Construction In Brief: Winter 2009 - Cohen Seglias Pallas Greenhall

VOL. 66 •• ISSUE
ISSUE 04
04 ••WINTER
WINTER 2009
2009
VOL.
A Quarterly Publication
brought to you by
the law firm of
Cohen Seglias Pallas
Greenhall & Furman PC
Providing a full range of
construction law services
together with specialties in
labor, real estate, commercial
transactions, tax, estates and
commercial litigation
d
PHILADELPHIA
FEATURE ISSUE: THE ECONOMY and THE LAW
As many of us are closely monitoring these current economic times, Cohen Seglias has devoted this issue of
Construction In Brief to various legal issues that pertain to the economy. While every article might not
reflect your business situation, we hope that you find some valuable information. As always, we recommend
you consult with an attorney for specific advice.
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2 White Horse Pike
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119 Littleton Road
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c
CONTRIBUTORS:
Nella M. Bloom, Esq.
Jonathan A. Cass Esq.
Lance S. Forbes, Esq.
Mark J. Leavy, Esq.
Susan A. Shaw, Esq.
Editor: Janet L. Treiman, Esq.
Asst. Ed.: Christopher P. Soper, Esq.
Aria K. Vaida, Marketing Director
Design: Goffman Group, Inc.
Show Me The Money
PROOF OF FINANCING IN
Are you having problems getting paid by the
owner of your current construction project?
Or is the owner concerned about your ability to
pay your subcontractors? If so, you’re not alone.
Unfortunately, as the economy has weakened,
money has gotten tighter, and jobs have become
increasingly hard to come by. Financing, or rather
the lack of it, has become a major obstacle in both
the availability of work and a contractor’s ability to
get paid on a project. The American Institute of
Architects (AIA) has added to contractors’
frustrations by tightening the reins on a
contractor’s right to request proof of owner
financing in the 2007 version of the AIA A201
form contract as compared to the 1997 version.
These changes do not lighten the load for owners
in all respects. An owner is still subject to
consequences if it fails to provide reasonable
assurance of financing sufficient to meet its
impending obligations. As a result, it is
important that both contractors and owners
are aware of these changes so they can
exercise their rights and protect their
investments.
According
to
both versions of
the AIA A201
contract, the contractor
may request proof of financing
AIA A201 CONTRACT
for any reason before the contractor begins its
work. The contractor does not have to begin
its work until it has received the appropriate
proof of financing from the owner. However,
once work begins, the version of the A201 form
contract being used determines the contractor’s
rights. Under both versions, an owner can not
substantially change its financial arrangements
without providing notice to the contractor.
In the 1997 version, the contractor may request
proof of financing in writing at any time and for
any reason. If the contractor makes the request
after it has already started the work, the owner
must provide the proof of financing before the
contractor has to continue its work.
Under the newly implemented and
increasingly used 2007 version, however, a
contractor’s right to ask for proof of
financing is limited to three particular
circumstances: where “the Owner fails to
make payments to the Contractor;” where
“a change in the Work materially changes
the Contract Sum;” and, where “the
Contractor identifies in writing
a reasonable concern
regarding the Owner’s
ability to make
payment
when due.”
www.cohenseglias.com
continued on page 4
&
Labor Employment Law
Five Tips to Avoid Liability
When Implementing Layoffs
by Mark J. Leavy, Esquire
Employers of all sizes are cutting their payroll in order to survive the recession. Total job losses in 2008 were at the worst level since the end of World War II, and
the unemployment rate spiked to the highest in almost sixteen years. Not surprisingly, the increase in layoffs has resulted in an increase in employment litigation.
If you are thinking about laying off a group of employees, closing a branch office, or even eliminating a single position, you need to plan ahead to avoid getting caught
in the jaws of a nasty lawsuit.
. The Worker Adjustment and Retraining Notification Act (“WARN”) is a federal law that requires a special
60-day layoff notice to employees. Employers who have at least 100 employees must issue a specific form of written notice if there is a layoff of 50
or more employees during any 90-day period. The failure to comply with WARN usually results in the payment of hefty damages and penalties.
With the right information, you may be able to structure your layoff to avoid any obligations under WARN. Also, keep in mind that many states and
municipalities have enacted WARN-like laws with different requirements. Therefore, it is important to make yourself familiar with state and local
laws.
Avoiding race, gender and age discrimination claims can feel like walking blindfolded through
a minefield – something’s going to blow up sooner or later. You want to avoid lay offs that, while made for legitimate reasons, may “smell bad”
(for example, laying off the three oldest people in your company or the only two minorities in a particular department). Usually, the safest way to
implement a layoff is by strict seniority (the last one in the door is the first one out). If you are using some other criteria to decide who is going to be
laid off, such as job performance, make sure that you have sufficient documentation and other objective evidence to defend your position in the event
of a lawsuit.
Sometimes you just know that an employee is aching to sue your company, no matter
what. Although under no legal obligation to do so, many companies offer a severance package to laid off employees based on years of service – just to
discover that “no good deed goes unpunished”when the company is sued anyway. Only a properly drafted severance agreement will withstand
scrutiny in court and eliminate the possibility of a lawsuit. As a general rule, whenever you give an employee a severance package, you should get your
money’s worth by obtaining a severance agreement that includes a global waiver that effectively releases all potential claims.
Virtually every collective bargaining agreement has provisions that relate to layoffs.
Does your collective bargaining agreement mandate that you lay off employees according to seniority, or can you do so based upon skill and ability?
Does your agreement require a certain amount of notice or pay in lieu of notice? What, if any, bumping rights (generally, the right of a senior
employee being laid-off to replace a junior employee not being laid-off) are afforded to employees in the
event of a layoff? In addition to arming yourself with the answers to these questions, even if you are not
obligated to do so, you may want to consider having a one-on-one meeting with your union’s business
agent to soften the blow caused by the layoff and maintain sound, long-term labor relations.
Upon termination, an employee
must be paid their full, final paycheck on the next scheduled payday (and
earlier in some states). But did you ever discover non-business expenses
charged to the company, or have an employee fail to return a company cell
phone or other company property upon termination? You should not even
consider making deductions against an employee’s final paycheck for any
such reasons – or you may find yourself facing potential criminal or double
or treble civil damages and penalties. Strict wage and hour laws require an
employer to pay all wages due upon termination without deductions.
(Some states, however, allow deductions if the employee specifically
authorized the employer to take the deduction in advance and in
writing, i.e., a signed release when the employee
received the cell phone). Wages include earned
commissions and possibly accrued personal and
vacation time. Know your legal obligations, so
you do not run afoul of the wage and hour laws.
2
Our Labor and Employment Group stands ready to provide the guidance you will need to manage both garden
variety layoffs and more complicated situations and steer clear of unnecessary and costly litigation.
Business Practice Group
EXPLORING THE OPTION OF
A DISADVANTAGED BUSINESS
ENTERPRISE CERTIFICATION
&
What is a disadvantaged
business enterprise?
A disadvantaged business enterprise, or “DBE,” is a business enterprise owned,
managed, and operated by an individual or individuals who belong to a group
that has historically faced discrimination. These individuals include members
of minority groups, women, disabled persons, veterans, or persons who can
prove significant economic or social disadvantage. Disadvantaged individuals
must own at least 51% of the business and must share in the risks and benefits
of business ownership. They must hold the highest position in the business
and manage the day-to-day issues of the business, as well as its overall policy.
They must also have sufficient knowledge, experience, and expertise to operate
a business in the industry. The disadvantaged individuals should possess any required professional licenses and have the expertise to actually perform the job
functions, such as estimating, operating machinery and project supervision. If the disadvantaged individual performs administrative management only,
no matter how comprehensive, the business will not qualify as a DBE.
What are the
benefits of DBE
certification?
My business applied for
certification but was
rejected. What can I do?
How do I obtain
DBE certification
for my business?
State and federal agencies must make a good
faith attempt to meet goals in employing
DBEs for contracts on public construction
projects. This provides an advantage for
qualified DBEs that are bidding on contracts
or subcontracts for public work. On some
projects, agencies may specifically set
contracting opportunities aside for DBEs.
In this instance, a subcontract is not put out
for bid, but instead it may be awarded to a
DBE by a prime contractor in order to fulfill
a DBE contracting goal. Moreover, under
certain circumstances, agencies are permitted
the latitude to award a contract to a DBE even
though it is not the lowest responsible bidder.
Yet another advantage, depending on the size
of the DBE, is that it might be qualified for
certain benefits under the Small Business
Administration’s various programs (though the
process for qualifying for Small Business
Administration programs is distinct from DBE
certification). Finally, although not required
by law, DBEs may be afforded preference on
certain private jobs as well.
When an application is rejected, the
applicant is sent a letter from the certifying
agency, explaining the reasons for the
rejection. The applicant may then file an
appeal, which can require a written statement
contesting the rejection, a hearing before the
certifying agency or both; after which, in
some states, the applicant may file a secondlevel appeal. An applicant whose application
is rejected must wait a certain amount
of time (generally a year) to reapply for DBE
status.
The agency will review any
reapplication with a critical eye.
In
reapplying, it is essential to address the
reasons for rejection specified in the original
application.
Even then, however, the
business’s chance of successfully reapplying
for DBE status after having been rejected
often decreases significantly.
Each state and federal agency may have its
own DBE application; however, in some
cases, a business with DBE certification in
one state or federal agency may gain
eligibility in another using a shortened
application. An application for DBE status
must contain sufficient evidence to show
the government that the disadvantaged
individual involved in the business has
ownership, managerial control, and
operational control over the day-to-day
business activities. The application also
requires documentation regarding the
business’s corporate status, finances,
ownership, and history, as well as the
resume of the disadvantaged individual and
any other individuals who manage the
business. It is essential to have your
application reviewed by an attorney before
submitting it, because if any information is
missing from the application, or if the
application does not reflect the depth of
the disadvantaged individual’s involvement
in the business, it will be rejected.
In order to avoid losing time, money, and
contracting opportunities by submitting a
deficient application for DBE certification,
contact Edward T. DeLisle, Esq.
for further information.
Contact a Cohen Seglias attorney at 215.564.1700
by Nella M. Bloom, Esquire
d
In Memorium
CHARLES F. WAHN
Cohen Seglias Pallas Greenhall & Furman PC mourns the passing of our dear
friend and colleague Charles “Chuck” F. Wahn, who passed away on Wednesday,
February 4, 2009. He was 33 years old.
Chuck, who practiced in the
Construction Practice Group
in the firm’s Philadelphia
office, was not only a
dedicated attorney but was
committed to his practice at
the Firm. One associate
described Chuck as a “man
for the people.”
Chuck was a sincere, loyal
and energetic individual.
Chuck had many friends at
Cohen Seglias. He founded
the Firm’s “Running Team” that
would frequently take to the streets of
Philadelphia after a hard
day’s work. Chuck was an
avid
mountain
biker
and was a member of the
Philadelphia
Mountain
Biking Association. In
addition, he challenged other
firm members to ping pong
matches, which were always
hard fought.
SHOW ME THE MONEY – (Cont. from cover)
The contractor may stop some or all of its work if the owner fails
to provide the proof only under these limited circumstances.
Importantly, if the contractor made the request for proof of financing
due to a change in work that materially changed the contract sum, and
the owner fails to provide the requested proof, the contractor may
stop its work related to that change only. The contractor must
continue the rest of its work on the project.
An additional protection available to contractors under both versions
is the ability to terminate the contract. As discussed above, under both
the 1997 and 2007 versions, a contractor has the right to stop work if
an owner fails to provide adequate proof of financing. If the work
stoppage spans a consecutive 30-day period, a contractor may
terminate the contract.
The attorneys and staff of
Cohen Seglias express our
deepest sympathy to Chuck’s
wife Heather and their families.
What’s New at the Firm?
by Aria K. Vaida, Marketing Director
attorneys have been very active, giving new seminars to help its
clients with their business and legal needs. In January, John A. Greenhall presented
a seminar to the National Electrical Contractors Association on “Construction
Law from A to Z,” and Shawn R. Farrell and Jack Graham presented a seminar to
the Building Industry Association on “Changes to the
Mechanics’ Liens and Important Ramifications.” In February,
Roy S. Cohen gave a seminar to the Penn-Del-Jersey Chapter
of the National Electrical Contractors Association on “”How
an Electrical Contractor Can Protect Itself in Troubled Times.”
Cohen Seglias is proud to announce the addition of Craig A.
Schroeder to its Construction Group in the Philadelphia
office. Craig received a B.S. from Lafayette College, and his
J.D. from the Rutgers School of Law. Prior to joining Cohen
Seglias, Craig was an associate in another Philadelphia firm.
The 2007 version makes certain that the right to request proof of
financing is not a one-way street. A provision added to the 2007
version gives the owner the right to request written evidence from the
contractor that it has paid all of its subcontractors and material and
equipment suppliers their respective shares of the owner’s payments
under the contract. If evidence is not furnished within seven days, the
owner can go straight to the source – the subcontractors – to find out
what payments have been made. If the contractor failed to pay its
subcontractors, the contractor has possibly breached its contract with
the owner and the owner can arguably withhold future payments from
the contractor until the subcontractors have been paid. Many
subcontracts also include a similar proof of payment provision.
As more contractors and owners become concerned with getting paid
and protecting their investments, it is likely that proof of finance and
related provisions will receive much more attention. This, combined
with the increasing popularity of the 2007 version of the A201,
highlights the importance of contractors and owners knowing their
rights and obligations under the altered provisions.
Craig Schroeder, Esq
For additional details, please contact Marketing Director
Aria K. Vaida at (215) 564-1700, or [email protected].
by Susan A. Shaw, Esquire
As our economy changes, Cohen Seglias attorneys are looking for new ways to help you
and your business. Our Labor and Employment Group will be giving a fast-paced halfday of seminars to let you know what to expect from Washington, and provide you with
nuts-and-bolts practical advice to protect your company. Far from a dry presentation
of legal rules, this interactive seminar will focus on real-world workplace situations.
Important topics to be discussed include:
• Cutting-Edge Developments
• Protecting Against Unfair Competition
• Top 10 Tips on Firing at Will
• Picketing A to Z ...and more!
Wednesday, March 25, 2009
The Four Seasons Hotel
For details and registration:
www.cohenseglias.com
Philadelphia • Harrisburg • Pittsburgh • New Jersey • Wilmington • West Virginia
4
Construction News
WHAT IS THE VALUE
OF YOUR LIEN
IN THE CURRENT
ECONOMIC CLIMATE?
H
ave you ever been on a project as either a contractor or
supplier where everything is progressing according to the schedule, and
then suddenly, payments for your labor and/or materials dwindle or
stop all together? Contractors and suppliers encounter this problem
often and, in these economically challenging times, such occurrences
are growing more frequent. So, what do you do?
As a contractor or supplier, you want assurance that you are going to
get paid for the materials and services you provide on a project. One of
the most effective tools at your disposal is the construction or
mechanics’ lien. By filing a lien on the property, you effectively
“cloud” the title of the owner –making it difficult for the owner to
refinance or sell the property. In addition, the lien is an effective tool
even in the event that the party that owes you money has no assets or
funds to pay you because the lien is secured against the property itself.
This gives you the assurance that if the party with whom you
contracted does not honor its obligations and pay for the goods
or services you provided, you can have the property sold to collect
the debt.
So, you file a construction or mechanics’ lien on the property for the
outstanding contract amount and you are confident that your rights
are protected and that this will result in you getting paid, right?
Well, not so fast. Now you find out that, as a result of the economic
downturn, the value of the property is less than the construction loan
that was provided to fund the project. Soon thereafter, the
construction lender forecloses on the property and wipes out your lien.
How did this all happen?
In the current economic environment, the construction lender’s
likelihood of initiating a mortgage foreclosure action against the
d
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
[email protected]
5
property and wiping out your lien has
increased. Traditionally, lenders have been
generally reluctant to foreclose on mortgages
because neither the loan officer who generated
the construction loan, nor the loan committee
of the lender, wants to report that they have
had to foreclose on a loan to their regulators
(state and/or federal agencies). As opposed to taking a loss, the lenders
have often pressured the property owner to come up with the money
to pay the contractor or supplier that filed the lien or, when necessary,
have loaned the owner additional money to pay the party that filed the
lien. However, many properties have now decreased in value below the
mortgage amount. Under these circumstances, not only do your lien
rights count for less, but the lender might not want to lend more
money to the owner to pay off your lien. Consequently, it may be
more beneficial to the lender to foreclose on the property and wipe
out your lien.
Despite this danger, liens are still a valuable tool in getting you paid if
the value of the property exceeds the amount of the mortgage. If, as a
contractor or supplier, you are unsure of the ability of the party with
whom you are contracting to pay, or the value of filing a lien, it is
prudent to do some investigation on the subject property to determine
if there are any mortgages or liens filed against it and to find out its
market value. This will enable you to determine whether it is worth it
to invest your time and money in a project that could go under in this
tough economic climate and, as a result, make any liens you file
worthless and leave you no means of getting paid for your materials
and services.
by Lance S. Forbes, Esquire
Don’t Forget to Check Out
Our New Web Site at
wwwCohenSeglias.com
Philadelphia • Harrisburg • Pittsburgh • New Jersey • Wilmington • West Virginia
UPDATE:
Millers Capital v. Gambone
by Jonathan A. Cass, Esquire
The Pennsylvania Supreme Court recently denied a Petition for Allowance of Appeal that Gambone Brothers Development Company, a residential
builder, filed seeking to overturn the Pennsylvania Superior Court’s decision in Millers Capital Insurance Company v. Gambone Brothers.
(We previously discussed this case at length in the Newsletter article: “There’s a Bad Moon Rising in Pa,” Volume 5 Issue 04 Winter 2008, available
at www.cohenseglias.com).
Gambone arose from two lawsuits filed against Gambone, the builder, by homeowners who had purchased homes in two separate developments.
The homeowners alleged that their homes had sustained extensive water leaks due to “construction defects and product failures” in, among other
things, the homes’ vapor barriers, windows, roofs and stucco exteriors. After Gambone’s insurer, Millers Capital Insurance Company, refused to
provide coverage for these lawsuits, the two companies filed suits against each other seeking a determination of whether there was coverage for the
homeowners’ lawsuits under the policy issued by Millers Capital.
After Gambone lost before the trial court, it appealed to the Superior Court. On appeal, Gambone argued that the homeowners’ lawsuits involved
claims for ancillary and accidental damage that the water damage caused to non-defective work inside the home (drywall, framing, trim, etc.).
According to Gambone, the resulting water damage constituted an “occurrence” under the policy, even though the damage to the faulty stucco
exteriors did not. The SuperiorCelebrating
Court disagreed,
the damage thatwww.CohenSeglias.com
the rainwater seepage caused was not an “accident,” and therefore,
ourexplaining
20th anniversary.
there was no “occurrence” for the purposes of insurance coverage. It held that “damage caused by rainfall that seeps through faulty home exterior
work to damage the interior of a home is not a fortuitous event that would trigger coverage.”
Now that the Pennsylvania Supreme Court has refused to hear Gambone’s appeal, we expect that insurance carriers will move even more
aggressively to deny new claims that arise from allegations of faulty workmanship, and to revisit old cases involving claims of faulty workmanship
where the carrier is currently defending and/or indemnifying its insureds.