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CAE570 Construction Law Duluth Marine Construction LLC You are Typical A Student, a grad of the IIT Construction Management program and a Professional Engineer

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CAE570 Construction Law Duluth Marine Construction LLC

You are Typical A Student, a grad of the IIT Construction Management program and a Professional Engineer. It’s early on a Monday morning at TTC construction and you are pondering what is going on. Over the weekend your boss called and asked you to come in to the Board meeting. Your boss and the President of TTC, Sally Mason, sees you come in the main office area.

“Hey Tip, good morning. Let’s head right in” exchanging pleasantries you go into the Board room with her. The Board is already there and you’ve know them all for years. One of them tells you, “Grab some coffee and breakfast Amigo, we’re going to be here awhile”. Well at least Labriola has a good catered breakfast.

The Chairman of the Board starts, “Tip, as you know we are always looking at new strategic directions. We’ve been a Chicago company for 110 years now and have diversified our business into 5 divisions, some government and some private work. However, our business has always been Design-Bid-Build (DBB). We’ve seriously been discussing the Design-Build business. We think we’ve found an opportunity and are sending you out with the Due Diligence team. Take a look at it and tell us what you see. Learned, do you want to take over here?”

The Corporate Counsel, Learned Hand, speaks, “Tip, we’ve been looking for a market with a good construction company for sale and an Engineering/Architecture firm in the area we can buy. We’re not against incorporating one or the other but we’d like to have the local contacts both offer. We’ve found Duluth Marine Construction (DMC) in Duluth MN and a combined A/E/ firm named Washington and Jefferson (W&J) in Superior WI. DMC is a Delaware Corp and W&J is a Wisconson Corp. You know Sally’s son Perry. He’s been on my staff about a year now and just passed the Bar so I will be sending him with you as my rep on the team.”

The CFO speaks up, “I’ll be sending Charlie Ponzi, my internal auditor. He’s already got initial accounting documents.”

After several hours of discussion and reviewing documents you are ready to look at the companies. In addition to Perry and Charlie you are taking Isma, your best PM, to look at operations in both companies with you.

Tuesday at 1:00 your Due Diligence team walks into Excelsior Construction.

Joe Totten is the president of DMC. After introductions and sending your team members off with their counterparts you sit down to talk.

“So tell me Joe I understand that you are a Delaware corporation. The prospectus I received is a bit vague about who owns stock since it is not a publicly traded company. Can you fill me in on that?”

“Oh sure, I own all the stock and I make all the rules. I am DMC and DMC is me so you have no problem in negotiating THIS sale!”

“Well do you have a Board of Directors?”

“Oh Yea, the paperwork with the State of Delaware lists my wife as the Board of Directors. She lives down in the Florida Keys now but it allows me to fly her here to see the grandkids for Christmas on the company tab. But rest assured, she doesn’t have any involvement in DMC, it’s just a paper thing. You can deal with me on all matters.”

“What about other corporate officers? Do you have an appointed CFO? Any VP’s?”

“Nope, Cecilia is an accountant and a damn good one. I wouldn’t want her to get a swelled head with a title like CFO and besides I do all the dealings with my bank, not her. And along those same lines I don’t need any extra assistants like VP’s. My people work and my Project Managers manage projects.”

“So who signs purchase orders?” “Cecilia does that kind of stuff.”

“And who signs Contracts?” “I sign all the contracts.”

“And who signs pay apps?” “The Project Managers sign all project documents; they are responsible for the projects.”

Joe Totten continues to talk about how the business is a $100Mil a year business, but due to the Covid thing the cash flow has dried up. You make a note to Check on backlog with Isma.

You spend the rest of the day going around to the various sections and watching your team inspect each of their areas. That night at the hotel you have dinner in a private dining room to discuss the day.

“Isma what did you find today?”

“Well Tip, from what I can tell the Superintendents and Foremen are competent construction people. After that there is the usual personal problems. One foreman is going through a divorce and has a pending domestic violence charge against him. On the Corps of Engineers job in Duluth Harbor they do drug testing and the superintendent came down positive for coke and pot. He’s banned from government work right now.

On the other hand, the Project Managers are a mixed bag. Two of them have been with Joe Totten for 30 years and are totally loyal, so they get the best projects. Below that there are two middle aged managers who believe they are more competent than the older two and basically are unhappy. They complain about opportunity and compensation. Then we have the younger two who are college grads and engineers. They perceive Totten as a bit of a bully due to his gruff ways but generally live with it. They are well aware that they were hired because they understand the technical things Owners require like Primavera and certified payrolls. However, one of them told me that the other one has a complaint in the EEOC for being called Gay by the two old guys. Perry came across it in the HR office.

Dunn & Bradstreet indicates slow pay to materialmen and suppliers. The PM’s say there are money problems and it is blamed on their Pay when Paid clauses.  There are 5 Statement of Lien notices that I found mailed as a threat of lien but I have found no actual filings, so I am sure there are more unpaid subs. However the Pay Apps appear to be in order and timely, so it appears there is not a Paid when Paid problem.”

Tip, “Charlie, what do you see in the finances?”

Charlie, “Tip, there was impact from the Covid at one time but there is a bigger problem. Totten has been estranged from his wife for years and there is $500,000 that has been paid to Mata Hari Consulting this year so far. I couldn’t find a registered corporation by that name and finally one of the junior accountants told me that is how they pay Totten’s girlfriend and that they also pay for a leased Mercedes for her. The problem is the payments are being made as a consultant on a government job, so we may have fraud.

On the notice of lien letters I found 8 of them but no lawsuits. Seems Totten pays the contractors that are threatening liens because there is some time limit in Minnesota.  Bottom line is I think the company is in the red by $2 Million. They have booked claims on the jobs due to a number of reasons to show break even job status, but no claims have been made. The accountants say they were told the claims would be made when the jobs were over and they real loss numbers are known. So we have some cooking the books.”

Tip, “And Perry, what do you get in HR?”

Perry,” The others have touched on it all. Yes we have an EEOC complaint that surely will turn into a lawsuit for discrimination. Nobody would tell me why but they think there may be an age discrimination suit by the middle age PM’s. Just rumor and innuendo.

There are the usual lawsuits from personal injuries by subs employees, a lawsuit from a truck accident, and a few workers comp claims. All lawsuits tendered to insurance counsel.

I didn’t hear about the girlfriend. But I was told by HR that they are behind on their payments to the IRS. That’s consistent with cash problems.”

The next morning the team went to Washington and Jefferson Architects and Engineers.

Jean Lafayette, President, met them at the door and took them to the conference room.

There were three other employees in the conference room waiting. Jean started out after coffee and Cheddar Cheese puffs, “Well Tip, I have to admit it was a little bit of a surprise when TTC contacted us about being bought, but after talking about it with the Partners it may not be a bad idea. A number of us are getting along in years and we’ve had discussions at our annual retreat about succession. I’ve brought our CFO, Mortica, our Chief Architect, Christopher, and our Business Manager Sylvia the link up with your people as requested. As well as President, I am the Chief Engineer too so you and I can discuss those issues.”

You, “Thank you Jean, I will start by saying we wouldn’t have contacted you if we didn’t hear good things about Washington and Jefferson. Think of our Due Diligence as the courtship before the marriage. Now that being said, do you have any concerns or issues before we start?”

“Well I’d like to kind of explain our firm a bit. While we are a very professional form, we are also a collegial organization. To own stock you have to be a Partner and we select Partners at the Annual Retreat. The bylaws limit Partners to 20% of the firm and require all Partners to be professionally registered, either licensed AIA or PE. Once you make Partner you are required to work 24 hours a week and may do other things such as teach, write, or pro-bono projects that raise the visibility of the firm. We call this our contribution to society. Partners are quite supportive of each other in their contributions to society projects. This also gives the younger worker most of the billable time.

We believe we follow the book on Wisconsin corporations with each Partner also formally being a Vice-President.

The Partners are concerned about what you want with our firm and how you might treat each of them in regards to their ownership interest and the fate of each of their personal endeavors that have been supported by W&J.”

“Are there any special problems I should know about before my folks tell me?”

“We do have an unusual problem in that one of our Partners, Richard Quisling, is on the Superior architectural advisory board. Superior was a French Colonial town and you may have noticed coming in here that our storefronts are faux colonial. That has become a city ordinance for all buildings in the business district. One of our competitors, Benedict Arnold Architects, has sued us claiming Richard used his position on the Board to steal their faux Colonial plans and incorporate them into the buildings we are now designing. What the facades should look like was a mutual thing developed over the years by the advisory board. They want royalties from us. In reality they took the designs from the committee and put them in their plans just due to that they were getting ready to build something at the time. This is generic faux French colonial and nothing special!”

The day proceeds well and you get to the hotel that night, same drill as the night before.

Tip, “I’ll start off, from a technical perspective they have a good engineering operation. I am concerned about their computer systems though. While the servers have the main documents, each individual has the ability to install any special software they like to do their job. I am sure there is a bunch of pirated software on those machines. If we buy the firm, we need to make a major IT scrub.”

Isma, “ I looked at the Architectural operations. CAD systems are up to date and operate off of a single server. So I don’t see the IT problem you see with the Engineers. The younger architects are a bit disgruntled at carrying the load while their Partner/Section Supervisor goes off on other things. They like the idea of having that freedom someday but resent the load today.

Seems the story on Benedict Arnold Architects is a bit more complex that Mr. Lafayette explained today. Benedict Arnold was one of those young architects that didn’t want to wait years to make Partner here. He left and started his own firm. Seems he did the initial design work under Richard what’s his name to be incorporated into the city ordinance for the colonial storefronts. That’s why he is claiming the intellectual property rights.”

“OK, Charlie what have you got?”

“Fiscally they seem pretty sound. The CFO is appointed by a resolution of the Partners. The slow economy has slowed them down, but they still have about a year’s backlog on the books. They have a good line of credit that is only 50% tapped out. They can probably lower that. However, this community service thing for Partners is a bit deceiving on the books. I don’t think it’s illegal but they use it as a means to regulate their balance sheet. The Partners don’t get paid except for billable hours to projects. That means when work is slow, the Partners go off and do other things to protect the cash flow.  Essentially the 24 hours per week is their base salary in reality. They then take the rest of their compensation on the year end distribution on the stock. It’s a bit unusual that’s all.”

From you, “Ok, so if I understand it then letting the Partners continue as is, means we don’t have to pay them if they are not billable? Is that legal Perry and if so do we need to write some type of employment contract with Partners that reflect reality?”

“And what else Perry?”

“Yes the lawsuit from Benedict Arnold is messy. But they have a top IP firm on it. I think we should check the press on it since we’re looking at buying this firm for reputation. We don’t want to pay for good will that is not there.

There is a complex workers comp issue. One of the engineers got injured on a jobsite. He claimed Workers Comp from W&J then sued the contractor and Owner. The Owner invoked the contract indemnity clause in the AIA contracts (in the back of our textbook)  and tendered defense to W&J.

Last we have a few other lawsuits from an auto accident involving a company car.”

TEST QUESTIONS

First, answer these questions as the manager, Typical A Student, in the construction company. DO NOT make the mistake of giving me a legal analysis as an attorney. I had one student who had a fiancé who was a practicing attorney and I got an attorney’s opinion for the answer. Remember the purpose of the course is to let you make good management decisions regarding law in your company.

Situation 1 – You decide to buy DMC. In general, what legal problems do you see?

a)            What are the corporate legal problems with how Joe Totten is running the company? What do you need to do to correct this?

b)            Are there any legal problems with the status of the Project Managers? What about Cecilia? What do you need to do to correct this?

c)            What is your analysis of Mata Hari consulting? What additional information might you need? What business action do you take upon assuming ownership? Do you contact the authorities about the potential criminal conduct? Do you have an obligation to do so? Any thoughts on a claw back?

d)            Do you need to contact a Construction Attorney in Minnesota about all the lien notices?

e)            What do you do about the booked claims in the accounting system that have not been filed (look at Enron mark-to-market accounting)?

f)             Do you try to settle the EEOC complaints or try to settle them (with Counsel)?

g)            What do you do about the IRS taxes that have not been paid?

Situation 2- You decide to buy W&J Architects. In general, what legal problems do you see?

a)            Is there any problem with corporate authority?

b)            What is your laymen’s analysis of the Benedict Arnold IP lawsuit?

c)            What do you do about pirated software in the company?

d)            What do you do about the Community contribution issue? Are there legal or tax issues with this or is it, as Charlie said, just a management mechanism? Do you write employment contracts to define this practice?

e)            Do you do anything about the existing lawsuits when you take over?

Question #3 – What is your solution to obtaining a Design-Build company in this market? A) Buy both companies and merge them? B) buy one of the companies and transform it? C) buy neither company and start from scratch? What legal issues influenced your answer?