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Construction In Brief: Fall 2008

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Cohen Seglias Pallas Greenhall & Furman PC
CONSTRUCTION IN BRIEF
  -  Fall 2008 Issue


Cover Story:LOOK BEFORE YOU LIEN
Leinor Beware: Intricacies in Pennsylvania's Mechanics' Lien Law Might Lead to Unexpected Results
--
by Anthony M. Bottenfield, Esq.


You entered into a subcontract with the general contractor to perform work on a project, then set your schedule, purchased your materials, and started working.  Everything seemed to be fine – work was going as planned and payments were coming in on time.  Then, the payments ceased.  Now you are on a job for which you are not getting paid.  Or, maybe, you completed your work but the final payment never came.  What do you do?  Your first instinct might be to walk off the job and file a lien on the property or, in the second scenario, file a lien for the money that is past due.

Two Pennsylvania cases might make you think twice about what to do when faced with these situations.  In Philadelphia Construction Services, Inc. v. Domb and Kelly Systems, Inc. v. Koda, the courts addressed the timeliness of filing mechanics’ liens under Pennsylvania’s Mechanics' Lien Law (“Lien Law”).  The two cases illustrate potential pitfalls in the Lien Law – even when you fully comply with the wording of the statute.

Domb involves a subcontractor that walked off a project prior to completing its work, claiming that the general contractor had not paid for the work.  Following the requirements of the Lien Law, the subcontractor sent the owner preliminary notice of its intent to file a mechanics’ lien.  According to the Lien Law, the subcontractor must send this notice “on or before the date of the completion of the work” on the project – which, in this case, the subcontractor did.

The Lien Law at the time also required that the aggrieved subcontractor file the mechanics’ lien claim within four months “of completion of the work” in order to properly perfect the lien.  The Domb Court interpreted this requirement to mean that a subcontractor can not properly perfect a lien unless it has completed its work.  The subcontractor in the Domb case, however, walked off the project before completing its work.  As the subcontractor never completed its work, the Domb Court determined that the subcontractor did not properly perfect its lien.

This interpretation of the Lien Law can create havoc for a subcontractor that is in the middle of a project.  The subcontractor is stuck between the proverbial rock and a hard place.  The subcontractor must decide: (1) Do I walk off the job and risk waiving my lien rights to the work I have already performed?; or (2) Do I continue to perform until my work is complete, even though I am no longer getting paid, in order to maintain my lien rights?

Although it may be little consolation for a subcontractor that has been burned, the court in Domb reasoned that a mechanics’ lien is an extraordinary remedy, and if a subcontractor does want to walk off of the job because it is not getting paid, it can still bring a lawsuit for breach of contract.

In the more recent Koda case, the court seemed to muddy the waters even more.  In Koda, the subcontractor had completed its work on the project – providing drywall for the construction of a new home.  After the work was performed, the financially distressed general contractor did not pay the subcontractor.  The subcontractor then exercised its rights under the Lien Law and filed a lien claim against the homeowners for the amount owed by the general contractor and it was filed a full month before the six-month statute of limitations under the current Lien Law had run.  The homeowners fought the lien claiming that the subcontractor had waited too long to file, even though the subcontractor had filed a full month prior to the end of the statute of limitations period.  The homeowners were successful.  How could this result happen?

Under the Lien Law, a contractor or subcontractor can waive its lien rights “by any conduct which operates equitably to estop such contractor or subcontractor from filing a claim.” Meaning, if the contractor or subcontractor acts in such a way that the court deems unjust, that contractor or subcontractor may have legally waived its rights to lien.  As noted by the court in Koda, neither the statute nor the courts have defined exactly what conduct can waive lien rights. 

But, in this case, the court was persuaded by the fact that the subcontractor knew that the contractor was in financial distress and was unable to make payments.  The subcontractor also failed to provide the homeowners with notice of intent prior to the date that the homeowners received title and waited until title changed hands to file the lien to ensure that the lien was against a party that could pay.  This conduct prejudiced the homeowners because it prevented the homeowners from availing themselves of remedies that the Lien Law provides, e.g., retaining a sum from the sale price sufficient to protect them from loss until the claim was settled or obtaining a bond from the general contractor to cover the claim.

The lesson to be learned from the Domb and Koda cases is that the courts apply the words as well as the spirit of the Lien Law very strictly.  As a result, be careful when attempting to assert your lien rights to make sure that you are not acting in a manner that could actually have the opposite result – causing you instead to waive those rights.


Labor & Employment Law:
RINGING In The New Year - Employer Checklist
-- by Melissa C. Angeline, Esq.

During the next several months, we will see a flurry of activity and change in the employment law landscape.  Employers should be preparing for these changes by updating their policies and procedures.  In addition, employers should use this opportunity to implement some “best practices” for the coming year.  To that end, we have created an employer checklist of new laws and action items for 2009.

Expanded Protections under the Americans with Disabilities Act (ADA):
The ADA prohibits employers from discriminating against employees and applicants based on disability, and requires that employers “reasonably accommodate” disabled employees so they can perform their jobs.  In September 2008, Congress amended the ADA for the first time since its enactment in 1990.  The ADA Amendments Act of 2008 (ADAAA) will result in many more employees being covered by the ADA.  As a result, employers must revise their guidelines for evaluating employee disability issues by January 1, 2009, when the ADAAA becomes effective.  The primary changes include:

•           While employees must still show that they are significantly limited in a “'major life activity” such as breathing or walking, to be covered by the ADA, they no longer have to show that the activity is one “of central importance to most people’s daily lives.”

•            The list of “major life activities” covered by the ADA has doubled in size, and now includes some activities not previously recognized by the EEOC.

•            Employers can no longer consider mitigating measures, such as medication and the fact that an employee’s illness is in remission or episodic, in determining whether an employee has a disability.

•            The ADAAA expands protection of employees who the employer mistakenly believes are disabled, although clarifying that such employees are not entitled to a “reasonable accommodation.”

A more detailed explanation of the ADAAA can be found on our web site, www.cohenseglias.com.

Hourly Minimum Wage Increases to $7.25: 
On January 24, 2009, the minimum wage under the Fair Labor Standards Act increases from $6.55 to $7.25 per hour.  The current minimum wage rate of $7.15 in Delaware, New Jersey, New York and Pennsylvania will increase to $7.25 at the same time.  Employers should make sure their minimum wage posters reflect the correct rates.

 

Use of “E-Verify” Required for Federal Contractors and Subcontractors:
“E-Verify” is a free, voluntary Internet-based system that allows employers to quickly verify the legal work status of new hires, based on information provided on the employee’s I-9 form.  Beginning in 2009, all federal contractors and most subcontractors will be required to use E-Verify to check the legal work status of all new hires, as well as that of existing employees who are working on federal contracts.  Look for more specific guidance about these new E-Verify requirements when final regulations are published in the Spring of 2009.

“No Match" Letters for Social Security Numbers:
When an employee’s name and Social Security number do not match the Social Security Administration’s records, the employer is sent a “No Match” letter requesting certain information.  On October 23, 2008, the Department of Homeland Security announced new regulations on employers’ obligations to take “reasonable steps” to resolve the discrepancy within 90 days of receiving a “No Match” letter.  Employers must update internal policies to reflect these new requirements.
 

Best Practices
• Each year, distribute copies of your policies that prohibit unlawful discrimination and harassment.  Annual distribution serves as a reminder of what forms of conduct are unacceptable, ensures that all new hires have received the policy, and demonstrates that you, as an employer, take these issues seriously.

• Finally, review your payroll register at the end of the year.  Is everyone a salaried employee, from the president to the receptionist?  Are employees receiving compensatory time in lieu of paid overtime?  If so, it is time to schedule a review of your compensation policies to make sure that you are compliant with the law.


Q&A: With The Business Practice Group - The Importance of Filing Annual Reports
by Nella M. Bloom, Esq.


Does my business need to file an annual report?
Generally speaking, corporations, LLCs and other types of entities formed in or registered to do business in a given state must file annual reports, which are distinct from tax reports, with that state’s Secretary of State, State Treasurer, or Department of State indicating whether they are still operating and, if so, whether there have been any fundamental changes to the entity.  The reports are usually due annually, but might be due on another schedule, such as every two or ten years.  Generally, the state provides a form that sets forth the information required, and often these forms are available on the internet.  States may require reports to be filed for foreign entities as well as domestic ones.

What will happen if my business fails to file its annual report?
If your business has failed to file annual reports when due, your business might be in jeopardy of losing its ability to do business in the state.  In some jurisdictions, the failure to file these annual reports may lead to personal liability for the owners or members of a corporation or LLC.  A state will generally give notice of the business’s failure to file an annual report before dissolving or annulling the entity’s ability to do business in the state.  Each state has its own standards for the timing of filing annual reports, the consequences for not filing the reports in a timely manner, and the amount of notice given by the state before the business is dissolved, annulled, or enjoined from operating.  In the event that your business receives notice that it can no longer do business, the method to reinstate the business’s right to operate varies from state to state (and may require the payment of late fees or penalties).  Generally, upon payment of the late fee or penalty, the business’s right to operate in the state is reinstated.

If you have questions concerning a business’s annual report, please contact the Business Practice Group.  We will be happy to help you by answering any questions or providing assistance on the completion and/or filing of any reports.

Question for our Business Practice Group?
Submit it to Janet L. Treiman, our editor, and you might just see it appear in this column.


Construction News:
If We Win, What Can I Recover?
by Jennifer M. Horn, Esq.


Clients who are suing an owner or general contractor for unpaid balances on construction projects often ask, “If we win, can we recover the attorneys’ fees and costs we incurred in achieving the win?  What about penalties and interest if money was wrongfully withheld from us?” To answer these questions, first look to the language of the agreement that you have signed. In addition, some state statutes, including those in Pennsylvania and
New Jersey, provide for specific recovery of attorneys’ fees, as well as interest and penalties.

If your contract provides for attorneys’ fees, interest and/or costs to the prevailing party of a litigation, the plain language of the document may control if there is no corresponding state statute.  It makes no difference whether such provisions are hidden in fine print on the back of a purchase order or prominently featured in bold type.  Courts tend to uphold the language of a contract which awards attorneys’ fees, interest and/or costs.  In this regard, all businesses should carefully review their contracts, with the assistance of counsel, to make sure that if they incur legal fees, costs, and expenses in the course of fighting the good fight, the contract provides for the recovery of the expenses incurred.  You should also review the contract to determine whether you are liable for the same costs if you unsuccessfully bring a claim, or a contractor or subcontractor successfully brings a claim against you.

Pennsylvania
Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) provides that the substantially prevailing party in an arbitration or litigation to recover contract balances under a construction contract for a private project may also recover attorneys’ fees.  While at first glance this potential for recovering attorneys’ fees might seem like a good reason to roll the dice and pursue claims that you would otherwise settle, it is a double-edged sword.  The “substantially prevailing party” can be either the party bringing the claim or the party defending the claim.  If you bring a claim for unpaid contract balances and lose, you could be on the hook for the legal fees of the owner or general contractor who you sued. 

CASPA also allows for interest and penalties payable to the party asserting a claim of unpaid contract balances.  If the arbitrator or court determines that the owner or contractor wrongfully withheld payments, CASPA provides for interest and a penalty, both at the rate of 1% per month of the amount wrongfully withheld.  The principle of CASPA is simple: contractors and subcontractors are entitled to be paid for the work performed, and an owner or contractor who fails to pay now will have to pay later.  It is important to note that the courts in Pennsylvania have indicated that the parties can waive or modify their statutory right to recover interest, but that they cannot waive their right to the penalties or attorneys’ fees.

Pennsylvania’s Prompt Payment Act is similar to CASPA, except that it applies to public projects rather than private projects.  The Prompt Payment Act awards attorneys’ fees to the prevailing party, a penalty in the amount of 1% per month for amounts withheld in bad faith, and interest at varying rates when the owner or contractor on a public project fails to make timely progress and/or final payments.

New Jersey
In New Jersey, a relatively new Prompt Pay Act permits an award of attorneys’ fees, interest and costs to contractors seeking to recover unpaid contract balances.  New Jersey’s Prompt Pay Act, which became effective September 1, 2006, provides for attorneys' fees and costs for the prevailing party in an action to collect payments under a construction contract.  Again, this means that the party that is seeking to recover unpaid contract balances could be responsible for the defense costs of the owner or contractor if it loses.  In addition, the New Jersey Prompt Pay Act provides for interest for delinquent payments at the rate of the prime rate plus 1%. 

While it may be reassuring to know that you may be entitled to attorneys’ fees, interest and penalties if you have to sue an owner or contractor for unpaid contract balances, that must be balanced by the possibility of your being liable for that same owner’s or contractor’s legal fees if you lose.


Legal Alert: What IS and IS NOT protected by FDIC Insurance?

Even though you purchased an investment through a bank, it may not be protected by FDIC Insurance which insures "deposit accounts".  Traditional checking accounts, which include money market deposit accounts, savings accounts, including passbook accounts, and certificates of deposit are insured up to $250,000.00 per customer.  The contents of safe deposit boxes are not insured.  Any other investments sold through a bank are not insured.  These include mutual funds (stock, bond or money market mutual funds), annuities, Treasury securities (T-bills), stocks, bonds or other investment products which are not considered "deposit accounts".  You can and should obtain definitive information regarding every account and investment purchased through your bank.

by Wayne C. Buckwalter, Esq.

 

UPCOMING SEMINAR:

Join us for this informative program designed for business owners, in-house counsel and executives with employee relations responsibilities.

Wednesday, March 25, 2009
The Four Seasons Hotel
See our web site for further details and registration.

 

What's New At The Firm?
by Aria K. Vaida, Marketing Director


Cohen Seglias is proud to announce the addition of Wendy R. Bennett, Anthony M. Bottenfield and Susan A. Shaw to its Construction Group in the Philadelphia office.  All three graduated from law school in the spring of 2008 and passed the Pennsylvania and New Jersey bar exams this fall.  Cohen Seglias would also like to welcome Michael L. Solomon to its Business Practice Group in Harrisburg where he will be joining the firm as senior counsel. Prior to joining Cohen Seglias, Michael served as Counsel to a mid-sized firm in the Harrisburg area.

Wendy R. Bennett
Wendy received a B.S. in architecture from the University of Virginia, a master of architecture degree from the University of Pennsylvania, and her J.D. from Temple University.  Prior to joining Cohen Seglias, Wendy was an architect for the Redevelopment Authority of the City Philadelphia.  Wendy maintains her Professional Architecture License, AIA affiliation and NCARB certification.

Anthony M. Bottenfield
Anthony graduated magna cum laude from Millersville University’s Honor’s College where he majored in political science.  He received his J.D. from The Pennsylvania State University’s Dickinson School of Law.

Susan A. Shaw
Susan graduated with honors from the Warrington College  of Business Administration at the University of Florida where she majored in finance.  Susan received her J.D. from the Rutgers School of Law.

Michael L. Solomon
For more than twenty-five years, Michael’s areas of practice have included real estate, administrative law, creditors' rights, commercial transactions, and corporate finance.  He also provides guidance and legal services in business law, estate planning and business transactions.

Since our last edition, the economy has changed dramatically.  Cohen Seglias  hosted several seminars during the last quarter to help our clients in these difficult economic times.  The  seminars included one on indemnity and insurance entitled “What to Know and What to Watch Out For” by Ed Seglias and Jonathan Cass, a seminar by Marc Furman on “Unfair Labor Charges from A-Z”, and a seminar by George Pallas and Shawn Farrell on “Managing the Risk of Escalating Material Costs.”

Other News:
It is time once again to begin our very successful Cohen Seglias toy drive.  Each year this effort helps to make the upcoming season a joyous one for children of all ages who might not receive anything at all for the holidays. We ask for your help as we collect new, unwrapped toys that will be donated to the Support Center for Child Advocates in Philadelphia and the Allegheny County Department of Human Services, Office of Children, Youth and Families in Pittsburgh.  Collectively, these organizations have more than 700 children in their care. 

For additional details, please contact Marketing Director Aria K. Vaida at (215) 564-1700.
 

Should you have a specific legal concern, we recommend that you consult with counsel so that you may receive the best advice.
John A. Greenhall, Esquire