One of the most common sources of litigation involving real property is that of disputes between adjoining property owners.  Of these disputes, many involve a disagreement regarding where the property line between the two parcels of land is actually located, and one party’s objection to his neighbor’s use of the property beyond the legal boundary between the properties.  Pennsylvania has a well-developed practical approach to such disputes where a line between the properties has been respected and acquiesced to for a requisite period of years. 

Pennsylvania Law disfavors hyper-technical, rigid determinations of real property rights where the facts and circumstances warrant a departure from the broader rules of general application. When an actual, de facto boundary between two adjoining properties exists apart from the legal descriptions of both properties by deed, Pennsylvania Law provides that property lines which are respected and mutually acquiesced to for a statutory prescribed period of twenty-one (21) years become the legal boundary between the properties. In a reported case as early as 1817, the Pennsylvania Supreme Court recognized the doctrine of “Consentable Lines” to settle issues concerning mistakes as to the boundary between adjoining properties. Sometimes referred to as “boundary by consent and acquiescence,” the Doctrine of Consentable Lines permits the passing of title to property where adjoining landowners establish a mutually respected boundary either by mistake and inadvertence or dispute and compromise, each landowner claims and occupies the land on his side of the boundary as his own, and the occupation continues uninterrupted for a period of twenty-one (21) years.  This twenty-one year requisite can include “tacking” of years from one owner to his successor in order to aggregate to a twenty-one year sum. 

As a matter of judicial policy, the doctrine functions as a rule of repose to quiet title and to discourage vexatious litigation, where no real dispute as to the validity of the boundary existed for such a period of time although the actual metes and bounds of the property may have varied from the boundary as respected by each property owner.  Consentable Lines may be used to quiet title and reflect a respected boundary as a legal boundary when, after the period has passed, one property owner (or his successor) objects to the other property owner’s use of the property up to the respected boundary – which often includes the erection of a structure – and demands that such use be ceased or the structure removed.

The Pennsylvania Uniform Fraudulent Transfers Act, (PUFTA) 12 Pa.C.S.A. § 5101 et seq., grants a statutory remedy to creditors where a debtor has acted to hinder his creditors and identifies several factors for scrutinizing transfers as fraudulent to creditors.  Where a transfer has been proven to be fraudulent as to a debtor’s creditors, remedies available to a creditor include voiding the fraudulent transfer, attaching the transferred property, injunctions against the debtor’s future disposition of assets, and Court appointment of a receiver to take charge of fraudulently transferred assets.

The statutory language defines a fraudulent transfer as a transfer made by a debtor “with actual intent to hinder, delay or defraud,” or a transfer made by a debtor  “without receiving reasonably equivalent value in exchange for the transfer or obligation.”  In assessing information to determine the efficacy of pursuing the collection of a debt where the debtor makes representations that he is insolvent and unable to pay the debt, it is important that the creditor diligently pursue certain information regarding the debtor’s transfer of assets and property to establish that the debtor has acted with “intent to hinder, delay or defraud” one or many creditors.

The most common kinds of fraudulent transfers seen in collection efforts are sham “paper transfers;”  transfers in which the debtor attempts to transfer legal title to property or assets while retaining the use and enjoyment of the property or assets.  In the context of corporate debtors, often the transfer of property or assets will be from the corporation to an “insider” for less than fair market value, yielding an undercapitalized corporation without sufficient assets and cash to satisfy a debt or judgment.  These sham transactions are particularly common where a corporation engages in a business that is cyclical and on the downslide of a cycle – the corporate “insiders” will squeeze substantially all of the income and assets from a corporation when business slows, leaving the corporation’s suppliers and other debtors with an insolvent, empty shell corporation that cannot satisfy its debts.  

Take, for instance, a situation in which a debtor corporation is threatened to be sued or sued for a substantial debt, and the corporation subsequently sells corporate assets or property to a corporate shareholder, board member, or officer at a “discount” of the property or asset’s fair market value – if the debtor then secures a judgment against the corporation, the sale of the corporation’s assets to a corporate insider at a “discount” may be shown to have been a fraudulent transfer.

Another example of a fraudulent transfer often seen in collections is the popularly believed notion that a debtor can escape a financial obligation by “putting property in someone else’s name,”  – most often a spouse or other family member – while retaining use and enjoyment of the assets or property.  For example, if an individual debtor with a money judgment against him engages in a sham sale of his car to his daughter, but no funds exchange hands or a nominal amount changes hands, and the debtor continues to use the car as if it was his own, the sham sale can most likely be avoided, and the car attached as property of a debtor pursuant to a money judgment.

This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.

Many Contractors may have become familiar with the recent Amendments to the Pennsylvania Mechanics’ Lien Law which became effective in January of 2007.  Those Amendments were the first Amendments to the Law since the Law’s adoption in 1963, and reflected an effort on the part of the Pennsylvania Legislature to re-assert the Contractors’ and Subcontractors’ right to file Mechanics’ Liens for non-payment by restricting effective Up-front Lien Waivers and providing a bonding procedure to ensure payment where Up-front Waivers were required.  For residential projects, Up-front Mechanics’ Lien Waivers were permitted only for projects for which the dollar value of the entire project was less than $1,000,000.00.  This dollar figure threshold seems to have created more questions than it answered, and created a good deal of ambiguity for Owners, Contractors, and Subcontractors in practice.

In response, the Pennsylvania Legislature has just amended its prior amendments to replace the million dollar threshold with a statutory test for a residential project for which Up-front Lien Waivers may be obtained.  Effective October 10, 2009, Up-front Mechanics’ Lien Waivers can be obtained for residential projects upon which will be built a residential structure not more than three stories in height, exclusive of any basement level.   Therefore, it would seem that most single family style residential projects can be the subject of Up-front Lien Waivers, increasing the chance that Contractors and Subcontractors will experience payment problems for work performed on residential projects.

This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.

Often times, Demolition contractors and Landscaping contractors will ask whether their services and the materials used in their trades constitute a proper basis for a Mechanics’ Lien Claim in order to preserve a likelihood of payment.  Knowing what is, and what is not properly lienable work and materials is something that every contractor should be mindful of when assessing different jobs.

Mechanics’ Liens have been traditionally closely associated with the improvements (i.e. the buildings or like structures) to real property much more than the land itself.  Early cases found Mechanics’ Liens extinguished due to the accidental destruction of a structure in a fire or flood, reasoning that the improvements had been removed and with them the contractor’s right to a Lien for work performed.  Subsequent to these early cases, the Mechanics’ Lien procedure was codified by statute, which defined a contractor as “one who,  by contract with the owner, express or implied, erects, constructs, alters or repairs an improvement or any part thereof  .  .  .”   Therefore, the right to Lien does not traditionally attach to land per se. 

This concept is important in order to understand when attempting to figure whether certain work – including demolition, excavation, and landscaping falls within the above definition.  In an attempt to guide contractors, the Mechanics’ Lien Law provides that “erection, construction, alteration, or repair includes  .  .  . [d]emolition, removal of improvements, excavation, grading, paving  and landscaping when such work is incidental to the erection, construction, alteration or repair.”  Therefore, under this definition, demolition of a structure or part of a structure for the purpose of erecting a new structure or addition is most likely the proper subject of a Lien Claim, whereas the demolition of a structure simply to clear the property most likely cannot give rise to a proper Lien Claim.  Landscaping contractors will similarly find that their Lien rights are strongest when they provide services and materials to finish new construction, but that the very same services and materials around an existing structure probably will not give rise to a proper Lien Claim. 

Many times a majority shareholder seeking to squeeze-out a minority shareholder will deliberately withhold information relating to the closely held corporation. Withholding information is usually coupled with another form of oppression. The reason for the same is by leaving the minority shareholder in the dark about the status of the corporations and the actions of its officers and directors the minority shareholder will be unaware of the other forms of oppression. For example, a majority shareholder may award herself an excessive salary without disclosing that it or the underlying financial data which would reveal the excessive nature of the salary.  By keeping the minority shareholder in the dark she will more often than not be in a position to complaint about it.

Unfortunately, unlike publicly traded companies which have disclosure and reporting requirements pursuant to federal securities laws, shareholders in a closely held corporation do not have such broad disclosure requirements. Nevertheless, state courts have recognized that a person who owns shares in a closely held company is a part owner of that company who is entitled for participation of their interest, to information about the company.  The problem is Courts differ on what shareholders are entitled to receive under their state’s laws and what obligations corporate managers have affirmatively to supply information.

Fortunately, the right of a shareholder to inspect corporate records has long been established in Pennsylvania common law. Simms v. Exter Architectural Products, Inc., 868 F. Supp.  668, 674 (M.D. Pa. 1994). That right was codified by the Pennsylvania legislature. 15 Pa. C.S. § 1508(B).   That statute requires the requesting shareholder to send a written request stating the purpose for the inspection of the company’s books and records. The request must request that the inspection occur during the usual hours of the business and provide the name of the person, agent or attorney who is going to conduct the inspection. A proper purpose is anything reasonably related to the interest of the shareholder.  15 Pa. C.S. §1508(B).  If the majority shareholder or company refuses to make the documents available for inspection, the requesting party has the right to file an action seeking the same.

This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.

Prior to the Amendments to the Pennsylvania Mechanics’ Lien Law of 1963 which became effective January 1, 2007, Mechanics’ Lien Claims were granted priority over Mortgages against the liened property that were recorded after the effective date of the Lien. Under the old law, a Mechanics’ Lien Claim representing amounts due to the Contractor for erection or construction “related back” to the start of work on the property, and Liens representing amounts due for alteration and repair dated from the filing of the Lien Claim.  Therefore, a Mechanics’ Lien Claim could have priority over a Mortgage recorded against the property, and a Foreclosure of a Mortgage or Mortgages against the property and resultant Sheriff’s Sale would not extinguish the prior Mechanics’ Lien Claims against the property.

When the General Assembly recently revisited the Pennsylvania Mechanics’ Lien Law – what one Pennsylvania Court called an “antiquated patchwork of statutory enactments” – it did so with the purpose of modernizing the Law and granting greater protection to Contractors and Subcontractors.  The General Assembly largely succeeded in doing this by severely restricting the ubiquitous Lien Waivers that had become so commonplace that effective Mechanics’ Lien Claims were often unavailable to the Contractor or Subcontractor left without payment.  In exchange for restricting Lien Waivers, however, and under pressure from lobbyists for Mortgage Lenders, the General Assembly changed the statutory framework of Lien priority, subordinating Mechanics’ Lien Claims (regardless of when the Claims are filed) to two common types of Mortgages.   Following the Amendments to the Law effective January 1, 2007, Mechanics’ Lien Claims are subordinated to Purchase Money Mortgages and Mortgages securing loans the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration, or repair.

This change, while seemingly hyper-technical, can have a real dollars and cents impact upon Contractors and Subcontractors in the current Foreclosure climate.  As is often the case, homeowners in financial difficulty simply ignore their mortgage payments, accruing interest at a penalty rate, fees, costs and a significant attorney’s commission due to the Mortgage Company in the several months before a Sheriff’s Sale.  This, along with falling residential real estate values can put a property “under water,” meaning that by the time of the Sheriff’s Sale, the Mortgage Company is owed more than what the property is worth, and likely owed more than will be bid at the sale.  When this happens, the Mechanics’ Lien Claim can be “wiped out” by a Mortgage Lien.  The modern Contractor or Subcontractor with a Lien Claim must be certain that a Sheriff’s Sale upon a Mortgage that proposes to extinguish a Lien Claim is of the narrow kind of Mortgages that have absolute priority over Mechanics Lien Claims.

In Zokaites v. Pittsburgh Irish Pubs, LLC a case decided in December, 2008, the Superior Court of Pennsylvania held that a judgment creditor may not receive a debtor’s membership interest in a limited liability company, unless the operating agreement of the company allows it. A judgment creditor is a person who has successfully won a judgment for a sum of money to be paid by a debtor. In Zokaites the Court held that §8924(a) of Pennsylvania’s Limited Liability Company Law makes clear that a membership interest in a limited liability company in the Commonwealth of Pennsylvania includes both an economic right and also a right to participate in the management of the business. Further, the Court held that unless the operating agreement of the company provides to the contrary, a member of the limited liability company could only transfer his or her economic rights in the company, and not his or her right to manage the company. The Court went on to state that a judgment creditor is only entitled to money to satisfy his or her judgment against a debtor, if courts allowed the transfer of the membership interests of the debtor to the judgment creditor, the judgment creditor would be receiving a right to manage and govern the company. Ultimately, the Court held that a judgment creditor is only entitled to collect future profits the debtor may earn from the company, but not entitled to a full transfer of the membership interests of the limited liability company, wherein the judgment creditor would be receiving a right to manage and govern the company.

If you or your company is a judgment creditor, it is important to understand what this case means for your collection efforts. It is important for you to obtain a copy of the company’s operating agreement, which should state what happens in the event a member’s membership interests in the company are subject to involuntary transfer. Unless the operating agreement provides otherwise, if all of the members of a company, other than the debtor, do not approve of the proposed transfer or assignment of the membership interests, the judgment creditor will have no right to participate in the management of the company or become a member of the company. All is not lost, however, as Zokaites makes clear, a judgment creditor can still attach the profits a debtor receives from the limited liability company of which he or she is a member.

This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.

Important changes to the Pennsylvania Mechanics’ Lien Law of 1963 became effective on the first day of 2007. A Mechanics’ Lien is a non-exclusive statutory remedy that permits certain contractors and subcontractors the protection of a lien against a property for amounts due and unpaid which are attributable to labor and/or materials used in a private construction project.

Prior to the effective date of the new law, property owners would often acquire a Pre-waiver of the potential lien claims of the contractor and subcontractors on a project. The new law, however, restricts a property owner’s ability to secure a Pre-waiver to situations in which the total contract price for a residential project is less than one million dollars. In the event that the residential project exceeds the one million dollar limit, a subcontractor can only effectively Pre-waive any liens if a contractor posts a bond with enough value to pay all subcontractors and materialmen. The bond guaranteeing payment to subcontractors is also required when the project is a non-residential project.

If the contractor or owner acquires a Pre-waiver from subcontractors in either of these cases where a bond is required for Pre-waiver, but does not post the bond, the Pre-waiver will not stop subcontractors’ Mechanics’ Lien Claims against the property. This new bonding requirement may present a significant economic challenge to general contractors, and should be factored into contracts in which the customer or property owner insists upon a Waiver of Mechanics’ Lien.

Additionally, the time period during which a contractor or subcontractor may file a Mechanics’ Lien Claim has been extended from four months to six months after completion of the contractor’s or subcontractor’s work. The last day that work has been performed at the project premises must be dutifully documented by the contractor or subcontractor who may wish to later file a claim in the event of non-payment, because a failure to file a Lien Claim within the six months required by the statute constitutes sufficient grounds for striking off the lien.

It should be noted that Mechanics’ Liens are considered non-exclusive “statutory creatures” that permit a claimant to begin litigation with a lien. Therefore, Pennsylvania Courts have always strictly construed the provisions of the Mechanics’ Lien Law, requiring that the Claim itself conform to the formal requirements of the law, and that service of Notice of the Mechanics’ Lien be technically correct and timely – if these strict legal requirements are not met, a Mechanics’ Lien Claim will be stricken off and rendered void.

A recent article in the National Law Journal reports that class actions have been filed in California and Washington State federal courts against four major real estate title and escrow companies. The suits claim that the title companies charged customers for work completed by other companies involved in the settlement process, led them to pay increased fees for unnecessary services and profited from interest earned from funds escrowed during settlements.  This is just another example in the long list of suits filed across the country against title companies that question their business practices and fee structure.