On July 28, 2015, the Pennsylvania Supreme Court agreed to consider an appeal from a Superior Court opinion involving the Pennsylvania Contractor and Subcontractor Payment Act.  To call the case significant is  an understatement because if the Supreme Court overturns the Superior Court, agents and principals of real estate development entities will become personally liable for debts owed to unpaid contractors.

In Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, et. al., a divided Pennsylvania Superior Court ruled that an individual owner and agent of a real estate developer was not personally liable for Payment Act damages owed to a general contractor.  (The Payment Act permits an unpaid contractor to recover interest at 1% per month, penalty at 1% per month, and reasonable attorneys fees incurred in collecting amounts owed to it from an owner.)  In that case, the the 51% owner of the developer interacted with the contractor, approved change orders, and processed the contractor’s payment requests.  The contractor argued that the plain language of the Payment Act permitted imposition of damages against the individual owner of the real estate developer because Payment Act’s definition of “owner” specifically included “agents of the owner acting with their authority.”

The trial court rejected this argument and granted summary judgment to the individual. The case then went to trial against the real estate developer entity and the trial court awarded the contractor over $1.5 million in damages. The contractor then appealed the trial court’s granting of summary judgment to the individual owner of the developer.

The Superior Court affirmed the trial court.  In affirming the trial court, the majority of the Superior Court explained that the language of the Payment Act was ambiguous on whether it imposed personal liability on the owners of real estate developers.  However, the Superior Court held (I believe correctly) that the Payment Act merely exemplifies contract damages and does not extend liability beyond traditional breach of contract principles.  To hold otherwise would be to impose statutory penalties for breach of contract on non-contracting parties.  Accordingly, the Superior Court rejected the “contention that the General Assembly intended to make every authorized agent of a property owner, or even corporate decision-makers, subject to liability under [the Payment Act] as owners. [Payment Act] liability lies against contracting parties only.”

The Supreme Court agreed to hear the appeal which will resolve the issue of whether the Payment Act makes the owner and“agent[s] of the owner acting with the owner’s authority” liable to contractors.   The ramifications of the Supreme Court’s decision for real estate developers cannot be underscored, especially for smaller developers.  If the Court overturns the Superior Court and holds that the Payment Act can impose personal liability on individual owners of real estate firms, it is hard to imagine when an individual owner of a developer would not be personally liable for non-payment.  The relationship between the 51% owner in Shurs Lane and the contractor – whereby the individual approved change orders and interacted with the contractor – is hardly unusual and is probably the norm on 99.999% of all construction projects.

Conversely, an overturning of the decision would be a boon to contractors and would give them tremendous leverage against developers who fail to pay.  This is especially true because many development entities are “single purpose entities” and unpaid contractors can only look to the assets of the entity itself to satisfy a judgment.  Except for limited circumstances, the individual owners of those firms enjoy immunity from personal liability based on the entities inability or unwillingness to pay.

We can expect a decision sometime next year.

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