What’s New?
In our second issue of 2020, we give you the tools to decide whether to terminate a construction contract for cause. In addition, you will learn about how your company can avoid becoming entangled with disadvantaged business entity fraud. You will also receive a refresher course on Pennsylvania’s Construction Notices Directory and how it may affect mechanics’ lien rights on your project. In the Q&A, you will hear from our newest partners in DC, Shanlon Wu and Julie Grohovsky.
As a reminder, as the COVID-19 pandemic continues to unfold, we welcome you to reach out to us with any concerns to help you navigate these challenging times.
Christopher W. Sexton, Co-Editor-in-Chief
Sydney Pierce, Co-Editor-in-Chief
Cohen Seglias COVID-19 Resources Page
As the effects of the coronavirus pandemic evolve, the rules are changing every day as federal, state, and local lawmakers issue new regulations, restrictions, and reporting requirements. Cohen Seglias attorneys are closely monitoring the legal and regulatory landscape to provide clients and contacts with up-to-date information and advice. To view a full list of our resources, visit cohenseglias.com/covid-19.
Cohen Seglias Announces Merger with DC-Based Firm Wu/Grohovsky PLLC
We are excited to announce the addition of Shanlon Wu and Julie Grohovsky as partners in our Washington, DC office.
Shanlon Wu represents clients in white collar, criminal, and higher education matters. A former federal prosecutor, Shan uses his in-depth knowledge of government investigations and trial experience to advise individuals, businesses, and students on their most pressing legal challenges. Shan has tried more than twenty-five cases to jury verdict, argued appellate cases in state and federal court, litigated complex commercial cases, and counseled clients at all stages of criminal and civil investigations.
Shan’s white collar practice involves advising individuals and companies facing investigations and prosecutions for federal and state criminal violations. He has also established himself as a resource for college and university students and their parents/guardians in the face of potential disciplinary proceedings or criminal investigations brought by their institution.
An accomplished trial lawyer, Julie Grohovsky has investigated hundreds of cases, tried over forty cases to verdict, and argued appellate cases before both state and federal courts. Julie draws on her experience as a federal prosecutor to represent crime victims in criminal, civil, and Title IX proceedings, as well as whistleblowers who bring cases under the qui tam provisions of the False Claims Act (FCA) or other laws with whistleblower provisions. She advises individuals—particularly government workers—in investigations conducted by Inspector General’s Offices and the Department of Justice Office of Professional Responsibility. In addition, Julie regularly represents individuals and businesses involved in white collar criminal investigations.
Cohen Seglias Ranked in Chambers USA 2020
We are pleased to announce that Cohen Seglias is recognized in the 2020 edition of Chambers USA: America’s Leading Lawyers for Business, the preeminent legal ranking of attorneys and law firms. The firm’s Construction Group is once again named a leading practice in Pennsylvania and for the first time, our New Jersey construction practice is similarly recognized.
The publication notes five attorneys for their outstanding work in the construction field: Michael McKenna joins Roy Cohen, Edward Seglias, George Pallas, and Jason Copley as those ranked this year. The group represents the largest number of Cohen Seglias attorneys recognized by Chambers USA. To view the full listing, please visit the Chambers and Partners website.
Cohen Seglias Ranked Sixth in Construction Executive’s “The Top 50 Construction Law Firms® of 2020”
We are proud to announce that our firm has moved into the sixth spot (up from eighth in 2019) in the latest national rankings in Construction Executive’s “The Top 50 Construction Law Firms® of 2020.” Construction Executive, a leading industry publication, surveyed hundreds of law firms with dedicated construction practices throughout the United States. Factors in the rankings covered the general scope and breadth of the firm’s construction practice, including the number of construction attorneys; the number of states in which the firm is licensed to practice; and the year in which the construction practice was established.
Cohen Seglias Attorneys Present at NASCC: The Virtual Steel Conference
The American Institute of Steel Construction (AISC) recently hosted its annual conference (this time, virtually!), and a number of Cohen Seglias partners presented on some key construction issues.
In George Pallas’ webinar “Change Orders: How to Avoid Making Their Problems Your Problems,” he provided best practices and key considerations for managing change orders. Partners Edward Seglias and Jason Copley, along with Associate Matthew Skaroff, provided guidance on design-assist, delegated design, and informal involvement in the webinar “The State of Design-Assist, Ground-Breaking Collaborative Project Delivery Method or Wolf in Sheep’s Clothing?” The leaders of the firm’s Construction Contracts & Risk Management Group, John Greenhall, Jonathan Cass, and Lisa Wampler, addressed COVID-19-related contract and insurance issues in “Your COVID-19 Construction Contract and Insurance Questions Answered!”
We Moved! New Washington, DC Office
Please update your records for this office.
900 Seventh Street, NW
Suite 725
Washington, DC 20001
P: 202.466.4110
F: 202.466.2693
Lessons Learned: To Terminate or Not to Terminate?
The old saying that “hindsight is 20/20” rings true in construction, especially with respect to contractor termination. Looking back, the downward spiral towards contractor termination sometimes appears obvious and usually involves either defective performance, delayed performance, or both. Despite what may be seen by the terminating party as clear cut justification, terminations lead to some of the most difficult, and potentially costly, decisions facing a project owner or contractor. Even if the decision to terminate seems unavoidable, it is important to pause, carefully consider the options, and recognize that a misstep may further delay the project, drastically increase the cost, or unnecessarily expose the party exercising its right of termination to significant litigation and substantial damage claims.
Termination for cause is considered a draconian remedy and will be upheld by a court only upon good grounds and rock-solid evidence. A wrongful termination exposes the terminating party to breach of contract damages, including the terminated contractor’s lost profit on the entire contract. A defaulted contractor also may claim that the wrongful termination caused it to be de-barred from certain public bidding lists, suffer reduced bonding capacity limiting its ability to obtain work, or even put it out of business altogether. If the terminated contractor can prove these consequential damages, such evidence can lead to a substantial award.
This very scenario recently played out in favor of our client, Silvi Concrete, who was wrongfully terminated from the W Hotel Project in Center City Philadelphia. The project—a 52-story hotel skyscraper—required a 9-foot thick, concrete mat slab foundation. Due to a change in specifications, the original concrete supplier could not supply the concrete necessary to complete the mat slab foundation in a timely matter. As a result, less than a day before the pour was set to begin, the project’s concrete subcontractor, Thomas P. Carney, Inc., contracted with Silvi to supply not only the mat slab but all of the concrete necessary for the project. Silvi immediately mobilized, supplying 600 truckloads of concrete poured in a continuously for approximately 26 consecutive hours to complete the mat slab. Twelve days after the pour, Carney wrongfully terminated its agreement with Silvi without explanation or cause, but much with much belated rationalizations. After a long-fought litigation and a six-day trial, a jury returned a $1.2 million verdict for Silvi, which completely compensated Silvi for its outstanding contract balance and lost profit on the unperformed work.
Carney’s failure to fully evaluate its basis (or lack thereof) for termination proved costly for Carney and demonstrates the need for careful consideration prior to terminating a contractor for default. To assist owners, contractors, and subcontractors in deciding whether to terminate a construction contract, we suggest taking the following steps when exercising termination rights.
Step One: Begin with a Properly Drafted Termination Clause
All too often, owners and contractors learn of the inadequacies of contract termination clauses amid a termination. The proper time to assess the adequacy of contractual termination clauses is before contract execution. In assessing your termination clause, consider the following:
- Does your termination clause clearly define the material breaches that may give rise to a termination for cause?
- Does your termination clause contain provisions concerning reasonable notice and opportunity to cure?
- Does your termination clause adequately specify each party’s post-termination rights and responsibilities?
Step Two: Consider Supplementing the Defaulting Contractor’s Forces
Termination for default almost always causes delays, cost overruns, and litigation. The risk of these potentially serious consequences can be reduced by exercising your right to supplement the work crew of the defaulting contractor or subcontractor. Thus, it is important to include a “right to supplement” clause in your contracts. If termination becomes necessary, your prior supplementation of forces will help demonstrate that you acted reasonably and explored less drastic remedies before terminating for cause.
Step Three: Follow the Contract Carefully
Because of the draconian nature of a default termination, courts closely scrutinize the terminating party’s exercise of its termination rights. If the terminating party fails to follow the contract provisions or terminates without cause, a court may find the termination wrongful and award the terminated contractor damages for the value of the work performed, lost profits and overhead on the unperformed work, demobilization costs, and other direct damages. Therefore, it is crucial to follow each contractually required step in the termination process:
- Determine that adequate grounds for termination exists.
- Document, document, document—sufficiently and contemporaneously record the contractor’s poor performance through correspondence, meeting minutes, schedules, daily reports, and photographs.
- Carefully follow the notice provisions and other procedural requirements of the contract, including any required notice and opportunity to cure provisions.
- Notify and/or consult the owner or the architect and obtain consent to the termination (if required by the contract).
- After any notice and opportunity to cure period, confirm that the contract is terminated, even if the contract does not require another notice.
Step Four: Mitigate Damages and Document Any Completion or Corrective Work
In any ensuing litigation, the propriety of the termination will be scrutinized, but the damages following from the decision to terminate will also be closely examined. Following termination, you should take steps to minimize and properly document any additional costs or damages:
- Protect the terminated contractor’s work until a replacement contractor is onsite.
- Solicit bids from several qualified replacement contractors to make sure that a competitive price is obtained. A fixed price is better than time and material.
- Detail the exact state of the defaulted contractor’s work at the time of termination by taking photographs, preparing as-built plans, and documenting any defective and incomplete work.
- Require the replacement contractor to provide detailed applications for payment broken down by line item with appropriate backup documentation. If the work is procured on a time and material basis, obtain from the replacement contractor detailed backup documentation, including payroll records, invoices, and daily reports.
Though terminating a contractor for cause is a drastic measure, it is sometimes necessary to part ways before the project has reached completion. Given the risks associated with a termination for cause, it is imperative that owners, contractors, and subcontractors prepare themselves for this possibility. Contractors would be prudent to consult with legal counsel at each of these steps, from before termination is ever thought of, through to the desired outcome.
Back to the Basics: A Fundamental Approach to the PA Construction Notices Directory
It has been just over three years since Pennsylvania amended its Mechanics’ Lien Law and launched its Construction Notices Directory (the Directory), a standardized statewide system used to access, register, and file construction notices on searchable projects. The intention of the Directory is to provide greater protections to the lien rights of owners, contractors, and subcontractors alike. However, in exchange for these protections, Pennsylvania implemented additional, and decidedly high-risk, filing requirements where a party’s failure to comply can result in the forfeiture of its lien rights for the project.
While most within the industry are aware of the Directory, we are offering a quick refresher to bring you back to the basics and reeducate you on each party’s fundamental responsibilities under the new law. Consider it a Cohen Seglias Directory Cheat Sheet.
What Is a Searchable Project?
At the onset of a project, the first question to ask is whether the project is a “searchable project.” According to the statute, a searchable project consists of the erection and construction, or alteration or repair, of an improvement costing a minimum of $1,500,000. Within this context, “erection and construction” refers to a new improvement, a substantial addition to an existing improvement, or any adaptation of an existing improvement for a new or distinct use and effecting a material change in the interior or exterior.
If the project falls within these parameters, it is deemed to be a searchable project and thus eligible to be registered with the Directory.
Who Is Responsible for Registering a Searchable Project?
Before the commencement of labor, work, or the furnishing of materials for a searchable project, either the owner or an agent of the owner may register the project by filing a Notice of Commencement with the Directory. A contractor may (and often will) act as agent for the owner and file the Notice of Commencement for the Project. However, the contractor must be specifically authorized by the contract to do so, and the owner must assume responsibility for the contractor’s actions.
The Notice of Commencement must include the following information:
- Full name, address, and email address of the contractor
- Full name and location of the project
- County in which the project is located
- Legal description of the property upon which the improvements are being made, including the tax identification number of each parcel included in the project
- Full name, address, and email address of the project owner of record
- Full name, address, and email address of a surety for the performance and payment bonds and the bond numbers (if applicable)
- Unique identifying number that is assigned to the Notice of Commencement
If the owner or contractor fails to file the Notice of Commencement, the project will not be registered with the Directory, and the parties will lose the extra protections created by the statute’s amendments.
What Are an Owner/Contractor’s Responsibilities After the Notice of Commencement Is Filed?
Once the Notice of Commencement has been filed and before physical work commences on the project, the project owner is responsible for posting the Notice of Commencement in a visible location at the project site and making sure that it remains posted until the completion of the project. Both the owner and the contractor must also make reasonable efforts to ensure that the Notice of Commencement is incorporated into the contract documents of all subcontractors awarded work on the project.
All subcontracts for a searchable project must also include the following written notice notifying the subcontractor that failure to file a Notice of Furnishing will result in the loss of lien rights:
A subcontractor that fails to file a Notice of Furnishing on the Department of General Services publicly accessible Internet website as required by the act of August 24, 1963 (P.L. 1175, No. 497), known as the Mechanics’ Lien Law of 1963, may forfeit the right to file a mechanics lien. It is unlawful for a searchable project owner, searchable project owner’s agent, contractor or subcontractor to request, suggest, encourage or require that a subcontractor not file the required notice as required by the Mechanics’ Lien Law of 1963.
What Are Subcontractor’s Responsibilities When Working on a Searchable Project?
A subcontractor that performs works or services, or provides materials in furtherance of a project for which a Notice of Commencement has been filed, must file a Notice of Furnishing with the Directory. The Notice of Furnishing must be filed within 45 days after the subcontractor first performs work or services, or provides materials to the job site. Failure to do so will result in the complete forfeiture of the subcontractor’s lien rights for the project.
The Notice of Furnishing must include the following information:
- General description of the labor or materials furnished
- Full name and address of the person supplying the services
- Full name and address of the person that contracted for the services or items being supplied
- Description that sufficiently identifies the searchable project, based on the description in the Notice of Commencement.
Furthermore, the Notice of Furnishing must be substantially in the following form:
Conclusion
The implementation of the Pennsylvania Construction Notices Directory impacts all those that work in the construction industry. In following these requirements, owners, contractors, and subcontractors are afforded greater protections under the Mechanics’ Lien Law. However, failure to do so can result in the absolute forfeiture of a party’s lien rights on a project. Our advice? Take this cheat sheet, and, depending on your role, allow it to guide you in incorporating the necessary steps into your routine at the commencement of a searchable project. If you have any further questions regarding the Directory or how it relates to your construction business, feel free to contact us for assistance.
Passing on the Pass-Through: How to Avoid DBE Fraud Through Due Diligence
Federal, state, and local government agencies, including the U.S. Department of Transportation (USDOT), award billions of dollars’ worth of contracts every year. However, they often require contractors to share a percentage of the work with certified disadvantaged business entities (or DBEs) to qualify for the work. The goal of the program is to remedy the effects of past discrimination against socially and economically disadvantaged businesses, such as women-owned and minority-owned businesses.
To participate in these lucrative projects, some contractors have knowingly engaged in DBE fraud to meet the project’s DBE requirements, diverting all of the profits to their non-DBE businesses. DBE fraud generally takes on one of two forms: a “front” company or a “pass-through” company. In the front company scheme, a non-DBE firm creates a DBE company as a front to bid on projects, while ultimately diverting all of the work (and profits) to the non-DBE contractor. In the pass-through company scheme, a legitimate DBE acts as an intermediary, passing the majority of the work on to a non-DBE firm while invoicing the general contractor for the non-DBE’s work, plus a small percentage fee (payable to the DBE firm, usually around 3%). In some of the most brazen cases, DBEs pass along the non-DBE firm’s invoices and crudely tape its logo overtop the non-DBE supplier’s logo and use a typewriter (or even handwrite) the mark-up on the invoice.
Recently, government agencies, including the Office of Inspector General of the USDOT, ramped up their investigative efforts relating to DBE fraud, claiming that too many contractors were engaging with DBEs who failed to perform a “commercially useful function” on the projects, as required by law. These efforts have resulted in criminal prosecutions and convictions. By way of example, in November 2019, the project manager for a bridge painting contractor was sentenced to nearly six years in prison after he was convicted of conspiracy to commit wire fraud, wire fraud, and making false statements for employing a pass-through company to meet DBE goals for two Philadelphia-area bridge projects. In 2019 alone, the USDOT Office of the Inspector General referred 19 DBE fraud cases for criminal and civil prosecution, an excellent reminder that the issue has not gone away and enforcement is anything but lax.
So, how does a contractor or supplier avoid a visit from the authorities? The most effective method is to perform due diligence to confirm that the DBE is performing a “commercially useful function.” According to federal regulations, a DBE performs a “commercially useful function” on a project if it is “responsible for execution of the work of the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved.” 49 CFR §26.55(c). When a pass-through DBE is used, the DBE is not actually performing, managing, or supervising any work because its function is purely as a paper-pusher, marking up the invoices and billings of the non-DBE subcontractor or supplier actually performing the work. Such conduct defeats the entire goal of the DBE program, which is to provide profits and project experience to historically disenfranchised businesses.
To crack down on DBE fraud, enforcement agencies not only focus on the entities participating in the fraud but also contractors and suppliers that engage in business with pass-through DBEs. This is concerning for both general contractors and suppliers. From the general contractor’s perspective, it often believes that it is engaged in business with a legitimate DBE to meet its project goals and is unaware that the DBE is merely passing its work onto a non-DBE because the contractor is receiving invoices or payment applications on the DBE’s letterhead. From the supplier’s perspective, though it is engaged in legitimate business transactions, its materials may be supplied through a sham DBE.
In an effort to pursue these seemingly innocent third parties, the government argues that entities and individuals conducting business with contractors or suppliers engaged in DBE fraud cannot be “willfully blind” to the fraud occurring around them. A person is “willfully blind” when he deliberately fails to conduct a reasonable investigation despite an awareness of a high probability of the fraud’s existence. In one DBE fraud case, a president of a company was convicted of DBE fraud in part because he was found to be willfully blind to his company’s DBE fraud scheme (United States v. Nagle). In affirming his conviction, the court recognized that even if the president did not have actual knowledge of the fraudulent scheme, the jury correctly found that he was willfully blind because: (1) he participated in meetings where the flow of contract work was discussed; (2) he was aware that employees of the non-DBE company were drafting letters on the DBEs letterhead; (3) he was aware that employees had misrepresented the identity of their employer; and (4) he was advised that the DBE engaged in the scheme should be their “one-stop-shop” for all projects with DBE requirements. Ultimately, the president was sentenced to seven years in prison. This case is but one example of the severe consequences of turning a blind eye to DBE fraud.
To avoid unwittingly conducting business with fraudulent pass-through DBEs, contractors and suppliers should conduct due diligence to ensure that DBEs are performing commercially useful functions on public projects. Such due diligence should include:
- Confirming the current DBE status of any entities used to meet DBE requirements;
- Determining whether the DBE owner has the background, expertise, or equipment to perform the subcontracted work by requesting references, past project lists, or equipment inventories;
- Reviewing the DBE’s payrolls to determine whether employees are shuttling back and forth between prime contractor and DBE-owned businesses;
- Observing the business names on equipment and vehicles, as business names covered with paint or magnetic signs is a “red flag” for DBE fraud;
- Reviewing orders and payment records to determine that supply orders are made by individuals employed by the DBE-owned business;
- Analyzing the DBE’s business records to determine whether the prime contractor facilitated the purchase of the DBE-owned business;
- Observing whether the DBE owner is ever-present at the job site;
- Reviewing the written contracts between the prime contractor, any DBE subcontractors, and any suppliers, as the absence of written contracts is often a sign of DBE fraud;
- Ensuring that DBE subcontractors have storage or warehouse facilities where the suppliers’ goods are maintained; and
- Visiting the DBE subcontractors’ facilities to ensure that they have an observable inventory of goods, maintain distribution and delivery equipment, and operate counter facilities where goods can be purchased.
If you have any questions or would like assistance in performing due diligence to avoid unknowingly engaging in DBE fraud, the attorneys at Cohen Seglias are here to help.
Q&A with Cohen Seglias’ New Partners, Julie Grohovsky and Shanlon Wu
Our newsletter team recently sat down with our new partners in Washington, DC, Julie Grohovsky and Shanlon Wu. They handle white collar investigations and defense for clients in a variety of industries.
Q: What drew you to joining Cohen Seglias? How do you think clients will benefit from your addition to the firm?
Julie: Shan and I are happy to be here. We had our own law firm for years, and before that we worked together trying cases at the U.S. Attorney’s Office in Washington, DC. I enjoyed the freedom of working in a small firm and for ourselves, but a larger firm means more colleagues, allowing us to staff larger cases. We were interested in Cohen Seglias because our white collar and Title IX practices complement Cohen Seglias’ work, as well as Paul Thaler’s scientific misconduct practice. The firm’s clients who face investigations or disciplinary proceedings will benefit from our experience in both conducting investigations and representing clients who are being investigated. Clients will also benefit from my experience in preparing witnesses to testify in various legal proceedings.
We were also drawn to Cohen Seglias because the firm supports our involvement in a cause that is important to me: Shan and I are both on the Board of Directors of DOVE (Defenders of Victims’ Empowerment), a non-profit that we founded to train and mentor pro bono attorneys to represent victims of crime in criminal cases.
Shan: For me, it was Paul Thaler’s scientific misconduct and internal investigations practices that drew me to Cohen Seglias because it had a natural synergy with the college student defense practice I developed. Having a larger platform was particularly appealing because it is hard to market to institutional and corporate clients when you are a smaller law firm!
Q: Tell us a little bit about your practice and the services you provide to clients.
Julie: In addition to my internal investigation and Title IX work, I represent whistleblowers who report fraud against the government in False Claims Act cases or who report securities or tax fraud and I also represent victims of crime. Whistleblowers and victims of crime have a lot in common as people who are put into these situations through no fault of their own, by being victimized, or by witnessing wrongdoing in their companies. I help these clients navigate the legal process so that they can understand their options and make the best choices available to them.
Shan: My practice falls into three primary categories: white-collar criminal defense, college student defense, and outside general counsel work. In my white collar criminal practice, I primarily defend individuals with recent notable representations, including Paul Manafort’s former deputy, Rick Gates, in the Mueller Russia probe.
Q: What are three lessons you learned while working in government that shape how you practice law?
Julie: Your reputation is everything. Always prepare for the worst that can happen. Be generous when working with colleagues.
Shan: Lessons from working in the government: (1) It’s easier to ask for forgiveness than permission; (2) No good deed goes unpunished; (3) The government does not have unlimited resources!
Q: Describe a memorable challenge you overcame in the course of your career.
Julie: One of the most memorable challenges I faced was presenting the testimony of a victim of a violent crime who had a terrible drug addiction. She was the only witness who survived to testify in the trial of a serial rapist/murderer. I worked hard to keep her focused on her testimony during direct examination. After testifying about her experience of the crime, this witness proceeded to repeatedly nod off during cross-examination. Everyone in the courtroom was watching me to see what I would do, and I pretended that it was no big deal (as if witnesses fall asleep during their testimony all the time). Luckily, I was able to clean up some of her testimony on re-direct. I am happy to report that the defendant was convicted and sentenced to life without parole.
Shan: After my first court appearance in United States v. Paul Manafort and Richard Gates, I was left behind by the SUV carrying Rick Gates and the rest of my team because I got separated in the media mob leaving the courthouse (in full disclosure, because I stopped to give an interview). I then had to walk the longest block of my life surrounded by reporters until I could get in a taxi.