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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
FALL ISSUE, 2007
"DON'T WORRY, I WILL PAY YOU LATER."
By Susan M. Marra, Esq.
Contractors working on private and public jobs
contracted after September 1, 2006 have less reason to fear these
words. Recent legislation toughens contractors' and subcontractors'
rights to prompt payment and may result in unintentional waiver of
rights by owners.
On September 1, 2006, Governor Corzine signed into
law the Prompt Payment Act (N.J.S.A. 2A:30A-1, et seq.) which
governs nearly all public and private construction contracts entered
into after September 1, 2006. The law applies to owners, prime
contractors, subcontractors, and sub-subcontractors, but does not
apply to contractors below the sub-subcontractor level. "Prime
contractor" is broadly defined to mean any person who contracts with
an owner to improve real property and therefore includes architects,
engineers and land surveyors providing services for construction
projects. Owners are required to take affirmative action within
certain short deadlines or risk waiving their rights to dispute
amounts owed for construction work.
Owner/Prime Contractor Relationship: The
Act requires owners to pay "approved and certified" contractor
invoices for each periodic and final payment and retainage within 30
days of the billing date. For periodic billings, the billing date is
that specified in the contract. There is no provision in the Act
allowing parties to agree to extend this timeframe. Unless the owner
provides a written statement of the amount withheld and a reason for
withholding the payment within 20 days after receipt of the invoice,
the invoice is deemed approved and certified, and the owner waives
all rights to challenge the amount at a later date. The timeframe
has been extended slightly for public and governmental entities that
require the entity's governing body to vote on authorization for
each periodic payment, final payment or retainage. Such entities
have the right to approve and certify the amount due at the next
scheduled public meeting of the entity's governing body and pay the
invoice during the entity's subsequent payment cycle. However, this
right only applies where it is contained in the bid specifications
and contract documents.
The Act clearly places the burden on the owner to
carefully examine bills, thoroughly examine the work and provide
appropriate timely notice to avoid waiving the right to withhold
payment or challenge the invoice. It is also important that owners
schedule construction advance inspections within the Act timeframes.
This may be more of an issue on smaller projects where construction
advances are limited to once a month, or otherwise controlled.
The Act leaves many questions unanswered, and may
have a significant effect on owner/contractor relationships during
the construction. For example, the Act does not specifically address
claims for defective construction or design. It is unclear whether
an owner must deduct monies from an advance if it knows about
construction or design defects. Nor does the Act address the
situation where an owner is entitled to liquidated damages for the
contractor's failure to meet construction deadlines. Is the owner
obligated to deduct monies from invoices at the time the right
accrues or may it wait until the end of the project? An owner may no
longer be able to let potential disputes lay dormant until the end
of a project to avoid conflict during construction.
Prime Contractor/Subcontractor and
Subcontractor/Sub-subcontractor Relationships: Sub and
sub-subcontractors are provided with similar rights. However, there
are some significant differences which dilute the protections for
subcontractors and sub-subcontractors. The Act requires that the
prime contractor pay its subcontractor and the subcontractor pay its
sub-subcontractor within 10 calendar days after receipt of each
periodic payment, final payment or receipt of retainage money from
the owner for that subcontractor's or sub-subcontractor's work.
Since payment from the owner/subcontractor requires prompt payment
to the subs, billings to owners/subcontractors should clearly
identify the applicable work so that there is no confusion as to
which sub is due payment. While the 30 day time frame for payments
by the owner to the prime contractor cannot be amended, the 10 day
period relating to subcontractors and sub-subcontractors may be. It
is therefore likely that subs will be required to extend or waive
the 10 day timeframe before the contract is awarded to them. The Act
further dilutes the protection by allowing payments for completed
work to be withheld from the subs, notwithstanding satisfactory
completion of the work and receipt of payment from the
owner/contractor, if there is a "good faith" allegation that the
subcontractor or sub-subcontractor is not performing satisfactorily.
Penalties: In the event timely payment is
not made by any party subject to the Act, the delinquent party must
pay interest at prime plus one percent. This rate, which is akin to
a lending and not a default rate, may not motivate the delinquent
party to cure the deficiency. In addition, the unpaid party may
suspend its performance under the contract without penalty for
breach 7 days after written notice to the delinquent party, except
if (a) the unpaid party receives a written statement of the amount
withheld and the reason for withholding; and (b) the delinquent
party is engaged in a "good faith effort to resolve the reason for
the withholding." "Good faith effort" is not defined. The above
provisions do not apply to certain transportation projects if the
project receives federal funding and the application of the
provision would jeopardize such funding because the owner could not
meet federal standards for financial management systems as outlined
by law. In any "civil action" brought to collect payments under the
Act, the prevailing party is entitled to reasonable costs and
attorneys fees. It is unclear if alternative dispute resolution
constitutes a civil action.
Required Language: All contracts subject to
the Act must contain a provision that "disputes regarding whether a
party has failed to make payments required pursuant to the Act may
[emphasis added] be submitted to a process of alternative dispute
resolution." It is unclear whether the use of the word "may" means
ADR is required if one party requests same, or it is merely an
attempt to advise the parties of its availability. Also, if the Act
requires ADR, it does not indicate whether ADR is binding.
In conclusion, it is advised that
owners/developers and contractors and subcontractors take measures
to ensure compliance with the Act, and receipt of its benefits. New
and significant rights have been provided to contractors and
subcontractors, and a significant waiver provision applies to
owners/developers. Contractors and subcontractors should take
advantage of the provisions intended to expedite payments to them.
Owners should put procedures in effect with respect to receipt of
invoices and inspection of sites to ensure that no rights are waived
with respect to payment or the quality or completion of the work.
All parties should contact counsel promptly in the event of a
dispute between the parties, or with questions as to the Act's
application.
For more information on the applicability of
this Act or other construction issues, please contact Susan M. Marra
or Christopher Nucifora.
A TRAP FOR THE UNWARY--CORPORATE-OWNED LIFE
INSURANCE
By Leonard J.C. Hardesty, Jr., Esq.
Our corporate clientele are often advised to
retain corporate owned life insurance on the life or lives of one or
more of their key employees. Our corporate clients often procure
these policies to fund deferred compensation arrangements or to fund
equity redemptions upon the death of an equity owner. The receipt of
proceeds after the covered individual's death has generally not been
a taxable event. However, as a result of recent changes in the tax
law, the proceeds of these policies will no longer be excludable
from income upon the death of the covered employee unless certain
requirements are satisfied.
The recently enacted tax law requires business to
treat the proceeds from corporate owned life insurance as taxable
income unless (a) the business complies with certain notice, record
retention, and consent requirements; (b) the insured individual is
either (i) an employee within 12 months of death, or (ii) is a
director or other highly compensated employee or individual at the
time the policy was issued; or (c) the proceeds are paid to the
insured's family member or designated beneficiary (or trust for
their benefit) and are used to buy back the equity interest owned by
the deceased.
Please contact Thomas J. Herten or Leonard J.C.
Hardesty, Jr. if you would like more information on the
implication of this recent change in the law or the applicable
notice, record retention and consent requirements promulgated
thereunder.
IRS GETS TOUGH ON DEFERRED COMPENSATION
The much-anticipated and much-delayed rules from
the IRS on the income tax treatment of deferred compensation are now
available. At almost 400 pages, the rules are not exactly light
reading for the average taxpayer. Taxpayers have until the end of
2007 to make any necessary changes to their deferred compensation
plans.
The Internal Revenue Code has special tax rules
for "nonqualified" deferred compensation plans. These are not to be
confused with "qualified" employer retirement plans, like a 401(k)
plan, or with bona fide vacation leave, sick leave, compensatory
time, or disability pay or death benefit plans. The new regulations
expand the already broad definition of what constitutes deferred
compensation. Essentially, a plan provides for deferred compensation
if an employee has a legally binding right during a taxable year to
compensation that has not been actually or constructively received
and included in gross income, and that is, or may be, payable under
the plan in a later year.
The impetus for the new rules was a growing
concern that some individuals were deferring money over which they
still had control, and which they could receive basically whenever
they wanted it. The memories are still fresh of top Enron executives
cashing out their deferred compensation early and leaving the
company financially floundering. In a nutshell, the new rules
accomplish the following:
* limit the flexibility for the timing of
elections to defer compensation;
* restrict distributions during employment
to fixed dates, certain changes in control, or extreme hardship;
* prohibit acceleration of distributions of
deferred compensation;
* prevent key employees of public companies
from receiving deferred compensation due to severance from service
until six months after severance; and
* require that deferrals of distribution
dates or changes in the form of payment be made at least one year in
advance of the scheduled distribution date.
If the rules are not followed, the tax
consequences are significant. The participant is immediately taxed
on the value of the deferred compensation once it is no longer
subject to a substantial risk of forfeiture. On top of that, there
is a 20% excise tax on the amount that is included as income. For
good measure, there is also an interest penalty. To avoid such a
scenario, employers and employees with deferred compensation plans
should promptly come up to speed on the new rules and get
appropriate professional help with making sense of, and responding
appropriately to, the new IRS rules for deferred compensation.
For more information on these or any other
employment or tax issues, please contact Steven B. Harz or R.J.
Contant.
NEW ATTORNEYS JOIN THE FIRM
As our firm continues to strive to meet our
clients' legal needs, we are adding outstanding personnel to serve
our expanding client base.
William Schmidt joined our firm in May of
2007. Bill has been practicing law for 20 years and has substantial
experience in areas of corporate law and transactional work. He has
also assisted his clients with commercial real estate issues
including land use and zoning applications, as well as handling real
estate and asset based financing transactions for his corporate
clients. Bill clerked with The Honorable Peter J. Cass of Superior
Court of New Jersey after graduating from law school.
On August 8, 2007, Eimi Thompson joined our
firm. Eimi graduated Cum Laude from Pace University School of Law
and attended the College of New Jersey where she was an Edward J.
Blaustein Distinguished Scholar and a State of New Jersey
Outstanding Scholar. She will be practicing primarily in the areas
of estate planning and estate administration, which has continued to
be a growth area for the firm.
August also saw another new associate join the
firm. Daniel Ritson, who previously clerked for Judge
Themling in Jersey City, New Jersey, has joined the firm handling
primarily employment and labor matters under the direction of Steven
Harz of our Labor Department. Dan also has substantial experience in
other areas of commercial litigation and will be a valued addition
to the firm.
Commencing September 4, 2007, the firm will be
welcoming two former judicial law clerks to our staff. Patrick
Ascolese, who formerly clerked for Judge Conti in Bergen County
and Kelly Kilduff Ruggiero, who formerly clerked for Judge
Contillo, will be joining us eager to begin their legal careers.
Kelly, whose clerkship involved both estate and probate litigation
as well as the usual corporate litigation seen in the Chancery
Division, will be assisting us both with transactional work, as well
as with litigation as needed. She comes to the firm with significant
legal experience as a corporate paralegal which will assist her in
hitting the ground running in the transaction area. Patrick has had
substantial experience while working through law school and has been
thoroughly seasoned by his experience clerking for Judge Conti. He
will be assisting us in our ever growing commercial and corporate
litigation areas of our practice.
Finally, Adriana Paula has joined us as a
paralegal. Adriana has a unique legal background which not only
includes substantial experience as a corporate paralegal but also a
legal degree from the University of Brazil. We look forward to her
adding her legal acumen to our corporate practice as well.
Herten Burstein remains committed to serving our
clients as efficiently and professionally as possible and these new
additions to our staff will assist us in doing so.
NEWS FROM HERTENBURSTEIN.COM
Our Corporate Department, as part of its
fast growing international practice, recently represented our
clients in several significant cross-border transactions, most
notably including:
* The representation of a leading
international diamond and jewelry manufacturer and exporter in the
acquisition of a $30 Million Dollar leading national diamond
retailer;
* The representation of the owners of a $60
Million Dollar professional staffing corporation in the acquisition
of a Mauritius owned, U.S. based professional staffing corporation;
and
* Advising a leading Belgian diamond and
jewelry manufacturer and exporter on a tax efficient plan to
restructure its Belgian/U.S./ Switzerland operations.
Other notable transactions that were recently
handled by our Corporate Department include:
* The representation of a New Jersey based
national healthful snacks-foods manufacturer and distributor in a
private offering, raising in excess of $6 Million Dollars of venture
capital; and
* The representation of a New Jersey based
staffing corporation in a forward triangular merger with a $100
Million Dollar plus resulting corporation.
Susan M. Marra represented the owner in the
development of two 17-acre tracts. The first is a 150,000 square
foot mall leased to national retail/restaurant chains. The second in
an office complex.
Program Co-Chairs, Thomas S. McGuire and
Susan M. Marra, announce the successful completion of the 2007
Summer Associate Program. This year's exceptional group included
Courtney Alexandropoulos (Seton Hall), Gary Didieo (Seton
Hall), Sean Dugan (Fordham), Marisa LePore (Seton
Hall) and Kristen Miller (Rutgers).
Andrew T. Fede was reappointed as an
adjunct professor and will be teaching a legal writing course this
fall at Montclair State University, Department of Political Science
and Law.
In June, Terry P. Bottinelli was
re-appointed to the Supreme Court Arbitration and Mediation
Committee. He was also elected to Bergen County Bar Foundation
Board. In July, he was honored by Bergen Catholic High School for
outstanding service to the school at their annual golf outing and
was also re-appointed Mahwah Township Counsel.
Albert Burstein has been appointed to a
second term as a member of the New Jersey Election Law Enforcement
Commission by Governor Jon S. Corzine and confirmed by the State
Senate.
Cynthia Brooks was the Women's Golf
Champion at the Bergen County Bar Association's 81st Annual Golf
Outing on June 25th. She also won the Ladies First Place at the
First Annual Uplift Our Children Outing held at Crystal Springs by
the service fraternity Omega Psi Phi.
In June, Jason and Amy Shafron were
honored as Couple of the Year at a Gala Dinner at the Woodcliff Lake
Hilton by the Chabad of Northwest Bergen County located in Franklin
Lakes.
Thomas J. Herten will be commencing the
second semester of the 2007-2008 term of the Honorable Morris
Pashman Inn of Court in September. He will be joined by Michael
I. Lubin and Daniel Y. Gielchinsky, who continue their
role as Masters.
David S. Steinberg is now serving on the
Board of Directors of the Uncommon Thread, a Learning Difference
Resource Center, which provides treatment options, educational
materials, and private training to help children dealing with
learning, developmental and behavioral disorders.
Steven B. Harz was recently selected as one
of only six New Jersey Labor and Employment Law attorneys to
participate in the Labor Law Roundtable Forum for 2007, which
discussed recent cases regarding whistleblower and retaliation
claims. The Roundtable Forum is featured in the July 11, 2007 GC
Mid-Atlantic Magazine, which is published by ALM Publications and
distributed to all corporate general counsels in the Middle Atlantic
States.
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