to help pay for the project; and (2) the private sector partner agrees to operate and maintain the public project for an extended period of time, which could run from 15 to 50 years. Recent DBFOM P3s have 20 to 35 year durations.

By requiring the private sector partner to operate and maintain the project for an extended period of time, there is an incentive to design the project in a manner that takes into account the life-cycle costs and performance of the project, resulting in a focus on energy efficiency. This approach also addresses one of government’s most difficult problems — the culture of deferred maintenance, as budgetary constraints make it difficult for public entities to budget sufficient resources for the necessary maintenance of aging public facilities and infrastructure. In these DBFOM P3s, the public entity pays the private sector partner over the maintenance period using “availability” payments based on the project achieving contractually-specified performance measures, such as a train station or courthouse being available or open to the public. The failure to achieve such requirements could result in the public entity withholding or deducting amounts from payments otherwise due.

How are P3s being used across the country?
While P3s are a hot topic in construction today, they have been around for a long time. P3s were first used to build, operate and maintain transportation infrastructure like interstate highways. P3s are still used that way today. Nevertheless, the economic downturn in recent years and the deteriorating condition of the nation’s infrastructure has resulted in increased interest in the use of P3s. For example:

  • In Virginia, the I-495 high occupancy toll (HOT) lanes project was completed in 2012, which created 14 miles of four new toll lanes for the Capital Beltway outside Washington D.C. This project replaced more than $260 million in aging infrastructure, including more than 50 bridges and overpasses, and upgraded 12 key interchanges. The HOT lanes use dynamic toll pricing, which changes the toll based on traffic flow. It also provides toll-free access to HOVs, buses and motorcycles.
  • Pennsylvania’s Rapid Bridge Replacement project aims to replace at least 500 structurally deficient bridges across the Commonwealth within the next five years. The project contemplates creating efficiencies through economies of scale, innovation, and optimal risk allocation that will allow PennDOT to deliver more bridges at a lower whole-life cost than a traditional design-bid-build procurement.
  • In New York, the Goethals Bridge Replacement project is the first surface transportation P3 project in the Northeast U.S. that includes project finance and long-term maintenance. The Port Authority of New York & New Jersey expects to completely replace the existing four-lane, 85-year-old bridge with a new six-lane, cable-stayed toll bridge by 2018.
  • The Port of Miami Tunnel project (DBFOM) will use advanced tunneling technology to provide new access to Miami's port and ease congestion in the region by May 2014.

Modern trends are applying P3s beyond traditional infrastructure projects to hospitals, schools, community centers, and courthouses across the country. These social infrastructure projects are a growing source of P3s. Here are some examples of other public entities making use of P3 contracts:

  • Since the mid-1990s, P3s have enabled Virginia to build new county and state prisons at a 15 to 20 percent savings, while creating jobs for contractors in the region.
  • The Long Beach, California project is the country’s first social infrastructure/non-transportation project in the U.S. using a DBFOM delivery method and availability payments as the revenue stream. This project finished ahead-of-schedule and under budget in the fall of 2013.
  • In July 2013, Florida House Bill 85 was signed into law, authorizing counties, municipalities, school boards, regional entities, and state subdivisions to utilize P3s to develop transportation, water, housing, and municipal infrastructure.
  • A rural North Carolina county effectively used a P3 to build a middle school to support the influx of military families to the area due to the Defense Base Closure and Realignment. The county used a sale/leaseback arrangement to pay the private developer over the term of the lease period. The private developer obtained a variety of tax credits, which enabled the development of a LEED platinum design for the school. The school opened in the fall of 2013 and is equipped to generate more energy than it uses.

What are some of the challenges associated with P3s?
Shrinking public funding is being met with increasing populations and growing needs for transportation, education, health care, and other infrastructure. These dynamics suggest that the role of the private sector will continue to expand in public projects in the United States. While there has been increasing publicity involving P3s and the opportunities they present to address infrastructure and other public needs, enthusiasm must be tempered by challenges that remain:

  • P3 legislation differs from state to state. At least 32 states have some form of enabling legislation, authorizing some use of public-private partnerships. In some cases, the legislation must be amended to provide further flexibility for public entities to address their needs.
  • For P3s to become reality, political support is critical. Further education of public officials and the local population on P3s is essential to obtain approval and support.
  • There are significant transaction costs, which create challenges for, and potentially prevent, the use of P3s on all but the largest projects. For example, the absence of standard form agreements for P3s results in higher transaction costs for negotiating the various contracts. The Federal Highway Administration has proposed model P3 contract language to guide states in drafting transportation contracts. One possible solution for overcoming the significant transaction costs is for the public entity to “bundle” a number of similar projects together as one P3.
  • P3s require a guaranteed revenue stream. The perfor­mance periods of P3s tend to be 20, 30, or more years. In order to pay the private sector partner for projects over this duration of time, there must be a dedicated revenue source. Typical sources include tolls, lease payments, and availability payments.
  • While P3s offer significant opportunity, private sector contractors and developers face a steep learning curve to become familiar with the various models and each state’s unique enabling laws. Moreover, this model shifts to the contractor risks related to financing, design, and construction and potentially the operation and maintenance of the public asset. Some contractors may not be willing and/or able to absorb these risks.

What should you take away from this article?
As with any new and unique public-private collaboration, challenges remain and participants should keep a close eye on the laws and regulations applicable in each state and for each project. Nevertheless, P3s could create a win-win situation for all involved. In tight economic times, P3s can enable public entities to take advantage of private sector financing to help bring needed public projects to fruition. Moreover, combined resources of the public and private sectors can result in a shorter construction schedule and other cost savings for the public entity. For contractors and developers, this recent trend in construction opens an exciting, new market offering both short-term, as well as long-term, financial returns. For communities, these partnerships could mean that once deferred, desperately needed public projects will have a better chance of getting off the ground. Additionally, because private entities may be obligated to operate and maintain what they build, the result is likely to be higher quality design and construction, including green and energy-efficient public facilities.

When federal or local governments and private sector developers exchange expertise and share investment burdens, communities can benefit from the resulting broader network of resources and sharing of best practices and industry knowledge, all while stimulating economic activity and creatively meeting public needs.

Jason is Senior Counsel with the Firm and Catherine is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700, jtomasulo@cohenseglias.com or cnguyen@cohenseglias.com.

Q&A with Bernie Conaway

Bernie Conaway recently joined Cohen Seglias as a Partner in the Firm’s Wilmington office. In addition to his bankruptcy, commercial, and construction litigation practice, Bernie is an accomplished mediator. For the last ten years, Bernie has also volunteered as an Attorney Guardian Ad Litem representing minor children in Delaware.

Q: A good portion of your practice is conducted in the Delaware Court of Chancery. Can you explain what the Court does and talk a little about your practice before the Court?

A: Most U.S. corporations are incorporated in Delaware. The Delaware Court of Chancery is where most of those corporations resolve their legal disputes. The Court of Chancery is nationally respected for its fairness, business sense, and intellectual depth. Attorneys who practice regularly before the Court of Chancery develop a specialized skill set that enables them to navigate critical business problems through some very intricate legal and factual issues. The Court also has a reputation for its willingness to act very quickly. I’ve filed, tried and successfully appealed billion dollar cases within three months. By comparison, in some jurisdictions, it can take a year or more to set a trial date.

I was also privileged to serve nine years as the Special Master of Complex Litigation in the Superior Court of Delaware. As Special Master, I was responsible for the pre-trial supervision of large, multiple-party cases involving mass torts like asbestos and claims regarding insurance coverage, construction, and environmental liability.

Q: Tell us about your clients.

A: As a litigator, I serve as lead and local counsel in Delaware for bondholder claims, bankruptcy matters, corporate control disputes, commercial contract claims, insurance coverage, and other complex civil matters. My clients range from Wall Street investors, to corporate directors and officers, to mom and pop shops caught up in a bankruptcy of a larger corporation. I enjoy working on different kinds of matters and working with a variety of different clients—authentically understanding my clients’ business broadens my knowledge base and benefits all aspects of my practice.

Q: You are also well-known for your Alternative Dispute Resolution (ADR) practice.

A: I’ve served as a mediator since 1994. Since that time I’ve mediated thousands of cases. For most of those mediations I was mutually selected by the parties. In twenty years of ADR practice, I’ve successfully mediated every kind of dispute including corporate espionage, law firm break-ups, mass tort, employment/workplace, construction, environmental, contract, and personal injury disputes.

Bernie is a Partner in the Firm’s Wilmington Office. He can be reached at (302) 425-5089 and bconaway@cohenseglias.com.

Helpful Advice for Smoother Roads Projects

By George E. Pallas and Jennifer R. Budd

On New Jersey DOT projects, road contractors are encouraged to construct as smooth a road surface as possible or face monetary penalties. The surface of a road is gauged by the International Roughness Index (IRI), which measures the roughness of all types of roads in countries around the world. According to the NJDOT’s Standard Specifications, the IRI is applicable to all paving in excess of one mile in length. The NJDOT’s specifications allow for positive pay adjustments for superior quality paving and negative pay adjustments, also known as penalties, for inferior quality paving. The dollar amount of the pay adjustments by roughness value are included in a NJDOT project’s specifications.

The Tilcon Case
In Tilcon New York, Inc. v. New Jersey Department of Transportation, the NJDOT imposed $419,125 in penalties due to a contractor’s failure to achieve the desired IRI values required by the Project’s specifications. Tilcon, a road contractor, sued the NJDOT, arguing that the NJDOT applied the IRI specification in an unreasonable and unfair manner. Specifically, Tilcon argued that impediments such as manholes, water valves, catch basins, and intersections skewed the averages of readings taken in the tested segments. Further, Tilcon argued that on an earlier pilot project, the NJDOT omitted such areas from the IRI testing, but failed to omit them on the project at issue. The court noted that the specifications did not state that such areas would be omitted and required bidders on the project to carefully examine the project areas and alert the NJDOT of any problematic circumstances prior to bidding. Thus, the court held that Tilcon was not justified in arguing that certain areas should be omitted from testing, since Tilcon did not raise its concerns about such areas prior to bidding. Therefore, the trial court entered judgment in the NJDOT’s favor and upheld the penalties.

Recently, the NJ Appellate Division upheld the trial court’s decision, noting that the NJDOT’s specifications did not discuss the waiver of any areas from roughness testing. Further, the Appellate Division held that the specifications required the contractor to inform the NJDOT pre-bid that it would be difficult or impossible to achieve the desired IRI on particular areas of the roadway due to the existence of manholes or water inlets. Moreover, the fact that the NJDOT waived testing in certain areas on another project was not controlling on Tilcon’s project, since the IRI specification did not mention waivers. Hence, the NJDOT was not required to issue Tilcon any waivers on the project at issue.

Impact of the Decision
Since this decision is the only appellate level case interpreting the IRI specification, courts across New Jersey will likely look to it for guidance. It is imperative that contractors thoroughly review the project area and alert the NJDOT of any impediments that could make it difficult to achieve the desired IRI roughness goal prior to bidding a project. The NJDOT has eased roughness requirements in the past when notified of contractors’ concerns. However, if the NJDOT does not make such an adjustment and a contractor submits a bid, the contractor may be required to meet the specified IRI goals or face penalties.

On the other hand, it is not clear how the Courts will react to other IRI challenges. For example, if events occur during the course of a project that interfere with a contractor’s ability to achieve the desired roughness value, a court may not uphold the penalties. If this happens, it is critical that such events be documented and reported to the Resident Engineer. A court will be less likely to relieve the penalties if the NJDOT was not given an opportunity to fix whatever circumstances made it difficult for the contractor to achieve the desired roughness value.

Further, the NJDOT may use the Tilcon decision to justify a “bidder beware” approach to any existing site conditions, even if the condition is not as obvious as a manhole. It is imperative that contactors carefully review the specifications and the site, and alert the NJDOT, pre-bid, to any issues that may prevent conformity with the specifications.

George is a Partner with the Firm and Jennifer is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700, gpallas@cohenseglias.com or jbudd@cohenseglias.com.

What’s New

Brief Note:
Spring has finally arrived! After a winter filled with shoveling and project delays due to weather, what a breath of fresh air spring brings. We are excited to introduce you to a few new faces at the Firm, as well as congratulate two of our attorneys on their promotions. Finally, a warm welcome to Jennifer Budd, who is serving as our new Associate Editor. Enjoy the first 2014 edition of Construction in Brief!

Ashling
Co-Editor-in-Chief

Kate
Co-Editor-in-Chief

Jennifer
Associate Editor

New Faces
Kathleen Garrity
has joined the Firm as Executive Director. She is responsible for the management and direction of the accounting, human resources, facilities, information systems, and marketing functions. Prior to joining the Firm, Kathleen worked at Ballard Spahr LLP as Controller and Director of Finance. She spent the first 15 years of her career at Arthur Andersen LLP serving professional services clients both as an auditor and as a consultant. She is a member of the Pennsylvania Institute of Public Accountants.

The Firm also welcomes Bernie Conaway as a new Partner in the Wilmington office who concentrates his practice on alternative dispute resolution, bankruptcy, and matters litigated before the Delaware Court of Chancery. Bernie is also an accomplished arbitrator and mediator — and is featured in this issue’s Q&A on page 7.

Promotions
We are pleased to announce that Jennifer Horn has been promoted to Partner and Jeffrey Brydzinski has been promoted to Senior Counsel.

A trial attorney who focuses her practice in the areas of construction, commercial litigation, and real estate, Jennifer has spearheaded numerous successes in multiple state and federal jurisdictions. Admitted to practice law in Maryland, Pennsylvania, New Jersey, and the District of Columbia, Jennifer also serves as Managing Editor of the Firm’s construction blog.

As Senior Counsel, Jeffrey maintains a practice concentrating on complex commercial matters and construction law claims on behalf of owners, contractors, design-builders, subcontractors, suppliers, and manufacturers in multiple jurisdictions.

Recent Victories
After more than six years of litigation, Edward Seglias and Robert Ruggieri negotiated a settlement for $5.1 million on Sept. 10, 2013, just prior to opening statements at trial in the matter of Springton Pointe Condominium Association v. Pulte Homes. The pre-trial settlement was for alleged design and construction defects in the Newtown Square townhome development. A previous June 2012 settlement between the parties for $467,500 was the result of alleged defects elsewhere on the Springton Pointe site including roads, sidewalks, and retention basins. The Association settled with defendant homebuilder Pulte Homes Inc. for a total of $5,567,500 in Delaware County court.

Awards
U.S. News – Best Lawyers ® has named Cohen Seglias a 2014 Best Law Firm for Litigation – Construction and Arbitration in Philadelphia.

Labor & Employment Law Seminar
Cohen Seglias welcomes you to our 6th Annual Labor & Employment Law Seminar! Join our speakers Marc Furman, Jonathan Landesman, Shawn Farrell, and Steven Williams for a seminar on cutting edge labor and employment law issues impacting your business.

When: Wednesday, April 30, 2014
Time:  8:00am – 12:00pm
Where: The Union League  140 South Broad Street, Philadelphia, PA 19102

When: Tuesday, May 6th, 2014
Time:  8:00am – 12:00pm
Where: Hershey Country Club  1000 East Derry Road, Hershey, PA 17033

For questions, please contact Kerstin Isaacs at kisaacs@cohenseglias.com or (215) 564-1700.