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Construction In Brief: Winter 2012

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PA Lien Law Update–New Case Holds that Union Funds Have Lien Rights

By Jason A. Copley and Daniel E. Fierstein

The Pennsylvania Superior Court recently issued a decision in the case of Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott's Development Co. expanding the class of claimants entitled to assert a mechanics' lien claim under the Mechanics' Lien Law of 1963 ("Lien Statute") to include union funds. This expansion will have a widespread impact on the construction industry, as companies take steps to mitigate this new exposure.

A Primer on Mechanics' Liens in Pennsylvania and the Bricklayers Decision

A mechanics' lien is a security interest in the title to property for the benefit of those who have supplied labor or material to improve a property. Liens encumber the owner's property and, if taken to their logical end, force a sale of the property to pay creditors.

Mechanics' lien rights in Pennsylvania are limited to "contractors" and "subcontractors," which are terms defined in the Lien Statute. A "contractor" is defined as one who, by contract with the owner, erects, constructs, alters or repairs an improvement. A "subcontractor" is defined as one who, by contract with the contractor, or by contract with a subcontractor who has entered into a contract with a "contractor," erects, constructs, alters or repairs an improvement.

The key issue in Bricklayers was whether a trustee of union member benefit funds has lien rights in Pennsylvania as a "subcontractor" as defined in the Lien Statute. The Court held that a trustee of employee benefit funds falls under the definition of "subcontractor" and could file mechanics' lien claims for unpaid contributions on behalf of union members.

In support of its decision, the Court held that the Lien Statute must be liberally construed. This conclusion is significant because, for decades, Pennsylvania courts have repeatedly held that the Lien Statute is to be strictly construed given that the mechanics' lien remedy is extreme and statutory in nature. It is important to note, however, that the impact Bricklayers will have is not yet clear since the decision has just been issued and the Bricklayers filed a Petition for Allowance of Appeal with the Supreme Court. Hence, the decision has not been tested or withstood scrutiny by other courts.

What Does This Holding Mean for You?

The most significant aspect of the Bricklayers decision is that contractors are now exposed to claims for union benefits brought by the trustees of union member benefit funds of lower-tiered contractors ("Sub-Funds"). In Bricklayers, the Superior Court held that a general contractor's union was a "subcontractor" under the Lien Statute. Therefore, if a contractor retains a subcontractor on a project, the subcontractor's union will likely be considered a sub-subcontractor. The Lien Statute's definition of "subcontractor" includes sub-subcontractors. Therefore, applying the Superior Court's rationale, a Sub-Fund also can have mechanics' lien rights.

As a practical matter, when a Sub-Fund files a mechanics' lien on an owner's property for unpaid benefit contributions, the owner will push its obligation to the Sub-Fund downstream to the contractor, exposing the contractor to liability for a subcontractor's failure to make benefit contributions to the Sub-Fund. To avoid or limit exposure to this type of claim, owners and/or contractors should consider the following options:

(1) To Owners – Follow Section 1405 of the Lien Statute

Owners can limit their exposure to mechanics' lien claims by placing subcontractors on notice of the terms of the prime contract by either (1) providing actual notice to the subcontractors of the prime contract price and its payment terms; and/or (2) filing the relevant provisions of the prime contract with the office of the prothonotary in the county in which the work is being performed. Following these steps in accordance with Section 1405 of the Lien Statute limits a subcontractor's mechanics' lien claim to its pro-rata share of the contract price that remains unpaid, or which should have remained unpaid (whichever is greatest).

(2) To Contractors and Subcontractors – Reexamine Your Subcontracts

Make sure your subcontracts include the following contractual requirements:

  • Condition payment to your lower-tier contractors on providing proof that their obligations to their union funds have been satisfied;
  • Require your lower-tier contractors to execute partial and final releases with language representing and warranting that their obligations to the union funds have been satisfied to date; and
  • Require lower-tier contractors to indemnify you to the extent you are forced to pay Sub-Funds due to nonpayment by your lower-tier contractors.

Also, consider the following more onerous (but also more protective) measures:

  • Require your lower-tier contractors to enter into a joint check agreement with you and the union to ensure firsthand that benefit contributions are paid. (Note: If you decide to take the joint check agreement route, it is critical to consult with your attorney to ensure that the agreement's scope is clearly limited to the specific job at issue.)
  • Prior to the commencement of work, require your lower-tier contractors to post a bond sufficient to protect against the risk of nonpayment.

The Bottom Line

The Bricklayers decision undoubtedly means more contractual requirements for, and heavier monitoring of, lower-tier contractors. It also highlights how truly important it is for lower-tier contractors to stay current with their union benefit contributions. Liability for nonpayment of benefits is not just limited to the corporation that fails to pay; it extends personally to the owners of that corporation under the Pennsylvania Wage Payment and Collection Law. In a down economy in which the next job is anything but guaranteed, the fundamental and obvious concept is to make sure that payments flow to the right places and people.

Jason is Managing Partner of the Firm and Dan is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700, jcopley@cohenseglias.com or dfierstein@cohenseglias.com.

A Brief Note

Greetings from the staff of Construction in Brief and the entire firm of Cohen Seglias. As with every issue, our goal is to bring you informative and interesting articles that will help you understand and navigate the complexities of construction law. This edition focuses on the intricacies of mechanics' lien laws including the Pennsylvania lien law's application to union funds, the New Jersey, New York and Pennsylvania Trust Fund statutes, and potential limitations on Pennsylvania liens. Moreover, we have included two articles that will be particularly instructive for potential bidders of public projects. We hope that you find these articles helpful. Kathleen J. Seligman, Esq. Co-Editor-in-Chief Ashling A. Ehrhardt, Esq. Co-Editor-in-Chief

What's New

Congratulations to Shawn R. Farrell

We are pleased to announce that Shawn R. Farrell has been named a shareholder and has joined the Firm's Board of Directors. Shawn has made significant contributions to the Firm's successful growth over the past 13 years. He serves clients in the areas of construction, labor, & employment and insurance.

New Faces

Cohen Seglias is pleased to welcome two new employees to the Philadelphia office:

Robert J. O'Brien has joined the Firm as an Associate in the Construction Group. Admitted to practice in Pennsylvania, he earned his J.D. from Georgetown University and B.A., Phi Beta Kappa, in Classical Archaeology and Political Science from the University of Michigan. Previously, he was a law clerk for the Honorable Linda K. M. Ludgate.

Maria L. Panichelli has joined the Firm as an Associate in the Federal Construction Contracting Group. Admitted to practice in Pennsylvania and Delaware, she is a cum laude graduate from Temple Law School and received her undergraduate degree from Lehigh University in International Relations.

At the Podium

The 4th Annual Labor & Employment Law Seminar is quickly approaching. Join us to hear about Cutting Edge Developments in Labor & Employment Law, Creating a "Bullet Proof" Employee Handbook, Wage & Hour Law–A Primer on the Fair Labor Standards Act and Hot Issues in Discrimination Law.

This year we will be hosting the event in three locations:

  • March 13, 2012–Philadelphia, The Four Seasons Hotel
  • March 27, 2012–Harrisburg, The Hilton Harrisburg Hotel
  • April 11, 2012–Pittsburgh, The Duquesne Club

For additional information and to register, please visit our website, www.cohenseglias.com, or contact Rachel McNally, rmcnally@cohenseglias.com.

In the Courtroom

The Firm recently obtained a victory on behalf of its client, Martin Construction Co. The case, Martin Construction Co. v. United States, involved the termination by default by the Omaha District of the Corps of Engineers on a multi-million dollar marina construction project in North Dakota. The Court agreed that the Corps' design was defective, and consequently ruled that the termination for default was wrongful and ordered a conversion to a termination for convenience.

The decision, which was issued by the United States Court of Federal Claims on December 20, 2011, is an important verification to the federal contracting community that a termination for default is a "drastic action" that will not be sustained unless the government can meet its burden of proof that the termination was justified. Michael Payne and Joseph Hackenbracht represented Martin Construction Co.

For more information on this case and other recent cases, please visit the News & Events section of our website.

Kerstin is the Firm's Marketing Director. She can be reached at 215.564.1700 or kisaacs@cohenseglias.com.

The Allure and Danger of Bidding as an LBE

By Lane F. Kelman

In this bleak economy, contractors are cutting profits down to razor thin margins in order to win bids. As contractors search for secure work, some have sought to become eligible for public set-aside or preference programs. At first blush, these programs may appear to provide a competitive advantage in a rough economy, and they can in fact provide tremendous opportunities to qualified businesses. However, contractors must ensure that their businesses actually meet the strict eligibility criteria to be eligible for such work. A business' failure to meet the criteria could result in a loss of the public contract, a demand for restitution, and could render the business ineligible to perform future public work. In the worst-case scenario, a criminal or governmental investigation, and actions against the business and its principals, can arise.

This article focuses on the City of Philadelphia's Local Business Entity (LBE) program. The purpose of the Philadelphia LBE program is to provide a preference and competitive advantage to businesses that are located within the City and bid for City work. In identifying the lowest bidder for a public project, the City will reduce the LBE's bid price by 5%, while a non-LBE's bid price will be considered at face value. The 5% reduction is considered only for purposes of identifying the lowest bidder. If an LBE wins a contract due to its preferential status, the contract value still will be based upon its actual bid price.

The LBE program is clearly available to City-based businesses. The City, however, also allows businesses whose primary offices are located outside of the City to take advantage of the LBE program, if they self-certify that they satisfy certain requirements. Among other things, applicants must certify that that they "continuously occupy" an office in the City "whereby the customary business operation of the business entity is conducted." Applicants also must certify that more than half of their total full-time employees work in the City at least 60% of the time, or that more than 50 of their full-time employees work in the City at least 60% of the time. Notably, the LBE regulations fail to adequately define a "customary business operation." Therefore, applicants and advocates alike are left to interpret what this term means in the context of a construction business, whose primary business functions are performed in the field.

Hence, even the most well-intentioned contractor is at risk of violating the requirements of the LBE regulation. Despite the ambiguous requirements, businesses must make sworn statements of "compliance" and must submit truthful and good-faith certifications in order to avoid penalties. Under the law, if it is determined that a business entity failed to comply with any term of the LBE certification at any time during the term of a contract, the business entity "will be deemed to be in breach of the contract, and shall pay liquidated damages of 10% of the bid, and may be debarred by the Commissioner for up to 3 years." There are additional ramifications for non-compliant LBEs even if the contract term has expired. Further, contractors must be aware of the criminal and civil implications of submitting potentially fraudulent certifications to the government.

The bottom line is that all public contractors who submit certifications to the government pursuant to set-aside or preference programs must be prepared to withstand scrutiny into their business structures and practices. If you have concerns about your business' status, or plan to submit any sort of certification to the government regarding your business, you should consult with an attorney in order to ensure your full compliance with the applicable laws and regulations. If your business is questioned, an attorney will be able to work with you to respond to the alleged violation.

Lane is a Partner with the Firm and Daniella is an Associate, both practicing in the Construction Group. They can be reached at (215) 564-1700, lkelman@cohenseglias.com or dgordon@cohenseglias.com.

The Devil Is In The Difference: An Analysis of the NJ & NY Trust Fund Acts and the Proposed Act in PA

By Jonathan A. Cass

In the construction industry, contractors often re-allocate or divert progress payments received on one project to satisfy unrelated financial obligations. This practice seriously and negatively impacts lower-tier contractors who expected to be paid from the now diverted progress payment. In an effort to prevent such diversions, many states, including New York, New Jersey, and soon, Pennsylvania, have enacted Trust Fund statutes limiting the ways in which a progress payment recipient can allocate funds. However, in comparing the Trust Fund statutes of these states, it becomes clear that New Jersey's Trust Fund statute does not apply to private construction projects. Hence, the New Jersey Trust Fund statute does not provide the same level of protection to subcontractors, and other lower-tier contractors, provided by sister states in New York, and in Pennsylvania (assuming that the proposed statute is enacted).

In Pennsylvania, the proposed Trust Fund statute is titled, "Contractor Commingling of Funds Held in Trust Act." Proposed Senate Bill No. 1227 (introduced October 20, 2011). The proposed statute applies to both public and private projects, and does not require that the funds be maintained in a separate bank account. Rather, the contractor/trustee can commingle the funds with other non-trust fund monies without being subject to civil or criminal penalties. However, officers of the trustee are potentially subject to personal liability if they knowingly use funds for any purpose other than to pay their subcontractors on the particular construction project at issue.

Similarly, New York's Trust Fund Act, contained under the broader umbrella of the New York Lien Law, applies to all improvements to real property or construction of public and private construction projects. The New York statute applies to contractors and subcontractors, and the trust arises upon receipt of the funds intended for payment to a lower-tier subcontractor or supplier. Again, officers of the trustee are subject to personal liability if they knowingly use funds for any purpose other than to pay subcontractors on a specific construction project.

However, unlike the New York and proposed Pennsylvania Trust Fund statutes, the New Jersey Trust Fund statute does not apply to private projects. As a result, a subcontractor involved in a private project that wrongly believes it is protected under the New Jersey Trust Fund statute, may fail to take timely actions to preserve its lien rights under the Statute. Under New Jersey's Lien Fund statute, if a subcontractor on a private project files a construction lien claim for funds that an owner already has paid to a contractor, the subcontractor's lien will not be deemed valid and enforceable. In such a situation, even if the contractor diverts or re-allocates the funds to another project, the subcontractor's only course of action will be to file suit against the contractor, without recourse to the protections of the lien law, or the threat of personal liability against the owner of the contractor to ensure recoverability of the judgment.

By contrast, in New York and, as currently proposed in Pennsylvania, the frustrated subcontractor working on a private project would have the option of filing suit under the applicable Trust Fund Act if the general contractor, rather than paying the subcontractor the amount it is owed, misappropriates funds. This option usually is quite attractive given that both the New York and potentially Pennsylvania Trust Fund statutes hold officers of general contractors personally liable if they are found to have diverted trust funds.

Subcontractors should be mindful of this critical distinction in the New Jersey Trust Fund statute in order to ensure that every road to recovery is preserved in the event of non-payment on a private construction project. With so many similarities between construction contract enforcement statutes applicable across the Mid-Atlantic region, the devil is often in the differences between the various statutes of the different states. You should consult your legal counsel for assistance in recovering damages pursuant to a trust fund claim.

Jonathan is a Partner with the Firm and practices in Commercial Litigation, Insurance Coverage & Risk Management Groups. Michael is an Associate and practices in the Construction Group. They can be reached at (215) 564-1700 or jcass@cohenseglias.com or mdecktor@cohenseglias.com.

Prevailing Wage Compliance: Tips Every Contractor Needs to Know

By Jonathan Landesman

When private sector construction dries up, more and more contractors look to perform public work. Public work provides businesses with a dependable payment source–a benefit at any time but especially during an economic downturn. However, in order to reap the rewards and profit on public projects you must be able to effectively manage the administrative burdens of the prevailing wage laws. These laws are complicated, so it is important to educate yourself and ensure that your company is in compliance. To safeguard your company from costly violations of the prevailing wage laws, consider these tips before submitting your bid.

Tip 1: Know the Terrain and Plan Your Mission

The first thing to do on any public project is to find out what prevailing wage law applies. The rules that apply to public work are not just tedious and complex–they vary from state to state and county to county.

Do your homework before you put together a bid. Find out the rules concerning issues such as journeymen-to-apprentice ratios, apprentice registration, licensure requirements, shift work, and daily and weekly overtime rules.

The hidden wrinkles of prevailing wage law can have a tremendous impact on your ability to generate profit. A lot of the information is available online, or can be found in your project specifications, but there may be any number of situations that require additional investigation–like how to pay materialmen or whether an off-site fabrication facility should be considered part of the project.

Unless you see the answer in 100% clear terms, contact the appropriate department of labor and get an answer in writing before the project starts. Getting it right often means finding out what the department of labor says is right.

Tip 2: Job Classifications

A troublesome issue that might arise on a project involves what tasks the particular crafts, or classifications of workers, are permitted to do in that locality. Worker classification is often the single most critical factor in making sure the correct wage rates are utilized in the bid and then paid to the workers.

No contractor wants to complete a project and discover that the wrong rate was paid because entire aspects of work were improperly classified. A common problem is the use of laborers to perform tasks that departments of labor (under a "custom and tradition" standard) enforce as work belonging to a craft or trade such as plumbers, electricians, or carpenters. Some departments of labor provide fairly detailed prevailing rate information regarding the types of tasks that may be performed by any classification of worker, and the corresponding rates. Most of the time, it is left completely unstated and there is no easy way to obtain an answer.

You should not rely on your current or past practices. In advance, make yourself aware of what classifications can perform what types of work–or obtain written guidance from the public entity–so you know your labor costs and can effectively manage deployment of your workforce.

Tip 3: Fringe Benefits Credits

You would think that if you have the correct prevailing rates, that you are also properly paying for fringe benefits. Unfortunately, this is not necessarily the case. The prevailing rate has a wage component, paid in cash, and a "fringe benefit" component that can be satisfied in a number of ways.

For union employers who already contribute to health, welfare, and pension funds it is generally easy to meet the fringe benefit requirements or to make up any shortfall in cash. Non-union employers, however, must often search for ways to meet the fringe benefit portion of the prevailing rate and avoid paying it as additional cash wages.

There are a host of potential credits that can be applied to the fringe benefit obligation: health insurance, fully-vested employer matched contributions to a 401(k) plan, vacation, holiday and sick pay, life insurance, and long-term disability benefits. While these credits may be applied, you must be diligent to both properly calculate the amount of the credit and avoid taking any improper credits.

Consistent with the above tips, you should find out ahead of time what fringe benefit credits you can take and how to calculate them.

Tip 4: Recordkeeping

On a public project, you must submit certified payroll reports on time, every week, and keep accurate payroll records on file. Assuming you have followed the tips above, your certified payroll reports should be correct.

In addition to maintaining your own payroll records, you also must ensure that all of your subcontractors are doing the same. As a general or prime contractor, or higher-tiered subcontractor, departments of labor will hold you responsible for any prevailing wage violations of lower-tiered subcontractors.

Perhaps the most critical information to document on a daily basis is your workers' classifications and the tasks they are performing. You should implement a strict protocol for your foremen to keep detailed and accurate records that track the time, tasks and worker classifications at all times on the job. Maintaining such detailed records is burdensome, but it will protect you in the event your company is audited.

Following these tips will allow you to profitably perform work on public projects.

Jonathan is a Partner with the Firm and Mark is an Associate, both practicing in the Labor & Employment Group. They can be reached at (215) 564-1700, jlandesman@cohenseglias.com or mleavy@cohenseglias.com.

 

Will Your Mechanics' Lien Claim Be Limited?

By Rene David Quinlan

At its core, Pennsylvania's Mechanics' Lien Law of 1963 protects contractors and subcontractors that provide labor and materials to improve real property by permitting them to place a lien on the title to the property. The law also provides that, if an owner doesn't take affirmative steps under the law to protect itself, it may be required to pay twice for the same work. So, for example, if an owner pays its contractor, but the contractor fails to pay its subcontractors, the subcontractors may file mechanics' lien claims to recover the entire amount owed to each of them–even if the amounts exceed the owner's contract price.

While some lien laws–like New Jersey's Construction Lien Law–contain specific language that protect owners from paying twice, Pennsylvania's Mechanics' Lien Law does not automatically protect owners. Rather, the law not only requires affirmative steps to limit the owner's exposure, but it also requires actual or constructive notice to subcontractors that their mechanics' lien claims may be limited. Therefore, subcontractors need to understand and recognize the notice requirements, and then consider other options to protect themselves in advance of signing a contract and supplying labor or materials.

Under Section 1405 of the Mechanics' Lien Law, if a subcontractor receives actual notice of the prime contract price, and times for payment, before it performs any labor or supplies materials, then its mechanics' lien claim may be limited to the pro-rata share of the prime contract balance. Although "actual" notice sounds comforting, it may not be as conspicuous as one might believe. For example, actual notice may be contained in a letter, facsimile, e-mail, or, depending on the terms of the subcontract, could be an oral statement made by the general contractor. It also could be contained within the terms and conditions of the subcontract. But, what if the subcontract contains a provision that incorporates the prime contract, and also states that the subcontractor had an opportunity to review that contract? Although arguments could be made for both positions, there have been no reported appellate cases in Pennsylvania on whether a "flow-down" provision, with an opportunity to review the prime contract, would constitute actual notice under Section 1405.

Constructive notice presents a slightly more difficult situation, because it requires that subcontractors review the Prothonotary's records at the appropriate time. So, if the prime contract (or its pertinent provisions) was filed in the Prothonotary's office within certain time limits, then subcontractors on the project will be deemed to have constructive notice of the contract and its provisions. The practical effect of constructive notice is the same as actual notice. But, in order to be effective as constructive notice, the prime contract (or its pertinent provisions) must be filed with the Prothonotary: 1) before any work was performed on site; 2) within ten days after the execution of the prime contract; or 3) at least ten days before the execution of the subcontract. As a result, subcontractors must timely review the Prothonotary's records to determine if they received constructive notice.

Although mechanics' lien claims are an effective tool to protect your investment in labor and materials, they do not guarantee payment–particularly in these troubled economic times, when the value of the real estate may be less than a mortgage or construction loan that encumbers the property. To understand whether your rights may be affected by these limitations in Pennsylvania's Mechanics' Lien Law, and other legal rights and remedies, you should consult with your attorney before negotiating and signing any construction contracts.

Rene is Senior Counsel with the Firm and practices in the Construction Group. He can be reached at (215) 564-1700 or rquinlan@cohenseglias.com.