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.