Construction Law Signal - Insights & Information on Current & Emerging Developments affecting the Construction Industry

By: Daniel E. Fierstein and Catherine Nguyen

Employers doing business in the City of Philadelphia must pay taxes on wages (including salaries, commissions, and other forms of compensation) and net profits. A new ordinance shores up current enforcement mechanisms, arming the City with aggressive penalties on overdue taxes and giving private citizens an enforcement role.

About Ordinance 19-1509

Under Ordinance 19-1509, an employer with an overdue tax bill could face a law suit from the City Solicitor and could be liable for attorneys’ fees, interest, and penalties to the tune of two to three times the amount of taxes overdue.

To prevail, the City must show that the employer knowingly committed a Wage Tax or Net Profit Tax Law violation, conspired to violate the laws, or was involved in falsified tax records related to compliance with the laws. The bar for “knowledge” is fairly low, allowing an employer to be on the hook for damages if it (i) actually knows the taxes are unpaid, (ii) turns a blind eye to the unpaid taxes, or (iii) recklessly disregards the fact that wage and net profit taxes are not paid. The same rules apply to falsification of tax records.

Private Citizen Referrals

The Ordinance not only empowers the City Solicitor, but it also creates enforcement rights for private citizens. A private citizen may refer a case to the City Solicitor for investigation, and may even litigate the claim with or on behalf of the City Solicitor. In fact, the law incentivizes private citizen referrals by awarding, in some instances, a 15 to 25 percent award from proceeds of a successful recovery. The Ordinance also contains a clause prohibiting retaliation by an employer against whistleblowing employees.

The Moral of the Story

With such potentially devastating penalties at stake, employers must ensure that they pay wage and net profit taxes on time, and vigilantly maintain current and accurate tax records. Employers should also consult regularly with a responsible tax professional. If faced with a claim by the City Solicitor and/or private citizen, an employer should cooperate, refrain from taking any adverse action against any employees involved, and immediately contact legal counsel.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Catherine Nguyen is an Associate in the Construction Group and concentrates her practice in the area of construction litigation. She has represented clients in construction litigation, contract disputes, landlord-tenant matters and consumer protection cases.

By Jennifer M. Horn and Daniel E. Fierstein

The Backdrop

Since the Recession of 2008, the story of the construction project that fell through shortly after breaking ground has repeated itself far too frequently.  In too many of these situations, financing dries up, leaving owners without project funds to pay general contractors and general contractors without funds to pay early-phase subcontractors who have already performed their work (e.g., demolition, excavation, and site work).  With that uplifting backdrop, let’s discuss how these circumstances affect mechanics’ lien rights.

The Case

As many of our readers know, mechanics’ lien claims are powerful tools for contractors to ensure that they get paid for their work by “encumber[ing] the owner’s property and, if taken to their logical end, force a sale of the property to pay creditors.”  A recent case in the Superior Court of Pennsylvania brought to light the issue of mechanics’ lien rights on buildings that go un-built.  

In B.N. Excavating, Inc. v. PBC Hollow-A, L.P. and PBC Hollowb, L.P., a site contractor (“BN Excavating”) was hired as a subcontractor to perform excavation work for the proposed construction of a two-building project.  BN Excavating performed its work, but the buildings were never actually constructed.  The contractor that hired BN Excavating never paid for the work, so BN Excavating filed a mechanics’ lien claim on the property. 

The owner argued that BN Excavating’s lien was invalid because the buildings were never actually erected.  The Superior Court, however, allowed BN Excavating’s claim to proceed because the excavation work was incidental to planned construction.  In other words, the Court held that BN Excavating’s lien rights were tied to the existence of a construction plan, not to the ultimate fulfillment of that plan.

The Take-Away

For contractors, subcontractors, and suppliers who perform site work can rest easier knowing that your lien rights are tied to the nature of your work and not whether a building is ultimately erected.   It is nonetheless critical for you to supply your attorney with detailed information about the project, so that he or she drafts the mechanics’ lien claim in a way that makes clear that your work was part of a construction plan.

For owners and developers, understand that the Mechanics’ Lien Law could be unsympathetic to situations in which a construction project falls through before a building is erected.  Predecessor work such as demolition and excavation will still be protected under the Mechanics’ Lien Law.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Trevor Taniguchi, a summer associate with Cohen Seglias, contributed to this post.

On April 11, 2013, the United States Small Business Administration (SBA) announced that $19 million in grants will be made to SBA resource partners to support small business recovery in the wake of Hurricane Sandy. The funding is part of a package approved by Congress in January to meet the demand for expanded SBA assistance including counseling, training, and technical assistance through Small Business Development Centers (SBDs), SCORE, and Women’s Business Centers (WBCs).

The first phase of the counseling and technical assistance funding totals $5.8 million, and will be distributed among the SBA resource partners in 11 states. The majority of this funding will be focused in New York ($2,394,000), New Jersey ($1,385,000), Connecticut ($527,000), and Pennsylvania ($410,000).

The second phase of funding, totaling $13.1 million, will be issued through the SBA resource partners to provide long-term small business recovery and expansion, with an emphasis on building creative community-based partnerships.

The SBA has so far approved disaster loans totaling $1.8 billion to individuals, and $279 million to businesses and non-profits recovering from Hurricane Sandy.

Shawn R. Farrell is a Partner in the Construction, Labor & Employment and Insurance Groups at Cohen Seglias Pallas Greenhall & Furman PC.

Peter Plevritis is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. He focuses his practice on complex construction litigation.

By: Jonathan A. Cass and Dan E. Fierstein

For most people, there is only one thing more excruciating than a discussion about insurance coverage: a blog post about it.  So brace yourselves dear readers.

With all kidding aside, the importance for contractors and owners to understand the ins and outs of their insurance policies, and the risk transfer mechanisms that they are using, or are being subject to, cannot be overstated.  Members of the construction industry should be generally familiar with the individual concepts of commercial general liability (“CGL”), additional insured status, and contractual indemnification, but few understand how they fit together and, worse, how their synergies can cause unintended and costly consequences.  It gets even worse when a liability policy called an Owners and Contractors Protective Liability policy (“OCP Policy”) is thrown into the mix.

In recent years, we have seen owners increasingly requesting that our contractor clients purchase an OCP Policy.  An OCP Policy is a policy that is specific to a construction project that insures the owner for personal and property damage arising out of the work of a designated contractor.  It differs from the more commonly utilized additional insured concept in that the OCP Policy only covers the owner, instead of the contractor and owner together under the contractor’s CGL policy.

Owners like it because an OCP Policy can provide broader coverage than that provided under an additional insured endorsement, and provides them with coverage limits that they do not need to share among any other parties in the event of an insured claim.  Contractors like it because an OCP Policy typically provide primary insurance coverage, which means in the event of an accident arising from the contractor’s work that leads to a claim against the owner, the OCP Policy’s limits will be tapped by the owner, rather than the contractor’s CGL policy providing coverage to the owner as an additional insured.  (This is true even if the owner has also required a contractor to name the owner as an additional insured on the contractor’s CGL Policy).

The concern and unintended consequences of which contractors must be aware arises in cases where the owner, in addition to requiring the contractor to purchase the OCP Policy, also requires the contractor, pursuant to the construction contract, to indemnify the owner for personal injury and property damage arising from the negligence of the contractors in performing its work.  In practice, if an accident occurs during construction – say an employee of a subcontractor is injured – the employee will sue both the contractor and owner.  The owner will respond by tendering its defense and seeking indemnification from the insurance carrier that issued the OCP Policy.  The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner, and its CGL carrier will defend it.

However,  what we have seen occur is that the attorney appointed to defend the owner by the OCP carrier then asserts a claim for contractual indemnification against the contractor, and demands that the contractor defend and indemnify the owner pursuant to the indemnification provision in the construction contract.  Although the contractor will typically have contractual liability coverage under its CGL policy for such an indemnification claim, the contractor’s efforts to insulate its own CGL policy from having to pay claims asserted against the owner by purchasing the OCP policy have been thwarted.  Not only did the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP Policy is triggered, the OCP carrier circles back and dumps the claim back on the contractor’s CGL policy through the construction contract’s indemnification provision.  Simply put, the contractor pays for the OCP Policy, and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.

The lesson to be learned?  It is important for contractors (and owners) to understand the interplay between an OCP Policy, additional insured status, and a contractual indemnification provision.  To the extent that an owner is demanding that a contractor purchase an OCP Policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for personal injury and property damage – the very same claims covered by the OCP Policy.  In doing so, the contractor can avoid the scenario discussed above.

Jonathan A. Cass is a the Chair of the Insurance Coverage & Risk Management Group at Cohen Seglias Pallas Greenhall & Furman PC. He has extensive experience representing insureds and insurers in insurance coverage disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

By: Jason Tomasulo

The Maryland Legislature recently passed House Bill 560, which makes significant revisions to Maryland’s Public-Private Partnership law, effective July 1, 2013. The genesis for the revisions was the combination of Maryland’s infrastructure needs and the budgetary constraints due to the economic downturn over recent years. In 2011, the American Society of Civil Engineers Report Card gave Maryland an overall grade of “C-” for its infrastructure. To put the infrastructure needs in perspective, the cost to build the number one transportation priority in all twenty-three counties and the City of Baltimore is more than $12 billion, which is six times the current $2 billion in annual transportation capital expenditures. After exploring the use of public-private partnerships (“P3s”) by other states and conducting meetings with private industry, Maryland concluded that P3s could help address its infrastructure needs, provided it retained ultimate control over its assets and combined the strengths of the private sector – flexible financing, advanced construction techniques, project development and operational efficiencies – with those of the public sector – accountability, transparency and the delivery of public services.

History

Revisions to Maryland’s P3 statute have been in the works for at least a couple years. In 2011, the Joint Legislative and Executive Commission on Oversight of Public-Private Partnerships was established and tasked with, among other things, reviewing Maryland’s current process for P3s, studying the best practices and lessons learned in other states, and making recommendations on improving the process for P3s in Maryland. Maryland Lieutenant Governor Anthony Brown chaired the Commission. The Commission issued its Final Report to the Governor and General Assembly on January 6, 2012. Although proposed legislation that included many of the recommendations in the Final Report was introduced during the 2012 legislative session, the Legislature was unable to pass the bill into law during that session.

On January 30, 2013, Benjamin Stutz, Policy Director for Maryland Lt. Governor Anthony Brown, spoke to members of the Construction Law Section of the Maryland State Bar Association in Annapolis, Maryland, and outlined key points of the proposed legislative revisions that would be re-introduced during the current legislative session. The proposed legislation was based on recommendations in the Final Report. Some amendments were made to the bill before passage in March 2013.

Key Revisions

The prior Maryland Public-Private Partnership law, State Fin. & Proc. Art. §10A-101 et seq., provided a skeletal framework for the authorization and implementation of public-private partnerships. The new legislation provides needed detail for the mechanics of such partnerships. Some of the key features include the following:

• A new definition of “Public-private partnership” that focuses more on the partnership and collaborative relationship between the public and private sectors, and less on the mechanics of how the agreements are structured
• A statement of public policy to utilize P3s to develop and strengthen the state’s infrastructure assets, apportion between the public and private sectors the risks with developing and strengthening public infrastructure assets, foster new job creation, and promote socioeconomic development and competitiveness of Maryland
• A process for a “Reporting Agency” (the Department of General Services, Maryland Department of Transportation, Maryland Transportation Authority, the University System of Maryland, Morgan State University, St. Mary’s College of Maryland, and Baltimore City Community College) to adopt regulations and processes for the development, solicitation, evaluation, award and delivery of P3s
• A revised P3 process that divides oversight between the Executive and Legislative Branches and shortens the review time for participants in the P3 process, with the Board of Public Works providing initial approval of the public infrastructure asset as a P3 and also having final approval after the agency reaches agreement on the terms of a P3 agreement
• Balancing the desire for more transparency with the need to protect confidential and proprietary information by publishing online the Reporting Agency’s Presolicitation Report and the proposed P3 agreement, but withholding confidential commercial, financial and/or trade secret information
• Subjecting P3s to Maryland’s Little Miller Act, prevailing wage statute, Environment Article of the Maryland Code, and requirements for high performance buildings (e.g., LEED Silver), if applicable
• Allowing for the possibility of recouping proposal costs in response to a solicitation of a P3 for unsuccessful private entities
• Allowing for the submission of unsolicited proposals to address Maryland’s infrastructure needs

While these changes seem well-suited to achieving the goal of spurring P3s to address Maryland’s infrastructure needs, time will tell if these changes have the desired effect.

Jason C. Tomasulo is Senior Counsel at Cohen Seglias Pallas Greenhall & Furman PC. He focuses his practice on construction law and represents owners, general contractors, subcontractors, suppliers and sureties.