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The Seattle Times is reporting that a local Seattle steel supplier provided falsified statements to the Federal Transit Administration (FTA) concerning the quality of steel provided for the Seattle Light Rail project. In the Times' report, David Appleby, the owner of Appleby NW could face up to five years in prison and fines of $250,000.00 for his misrepresentations to the FTA because the the Light Rail project is a federally managed project, overseen by the FTA.

According to the Times, Appleby supplied over 1.5 million pounds of Oregon-made steel rated for 36,000 pounds per square inch (psi) of force under a $240 Million dollar contract. Unfortunately for Mr. Appleby, the project specifications for the massive Light Rail project, which is managed by Sound Transit and funded by the FTA, required steel rated for at least 50,000 psi.

Appleby's charge stems from mill certificates that he forged, once learning that the steel was underrated for the specifications. General contractors are obligated to follow the strict terms of specifications provided to them.

Appleby's attorney, Irwin Schwartz, admitted that Appleby intentionally changed the certificates.

"People panic and they cover up"

Especially on public works projects, contractors must obtain consent from the managing government authority in order to wane or deviate in any way from given specifications. Permitting a contractor to vary from the specs is not only dangerous, but is competitively unfair to other job bidders who lost out in their bids to perform the work.

In this case, it is certain that the Sound Transit would not have agreed to such a change. Early estimates are that the 50,000 psi demand was a conservative requirement. Thus the 36,000 psi steel may be sufficient to withstand the project's engineering requirements. Based upon this assertion, Appleby intends to defend against any claims for backcharges against his contract.

One final note, the contractor is also under the bus for entering into an oral contract with a subcontractor that provided Appleby's drilling on the project. The Sound Transit, like many public entities, requires that all contracts be in writing.

Though the jockeying has just begun, it is fairly certain that a civil suit between the contractor and Sound Transit is readying, over dollars being withheld from the contractor's pay.

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This weekend, I read a post on the South Carolina Construction Law Blog about Texas' Prompt Payment Act.  It caused me to do a little online research on similar acts around the country, finding them in Alabama, Tennessee, Georgia, Wisconsin, New York, federally, and elsewhere.  

A "Construction News" pamphlet from Baker Donelson [pdf] in the Winter of 2004 has a good article about the statutes in AL, TN & GA, the theme of each act simply being this:  "Prompt Payment Acts Set Payment Guidelines for Construction Work."

It's no secret that payment problems are rampant in the construction industry.  And unfortunately, the old statement that "possession is 90% of the law" has some truth to it. 

Large well-funded construction companies can hold progress payments at the end of a project for trivial reasons, and strong-arm its subcontractors into settling for less.  Prompt Payment Acts aim to equalize the playing field a bit, applying penalties against those who misapply funds or try to strong-arm subs and suppliers.

So, do they exist in Louisiana and Washington?   Mostly....no.  

Both Louisiana and Washington lack a pure "Prompt Payment Acts."  Those victim to the misapplication of funds must rely on jurisprudence or other possibly applicable statutes, discussed below. 

Misapplying Funds in Louisiana
Buried within the Private Works Act in Louisiana is La. R.S. 9:4814 (A), which provides as follows with regard to the misapplication of funds:

No contractor, subcontractor, or agent of a contractor or subcontractor, who has received money on account of a contract for the construction, erection, or repair of a building, structure, or other improvement, including contracts and mortgages for interim financing, shall knowingly fail to apply the money received as necessary to settle claims to sellers of movables or laborers due for the construction or under the contract. Any seller of movables or laborer whose claims have not been settled may file an action for the amount due, including reasonable attorney fees and court costs, and for civil penalties as provided in this Section.

This provision actually works as a "prompt payment" requirement, but as is evidence from its terms it only has limited applicability. 

First, the contractor must "knowingly" misapply the funds.  Second, the only parties qualified to recover the penalties of the provision are "sellers of movables" and "laborers." 

The Private Works Act in Louisiana specifically distinguishes between laborers and subcontractors, and so subcontractors who provide labor to the project would not likely qualify for the penalties under La. R.S. 9:4814 - although the matter has never been decided.

Unfortunately for everyone not mentioned by §9:4814, Louisiana doesn't provide a remedy when funds are misapplied, and the parties must rely exclusively on the conditions of its contract.

Misapplying Funds in Washington
In 2006, the Washington Court of Appeals published an interesting reversal in Westview Investments, Ltd. v. U.S. Bank National Association [pdf of decision], addressing the issue of misapplying construction funds in Washington.

Since progress payments are not funds held in "trust" by statute in Washington, the court explained that they may be considered trusts if appointed as such by the parties - namely, through contract.

According to the Westview decision, progress payments made by a project owner to a general contractor constitute "trust funds" for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997).    

Interfering with any "trust funds" would be a tortious conversion - and the Westfield court even goes so far as to rule that banks may be liable for misappropriating trust funds when it uses these funds to  pay down the borrower's debt to the bank (see discussion here).

Time for A Prompt Payment Act?
Is it time for a Prompt Payment Act in these Washington and Louisiana?  

While many statutes and regulations have drawbacks, there doesn't seem to be a downside to requiring contractors to pay its bills!

Litigation is costly and time-consuming - and it doesn't seem fair that after a long, expensive battle with a better-funded opponent, subcontractors and suppliers must settle for the principal debt. 

There are ways to punish contractors in Louisiana and Washington when funds are misapplied, but it's always dependant on circumstance.  A Prompt Payment Act would help equalize the playing field for subcontractors and suppliers who rely heavily on prompt payments.

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