Category Archives: In the news

Surety Bond Use In Everyday Life

Surety bonds are a part of everyday life.  Many individuals don’t understand the concept of bonds and how they are used to protect parties entering into a contract with one another.  In basic terms a surety bonds are a binding legal agreement that offer financial guarantees to the parties involved in a multitude of contracts.  Surety bonds state that one party, known as the surety is obligated to a second party, the obligee , in case of a default by the third party, the principal.

Various categories of surety bonds:

Contract surety bonds offer both financial security and construction assurance on projects both building and construction.  Contract surety bonds assure the project owner that the contractor will meet the requirements set forth in the contract.  If the contractor fails the project owner the surety company will cover the contract requirements so that the project owner is not at risk of loss.  The surety offers a guarantee that the contractor will perform the job stated while meeting their financial obligations to subcontractors, material providers and employees.

Bid bonds ensure that a contractor submits a bid that is intended to meet the needs of the contract.  The price of the bid that is submitted covers the financial obligations of performing the work as stated in the contract while covering the expenses on their end.

Performance bonds ensure the project owner is covered from loss if the contractor fails to perform the contract as stated and agreed upon.

Payment bonds are in place to make sure that the contractor is liable for the expenses to subcontractors, laborers and materials related to the contract that was entered into.

Maintenance bonds protect project owners against defects in materials or workmanship for a specific, agreed upon period of time.

Subdivision bonds ensure cities, counties and states that the principal, contractor of a subdivision, will financially cover and construct improvements within the sub like streets, sidewalks, curbs, street gutters, and more to make sure the sub meets stated requirements.

License and permit bonds are obtained to allow certain businesses to do business. An example of these bonds include: construction bonds, motor vehicle bonds, employment agency bonds and more.

Fiduciary bonds secure that administrators, executors, guardians and such will perform duties in line with court stated orders.

Different bonds are used in special situations to guarantee that contracts or duties are performed as contracted.  Many people confuse insurance and bond however they are completely different.  Insurance is used to protect individuals or businesses from themselves or others where as bonds are used to make sure expectations are met by others.  Both protect against loss of finances.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Ending The Confusion When Hiring A Contractor

If you are confused about hiring a contractor to do work around your home you are not alone.  The terminology is a bit confusing, laws in each state are different and regulations are constantly changing which makes the whole process of hiring contractors to perform work on your home is difficult.  Licensing within different trades be it electricians, plumbers, construction or heating and cooling are very specific as well.  Below we attempt to define the terminology used throughout the industry and how it relates to specific contractors within different industries.

  • Licensed Contractors: A license is granted to contractors throughout different trades as authorized by local and state laws. This ensures that the contractor has passed tests regarding their business practices, trade skills and ability to pay for the fees associated with the required license and bonds.
  • Registered Contractors: Contractors that have been registered are only required to prove they are offer insurance and can pay the required fees. These requirements are often less stringent than what is required for a contractor to become licensed.  To be a registered contractor you rarely have to pass any trade related competency tests or to be bonded.  Licensing and registration terms are often used interchangeably.
  • Bonded Contractors: Contractors that are bonded have obtained an agreement with a third party, a private company that offers surety bonds, to ensure that the consumer is protected against any misdoings by the contractor. If contractors fail to perform work as contracted, fail to pay for materials or their subcontractors or what not, their customer can petition the surety company for reimbursement for the failure of the contractor to perform as stated within the signed contract.
  • Insured Contractors: Contractors should all be insured. They should hold two types of insurance: liability insurance and workers compensation.  Liability insurance protects the homeowner against damage done to their property.  Workers compensation protects workers hired by the contractor from coming after the homeowner if injured or killed while working on your home.

Before choosing a contractor to complete work around your home verify you are protected from wrongdoing.  Ask contractors for all certificates that state they are registered, licensed, bonded and insured.  If the status of any of these certifications is questionable don’t feel pressured into hiring this individual contractor.  All certificates should be current and cover all aspects of the project that is to be completed.  Once you have confirmed and verified a contractor be sure to file copies of all paperwork, certifications and such in a place that is easily accessible.  This will ensure if proof of you will have it at your finger tips.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Legal Landscape: Top News in the Mentor-Protégé Program, Bond Claims & DBE Fraud

Welcome to the third edition of Onvia’s Legal Landscape, a series designed to provide government contractors with a quick, but thorough, summary of important legal developments in government contracting and a plain-English explanation as to how these developments may affect contractors. In this issue, we discuss recent trends in federal, state and local government contracting. Contractors should keep in mind that state and local agencies often look to changes in federal regulations as a guide for future changes at their respective levels. Changes recently made in the federal arena are likely to trickle down to state and local governments soon.

icon_legal_landscape_424x259

1) The SBA Offers Some Specifics on the Expansion of the Mentor-Protégé Program

As many government contractors may know, in February 2015, the U.S. Small Business Administration (SBA) issued a proposed rule aimed at expanding its mentor-protégé program. The proposed regulations would implement changes introduced by the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013, and would permit a wide array of small businesses to participate in the SBA’s mentor-protégé program. Currently, only 8(a) certified firms can take advantage of the many benefits offered SBA’s mentor-protégé program, including a broad exception to affiliation for mentor-protégé joint ventures.

While this was great news for many back in February 2015, it has been nine months since this proposed rule was issued and we have yet to see an interim, or a final, rule. The delay has many government contractors asking when the SBA is actually going to put these changes into effect. Well, we now have some idea: Sometime in the first quarter of 2016.

On October 27, 2015, the U.S. House of Representatives’ Committee on Small Business Subcommittee on Contracting and the Workforce, chaired by U.S. Representative Richard Hanna, held a hearing entitled “Maximizing Mentoring: How are the SBA and DoD Mentor-Protégé Programs Serving Small Businesses?” Based on the testimony given at the hearing, and the information compiled in the Subcommittee’s related memorandum, it appears that a final rule will be issued in the first quarter of fiscal year 2016, and that the agency hopes to launch a pilot program sometime in the summer of 2016.

Key takeaway for government contractors:

The expansion of the mentor-protégé could mean a lot more flexibility for small businesses. HUBZone, SDOVSB and WOSB/EDWOSB companies would have the ability to joint venture with larger mentors without the risk of affiliation. This, in turn, would make these small companies much more competitive.

2) The Importance of Complying with the Specific Requirements of Bond Claims

Ok, so this isn’t really a “new” legal development, per se. The requirements relating to bond claims is an issue that has been discussed among government contractors since, well, since bonds have been a requirement. However, while bond claims are often discussed, they are also commonly misunderstood. Many contractors do not fully understand their obligations concerning timing, notice, or procedure to perfect a bond claim. This is particularly true when it comes to performance bond claims against bonded subcontractors. In this context, contractors often fail to comply with their obligations and are adversely impacted. A recent Missouri case is just the latest example of this, and serves as a harsh reminder that the failure to comply with bond requirements can nullify an otherwise legitimate bond claim.

In that case, a plaintiff-general contractor, Curtiss-Manes-Schulte (CMS), subcontracted work to Balkenbush Mechanical, Inc. (BMI) on a renovation project located at Fort Leonard Wood, MO. Safeco Insurance Company of America (Safeco) provided the performance bond for BMI. As the project progressed, BMI fell significantly behind schedule. CMS informed Safeco, through a “Contract Bond Status Query” that BMI was not progressing satisfactorily, the contract was 9 months past due and liquidated damages would be assessed. However, CMS did not declare the subcontractor “in default,” a requirement under the bond. BMI ultimately abandoned the project, and then filed for bankruptcy protection. After completing BMI’s work itself and incurring significant additional costs, CMS made a claim against Safeco under BMI’s performance bond, citing BMI’s failure to perform. Because CMS never technically defaulted BMI, Safeco refused to pay CMS’ demand, asserting that CMS had failed to satisfy the bond requirements. CMS then sued Safeco.

In assessing CMS’ performance bond claim, the United States District Court for the Western District of Missouri noted that the performance bond specifically provided that the subcontractor had to be declared in default, and, further, that Safeco had to be notified of that default. Because CMS never formally defaulted BMI, and, in any case, never informed Safeco that BMI had been defaulted, the Court found that Safeco’s obligations under the bond were never triggered.

Key takeaway for government contractors:

Make sure you are aware of the specific terms of each and every bond that could affect your interests. Contractors tend to pay close attention to “upstream” bonds relating to payment but forget about how important the rules are when it comes to “downstream” performance bond claims. It is imperative that all government contractors understand the terms of all relevant bonds, and their obligations thereunder, as well as any federal, state or local statutory or regulatory requirements relating to those bonds. Otherwise, they risk forfeiting a perfectly legitimate claim. If you have any questions about the terms of a particular bond, or the applicable regulatory or statutory requirements, consult a legal professional.

3) Third Circuit Creates “Offset” Exception for Damages Relating to State DBE Fraud

In the last issue of Legal Landscape, we talked about the increased importance of the False Claims Act and the uptick in fraud actions by the Federal Government, as use of the FCA has expanded. As previously discussed, state and local governments have followed suit by aggressively prosecuting contractors for making false statements, or claims, of various types and kinds. As part this process, many local governments have increased the amount of monetary damages, and broadened the types of penalties, associated with fraud and false claims actions, including suspensions and debarments. Overall, there has been a marked trend over the past five years toward the draconian enforcement of fraud-related regulations and statutes, the expansion of liability, and the imposition of increasingly serious penalties.

A good example of the above is the Federal Government’s Presumed Loss Rule, introduced by the Small Business Jobs Act of 2010. The Presumed Loss Rule provides that, if a concern willfully misrepresents its size or status to receive the award of a federal contract, subcontract, grant or cooperative agreement, the loss to the government is presumed to be the total amount expended by the government under that contract, subcontract, grant or cooperative agreement. In other words, if you lie to the government about being small to get a contract, the damages assessed against you will be equal to the total amount of that contract. That’s a pretty stiff penalty, but it is entirely consistent with the trend toward escalating enforcement and prosecution.

One recent case may signal a slight shift in the other direction. In United States v. Nagle, the Third Circuit found that the damages assessed against a contractor found guilty of fraud on a state government contract had to be “offset” against the fair market value of the services provided under that contract. In Nagle, the co-owners of Schuylkill Products Inc. (SPI) and its wholly owned subsidiary, CDS Engineers, Inc. (CDS), engaged in fraud-related crimes in connection with PennDOT and SEPTA contracts. In order to take advantage of contracts with Disadvantaged Business Entity (DBE) participation requirements, SPI and CDS – both non-DBE entities – set up a “front” DBE subcontractor, Marikana. SPI and CDS “subcontracted” to Marikana, but, in reality, they performed all of the work on Marikana’s subcontracts. SPI and CDS paid Marikina a fixed fee for its participation, but otherwise kept the profits for themselves.

When this scheme was uncovered, the owners of SPI and CDS were charged with fraud. In analyzing the appropriate damage assessment against the owners, the U.S. District Court for the Middle District of Pennsylvania determined that the amount of loss each defendant was responsible for would be equal to the face value of the contracts that the DBE front company was awarded. Such an assessment was consistent with the Presumed Loss Rule outlined above.

However, on appeal, the Third Circuit disagreed with the lower court’s damage assessment. The appellate court held that, in a DBE fraud case, the amount of loss attributable to defendants should be calculated by taking the face value of the contracts and subtracting the fair market value of the services rendered. The court further clarified that “fair market value” can be calculated by the value of the materials supplied, the cost of the labor necessary to assemble the materials and the value of transporting and storing those materials. In other words, the damages assessed to a defendant for DBE fraud must be decreased to account for the fair value of services actually provided by that defendant.

Key takeaway for government contractors:

Nagle dealt with DBE fraud committed in connection with Pennsylvania state contracts, which were funded through the U.S. Department of Transportation. The Nagle decision was rendered by the Third Circuit, which means the case could be considered controlling in Pennsylvania, New Jersey and Delaware. It is not yet clear whether other jurisdictions will carve out similar exceptions, or whether the majority of other states will adhere to something more similar to the Federal Presumed Loss Rule. It is further unclear as to whether the exception in Nagle would apply if SPI or CDS had misrepresented their own DBE status, rather than arranging for a front DBE subcontractor. In any case, the damages associated with a potential fraud matter can be quite severe. It is important to understand the rules and make sure that you and your subcontractors are not engaging in any conduct that might constitute fraud.

Original Source: http://www.onvia.com/blog/legal-landscape-top-news-in-the-mentor-protege-program-bond-claims-and-dbe-fraud

 

 

Major Points Of The Claim Process In Auto Dealer Surety Bonds Continued

In this installment of surety bonds we will continue to look at major points of the claim process in auto dealer surety bonds.

Eligibility

Only certain consumers are eligible to process a claim against the auto dealerships surety bond.

–          Consumer Purchaser:  Most of the claims that a consumer will make are related to the auto dealer’s failure to report the sale and not producing a title for the vehicle.  This creates a multitude of issues for the buyer.  Other claims involve the dealership not paying off the vehicle that was traded in, when the mileage on the odometer has been changed or the condition of the car was not reported and clearly becomes evident after the purchase.

–          The Seller of a Motor Vehicle:  A seller may file a claim if an auto dealership fails to pay for cars sold to the dealership or through the dealership.  This seller may be another car dealer, an individual, a consignor, a regional or national auto auction.

Be Prepared

Auto dealers should follow these basic steps when a claim is presented against them.
–          Auto dealers need to understand and follow the rules that are set by your state’s department of motor vehicles.  It is important to meet all of the terms within the contracts to avoid complications later on.

–          Auto dealers should always be honest.  They should ask the claimant for proof of their loss.

–          All communication should be documented.  All correspondence, statements and agreements should have proper documentation.

–          Auto dealerships should always be proactive in finding a solution to problems that have arisen before an official surety bond claim.

Look for assistance from the surety bond agency

When a claim is brought to the attention of the surety bond company all of the parties involved in the argument to explain their side of the story.  The guarantee that is offered by the surety bond company is that if they don’t find the claim to be legitimate they will not pay.  The opposite is true as well, if the evidence is found to be against the dealership the dealer will be obligated to pay the claim up to the bond’s penal sum.

Bonding company’s provide legal defense on your behalf; often leading to a winning verdict on your behalf.  It should be understood that if they end up paying the claim due to the dealerships negligence the legal fees plus the amount of the claim will need to be reimbursed.

Protect yourself and your dealership

Claims do arise against auto dealer surety bonds.  It is important to protect yourself.  Be sure that your dealership follows all industry regulations.  If you are honest in your dealings with customers you have nothing to be worried about.

Keep all licenses up to date, renew bonds on time and file all necessary paperwork diligently.  If a claim happens to arise you will easily be able to plead the case against the dealership without hurting business.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Congress Tightens Surety Asset Rules With Eye on Fraud

The defense authorization also expands SBA-backed surety bonds

Tucked into the defense authorization passed by Congress Monday are little-noticed amendments that should eliminate much of the fraud that has characterized individual surety bonds and expand the Small Business Administration’s flexibility in backing bonds for small contractors.

The surety measure tightens up the rules for using individual sureties on federal projects by requiring the assets backing the bonds to be real and deposited into an account that is in the care of the federal government.

The measure also expands the SBA’s ability to back bonds under its guarantee program, from 70% to 90% of the loss paid by a participating surety, on a contract amount up to $6.5 million.

The amendments are contained in Section 874 of the National Defense Authorization Act, which President Obama is expected to sign. Major industry associations, including the Surety & Fidelity Association of America and the National Association of Surety Bond Producers, backed the measures.

NASBP, which has battled individual sureties in court and in legislatures, views the passage as a major victory for the association and the industry.

“We are confident now our five years of toil to curb individual surety abuses on federal construction contracts are paying off,” said Mark McCallum, NASBP’s chief executive.

Rep. Richard Hanna (R), a former contractor whose district is in central New York State, was a key sponsor.

ENR’s investigations of individual sureties in 2013 revealed extensive use of deceptive assets.

Original Source: http://www.enr.com/articles/37939-congress-tightens-surety-asset-rules-with-eye-on-individual-surety-fraud

Richard Korman
November 12, 2015

Carwash Owners Sue New York City Over New Surety Bond Rules

A group of carwash owners have filed a lawsuit against New York City charging a new law illegally favors unionized carwashes.

The Association of Car Wash Owners lawsuit centers on rules that require owners of nonunionized carwashes to post $150,000 surety bond before obtaining a license. Unionized operations pay only $30,000.

The association says the two-tiered system is illegal.

Association attorney Michael Cardozo tells The New York Times the rule gives those who have collective bargaining a competitive edge.

He says “governments can’t put their thumb on the scales of whether a company should unionize or not unionize.”

The union-supported Car Wash Campaign, which represents community groups, said the $150,000 bond is “designed to secure worker wages against wage theft, and to protect consumers and possible creditors.”

The city Law Department says it will review the merits of the complaint but believes the law serves to protect low-wage workers.

Original Source: http://www.insurancejournal.com/news/east/2015/10/22/385822.htm

A brief look at common construction loan credit enhancements

As the competition for construction loan projects remains at unprecedented levels in much of the country, lenders are frequently being asked to waive, modify or re-visit their standard construction loan credit enhancement requirements. The following is a brief look at some of the more common credit enhancements required by lenders and the benefits and shortcomings of each.

Guarantees. Guarantees continue to be the most common credit enhancement for balance sheet lenders on small and medium-sized construction loans. Lenders generally obtain either a payment guaranty, a completion guaranty or some combination of the two from key principals of the developer.  Obtaining guarantees from developers with significant assets and liquidity is obviously ideal, however, obtaining guarantees from principals with limited financial resources can still be helpful as these principals are less likely to walk away from a project with the threat of the enforcement of a guaranty hanging over them.

Payment guarantees are best, but they may not always be available due to the competitive landscape for a particular project or developer. Completion guarantees, while helpful for the same “skin in the game” reason pointed out above, tend to be far less reliable credit enhancements for a lender.  Generally, courts will not require the guarantor on a completion guarantee to “specifically perform” the developer’s obligations under the loan and cause the completion of project. Instead, a lender will need to sue the completion guarantor for the damages the lender has incurred as a result of the project not being completed under the terms agreed to in the construction loan documents. Damages under a completion guarantee can be fairly difficult to prove and require expert witness testimony. The damages are subject to varying calculations based on competing appraisals presented by the lender and guarantor and oftentimes will be non-existent if the current value of the land and the partially-completed project are determined to exceed the outstanding balance of the loan.

Payment and Performance Bonds. Payment and Performance Bonds (P&P Bonds) are often a standard requirement for construction lenders, but, like guarantees, pose their own set of limitations. A P&P Bond is an insurance contract made by a surety company under which it insures that its “bonded” contractor will (1) complete a construction project under the terms agreed to by the contractor and the developer and (2) pay its subcontractors. A construction lender may become a beneficiary of a P&P Bond by being named by the surety company as a “co-obligee” pursuant to a dual-obligee rider attached to the P&P Bond.

While P&P Bonds can be very useful to construction lenders (especially in instances involving inexperienced or undercapitalized developers), they often can be difficult to obtain.  Not only do they drive up the cost of a project, P&P Bonds are generally only available to more established and well-capitalized general contractors. Even when available, P&P Bonds can be difficult to collect on as a result of shortened deadlines in which to assert claims and other standard limitations and restrictions contained in the bonds, resulting in protracted and expensive litigation to determine a construction lender’s actual coverage under the bonds.

Letters of Credit. Letters of Credit tend to be less common credit enhancements for a lender providing construction financing, but can serve as an attractive alternative when P&P Bonds are not a viable option. An irrevocable, standby letter of credit is the unconditional obligation of an issuing bank to, for a specified period of time, pay the beneficiary of the Letter of Credit (i.e., the construction lender) all or some portion of the face amount of the Letter of Credit upon the beneficiary’s demand and presentment of the Letter of Credit to the issuer. The terms of the loan agreement detail when the construction lender may draw upon the Letter of Credit – typically, an event of default under the loan or the failure of the borrower to renew the Letter of Credit prior to construction completion or loan repayment.

Unlike P&P Bonds and Guarantees, Letters of Credit provide, for the most part, more readily available access to cash for a construction lender and fewer obstacles to obtaining it.  Like P&P Bonds, however, Letters of Credit are expensive (even more so) and require that the applicant-developer either be well capitalized, provide collateral security to the issuer, or both.

Each of the above credit enhancements continues to play a significant role in construction financing.  Understanding the economics, benefits and limitations of each is a critical component to determining when and how each may be used to enhance the credit of a construction loan.

Original Source: https://www.lexology.com/library/detail.aspx?g=54e6743b-c2b1-40d1-a9a0-314bca5a1c91