Root canals & Lawsuits: two things to avoid (Law Note)

man flossing

 No one (with the exception of sadistic dentists)  likes root canals, and no one (except lawyers) likes lawsuits.  In the same way you can prevent (or limit) the need for root canals through proper flossing habits, you can limit the number of lawsuits you need to be involved in if you include everyone you should the first time around.  For those involved in filing construction liens, this means that when you perfect a lien by filing the lawsuit, be sure you include everyone you need to include.  A recent North Carolina Court of Appeals case demonstrates this principle in full living color.

In Lawyers Title Insurance Corp. v. Zogreo, LLC, __ N.C. App. __ (November 16, 2010), two contractors filed and perfected valid liens on a piece of property.  They did not include, in the lawsuits to perfect the liens, the banks which had given funds to the property owner after they first began work on the property.  The Court held that it was entirely proper not to include the banks (who held deeds of trust on the property to secure their loans); however, by the contractors’ failure to include them, they were forced to later litigate priority issues with the banks.  This is because “if a subsequent encumbrancer is not joined [in the underlying lien perfection lawsuit], he is not bound by the judgment in the action between the contractor and the owner.” 

In other words, even though they filed proper liens, filed the lawsuits timely, and even won final judgment in those lawsuits, because they did not include the banks, the banks were free to start a new action, which they did in this case.  The banks also obtained an injunction to stop any judicial sale of the property until priorities could be established.

Moral of the story? It is better to include all subsequent encumbrancers (i.e., the banks) when perfecting a lien.  It’s not required, but it is better practice.  (And flossing your teeth isn’t required, either).   After all, who wants a root canal, or, in this case, to re-litigate your right to be paid money in yet another expensive lawsuit?  When it comes to root canals and lawsuits, fewer is better.

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Photo: Day One Hundred Fifty-One by Eric Mesa via Flickr/Creative Commons License

Tues Tip: Check out the new AIA Bond forms

Have you seen the 2010 AIA 312 Payment Bond Form?  If you regularly deal with AIA bonds, be Payment Officer looking at demolitionsure to check out this blog post, entitled “What changes you need to know about in the new AIA A 312 Payment Bond” from the New York Construction Law Update Blog.

  Of particular note:

There is a new section (7.3) that expressly states the surety’s failure to respond within sixty (60) days does not constitute a waiver of any potential defenses.  However, the new AIA A312 also states that if the surety fails to respond and if the claimant has to bring an action to recover under the bond, and is successful, then the surety will be responsible for attorneys’ fees incurred by the claimant. 

The new Section 16.1 provides certain minimum requirements that must be in the notice of claim to constitute a valid claim under the bond.  Previous versions of the AIA A312 did not contain such minimum requirements and a claimant in a rush could potentially submit a simple letter identifying the project and setting forth the amount of its claim to try and squeeze in before the deadline to submit a claim. 

While it is tempting and easy to skip reading standard form contract documents, that is not a good practice.  The new requirements involved in making a bond claim, for example, are something that would be easy to overlook if you have previous experience making bond claims– and it could be a very expensive lesson.  Moral of the story, as always, is to read your contracts, preferably with your attorney and insurance carrier at hand.

Do you use the AIA 312 Payment Bond form?  Thoughts about the new Form versus the old Form? Bonding questions in general?  Drop me a line or comment below.

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Photo copyright of U.S. Air Force and made available via Creative Commons license. 

Unlicensed Contractor & his partnership take a hit (Law Note)

man banging head against wallImagine being told that you will not be paid for a house you constructed pursuant to a contract with homeowners.  And imagine that the reason for not getting paid had to do with whether or not you signed a contract “on behalf of” your partnership or whether you simply signed your individual name.  This is the exact case that Ron Medlin, partner in Ron Medlin Construction, is facing thanks to a recent North Carolina Supreme Court case, Ron Medlin Construction v. Raymond A. Harris, __ N.C. __, (December 20, 2010).

Ron Medlin entered into a contract with the Harris’ for the construction of a home not to exceed $604,800.  Of note, Medlin did not have a licensed general contractor’s license, as is required.  However, Ron Medlin Construction, a partnership, was appropriately licensed as a general contractor, and the partnership performed the work relating to the construction of the residence.

When litigation arose over cost overruns, the Harris’ claimed they did not need to honor the contract because it was with an unlicensed contractor.  Under North Carolina law, any person who performs work in excess of $30,000 needs to be appropriately licensed or he cannot recover for his work in the Courts.  (See Brady v. Fulghum, 309 N.C. 580, 586, 308 S.E.2d 327, 331 (1983)).  The partnership argued that it did not have a contract with the Harris’, yet it performed work in constructing the residence and, therefore, was entitled to recover a just amount under a theory called quantum meruit.  The Court held that the partnership ratified Ron Medlin’s individual acts, and as such the partnership was bound by the (unenforceable) contract and could not recover. 

The Court held, as a matter of law, that:

a contract for the construction of a home or building executed by a partner in a licensed partnership engaged in the construction business is the contract of the partnership unless the remaining partners can show that the partner was not authorized to act on behalf of the partnership and, if not so authorized, the partnership did not ratify the contract.

Moral of the story?  It is important that you follow the rules in signing and performing under construction contracts, as well as in maintaining your proper corporate formalities.  It might even be worth having your attorney review your construction contract before you sign it.    Unless, that is, you don’t mind that chance that you may end up performing some of your work for free.

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Photo:  “361/365 days -it feels good to stop” by badjonni via Flickr/Creative Commons license.

Top 10 OSHA Violations– don’t let it be you! (Tue Tip)

dancing woman in safety vest
Photo: Dancing for Workplace Safety

by Washington State DOT via Flickr/Creative Commons license

OSHA has published the top safety violations for 2010.  There are two categories:  (1) the top 10 standards for which OSHA most frequently gave Citations in fiscal year 2010; and (2)the top 10 standards for which OSHA assessed the highest penalties in fiscal year 2010.  

The most frequent violations are:

  1. Scaffolding
  2. Fall protection
  3. Hazard communication
  4. Ladders
  5. Respiratory protection
  6. Control of hazardous energy (lockout/tagout)
  7. Electrical, wiring methods, components and equipment
  8. Powered industrial trucks
  9. Electrical systems design
  10. Machine guarding

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The most expensive violations are:

  1. Fall protection
  2. Electrical
  3. Safety training and education
  4. Control of hazardous energy (lockout/tagout)
  5. Machines
  6. General duty clause 
  7. Excavations
  8. Lead
  9. Grain handling facilities
  10. Ladders

 

Detail about the specific regulations which were violated, the OSHA requirements in these areas, and related materials can be found here on the OSHA website.  (Hat tip to NC Construction News for alerting me to OSHA’s list). 

OSHA violations can be costly– both in money, and in safety.  Don’t gamble with either!

Now it’s your turn:  Do you have an experience with OSHA violations that you think others should learn from?  Let me know in the comments below or email me at mbrumback@rl-law.com.

Personal Assets at Risk Despite Corporate Formalities (Law Note)

checking the plumb of a trussMany people establish business entities to protect themselves from personal liability.  In a ruling last week, however, the NC Court of Appeals  held that despite such corporate formalities, contractors can be personally liable for their own negligence.

The case, White v. Collins Building, Inc., __ N.C. App. __ (January 4, 2011), involves a new home constructed by developer AEA and purchased by the Whites.  AEA contracted with Collins building, Inc. to build the residence.  Collins Building is a one-member company owned by Edwin Collins, president, sole-shareholder, and qualifier for the company.  When the Whites began to experience alleged construction defects, they sued all involved, including both Collins Building Inc. and Edwin Collins, individually.

Edwin Collins moved to dismiss the lawsuit against him individually, and his motion was granted.  On appeal, the Court held that the dismissal was in error, and that Edwin Collins could be found individually liable to the Whites because the alleged negligence was his own action.   While noting that it was a case of first impression for the construction context, the Court pointed out that “It is well settled that an individual member of a limited liability company or an officer of a corporation may be individually liable for his or her own torts, including negligence.”

The Court stated that a properly formed and maintained business entity may provide a shield or “veil” of protection from personal liability, but that the protection was not absolute.   The Court also contrasted this situation to one in which the parties had contracted with each other; there the claim is usually a contractual one only, so if the Whites had contracted directly with Collins Building, Inc. to build their residence, they likely would not have a cause of action against Edwin Collins individually.

This case shows that, whilecorporate formalities are  important to protecting yourself from individual liability,  they are not a guaranty.

Share your thoughts, questions, or comments below.

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Photo copyright Defense.gov.

 

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