REPORT FROM COUNSELSPRING 2007 ISSUEFIRM UPDATESPennsylvania Super Lawyer and Rising StarsAttorney Lawrence V. Young has been named one of Pennsylvania’s Super Lawyers for 2007. Super Lawyers are among the top 5 percent of all attorneys in Pennsylvania, as chosen by their peers and through the independent research of Law & Politics.
ANNOUNCEMENTSCGA Law Firm would like to welcome Matthew Tyler Zerbe to our family. He was born on January 23, 2007, at 10:08 p.m., and weighed 8lbs/13 oz. He is the baby brother of Victoria and is the second child of Attorney Anne E. Zerbe and her husband, Mark Zerbe.CGA Law Firm is also anxiously awaiting the arrival of Aaron Jeffrey Fox to our family. Aaron is due to join us in the middle of February. He will be the first child of Attorney Tina H. Fox and her husband Jeffrey Fox. LEGISLATIVE UPDATE…The Pennsylvania Motor Vehicle Code now requires a driver to turn on their vehicle’s headlights anytime their windshield wipers are in continuous or intermittent use due to precipitation or atmospheric moisture, such as rain, snow, sleet or mist. This 2006 amendment adds to a driver’s obligation to use their vehicle’s windshield wipers when, due to insufficient light or poor conditions, they are unable to see clearly for a distance of 1,000 feet ahead. A violation of this provision is a summary traffic offense subject to a fine of up to $25.00.ARTICLESPRESERVATION AND DISCOVERY OF ELECTRONIC DATA
by Anthony T. Bowser, Esquire On December 1, 2006, the amendments to the Federal Rules of Civil Procedure regarding electronically stored information (ESI) took effect. The amendments address both the preservation and discovery of ESI. Under the new Rules, potential litigants must take special precautions to understand how and where their electronic data is maintained. Moreover, the failure to properly safeguard against the destruction of ESI could lead to negative inferences about crucial evidence and ultimately, defeat in the case. While the previous version of the Rules covered the production of documents and things, as well as data compilations, the scope has now been expanded to cover electronically stored information. The change is intended to provide for discovery of a broader range of information than previously covered and recognizes the dynamic nature of ESI. Electronically stored information may include documents, data, notes, memoranda, cell phone records, phone records, bills, invoices, information on personal data devices such as computers, memory sticks, facsimile machines, caller identification devices, and blackberries, as well as e-mails, instant messaging, and any and all other evidence, data or information in your control or possession that relates to the potential or actual litigation. The preceding list is by no means all-inclusive. The new Rules require each party to make a good faith effort to preserve all relevant ESI, beginning at the point where the party reasonably anticipates litigation. A good faith effort to preserve ESI requires a party to alter or suspend routine purging practices that may affect relevant information. Under the new Rules, a party may be subject to sanctions, including monetary and adverse jury instructions, where it fails to take steps to preserve information the party reasonably anticipates will be subject to the litigation. The key in regard to the preservation of ESI is taking a proactive approach. In particular, companies should work with their information technology professionals to assess the types of ESI they have and understand how their data purging systems and retention policies could affect this information. Furthermore, companies should educate their employees about their retention policies and preservation efforts. When litigation becomes apparent, potential parties should contact their attorneys to assist them in determining what information may be relevant in the impending suit. While many of the aforementioned are directed at large companies with complex electronic systems, individuals and small business need to also take note of the changes. Simple tasks such as re-formatting a hard drive on a home computer or deleting text messages may lead to sanctions. If you have any questions regarding the preservation of ESI, please contact Anthony T. Bowser at (717) 848-4900, ext. 105 or abowser@cgalaw.com. MECHANIC’S LIEN LAW CHANGES FOR THE NEW YEAR
By Benjamin L. Pratt Pennsylvania Mechanic’s Lien Law 49 P.S. § 1101-1902 (“Lien Law”) went into effect January 1, 2007. The amendments will bring the Lien Law more in line with the lien laws with other surrounding states. Perhaps the most important change in the Lien Law is that up-front lien waivers, often referred to stipulations against liens or no lien agreements are invalid. A general contractor will no longer be able to waive a subcontractor’s right to file a lien simply by filing an up-front lien waiver with the Prothonotary’s Office. In the past, unpaid subcontractors desiring to file a lien were often disappointed to discover that the general contractor had filed an up-front lien waiver before the work began which waived the subcontractor’s right to claim a lien. Under the amended Lien Law, such waivers are “against public policy, unlawful and void.” Another change in the Lien Law, and considered the most important, is that the time period for filing a lien has been extended to six (6) months. Under the old law, lien claims had to be filed within four (4) months of the last day on which work was performed. Up-front lien waivers are still effective to defeat a subcontractor’s lien only if the general contractor has posted a payment bond on the project. When a payment bond is in place, a subcontractor’s payment rights are adequately protected and therefore, the adequate protection provided by a mechanic’s lien is unnecessary. The amendments to the Lien Law do not affect waivers obtained in connection with these payments. Thus, lien waivers executed in connection with interim and final payments are still valid. Since interim and final lien waivers are now the only way to prevent subcontractors from filing liens, in the absence of a payment bond, general contractors should always obtain executed lien waivers from subcontractors in return for making interim and final payments. Such waivers, when actually signed by the subcontractors are enforceable and would prevent subcontractors from perfecting liens for a portion of the work for which payment was actually received. Payment bonds are the exception and not the norm on private projects, so in the absence of effective interim and final lien waivers, the subcontractor would have the right to file a lien under the new law. This is all the more reason for general contractors to consistently obtain interim and final lien waivers in return for payments. The amendments to the Lien Law contain an exception for residential projects. On residential projects valued at less than one million dollars ($1,000,000), which is determined by the contract price between the owner and general contractor, a properly filed up-front lien waiver continues to prevent a subcontractor from perfecting a lien claim. Thus, for general contractors who perform a lot of residential work, the new law will not require a substantial change in business practices. However, general contractors should still take the additional precaution of requiring subcontractors and suppliers to provide lien waivers in return for the receipt of interim and final payments. Another significant change is that the amended Lien Law allows sub-subcontractors to file mechanic’s liens. Previously, the right to file a lien extended only to those having a direct contract with the general contractor, for example, subcontractors. As a result of this important change, general contractors making interim and final payments should insist that subcontractors provide executed lien waivers from sub-subcontractors as a condition to receiving payment. General contractors should be sure to obtain interim and final lien waivers from the all sub-subcontractors and suppliers in order to prevent them from filing mechanic’s liens for work performed before the lien waiver was executed. The removal of the preliminary notice formerly required on projects involving “alteration and repair” is another significant change in the new Lien Law. Under the old law, before filing a lien on such projects, a subcontractor had to provide preliminary notice of its intention to file a mechanic’s lien before work was completed on the project. This was problematic because while the subcontractor is still working, it often does not know if it will be paid for its work. Previously, the only way a subcontractor could protect its right would be to file a notice of intent to file a mechanic’s lien before leaving the project. This onerous requirement was awkward and fostered poor customer relations as it required the subcontractor to provide an adversarial notice before there was any reason to suspect a payment problem. The priority of mechanic’s liens is another notable change in the new Lien Law. Under the new law, most traditional mortgages, such as purchase money mortgages and open-end construction mortgages are getting “super priority” over mechanic’s liens. Thus, these mortgages will have priority over mechanics liens, even if the effective date of the lien precedes the filing date of a mortgage. The perfection of a mechanic’s lien is still paramount under the new Lien Law. To perfect a claim, claimants must comply with the requirements of the Lien Law. As stated earlier, the preliminary notice requirement is now eliminated. Formal notice, however, in all cases involving erection, construction, alteration or repair, must still be given by a subcontractor that they intend to file a claim at least thirty (30) days before the claim is filed. As set forth in the Lien Law, that formal notice must contain the following information:
Valid service of the formal notice must be by first-class mail, registered or certified mail on the owner or his agent, or personal service upon an adult in the same manner as a writ of summons. If service cannot be made in any of the above-indicated ways, a notice can be posted in a conspicuous, public part of the improvement. The Lien Law now extends the time period to file a claim to six (6) months from completion of the work. Failure to strictly adhere to this time requirement, will render the lien invalid. Lien rights will not be restored by the contractor or subcontractor returning to the project to provide a small amount of additional work if there has been a long interruption between the date which the work was last performed and the date on which the new work was performed. The service of notice of filing a claim must be served upon the owner within one (1) month after filing informing the owner of the court term and number assigned to the claim and the date of filing. An affidavit of service of notice with the acceptance of such claims must be filed within twenty (20) days after service is perfected, setting forth the date and manner of service. If an affidavit is not timely filed, failure to do so will be sufficient grounds for striking the claim. All time requirements of a mechanic’s lien should be considered mandatory. The courts have adopted the concept of “substantial compliance” with respect to the contents of the claim and the legal notices. However, a lien will be stricken if the affidavit of service is not filed within twenty (20) days. It is safe to assume that all time requirements must be rigorously followed, and if the time requirements are met, the court may be somewhat lenient in considering claims of “substantial compliance” with requirements of the act. A lien claim must be filed with the Prothonotary of the Court of Common Pleas in the county where the improvement is located. If the improvements are located in more than one county, a claim may be filed in any or all of the counties. However, the claim is effective only to the portion of the property located in the county where the filing took place. The lien claim must state:
BULK SALES COMPLIANCE WITH RESPECT TO PENNSYLVANIA TAXES
By Andrew M. Paxton, Esquire When buying a business, both the buyer and seller must agree upon which form the acquisition should take; either a stock purchase, or asset purchase. There are many legal and tax considerations to be analyzed when making this decision, one of which being the assumption of liabilities from the business, as previously operated by the seller. The general rule under an asset purchase structure is that the buyer becomes liable only for those pre-closing liabilities arising from the operation of the business which the buyer expressly elects to assume in the asset purchase agreement. Those liabilities that are not expressly assumed by the buyer continue to reside with the seller. One very important, and often overlooked, exception to this general rule in Pennsylvania is the bulk sales laws with respect to all Pennsylvania state taxes, including corporate taxes, personal income tax withholding, and sales and use tax (collectively “Taxes”). In accordance with Pennsylvania bulk sales laws, every corporation, joint-stock association, limited partnership, and/or company, including limited liability companies, which sells or transfers 51% or more of any category of its assets must comply with the bulk sales laws under 43 Pa.C.S.A. §788.3, 69 Pa.C.S.A. §529, and 72 Pa.C.S.A. §1403(a), 7240, 7321.1 (collectively the “Bulk Sales Transfers Laws”). It is important to note that the bulk sales laws are interpreted disjunctively with respect to any category of assets. For example, a corporation may own real estate, and that real estate may constitute less than 51% of the corporation’s total assets; however, the sale of 51% or more of all real estate owned by the corporation would require the buyer and seller to comply with Bulk Sales Transfer Laws. Failure to comply may result in the buyer assuming joint liability for any of the seller’s Tax liabilities that are accruing and unpaid as of the date of the sale. These Taxes need not be assessed as of the closing date, but the mere obligation of the seller will give rise to buyer’s liability. With respect to the Bulk Sales Transfer Laws, the burden falls squarely on the buyer to force the seller to comply in order for the buyer to be exonerated from the seller’s Tax liabilities. To our knowledge, there is no penalty on the seller for failure to comply with Pennsylvania Bulk Sales Transfer Laws. Failure of the parties to comply with the Bulk Sales Transfer Laws does not invalidate the sale of assets, but may result in the buyer becoming jointly liable for any unpaid Taxes owed by, or arising out of, the business’s operations prior to the closing date. In order to comply with the Bulk Sales Transfer Laws and prevent the Tax liability from being assumed by the buyer, notice of the transaction must be provided to both the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry. The seller must apply for, and receive a tax clearance certificate indicating that all Taxes arising out of seller’s operation of the business have been paid to the Commonwealth of Pennsylvania. In a Pennsylvania Bulk Sales compliance situation, either party may provide notice of the sale to the Pennsylvania Department of Revenue at least 10 days prior to closing. Again, the buyer must take an active role in either delivering this notice on their own or confirming that the seller has complied with this notice requirement. It is always prudent to order a tax lien certificate to see if any Pennsylvania tax liens are in place. However, it is important to note that the buyer may also be liable for any Taxes that are accruing and unpaid as of the date of closing, but not yet liened. Immediately after closing, the seller should file a fully completed application for bulk sales tax clearance certificate with the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry, as well as file short year tax reports and returns for any and all applicable Taxes. It is important to note that while the seller does not have to file a short year return with the Internal Revenue Service for federal tax purposes, the Pennsylvania Department of Revenue requires that the seller submit a short year federal return with the short year Pennsylvania report and return in order to process the request for the bulk sales tax clearance certificate. The buyer should require some security and assurance that the Taxes of seller are current, and that the seller obtain the appropriate clearance certificates post-closing, as the liability of any unpaid Taxes will be assumed by buyer. One avenue to provide security for bulk sales compliance by the seller is to escrow some of the asset sale proceeds in an amount equal to, or in excess of, the seller’s estimated Taxes that are accruing but unpaid as of the date of closing. To determine this, it is prudent to request a letter from the seller’s regular accountant certifying exactly what that number will be, said number to include any Taxes that are generated based on the asset sale. Once the seller provides to buyer a copy of the tax clearance certificate from both the Departments of Revenue and Labor and Industry, buyer will cause the escrowed proceeds to be released. The Pennsylvania courts have held that the duty imposed by the Bulk Sales Transfer Laws upon the purchaser of business assets is not overly burdensome. The Commonwealth Court has held that the buyer of a corporation’s assets must require the seller to present a certificate from the Department of Revenue showing that all state taxes were paid. The failure of the buyer to require such a certificate renders that buyer jointly liable to the Commonwealth for the unpaid Taxes. One challenge here may be that, in certain situations, the potential tax liability may meet or exceed the sales price. For example, where a buyer is purchasing more than 51% of a class of assets from a distressed business for a relatively low purchase price, it would not be difficult for the outstanding tax liabilities of the seller to exceed the total purchase price. In effect, the buyer would have inadvertently assumed liabilities greater than the total value of the assets purchased. It is important to note that the Bulk Sales Transfer Laws may not be applicable to certain sales or transfers, such as those made under any order of court, by assignees for the benefit of creditors or by any officer of a court. Although an asset purchase agreement may contain indemnification language, the Department of Revenue will pursue the party holding the assets. A buyer may be stuck paying the seller’s unpaid Taxes and then have to seek relief directly from the Seller. It is best to comply with the Bulk Sales Transfer Laws and escrow a portion of the sales proceeds at closing in order to avoid prolonged and costly litigation with the seller to recover Taxes paid. It is not difficult to prevent the inadvertent assumption of this liability for Taxes if the parties comply with the Bulk Sales Transfer Laws. It is therefore important, even for seemingly simple asset purchases, to seek counsel from your attorneys at CGA Law Firm and your accountant prior to closing such a transaction. |
