In Pennsylvania, it is well-established that a homeowner can assert claims for fraud and violation of Pennsylvania’s consumer protection statute – the Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) – against a contractor based upon the contractor’s representations, even absent any contractual relationship between the homeowner and the contractor. Essentially, where a contractor makes a representation on which reliance is “specially foreseeable” and the homeowner relies upon the representation and sustains damages as a result, the homeowner may have a claim against the contractor. This scenario often comes into play where a homeowner asserts a claim against the builder where the homeowner is not the initial purchaser of the home, but rather a subsequent purchaser.  Continue Reading Adams v. Hellings Builders, Inc.: PA Superior Court holds that a homebuilder can be liable for representations made in its promotional materials

By: Daniella Gordon and Jennifer M. Horn

Several top New York construction companies have been served with federal subpoenas seeking information regarding their billing practices in connection with New York public works projects.  Skansa USA Building, Inc., Turner Construction Co., Plaza Construction and Tishman Construction Group were among the construction firms served with information subpoenas.  The status of the federal inquiry, and whether an official investigation will result, is currently unknown.

The probe comes in the wake of the federal prosecution of one of New York’s top construction firms Bovis Lend Lease, now known as Lend Lease Project Management and Construction. Deceitful billing practices, including rigged contract bids, misrepresentation regarding the participation of minority firms, inflated bills and no-show jobs emerged as critical areas of inquiry in the Bovis prosecution.  Ultimately, as a result of the prosecution of Bovis and certain employees, Bovis agreed to pay the Government $56 million dollars in restitution and fines in July of 2012.  Ironically, one of the projects for which Bovis was alleged to have committed acts of fraud involved the construction of the Bronx Criminal Courthouse.

The prevalence of fraudulent bidding and billing practices on public construction projects appears to be a growing concern for federal and local legislative and enforcement bodies in the wake of the economic downturn.  It remains to be seen whether the Government’s actions will have the desired a deterrent effect.

Daniella Gordon is a litigation Associate in the Construction Group. She represents clients in a wide range of construction related matters, including public bidding contests, construction defect claims, and appeals.

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.

check.jpgSeparate but commonly owned or related companies are common place in the construction industry. It is also common for contractors to get squeezed by late or nonpaying owners and/or subcontractors demanding payment for work performed. A recent case in New Jersey highlighted the pitfalls contactors and their owners can fall into in these situations, and the harsh ramifications they could face if they don’t follow corporate policies and are less than honest in their representations to owners and their subcontractors.

AACON Contracting, LLC v. Glen Poppe et al

In AACON Contracting, LLC v. Glen Poppe et al. (A-1500-11T2), the Appellate Division in New Jersey upheld a trial court decision that found that Glen Poppe, individually, and the three corporations that he owned and controlled, Walter H. Poppe General Contractors, Poppe Construction (“Poppe Construction”) and Poppe Contracting (“Poppe Contracting”), were jointly liable to their subcontractor, AACON Contracting, LLC (“AACON”) for fraud. AACON contracted with one of the Poppe entities, Poppe Construction, to serve as a masonry and concrete subcontractor for the construction of a new Walgreens pharmacy. Prior to entering into the subcontract with AACON, Poppe Construction represented that it was the general contractor and had a contract with Walgreens. But in actuality, a different entity, Poppe Contracting, was the party that had a contract with Walgreens.

Project Background

During the course of the Project a dispute arose between Poppe Construction and AACON regarding the installation of a concrete floor. The third entity, Walter H. Poppe General Contractors, was the company issuing payments to AACON. These payments stopped when the dispute arose, resulting in the withholding of the contract balance from AACON. However, Poppe Contracting continued to represent to Walgreens in its payment applications that it was paying AACON, and Walgreens continued make payments. At the same time, Poppe Construction was representing to AACON that that it could not pay AACON because it had not received payment from Walgreens, and that AACON would be paid when Poppe Construction was paid by Walgreens. AACON relied upon these representations and continued working.

The Dispute

AACON then filed a construction lien claim against the project for unpaid work. Walgreens paid AACON $34,900 in exchange for AACON’s completion of its work and discharge of the lien. AACON arbitrated its payment dispute with Poppe Construction, and was awarded the majority of its contract balance. AACON then filed a lawsuit against all three corporations and Glen Poppe, individually, for, among other things, fraud. The trial court held Glenn Poppe and all three corporations liable for fraud.

Corporate and Personal Liability for Fraud

The Court’s finding of fraud was based on several key facts: (1) that Poppe Construction represented to AACON that it had a contract with Walgreens when it didn’t; (2) Poppe Contracting and Glenn Poppe represented to AACON that it would be paid when Walgreens issued payment, when in fact Walgreens had already issued payment to Walter H. Poppe General Contractors; (3) Poppe Contracting represented to Walgreens that it had paid AACON for its work, when it fact it hadn’t; and (4) AACON was induced to continue working on the project by Poppe Construction’s misrepresentation that it had not yet been paid by Walgreens.

Finally, and perhaps most significantly, the Court held that Glen Poppe was personally liable for the fraud of the corporations because he clearly controlled all three corporations and was the sole individual responsible for “the shuffling of these corporations” to avoid their payment obligations to AACON.

The Takeaway

The Poppe case reminds us of the importance of maintaining corporate formalities when operating related businesses, and that when they are not, the related entities, and the individuals who control them, can be jointly liable for their debts. Most importantly, general contractors, and their principals and officers, must avoid making false certifications to owners regarding the status of payments to owners, and also false statements to subcontractors regarding the status of payments from owners, lest be subject to claims of fraud and personal liability.

Robert Ruggieri is a Senior Associate at Cohen Seglias Pallas Greenhall & Furman PC and practices in the area of complex construction litigation.

Jennifer Budd, an Associate with Cohen Seglias contributed to this post.

By: Jennifer M. Horn

The “Gist of the Action” Doctrine may bar plaintiffs from asserting tort-based claims, such as fraud, where the “gist” of the lawsuit is the breach of a contract. Although the Pennsylvania Supreme Court has not yet adopted the Gist of the Action Doctrine, the Pennsylvania Superior Court has done so on several occasions. In the recent case of Mendelsohn, Drucker & Associates v. Titan Atlas Manufacturing, Inc. (Civil Action No.12-453), U.S. federal court for the Eastern District of Pennsylvania strengthened the foothold of the Gist of the Action Doctrine in Pennsylvania by predicting that the Pennsylvania Supreme Court, if presented with the question, would adopt the Doctrine. The Eastern District also clarified an exception to the Gist of the Action Doctrine where allegations of fraudulent inducement were present. Although the Mendelsohn case involved a contract for legal services, its holding applies to other types of contracts, including construction.

The Mendelsohn Case

The Mendelsohn case involved a lawsuit between a law firm, Mendelsohn, Drucker & Associates (“Mendelsohn” or the “Firm”), and Titan Atlas Manufacturing, Inc. (“Titan”), whom Mendelsohn represented in separate litigation arising from Titan’s business activities. Although Titan failed to make timely payment to Mendelsohn for legal services rendered, it provided assurances to the Firm that payment would be forthcoming. After working for months, allegedly in reliance on the promises of payment, Mendelsohn finally withdrew as counsel and filed a complaint in the Eastern District of Pennsylvania against Titan, seeking $402,511.06 in unpaid legal fees. In addition to the underlying breach of contract claim, Mendelsohn alleged a tort-based claim of fraudulent inducement, based upon multiple promises from Titan and its CEO that the legal fees would be paid.

The “Gist of the Action” Rule . . . And The Exception . . .

Titan sought dismissal of the lawsuit based on the Gist of the Action Doctrine, which typically precludes plaintiffs from pursuing tort actions where the underlying “gist” of the action is the breach of contractual duties. Notably, the Pennsylvania Supreme Court has not yet recognized the doctrine. Where the state Supreme Court has not yet ruled on an issue, a U.S. federal court, such as the U.S. Court for the Eastern District of Pennsylvania, is required to predict how the state Supereme court would rule, and hold accordingly. The Eastern District, with the guidance of prior Pennsylvania Superior Court cases, predicted in the Mendelsohn case that the Pennsylvania Supreme Court would recognize the Gist of the Action Doctrine.

In addition, the Eastern District held that a certain exception to the Gist of the Action Doctrine would allow the tort claim to proceed, even though the alleged breach of a contract was central to the dispute. The Mendelson Court noted that sometimes the Doctrine is applied categorically, in that it bars fraud actions in connection with the performance of a contract, but does not preclude fraud in the inducement. This Court rejected that approach, and instead, engaged in what it called a “fact-intensive analysis of the parties’ conduct in relation to the fraud alleged.”

Although the District Court stopped short of holding that any fraudulent inducement claim would be an exception to the Doctrine, the Court ruled that where the fraudulent inducement was, as here, “collateral to the contract,” such claims would not be barred. The Court’s justification was its finding that the fraudulent act of promising payment, when no payment was forthcoming, was not itself a breach of the contract, but rather a breach of a duty “honestly imposed by society.” As a result, the tort claims were “collateral to the contract” and not barred by the Gist of the Action Doctrine.

The Takeaway

Although the Pennsylvania Supreme Court has yet to issue a ruling regarding the Gist of the Action Doctrine, the Eastern District provided another example of its impact and a critical exception. In this regard, plaintiffs will likely be able to plead the tort-based claim of “fraudulent inducement” along side a breach of contract claim, but only where that fraudulent inducement arises from actions that are “collateral to the contract.” Significantly, in the view of the Eastern District, inducing a party to continue work under a contract by promising to provide payment constitutes inducement “collateral to the contract.” Thus, a cause of action for such conduct is not barred by the Doctrine. Potential litigants must be aware of this possible defense to tort claims, and the important exception.

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.

Christopher Polchin, a Summer Associate with Cohen Seglias, contributed to this post.

Lane F. Kelman contributed to this post.

A recent increase in fraud investigations relating to disadvantaged business enterprises (DBEs) has caused companies to revisit the qualifications of the DBEs they work with. Two recent investigations in New York State resulted in multimillion dollar settlements after investigators determined two companies were using DBEs as so-called “pass-through” entities. These pass-through entities were retained to perform certain work on projects, but performed none of the work and instead allowed other entities to fulfill the contractual requirements. Unfortunately, this scenario is not uncommon.fraud.png

DBE Fraud

 

The reality is that some general contractors will use a DBE firm solely as a pass-through entity. In other cases, the DBE firm should never have received certification at all, or changes in ownership and management have caused the company to lose its qualification while maintaining certification. In October 2009, The U.S. Government Accountability Office, the investigative arm of Congress, conducted a detailed study on the use of DBEs in order to determine whether ineligible firms certified as DBEs were being awarded contracting opportunities, thus taking opportunities from legitimate DBEs. The study’s authors concluded that the unqualified DBEs were benefiting by obtaining contracting opportunities with federal government entities and the DBE certification system was vulnerable to fraud.

Additionally, DBE fraud can occur over decades. In a recent case, an officer of Perini Corporation pled guilty to conducting DBE fraud from 1988 through 2001, using several pass-through DBE entities to obtain contracting opportunities and paying the entities 3% to 5% of the subcontract value as a fee to run payroll. The officer pled guilty to criminal charges of money laundering and conspiracy, and the company paid several million dollars to settle the civil suit against it stemming from the fraud.

Who Qualifies as a DBE?

DBEs include women-owned businesses, minority-owned businesses, small businesses who qualify through the Small Business Administration, service-disabled veteran-owned businesses, and HUBZone businesses, which are located in historically economically disadvantaged areas and employ persons residing in such areas. Though requirements differ slightly among states and governmental organizations, the following requirements generally apply:

  • The firm must be at least 51% owned by disadvantaged individuals, whether they be women, minorities, or other disadvantaged individuals;
  • Those individuals must have managerial control and operational control over the business’s activities; and
  • The individual disadvantaged owners’ net worth cannot exceed a certain amount (generally, $750,000, but this amount varies).

Managerial and operational control means, in a practical sense, that the individuals must have sufficient functional knowledge of the business so that they can successfully manage it. For example, though a woman owner of a plumbing business need not be a plumber, she must be able to effectively direct the work of the plumbers working under her, as well as to determine the equipment, man-hours, and materials required to complete any particular job, without relying on any other person to advise her.

Bid Protests

With the current highly competitive climate, competitors are seeking to use every advantage to obtain contracting opportunities, including using the bid protest process to question the legitimacy of a DBE entity, whether that entity is a prime contractor or a subcontractor. For example, a general contractor submitting an unsuccessful bid may challenge the awardee’s bid on the basis that the DBE firms which the successful bidder proposes to use (or the DBE proposing to act as general contractor) are either not legitimate DBE firms, or do not have the capability to perform the work proposed.

In order to protect against such an investigation, before submitting a bid using a DBE subcontractor, it is critical to examine the DBE entity in light of the work that must be done before submitting a bid. Do the disadvantaged owners have the requisite knowledge to plan the project, direct the work, and ensure its completion? Will the DBE be capable of performing the work it proposes to do? Will the DBE need to obtain additional employees or subcontract part of the work to another entity? Performing this type of preliminary investigation prior to submitting a bid could save a company millions of dollars, as well as avoid criminal liability for the use of a fraudulent DBE.