Lamson, Dugan and Murray, LLP, Attorneys at Law

Is Equal Always Fair? The Importance of Thoughtful Business Succession Planning

Posted in Uncategorized

Previously submitted as an article in The LICA Contractor publication by Dan Waters, Attorney & Sean Minahan, Attorney  Lamson, Dugan and Murray, LLP; Proud members of C2C

Christmas Dinner, 2042:

Steve: Mike, pass the sweet potatoes. . . . Mike, I said pass the sweet potatoes!

Mike:  Maybe I would pass the sweet potatoes if you carried your weight around here!

Steve:  Come on, I didn’t ask to be a part of the family business, ok?  Mom and Dad’s estate plan made us equal owners, that wasn’t my choice!  I’m a fitness instructor, not a land developer!

Kelsey: Still Steve, that doesn’t mean you get to take your third of the profits and do nothing to contribute.  Mike is right, you need to start taking your role seriously and . . .

Mike:   How about this for serious, I’m quitting! *stands up* I’ll be taking my third of the business in cash, then you’ll never hear from me again!  *storms out.*

Fast forward several months, or years, and a substantial portion of the family business has been drained paying legal fees.  Disagreements in valuing Mike’s share of the business and resulting litigation continue to put financial and emotional pressure on all the parties involved.  Worse yet, the children and their respective families refuse to speak to one another.  The holidays will never be the same.  What could have led to such a disaster?  A simple oversight on the part of the parents, granting an equal share of the family business to each child pursuant to their estate plan, without considering the children’s future roles within the company.

Most parents want the best for their children.  When it comes to succession planning, parents wish to transition the family business fairly.  To achieve this goal, parents may choose to divide the business among the children equally.  However, an equal division may not create the fair result desired by the parents.  While an equal division is often the easiest approach, it can lead to significant conflict, and even the demise of the business or family relationships, if the children are not equally invested in running the company.  Easy is not always right, and equal is not always fair.  For example, let’s wind back the clock and reconsider the above scenario, except with the parents still alive and running the family business, and try to avoid an unfortunate falling out:

  • Mike works full time for his parents and actively contributes time and effort to the company. He understands the equipment and other details of the business, is a natural manager, and builds great relationships with clients.  Mike shows consistent interest and knowledge regarding the land improvement industry.
  • Kelsey works part time for the business as the book keeper. She acts responsible in this role.  Kelsey prefers this limited position, being largely preoccupied by taking care of her three young children.  Kelsey’s understanding of the day-to-day operations of a land improvement contractor is limited.
  • Steve works for an unrelated business in a different industry. He shows little interest in the company, but is respectful towards his parents and is a good son.
  • The parents work with a team of advisors to develop a succession plan. At first, the parents consider an equal division of the company.  However, it is explained that a fair division of all assets can be achieved without dividing the company equally.  Instead, the parents designate the following ownership structure to take effect at their passing:
    • Mike will receive a 70% ownership interest in the company and become the controlling owner of the business.
    • Kelsey will receive a 20% ownership interest in return for her labor.
    • Steve will receive a 10% ownership interest so he can collect distributions from the company, but not have a controlling say in the direction of the business.
  • Understanding the potential for dissatisfaction and conflict based on this arrangement, and desiring a fair distribution of all assets in the estate, the parents designate that Kelsey and Steve will receive a greater percentage of other assets than Mike.
    • For example, Kelsey may receive the parent’s boat and certain investments while Steve receives the parent’s second home and his father’s classic car.
  • The end result is each child receiving a fair percentage of the estate, considering the total value of the business and all other assets owned by the parents at their passing.
  • Alternatively, the parents may wish to give Mike the entire business and more of the other assets to Kelsey and Steve. It is possible that the value received by each child in this scenario may not be nearly equal, but this could be considered fair given Mike’s contributions to the business and the parents’ objective to preserve the business and family relationships.  Granting Mike sole ownership and control may avoid any potential family dispute later on involving the business.  Mike has demonstrated himself to be capable of operating a successful land improvement contracting business.  However, owning the business is also a risk for Mike.  There is no guarantee the business will grow, while the value of other assets is more certain.

While considering one’s mortality is often uncomfortable, knowing that a tailored succession plan is in place which matches the business skills and future needs of the children is worth the extra effort.  Consider the following questions when beginning to form a succession plan prior to meeting with an advisory team:

  • What are the current and future prospects of the business and the land improvement industry as a whole? If the business is struggling or expecting difficulties, receiving an interest in the business may be more of a burden than a benefit.
  • What is the current and anticipated future role of each child within the business?
  • Which child has shown the greatest ability with regard to the operation and management of the company?
  • Which child has shown the greatest interest and knowledge regarding the land improvement industry?
  • Which child has the best vision for the company moving forward? How should the ownership interests in the company be valued? Is the valuation method established in the governing documents of the business?
  • Which child should have the greatest ownership percentage in the business?
  • Should one child receive a greater than 50% ownership interest in the business, granting authority to have the final say in cases of disagreement among the owners?
  • Should one child receive the entire business?
  • Are there certain individuals working for the business that should receive a percentage of ownership in the company other than the children?
  • Are there assets, such as certain construction equipment or supplies, outside the business which are important to the functioning of the business that need to be passed on to the child who will be the primary owner of the company?
  • Whose name(s) is on the deeds and titles of any machinery registered and used by the business or real estate belonging to the company?
  • What assets do we own that may be passed on to the children other than the business? Generally, how should these additional assets be valued and divided among the children to balance against children receiving different ownership percentages in the company?
  • What team of advisors should we work with in creating a succession plan?

Once a business succession plan is established, the children’s relationship with the company may change.  One child may choose a different career path, while another becomes more invested in the business.  The succession plan should be updated to account for such changes.  It is advisable to reexamine the succession plan in regularly scheduled intervals to ensure it matches the current and anticipated circumstances surrounding the business.  A thoughtful succession plan can protect a lifetime of effort channeled into your business, and create stability for future generations.  Give your family the gift of a more certain future this holiday season.

Disclaimer: The content of this article is for informational purposes only.  It is not legal advice, nor is it intended to create, and your receipt of it does not constitute, an attorney-client relationship.  This article may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.  The content of this article is intended to be up-to-date, but may or may not reflect the most current legal developments.  The authors assume no liability or responsibility for any errors or omissions contained within this article.  You should not act or refrain from acting based upon this article without seeking professional legal counsel.  This article only provides a brief overview and an attorney should be consulted if you have questions regarding this topic in relation to your specific situation.

Don’t Get Caught Holding the Bag: Hold the State Liable When General Contractor Fails to Pay on a Public Project.

Posted in Bond Claims, Breach of Contract, Construction Claims, Construction Law, Government Contracting, Lien Rights, Nebraska Construction, Payment Bond, Uncategorized

Holding the Bag

According to a quick Google search the term “holding the bag” comes from the mid eighteenth century  and means be left with the onus of what was originally another’s responsibility.  Nobody wants to be left holding the bag.  But that is the situation our client (subcontractor) found themselves in when upon completion of a public project the general contractor went out of business before paying the remaining amount due and owing to our client.

Under Nebraska law, liens are not allowed against public projects.  Instead the subcontractor is to make a claim on the payment and performance bond secured by the general contractor at the start of the project.  In our case, the general contractor never secured a bond on which to make a claim; consequently leaving our client holding the bag.

Fortunately, we were able to hand the bag back to the State and obtain full payment for the services and materials provided.

In Nebraska, when the State undertakes a construction project, the State is required to take from the contractor “a payment bond or bonds in a sum not less than the contract price with a corporate surety company and agent selected by the contractor…”  Neb. Rev. Stat. Sec.52-118(1).  Furthermore, “no contract referred to in this section shall be entered into by the Sate of Nebraska …until the bond or bonds referred to ….has been made, filed and approved.”  Neb. Rev. Stat. Sec.52-118(3).

So what happens if the State fails to abide by the statute?  The Nebraska Supreme Court has held that the state and any public entity has a duty ensure a bond is in place for the the benefit of the materialmen before entering into a construction contract.  Westinghouse Elec. Supply Co. v. Brookley.

Applying the statute and the Supreme Court’s decisions the District Court found the State violated its duty imposed by statute and sustained our action against the State for the full amount left due and owing.  In the end, the State was left holding the bag.  Good for our client, and possibly good for you if you find yourself in the same situation.

Please contact us if you would like a copy of the Court’s order.

Pulled from the Swamp: EPA Wetland Determination Now Judicially Reviewable

Posted in Construction Activity, Construction Law, EPA

Sunset Over Scenic Everglades National Park Horizon

Landowners and developers bogged in an EPA wetland determination were recently thrown a life line when the United States Supreme Court determined The Army Corps of Engineer’s (Corps) “jurisdictional determinations” (JD) regarding wetland designations are reviewable by the court.  United States Army Corps of Engineers v. Hawkes Co. Inc.

Under the Clean Water Act (CWA) landowners and developers who do not have the proper permits can face severe criminal and civil penalties for releasing any pollutant into “the waters of the United States.”  Anybody stuck wading through the permitting process will tell you it is difficult, time consuming, expensive, and may eventually prohibit the intended use of the property.  Furthermore, there is yet to be a consensus on the definition or scope of the term “waters of the US”.  Consequently, a landowners or developers may never be certain whether a permit is necessary before conducting any activity that may discharge a pollutant into a “water of the United States”.

To solve this dilemma, the Corps will graciously provide a “jurisdictional determination” (“JD”) designating whether a property (1) contains waters of the US; (2) does not contain waters of the US; or (3) “may” contain waters of the US.  Any JD stating the property contains or does not contain waters of the US is binding on the Corps and landowner or developer for 5 years.  The JD is also appealable to the EPA but not to the District Court.

Because the landowner was not allowed to appeal the determination beyond the EPA, the landowner was stuck with the decision unless the landowner decided to discharge the pollutant and argue in a government enforcement action that a permit was not necessary.  The landowner or developer could also complete the permit process and have the determination judicially reviewed after the permit is issued or denied.

The Supreme Court determined that neither was a viable option for the landowner or developer.  Federal law states that any agency decision that (1) concludes the agency’s decision making process and (2) legally affects the rights or obligations of another are appealable to the federal district court.  The Supreme Court found that a Corps’ JD met both obligations.

First, the JD was issued after a fact-finding investigation and was described as a “final agency action” by the Corps.

Second, the JD had a legal binding effect for a period of 5 years which directly affected the legal rights and remedies of the landowner or developer.

Obviously any feelings of joy or celebration have to be tempered by the fact that any court to which the JD is appealed can determine the JD is correct.  However, the life line gives the landowner or developer an opportunity to pull the decision from the very agency which made the original decision.

You can find the entire decision at:United States Army Corps of Engineers v. Hawkes Co.

Your Contract is a Hodgepodge of Conflicting Proposals

Posted in Construction Contracts

Ouch.  That’s what a court called a contract to remediate petroleum contamination at a number of iStock_000003681549XSmallgas stations in New York.  Sometimes, it’s hard to believe the contracts that get signed.

Environmental Risk hired Science Applications to remediate petroleum contamination at 47 gas stations.  Environmental Risk had previously entered into a Professional Services Master Agreement with Science Applications, but also required Science Applications to sign three separate, but basically identical, subcontracts called the Project Specific Scopes of Work.  So, right from the start, there were four contracts that could apply to Science Applications’ work.

Sometime after work started, Environmental Risk terminated the contracts with Science Applications under a termination for convenience clause.  Science Applications pulled off the job and submitted its final pay application.  When Environmental Risk failed to pay, Science Applications filed mechanics liens and filed a breach of contract lawsuit.  Environmental Risk then claimed that Science Applications breached various provisions of the contracts.  After a five week bench trial, the court awarded Science Applications $800,000.

During litigation, Environmental Risk argued that Science Applications failed to meet the stringent clean-up standard contained in the Project Specific Scopes of Work.  Unfortunately for Environmental Risk, the court noted that another section allowed for a completely different clean-up standard, thus allowing for multiple interpretations of the contract.

To make matters worse, the Professional Services Master Agreement contained internally inconsistent clean-up standard provisions. One clause required Science Applications to achieve a “clean-up standard” and then obtain approval from the New York Department of Environmental Conservation.  But the very next provision only required approval from the Department of Environmental Conservation.

Projects can get complicated.  But, the contract should not make them more complicated.  As this case shows, cobbling together a number of contracts may create a hodgepodge of conflicting proposals that will greatly hamper your effort to win your case.

The Ghosts of Projects Past

Posted in Construction Claims

Sean Minahan, one of my partners, and I were discussing a construction dispute the otherghost_of_christmas_past
day and we commented again and again about the significant organization required to get a construction project to completion. From the contracts, to the schedule, to the funding—everything has to be in lock step or there will be problems that could bring the project to a halt, or worse yet litigation.

The same is true of construction claims. To present a claim effectively, it has to be simple. But, to make it simple will require substantial documentation and organization of all aspects of a claim.

This point was driven home this week when I received Long International’s Construction Claims Analysis Checklist Long International. The Checklist is 11 pages long and identifies various aspects of a claim, from the simple to the complicated. A few of these items include:

  • Identify the law which governs the contract.
  • Prepare a chronological history of events related to each claim and problem.
  • Perform an assessment of the project and construction management performance of the owner and contractor.
  • Determine if the as-built start and finish dates for the scheduled activities are accurate.
  • Prepare narratives with supporting documentation that describe the information utilized, the problems encountered, the analyses performed, and the results of the damages calculations.

Determine if the as-built start and finish dates for the scheduled activities are accurate.

Prepare narratives with supporting documentation that describe the information utilized, the problems encountered, the analyses performed, and the results of the damages calculations.

If you want a little light reading as you’re sitting around the fire this holiday season, I suggest Long International’s Checklist. It may not bring in the holiday spirit, but it may provide some insight to avoid a visit from the ghosts of projects past.

Changing Course Midstream Did Not Work in River Dredging Project

Posted in Construction Contracts, Government Contracting

 

A contractor learned a $12M lesson when it tried to change course on a Corps of Engineer event_271718552river dredging project.  The case also illustrates the importance of documenting problems on a project and providing notice of those problems to the owner.

In Weston/Bean Joint Venture v U.S., Weston/Bean was awarded a Corps of Engineers project to provide maintenance dredging on the Miami River to a depth of 15 feet.  The contract noted that the contractor may experience sediment, debris and rock, including soft to moderately hard limestone.

The contractor encountered rocks early on in the project, but consistently submitted reports to the Corps of Engineers that nothing was experienced on the project that would lead to a change order or claim.  And, for the first year of operations, the contractor made no claim for differing site conditions.  Instead, the contractor terminated the subcontractor for not being able to process the rock uncovered during the dredging process.

Once the project was completed Weston/Bean submitted a claim for $12 million alleging that the Corps of Engineers directed it to perform work above and beyond the contract.  The Court of Claims closely reviewed the contract, finding various clauses precluded the contractor’s claim.  Importantly, the contract stated that “massive, monolithic in situ rock” would not have to be removed.  This necessarily meant that large rocks, but not massive ones, would have to be removed.

The court also found it significant that Weston/Bean never submitted a change order or claimed differing site conditions until well after a year on the project.  In essence, the contractor’s failure to submit a claim immediately upon finding rocks larger than expected precluded its claim.

Take Away: It is very difficult to change course midstream. The contractor’s failure to notify the Corps of the rock problems early on greatly diminished its ability to claim unforeseen conditions later on.

Are Defense Costs In Addition to Policy Limits?

Posted in Insurance coverage

I recently had a discussion with an insurer about whether defense costs were included iStock_000015701146XSmallwithin the policy limits of a client’s coverage or in addition to policy limits.  This was an important discussion because if costs of defense were included in the policy limits, my client was going to exceed those policy limits in a hurry.  How would this situation play out with your insurance?

Fortunately, the majority of insurance policies, such as Commercial General Liability (CGL) policies, provide that defense costs are “in addition” to the policy limits.  But some policies, often times referred to as “burning limits” policies, provide that cost of defense is included in the policy limits.  This means that if you have $1,000,000.00 policy limits, your costs of defense will reduce that limit throughout the course of litigation.

When the claim is substantially less than your policy limits, this will probably not be a problem.  But, if the claim is near your policy limits, you may find that the company is on the hook for any excess claim over the remaining limits.

So, why would you buy a burning limits policy?  Because they are cheaper, often times a lot cheaper. And, you may still get a certificate of coverage that indicates that you have policy limits of $1,000,000.

Take Away: Review your insurance policies and determine whether costs of defense are included within your policy limits before any claims are made.  Otherwise, you might be having this conversation during litigation and finding out you have a burning limits policy.

Happy Thanksgiving

Posted in Uncategorized

I hope you and your family are enjoying some well earned time off this Thanksgiving.

Today’s post provides me an opportunity to thank everyone who gave me ideas for the blog and I thank you for reading it.

I’d also like to thank all of my construction clients from whom this blog is written.  I appreciate the opportunity to assist you in your construction projects.

Finally, we will be smoking, NOT deep frying our turkey this year.  So, there is very little chance that we will burn the house down.

The Secret to an OSHA Inspection

Posted in OSHA

Wouldn’t it be nice to know ahead of time what an OSHA inspector will be looking for
iStock_000007097095XSmallwhen he comes to your work site?  Well, I know the secret.  And, it’s not really a secret.  Just look at OSHA’s top ten citation standards and it becomes quite clear.

In 2015, OSHA’s top ten most frequently cited violations are:

  1. Fall protection (C)
  2. Hazard communication
  3. Scaffolding (C)
  4. Respiratory protection
  5. Lockout/tagout
  6. Powered industrial trucks
  7. Ladders (C)
  8. Electrical: wiring
  9. Machine guarding
  10. Electrical: systems design

Those marked with a (C) are construction standards.

So, when OSHA comes knocking, you know the top ten areas they are investigating. And, if you are on a construction site, you know they are going to look hard at fall protection, scaffolding and ladders.

Arbitration Clauses—Where will you be arbitrating?

Posted in Arbitration

 

Craig Martin, Construction Attorney, Lamson Dugan & Murray LLPI had the pleasure of speaking at the National Association of the Remodeling Industry (NARI) Education Day earlier this month. During my presentation, “The Myth of the One Year Warranty”, we discussed the impact of arbitration clauses in construction contracts and who should act as arbitrator.

While the American Arbitration Association is certainly a popular forum, there are others.  For example, the New York Times recently wrote about a hardwood supplier, Higuera Hardwoods, in Washington State that requires arbitration before the Institute for Christian Conciliation, a division of Peacemaker Ministries.  This organization has adopted Conciliation Rules of Procedure, the purpose of which is to

glorify God by helping people to resolve disputes in a conciliatory rather than an adversarial manner

The rules further provide that it will consider the state, federal and local laws brought to its attention, but

the Holy Scriptures (the Bible) shall be the supreme authority governing every aspect of the conciliation process.

I don’t honestly know how a dispute about the hardwood product would be resolved relying on biblical principles.  But, if you purchase hardwood from this company, you will be obligated to find out.

Take Away: Arbitration clauses will impact how your dispute will be resolved.  Make sure you review the arbitration clause so that you know how your dispute will be resolved before you sign the contract.