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Enforcing N.J.’s Prompt Payment Act

Contractors deserve timely compensation for their work, even from towns and counties
By John G. Webb III and Sheryl Mintz Goski

New Jersey’s Prompt Payment Act, N.J.S.A.2A:30A-1, et seq. (PPA), obligates a real estate owner who engages a contractor to make improvements to real property to: (1) pay promptly payments due to the contractor; (2) alternatively, object in writing to such payment; or (3) risk being subject to the PPA’s remedies of interest at 1 percent above prime on the unpaid amount and shifting of the contractor’s legal fees should it prevail in subsequent litigation.

There are few cases reported under the PPA. The only Appellate Division case construing the PPA is unpublished. In that case, Shore Mechanical Contractors v. W. G. Osborne Construction, 2008 WL 4107895 (App. Div. Sept. 8, 2008), the court held that the fee-shifting provision was mandatory, i.e., not discretionary, when the contractor prevailed. Recently, a decision in the Superior Court of New Jersey upheld the PPA remedies against the County of Warren in a case brought by one of its contractors on a county project. Aire Enterprises v. County of Warren, WNL-151-09.

Almost five years after Warren County’s architect certified the final amount due to a contractor who had completed renovation of a county building, the Honorable Amy O’Connor, Justice of the Superior Court, Warren County, awarded the contractor in the Aire Enterprises case the unpaid balance of the architect-certified final amount due, plus interest, costs and attorney fees under the authority of the PPA. Judge O’Connor rejected the County’s position that the contractor’s alleged defective installation of approximately 20 of 400 carpet tiles justified withholding the final contract balance. The trial court denied the County relief on all points other than to award it $150 for the relative handful of carpet tiles of which it complained.

As adopted effective in September 2006, the PPA requires that real estate owners make full payment to contractors for work performed on their property within 30 days of the contractor’s submission of a final billing. The PPA allows the owner to dispute some or all of the final billing by written notice to the contractor within 20 days of the owner’s receipt of the final billing. However, the PPA obligates the owner to pay whatever portion of the final billing amount is not so disputed. If a contract with a governmental owner specifically allows the payment to be made to the contractor at the next payment time in the governmental agency’s billing cycle, the 30-day payment requirement can be modified by contract between the contractor and the government owner. In the Aire Enterprises case, the trial court found that there was no evidence in the contract between the parties specifying the time of payment to be defined by Warren County’s billing cycle.

The defendant in Aire Enterprises moved for reconsideration of the trial court’s interpretation of the PPA. The defendant argued that the PPA allows a property owner to withhold any amount of payment from a contractor whose work is not in fact entirely complete and defect-free, irrespective of whether the property owner notifies the contractor within 20 days of the billing date of “the amount withheld and the reason for withholding payment.” N.J.S.A. 2A:30A-2a. In its April 23, 2012, decision denying Warren County’s motion for reconsideration, the court interpreted the PPA to mean as follows:
The statute imposes a twenty day deadline when an owner has to advise a contractor that it is not going to pay a bill or a part of a bill, and to give the reasons why. If the owner does not meet the deadline, then the statute deems the bill to have been approved by the owner and, impliedly, the work performed by the contractor as well. Under the statute an owner does not have to pay the bill if it does not approve it, but the owner must give the contractor reasons within twenty days of getting the bill. Otherwise, the bill must be honored.

The court further observed, “The defendant did not forfeit any remedies it had if thereafter it discovered that there was a problem … but it had to pay the full bill…”

Additionally, the court pointed out that even if the defendant’s interpretation of the PPA were correct, in the Aire Enterprises case the County violated the PPA by withholding a portion of the final billing ($9,095.85 paid six months late) for which the County had no reason to withhold payment. The court stated, “the defendant withheld over $21,345.85. The amount in controversy was $12,250. The defendant did not justify why it withheld as much as it did. The defendant is responsible for withholding $9,095.85 under the Prompt Payment Act even if the defendant’s interpretation [of the] statute is correct.”

Shortly after the effective date of the PPA, the Finance Department of the State of New Jersey issued a policy statement to all municipal (county and town) governments providing guidelines on implementation of the payment provisions required by the PPA. Local Finance Notice 2006-2. According to responses to Open Public Records Act (OPRA) requests to the 21 counties in New Jersey between February 2010 and March 2011, approximately half of the counties in New Jersey ignored those guidelines, including Warren County, which, based upon the Aire Enterprises decision, disregarded the PPA at its peril. As late as March 2011, Warren County had adopted no policy on the PPA, despite the fact that, in the Aire Enterprises litigation, the contractor had persistently since the March 2009 commencement of litigation sought statutory relief under the PPA, specifically, legal fees and statutory interest on the contract balance due.

Between February 2010 and February 2011, plaintiff’s counsel in Aire Enterprises sent each county in New Jersey the following OPRA request:
If the County has adopted any policy or procedure related to compliance with the New Jersey Prompt Payment Act, N.J.S.A. 2A-30A-1 et seq., provide a copy of any such policy or procedure that is in writing, briefly set forth the substance of any such policy or procedure that is in existence but not reduced to writing, and state the first date when such policy or procedure was adopted by the County.

According to the OPRA responses, approximately half of the counties in New Jersey had a written policy about, or reported compliance with, the PPA. Counties’ PPA responses took different forms.

The counties of Bergen, Cumberland, Essex and Mercer had adopted standard construction contract provisions assuring contractors of the county’s compliance with the PPA.

Bergen County’s contract provisions exemplify this approach to PPA compliance. Bergen County’s contract form provides that payments “shall be deemed approved and certified 20 days after the County’s receipt of same unless the County provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment.” The Bergen County contract further provides: “In the event that a payment is approved or deemed approved but is not paid in a timely manner … the County shall be liable for the amount of money owed under the contract plus interest in accordance with N.J.S.A. 2A:30A.”

Burlington, Monmouth and Ocean Counties simply responded that they comply with the PPA, and Atlantic County replied that they comply with the PPA and with Local Finance Notice 2006-2.

The Counties of Middlesex, Somerset and Sussex reported the formal adoption of policies concerning compliance with the PPA. Middlesex County’s policy carries forward a policy adopted in 2002 to include a “payment clause” in the specifications for all contracts. The payment clause includes the following:
The contractor shall submit a request for payment before the 10th day of each month … If within 20 days of the receipt of the request for payment either the County Engineer, designated County Representative or the consulting engineer whichever is appropriate, questions any item or items contained in the request for payment, the engineer shall notify the contractor as to the items in question and the amount withheld from the pending payment. All requests for payment which are not in dispute shall be paid within 30 days after receipt by the County.

The Counties of Middlesex, Somerset and Sussex, as well as a majority of the other counties that reported compliance with the PPA, reported paying contractor billings in the county’s billing cycle after the billing had been certified and approved as specified in the PPA.

What was surprising was that almost half the counties responded to the OPRA request that they had no PPA policy at all. The counties of Camden, Cape May, Gloucester, Hudson, Hunterdon, Morris, Passaic, Salem, Union and Warren all responded to the OPRA request that they had no policy on compliance with the PPA. A county, or any other property owner, that fails to comply with the PPA in making timely payments to contractors does so at its peril, as the Aire Enterprises case demonstrates.

Webb and Goski served as co-counsel to the contractor plaintiff in the Aire Enterprises case. Webb offers general-counsel and business-strategy services as the owner of JGW, INcounsel in Budd Lake. Goski is a solo practitioner in Florham Park, focusing on all aspects of civil dispute resolution, and offering mediation, arbitration and civil commercial trial experience.

Reprinted with permission from the May 31, 2012 issue of the New Jersey Law Journal. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Why You Need A Will

By David T. Norrie, Attorney at Law, New Jersey

Summary: You need a Will to make sure that your estate is left to whom you wish and to control who will administer your estate. Your Will can also appoint a guardian for your minor children and control the manner in which your children inherit your estate. Your Will can further be used to minimize federal estate taxes when your individual assets exceed $650,000. In addition to your Will, you should also have a Power of Attorney and a Living Will.

Who Inherits Your Estate: If you die without a Will, New Jersey’s statutes determine who receives your estate. These statutes could result in your estate being divided up differently than you want. For example, if you are survived by your spouse, and you have children, your estate will be split between your spouse and your children. If you do not have children, but your parents are alive, your estate will be split between your spouse and your parents. In both of these situations, most people would prefer to have their entire estate go to their spouse if their spouse survives them. If you want to control who receives your estate, you need to have a Will.

Who Administers Your Estate: If you die without a Will, someone will need to go to the County Surrogate and obtain letters of administration of your estate. This may or may not be the person whom you would wish to administer your estate. In addition, this person may be required to post a bond which may be paid for out of your estate. You can designate in your Will an executor to administer your estate and can waive the requirement for a bond.

Inheritance By Minor Children: If you do not have a Will, and you have minor children, the person who is appointed administrator of your estate will need to designate a person to manage your children’s inheritance until they reach age of 18. This may or may not be the person you would choose to manage that money. You also may not wish your children to receive all of this money directly at age 18. You might, for example, prefer that they not receive the money until they are done with college or until they reach the age of 25 or even 30. If you have a Will, you can specify the person who will manage this money for your children, and the manner in which the money is to be spent, and the age at which your children will receive the money directly.

Guardian For Minor Children: If you do not have a Will, someone will need to file a court proceeding for guardianship of your minor children. This person may or may not be the person you would choose to be guardian and this person may be required to post a bond. The costs of this proceeding and the cost of the bond may be paid out of your estate. If you have a Will, you can specify the person who is to be guardian of your minor children and you can waive the requirement of a bond. The appointed guardian will not have to file a court proceeding, but will merely need to go to the County Surrogate and sign some papers to confirm the guardianship.

Federal Estate Tax: The federal government may presently tax your estate up to fifty-five percent. That portion of your estate which goes to your spouse is exempted from this tax. You also have an exemption equivalent in 1999 for up to $650,000 of your estate. If you leave your entire estate to your spouse, there is no federal estate tax upon your death because of the spousal exemption, but your spouse cannot use your exemption equivalent, so your spouse’s estate will be taxed up to fifty-five percent of the amount it exceeds $650,000. However, with appropriate tax planning trusts, you can each make use of your exemption equivalents and have no federal estate taxes on up to $1,300,000.

Power of Attorney: A Power of Attorney is used to designate someone to take control of your finances in the event you become disabled. Without a power of attorney, someone would need to go to court in order to obtain control over you finances.

Living Will: A Living Will (also called an Advanced Directive for Healthcare) is used to designate someone to decide matters about your medical treatment and termination of treatment in the event you are unable to do so. Without an advanced directive, no one may know what your wishes are with respect to your medical treatment, and if even if they do know, they may need to go to court in order to carry out your wishes.

© 1998-99 by David T. Norrie, Esq.

Mr. Norrie has a law office in Mount Olive, New Jersey, that is separate and independent from Mr. Webb’s law practice. More information about Mr. Norrie’s law practice can be found at his Internet Web site: www.NorrieLaw.com

A Guide For Businesses In Mount Olive, NJ


Questions All Mount Olive Businesses (Should) Ask – ABOUT BUSINESS ACTIVITIES

Q: What Township agencies might affect how my business operates?
A: The Township Fire Prevention Bureau, the Health Department and the Planning Department each has an area of responsibility that could conceivably affect your business operations.

Q: Does my business need a Township license? If so, how can I obtain one?
A: If your business involves one of the following activities, the Township Health Department can either take your application or direct you to the appropriate Department:

  • food handling
  • tattooing
  • vending from machine(s)
  • septic installing
  • waste (solid or septic) hauling
  • service/sales alcohol

If your business involves other activities, the Township Zoning Officer, in the Planning Department, can advise you whether any, and if so which, Township Departments must issue a permit or license. If you provide full information about your business when preparing a Zoning Permit Application for your business site, necessary licensing can be identified during application processing. Thorough disclosures save time.

Q: Is there a Township agency that records all businesses operating in Mt Olive?
A: A Township ordinance requires certain buildings and businesses to register annually with the Fire Prevention Bureau and pay a fee. Also, the Police Department’s Emergency Contact System and the Fire Prevention Bureau records volunteered data. Registration forms are available from the Fire Prevention Bureau’s office and Police dispatch.

Q: What local taxes apply to my business, and how are those taxes collected?
A: The Township Clerk and the County Finance Department deal with real property taxes, which may only affect your business if you own the business site.

Q: Are there other local fees or assessments I should be aware of?
A: The Fire Marshal inspects each business site annually, and there is an inspection fee. There may be other costs, like sewer assessments or permit renewals, also.

Q: What are the Township rules governing business waste removal and recycling?
A: The Township Sanitation and Recycling Division can provide specific information applicable to your particular business about recycling and disposal of waste that your business generates.

Q: On opening day for my business in Mount Olive, can I float a balloon over the site, display special banners and set out temporary signs to advertise my business?
A: The Township has a sign ordinance, and the Township Zoning Officer can tell you what type of displays can be licensed for special events. Allow 30 days for processing.

Q: Are there Township rules on weights, measures and labeling for my business?
A: No. The Division of Weights and Measures, Morris County, has enforcement powers related to weights, measures and product labeling. They offer employee orientation about State regulations they administer.


Questions All Mount Olive Businesses (Should) Ask – ABOUT BUSINESS SITES

Q: What agencies might have an interest in the location of my business site?
A: Any one or more of the Township Planning Board, Township Zoning Board, County Planning Board, Township Building Department, Township Department of Health and Township Fire Marshal potentially have jurisdiction over some aspect of your business’s location. To find out what is needed to locate your business in Mount Olive, start by speaking with the Township Planner.

Q: I run a business out of my home in Mount Olive. I never receive customers at home. Are there applicable regulations?
A: Probably not. The Township Zoning Officer will have up-to-date guidance for home-based businesses.

Q: Whether I own or rent my business site, are there any required approvals for the business use of my property?
A: First discuss your business’s activities with the Township Zoning Officer, who can advise you whether any, and if so which, Township Department must issue a permit or license related to your occupancy.

Q: My business site needs structural changes. What approvals are needed before, during and after construction?
A: To obtain permission to make structural improvements, start by completing a Zoning Permit Application and discussing your situation with the Township Planner. Zoning variances and/or site plan approval may be needed. Once the review and approval of building plans has been completed and your business’s proposed site has approval, the Township Building Division is responsible for Construction Code enforcement, and the Engineering Division, Health Department and Fire Marshal make site inspections.

Q: With whom can I discuss my business site’s security?
A: The Township Police Department can perform a security survey at your site. The Police Department wants to include data about YOUR business in the Department’s Emergency Contact System. The System records contact and security (e.g., security service coverage) data on every business site.

Legal Entities For Consultants

ORGANIZATIONAL FORM CHOICES FOR (N.J.) CONSULTANTS

Information that follows was prepared for a half-hour segment of a full-day educational program at Fairleigh Dickinson University, Madison, NJ. Participants in the seminar either had experience consulting (i.e., providing advice, information and services for a fee) and wanted to learn how to improve their business or were trying to decide whether they wanted to try it. This segment of the program provided participants information about different types of legal entities that they might organize to do consulting business. The information is not legal advice; a competent attorney should advise how to apply this information for optimum benefit in a particular business situation.

In the oral presentation there was more detail about the characteristics of different legal entities and practical considerations like cost and time required for organizing the different business entities. This information is offered as background for consultants or prospective consultants to use in working with their own advisors.

There are three basic choices of form for a consultant’s business:
Proprietorship
Corporation (Business, Professional or “Sub-Chapter S”)
Partnership

Variations on the basic forms:
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
{Association?}
{Not-for-Profit Corporation?}

The SBA has a general discussion of factors to be considered (in conjunction with professional assistance) in choosing a business form. The New York discussion (found under the title “Types of Business Organizations”) may be accessed on the World Wide Web at: http://www.sba.gov/regions/states/ny/ny/nydo.startup.html.

In New Jersey, the ranking of relative formation cost of these basic choices, from least costly to most costly, is: Proprietorship (0 to $50, depending on whether an assumed name is registered with the County); Corporation (+/- $200 plus professional fees); Partnership (+/- $200 plus professional fees).

And approximate minimum times for organization, from concept to business bank account opened, are 3 hours for a Proprietorship; 48 hours for a Corporation; 10 days for a General Partnership; and 2 weeks for a Limited Partnership or Limited Liability Company.

The attached table compares characteristics and suggests questions that may help in planning what form to choose for a New Jersey consulting business. The details of characteristics in other States may be different, this table suggests questions but cannot provide detailed specific advice, in any event.

Characteristics of Different Forms for New Jersey Businesses

Characteristic Proprietorship C S Corp. General Partnership Limited Partnership Limited Liability Company
Document of Formation Certificate of Incorporation Partnership Agreement Certificate of Ltd. Partnership Certificate of Formation
Document(s) establishing relative roles of Owners & Managers Certificate of Incorporation, Bylaws, Shareholders’ Agreement Partnership Agreement Partnership Agreement Operating Agreement
Perpetual life? No Yes Yes Yes Yes1 Yes1
Minimum No. of Owners? 1 1 1 2 2 1
Units of Ownership — (No separate entity) Shares of Common Stock Partnership Interests Limited Partnership Interests Membership Interests
Limited Liability for Owners? No Yes Yes No Yes for LPs Yes
Limited Liability for GP or Managers? No Yes Yes No No2 Yes
Management Owner Directors/ Officers Partners General Partner(s) Members or Managers
One level of Tax? Yes No Yes Yes Yes Yes
Maximum Federal Tax Rate 39.5% 35%3 39.5% 39.5% 39.5% 39.5%
Can Owners Deduct Losses? Yes No Yes4 Yes4 Yes4 Yes4
Convert Tax-Free to an LLC? Yes No No Yes Yes
Convert Tax-Free to a Corporation? Yes — — Yes Yes Yes

1May, however, be dissolved upon certain events specified in the Agreement, such as death or bankruptcy of the general partner (or LLC manager), unless the limited partners (or LLC members) consent to continuation of the partnership (or LLC).

2Partners of a “limited liability partnership” are not personally liable for debts or liabilities of such partnership not caused or incurred by reason of the particular partner’s own acts or negligence. (Perhaps only of academic interest, partners of a pre-1988 “Limited Partnership Association” that has fully paid up capital subscriptions also are not personally liable for any debts or liabilities of the entity.)

3 Assuming a maximum rate of 35% and that remaining income distributions to shareholders are taxed at a maximum rate of 39.5%, the combined maximum federal effective rate is about 60%.

4To the extent of tax basis.