P3 PROJECTS & PROTECTION

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Webinar Wednesday

PAY IF / WHEN PAIDJOINT CHECK AGREEMENTS

BANKRUPTCIESCONFUSED RECOVERY RIGHTS

WORKMANSHIP DISPUTES

CHANGE ORDERS

SCOPE OF WORK ISSUESCODE INSPECTION VIOLATIONS

PROJECT-TYPE PROBLEMS

PAY WHEN PAIDPAY IF PAID

JOINT CHECK AGREEMENTSBANKRUPTCIES

DELAY DISPUTES & DAMAGESWORKMANSHIP DISPUTES

CHANGE ORDERSSCOPE OF WORK ISSUES

CODE INSPECTION VIOLATIONSPREVAILING WAGES

There are a lot of reasons why

getting paid is tough in your industry

Security and Protection Depends on Project Type.

What Protections Are Available?PUBLIC PRIVATE PARTNERSHIPS

P3 Projects

Answering that question can be difficult, but the 1st step is determining what type of project a P3 project actually is.

So first, a little background info

WHAT IS A

1. A “public private partnership” 2. Public & private entities invested3. Both have “ownership” in the project

4. No specific standard contract structure

5. Financial, and other, risks of the project are transferred or allocated between the parties pursuant to their particular agreement

P3 Project?

…the underlying structure of the contract between the parties can have a significant impact on the nature of the project, and the applicable remedy for non-payment.

THEREFORE

SHOULD YOU

CARE?

1.Rapidly Growing in Popularity / Becoming More Prevalent

Allow a financially-strapped public body to privately finance an improvement by allocating some of the financial risk and subsequent reward to pirate companies.

Cheaper than the traditional “design-bid-build” method that has been historically employed.

Generally something like a “design-build-operate” type of agreement. While P3s by name are public private partnerships, they are routinely not a traditional partnership as commonly understood.

WHYWHYWHY

2.Odd Nature of Project Leads to Non-Payment Remedy Problems

The fact there there can be some question as to whether a P3 Project is fundamentally private project, a public project, or some sort of hybrid makes the nature of the available remedies

difficult to determine, as well.

•Mechanics Lien agains private interest?

•Bond claim because the work is on publicly owned land?

•Neither, because this area of the law hasn’t caught up with current construction practice yet?

WHAT SAYS YOU?What Type of Rights Do You Have On A P3 Project?

Factors to consider in making determination on nature of potentially available remedies are:

1. The party with the underlying fee interest in the property

2. Whether there is an interest in real property other than that of the fee owner sufficient to give rise to lien rights

3. The underlying contract

4. The structure of project funding

Available remedy for private projects/privately owned property

P3 PROJECTS + MECHANICS LIEN

Available remedy for private projects/privately owned property

Sovereign immunity, and the specific statutory language of the Miller Act and the individual states’ Little Miller Acts prohibit mechanics liens from attaching to public property.

P3 PROJECTS + MECHANICS LIEN

BUT

In some states a leasehold interest is a property interest on which a mechanics lien can attach, but in other states that is expressly forbidden. !If a mechanics lien can attach to a leasehold interest, that may provide a remedy on a P3 project, even if the underlying property is publicly owned (provided the leasehold interest is a private property right).

THE LEASEHOLD INTEREST MAY HELP

South Bay Expressway v. Otay River Constructors, 434 B.R. 589 (Bankr. S.D. Cal. 2010)

P3 Project for toll-road construction. California Department of Transportation (CalTrans) entered into an agreement with a private developer to construct the toll road.!Agreement allowed the developer a 35 year lease to collect tolls and operate the toll road. Developer contracted with GC to build the road, and GC remained unpaid at project’s completion.!GC filed a mechanics lien, specifically against the leasehold interest of the developer, and sought to foreclose that lien.!MECHANICS LIEN WAS ALLOWED

EXAMPLES

South Bay Expressway v. Otay River Constructors, 434 B.R. 589 (Bankr. S.D. Cal. 2010)

Why was the mechanics lien the proper remedy in South Bay Expressway v. Otay River Constructors, even though the property was public? !• California allows the attachment of

mechanics liens to leasehold interests

• Leasehold interest and right to collect tolls was a private property right

• Despite the underlying public nature of what was being constructed, the developer had the right to privately finance and develop the road

• GC’s contract was with the private developer, NOT the public entity - project was classified as a “private project” (for, ultimately, a public benefit).

EXAMPLES

North Bay Constr., Inc. v. City of Petaluma, 49 Cal. Rptr. 3d 455 (Ct. App. 2006)

ON THE OTHER HAND !• The mechanics lien claimed by the GC on

this project was DISALLOWED.

• The GC contracted with a developer, not the public entity, but there were two flaws:

1.There was no lease agreement / private property right to which the lien could attach, so . . .

2.The lien was claimed against the underlying (public) property

EXAMPLES

While many other states allow mechanics liens to attach to leasehold interests, it is by no means universal. !

In fact, NY specifically disallows mechanics liens in this type of situation: In Paerdegat Boat & Racquet Club, Inc. v. Zarrelli, 57 N.Y.2d 966 (N.Y. 1982), the court concluded:

!

[T]hat the property against which the mechanic’s lien was asserted was exempt from such a lien since the realty was owned by the City of New York and a mechanic’s lien may not attach to city-owned property nor to the improvements erected thereon, and that Paerdegat’s leasehold interest in the city-owned land was similarly exempt. 

2 CALIFORNIA CASES | DIFFERENT OUTCOME

So by process of elimination, if a mechanics lien is not the correct remedy

a bond claim must be - right?

Not Necessarily

While the ultimate availability of making a bond claim as the remedy for non-payment on a P3 Project is determined by whether or not there is a bond - the requirements governing whether there should be one require a determination similar to what must be undertaken to determine whether a mechanics lien remedy would be available.!The language of the contract for the development of the work, and more specifically, the parties to that contract are vitally important to the bond claim remedy.

The requirements for payment bonds set forth by the Miller Act, and each state’s Little Miller Acts, are generally triggered by, and only required for, public projects.!In states where a “public work” is defined by statute as “any work of improvement contracted for by a public entity” the bonding requirements are likely not triggered by a project where the ability to contract for, develop, and operate the improvement (for a period of time), is given to a private company.

Interestingly, one state that has taken proactive steps to address this issue is Oklahoma.

Oklahoma requires a bond to be provided for all projects on public land - whether the project is public or private in its underlying nature.

Recent NJ case provides some sobering possibilities

WHAT ABOUT OTHER STATES?

NEW JERSEY EXAMPLE• 71 Solar facilities in 3 counties

• $90 Million in municipal bonds issued for project

• Property on which project constructed publicly owned

• Developer listed as “owner” of solar project for federal tax purposes

• Developer ended up paying 30% of costs

• Developer had right to some percent of energy producedRecent NJ case provides

some sobering possibilities

NEW JERSEY EXAMPLE

Lien Claimant was denied recovery pursuant to both New Jersey’s Municipal Mechanics Lien statute, and the traditional “classic” mechanics lien statute because neither was found to specifically apply to this hybrid project type.

Recent NJ case provides some sobering

possibilities

Conclusion and

Take-aways

Determination of project type, and how a specific situation or contract relates or

applies to the standard remedies available for non-payment, must be

done case-by-case and by an in-depth and thorough analysis.

NO EASY WAY

Since the proper / available remedy can change on a project by project basis

because of the underlying contracts and property rights involved, the remedy for

non-payment on P3 projects is not uniform for all projects in one state

NO SINGLE SOLUTION

Public land means no mechanics liens can attach to the underlying property,

but they could still attach to some other private property interest, like a private

leasehold.

PUBLIC LAND = NO LIEN

Even if the property is public, if the basic contract for construction is

private, this may not trigger the state’s Little Miller Act bonding requirements.

PRIVATE CONTRACT REDUCES BONDS

This is a very complex area of law, and these types of projects were not contemplated

during the drafting of most mechanics lien or bond claim statutes. As these projects

continue to become more and more popular, more consideration is needed by courts and legislators in order to clarify these issues.

LAW EXTREMELY CONFUSING

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