July 2013

Wally Zimolong, Esquire, founder of Zimolong, LLC, announced today that he had obtained an $86,000 settlement from a real estate developer and its real estate broker over claims that they built and sold a home that leaked because of defective stucco.

Two homeowners, a husband and wife, brought the case in the Philadelphia Court of Common Pleas.  The case involved the purchase of a new luxury townhome in Philadelphia.  The townhome experienced leaks because of defective stucco.  The defective stucco was so severe that they caused mushroom growth in the homeowners’ window sills. The homeowners also alleged that the home had a green roof that they never approved and was installed in an incorrect manner, which contributed to the leaking.  The developer eventually refused to attempt to repair the leaks.

Zimolong, LLC engaged a forensic account, Dan Pike, CPA, of the accounting firm Cantor Novak Beaver & Pike, P.C. to review the developer’s bank accounts and tax returns. The analysis revealed that there was a basis to hold the developer entity’s sole owner personally liable for the defective construction.  Ralph Clapp, AIA of Arcon Consulting acted as the plaintiff’s construction defect expert.  Jeff Lappin served as Zimolong’s green roof expert.

“We are very pleased with the settlement,” Zimolong said.  “Sadly, it is all too common for unscrupulous developers to cut corners during construction, deliver a defect product, and then try to leave the homeowner holding the bag.”

Wally Zimolong, Esquire is a trial lawyer who represents individuals and companies in construction matters. Wally has been named one of Super Lawyer Magazine’s “rising stars” for 5 consecutive years. He has successfully litigated hundreds of construction related cases and has counseled clients nationwide on developing and constructing highways, multifamily apartment buildings, professional and collegiate sports stadiums, schools, and uniform planned communities.

The local CBS affiliate in Philadelphia has a story that many lawyers already know: defectively installed stucco is causing homeowners to spend thousands of dollars to repair their homes.   The story underscores another problem homeowners face: they will not likely recover a dime of their repair costs.

The story recounts an all too familiar tale of homeowners who discovered defects related to improperly applied stucco, brought suit against the builder, obtained a judgment, but have been unable to collect on the judgment.  The two primary reasons that homeowners face difficulty in collecting on judgments for defective stucco installation – or any defective construction for that matter – are the unavailability of insurance proceeds and the court’s respect for the corporate structure.

Insurance Coverage for Defects.

Homeowners in construction defect cases are always unpleasantly surprised to learn that in Pennsylvania a builder’s or contractor’s insurance policy does not cover claims of defective construction.  Pennsylvania Courts share the opinion of a minority of states that faulty workmanship is not an “occurrence” under an insurance policy and, therefore, not subject to insurance coverage.   Homeowners can thank the Pennsylvania Supreme Court and something known as the “Kvaerner doctrine” for this.

Generally, an insurance company’s duty to defend a lawsuit against its insured and to indemnify the insured (i.e. pay a judgment against the insured) depends on the language of the insurance policy.  Most standard policies cover “occurrences” causing damage to persons or property.  Moreover, most policies define an “occurrence” as something accidental.  In Kvaerner v. Commercial Union Ins. Company, the Pennsylvania Supreme Court held that faulty workmanship was not an occurrence because “[s]uch claims simply do not present the degree of fortuity contemplated by the ordinary definition of “accident” or its common judicial construction in this context.”   This holding has become known as the Kvaener doctrine.

Critics of the Kvaener doctrine point out that by holding faulty workmanship as not accidental Courts are essentially saying that contractors intended to construct the home in a faulty manner.  While that is certainly true in some cases involving unscrupulous builders, more often builders have every intention of providing consumers with a sound product that they can be proud of.   Despite this criticism, Pennsylvania Courts and their federal brethren have upheld Kvaener time and time again.  Thus, unless Pennsylvania Courts suddenly have a change of heart, homeowners are stuck looking solely to the contractor and builder to recover money for repairs.

The Liability of the Builder and Contractor

In stucco defect cases the liability of the builder and contract is usually clear.  The problem is that the entities that built the home typically have little to no assets by the time homeowners obtain a judgment or verdict in their favor.  Builders usually set up “single purpose” entities who are the legal owners of the homes at the time of construction.  The only assets of these entities are the homes being built and once the homes are sold the entity has no more assets to “attach” and liquidate in order to have a judgment paid. Contractors, on the other hand, are often under-capitalized and rarely own many assets (much of their equipment is leased), especially in the case of smaller residential construction firms.

What about the deep pockets of the individuals who owned the single purpose entity?  By statute, individual shareholders (in the case of a corporation) limited partners (in the case of a limited partnership) and members (in the case of a limited liability company), are not individually liable for the debts of the corporate entity.  However, the “corporate veil” can be pierced in certain circumstances. There is no hard and fast rule as to when the corporate veil can be pierced.  Court look to a variety of factors, including, failing to treat the entity truly as a separate entity and commingling personal and entity funds.   Proving such a case is no easy task.

Certain states realizing the inequities that can result in a case involving defective workmanship to a residential property have passed statutes specifically requiring insurance policies in those states to cover claims for defective workmanship.  However, until Pennsylvania’s legislature either passes a law like this or Pennsylvania courts have a change of heart, homeowners will continue to be frustrated when pursuing claims for defective workmanship.

 

 

As has been discussed on this blog, the most common form of fraud involving the Department of Transportation’s disadvantaged business enterprise program, involves a “pass through” entity that performs little or no actual work on the construction project.  Under this common scheme, a general contractor hires a subcontractor that has been certified a DBE and uses the value of the work subcontracted towards the percentage of work it has agreed to perform using DBE firms, however, in reality, the DBE does not perform a “commercially useful function.”  Instead, the work is performed by a non-DBE firm or even the general contractor’s own employees.

Sometimes the fraud is one of willful ignorance of the scheme by the general contractor, who knows the pass through scheme is happening and simply winks, nods, and looks the other way.  Other times the scheme is more blatant and the firm guilty of DBE fraud willfully engages in the pass through scheme, like the one announced yesterday by the U.S. Attorneys Office in North Carolina.  There the U.S. Attorney filed a 29 count indictment against a North Carolina highway construction firm and its executives for taking part in a massive and complex DBE fraud scheme involving a pass through entity.  The case is troubling because of extent of the actions the firm and individuals involved took to try covering up the pass through scheme.

The indictment alleges that Boggs Paving, it’s President, Vice-President, CFO, and Chief Estimator violated federal mail fraud, wire fraud, and money laundering laws, by engaging in a massive scheme to obtain contracts through the North Carolina DOT by using a pass through scheme involving a DBE trucking firm.  (The DBE firm and its principal were also indicted.)

It is not criminal per se to violate the DOT’s DBE program.  What makes the violating the DBE program criminal is that it invariably involves violating federal mail and wire fraud laws.  An individual or corporation commits mail fraud when the U.S. mail is used in furtherance of a fraud scheme.  Likewise, wire fraud occurs when a telephone or the internet (i.e. the wires) are used in a scheme to obtain money from a person or entity through false or fraudulent pretense.  Mail and wire fraud occurs in the context of DBE fraud because mail, telephones, and the internet are used in submitting bids, payment applications, and DBE compliance reports all of which make false statements about the level of participation by DBE firms.  Moreover, because it is the use of the mail and wires that is the violation, firms and individuals can be indicted even though the DBE fraud involved a county or municipal DBE program.  Each mail and wire fraud count carries a maximum sentence of 20 years in federal prison.

Because all the government must show in a mail or wire fraud case is that the mail or wire was used in “furtherance of the scheme,” it is hard to imagine what defense the indicted individuals in this case will have to the government’s claims.  Here, without falsely claiming the level of DBE participation in writing there could be no DBE fraud because the NCDOT would never have paid Boggs for its work.

This case is a reminder that federal authorities are on the lookout for DBE fraud and the consequences for construction firms and their executives violating DBE rules.

Has anything changed with the way L&I conducts business in the wake of the Market Street building collapse?  Perhaps not surprisingly, no.

In today’s Philadelphia Daily News, Helen Urbinas shares a story of a neighbor who is plagued by an adjoining home that is in danger of collapse. Despite a report from a structural engineer that concludes

“The front wall is bowing out, flashings are loose and falling off of the wall, the downspout is loose and falling. It’s also not properly connected to the wall or connected to city storm pipes. Brick joints are open for water to flow into them”

L&I refuses to act.  Instead, its inspectors, who you recall are not structural engineers or even trained in spotting what a building in danger of collapse looks like, have stated that there are no structural issues with the home.

If that is not bad enough we have this gem from L&I spokesperson, Rebecca Swanson,

“It’s [the neighbor’s] responsibility to take care of his property. We enforce the code.”

Right, and enforcing the Code includes getting the Law Department to petition the Court for injunctive relief to have the City make the repairs and then place a lien against the property for the cost or even getting permission from the Court to demolish the property.  Apparently, the L&I has done neither.

On a positive note, officials in Harrisburg are apparently not waiting around for the City to change its ways.  Rep. Bill Keller of Philadelphia has introduced legislation that would require L&I inspectors to actually be trained in what to look for in structural failures and would include State oversight of L&I officials to make sure they are completing their training.

 

 

Owners should never be “thrilled” with bids that come in substantially under budget because it usually means something is either wrong with their construction documents or their contractor intends to make up there thrilling under budget bid with scope related change orders.

According to ENR, Taisei Construction Company has filed a lawsuit against San Joaquin Delta College, which seeks $25 million, claiming the College “substantially increased the scope of work” on a project to construct a new math and science building.  The story goes on to say that the College estimated the cost of construction to be $65 million but was “thrilled” when Taisei bid just $35 million for the project.  Shockingly, the contractor is claiming that the actual cost of construction was close to the College’s original estimate.

Two things could have happened here.  Either, College’s construction documents (the drawings) were woefully inadequate for the contractor to accurately prepare its bid.  In other words, the contract document did not fully show the contractor what was intended to be constructed.  In which case, the College can proceed against its design profession (construction speak for the architect or engineer) who prepared the contract documents.  Or, the contract documents were in fact 100% complete and the contractor simply deliberately underbid the job in order to be awarded the contract with the intent to make up its price through change orders.

Either way, the College could have prevented this lawsuit.  First, it should have assured its contract with its design team required the design team to prepare a fully complete set of construction documents that were fit for construction, rather than simply preparing a set of documents showing the general intent of the architect, which is often the case.  The College apparently did not do that because College officials are quoted in the article as saying “here was no such thing as a perfect set of design drawings.”  Second, it should have assured that its contract with Taisei required that Taisei fully familiarize itself with the drawings and to raise any objections to the drawings prior to construction.  Finally, and perhaps most importantly, it should have asked why the Taisei’s bid came in $30 million under budget!

Three simply things that could have potentially avoided a $25 million lawsuit.

(This post is a guest blog post from John Sullivan, Esquire.  John specializes in DBE issues and disparity studies.  His website is www.crosonlegalservices.com and his he can be reached via email at jcharlessullivan@yahoo.com)

During the last week of its just-concluded term, the United States Supreme Court ruled on the constitutionality of racial preferences at the University of Texas. The impact of Fisher v. Texas is not limited to preferences in public education. Fisher poses a serious threat to the USDOT Disadvantaged Business Enterprise program.

Why does Fisher threaten the constitutionality of the DBE program? In Fisher the Supreme Court ruled that any race conscious preferences, like those benefitting DBEs on USDOT contracts, are permissible only if the government has shown that “workable race-neutral alternatives do not suffice.”

Very few state DOTs have invested much effort in evaluating the race neutral parts of their DBE programs. It’s true that USDOT regulations require every state DOT to maximize the race neutral portion of its annual DBE goal. In reality, state DOTs seldom do what Fisher insists on: “serious, good faith consideration of workable race-neutral alternatives.”

For instance: it is often suggested that the largest USDOT projects like interstate construction and tunnel work be unbundled. This would allow smaller firms – both DBEs and non-DBEs – to effectively compete for these otherwise prohibitively large contracts. How often does unbundling happen? Is the effectiveness of doing so ever examined with any care?

There are probably dozens of state DOTs with bonding assistance programs. How often are these programs given “good faith consideration” of their effectiveness? If the programs aren’t evaluated, how can the agency know that workable race neutral alternatives do not exist?

Fisher may impact DBE preferences on construction contract with particular force. Certain industries get hit hardest by the DBE goals: guardrails and fencing, signage, and landscaping are examples. DBEs inevitably gravitate to these fields as subcontractors. That’s understandable; DBEs are more likely to be selected by the prime when a DBE goal has to be met and these are the specialties where goals are most often set.

In those specialties where DBE subs thrive, non-DBE subs struggle. Current court challenges to the constitutionality of state DBE programs reflect this: Geyer Signal v. Minnesota DOT and Midwest Fence v. Illinois DOT.

USDOT regs anticipate this result by prohibiting an over-concentration of DBEs in any specialty. To date, no court has struck down a DBE program due to over-concentration of DBEs.  After Fisher, with its insistence on good faith consideration of race neutral alternatives, that may be changing.