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Texas Construction Law Blog

For Subcontractors & Suppliers

Series LLCs in the Construction Industry: Increasingly Popular Fortresses to Protect Contractor’s Assets

Posted in Business Management

Originally published in Build Houston magazine. 

Co-author: Catherine Chlebowski

The business of construction is a day to day adventure fraught with peril and liabilities dangerous enough to put many construction firms out of business. Given that reality, it is imperative that contractors properly structure the legal entities that provide the fortresses to protect their assets. While most are familiar with the limited liability company (LLC) and limited partnership (LP) set ups, many have no familiarity with series limited liability companies (Series LLC).

A special kind of LLC, a Series LLC can be thought of as an umbrella under which lie separate, independently-owned and operated LLCs, each of which is called a series.

To designate an LLC as a Series LLC in Texas, the Texas Business Organizations Code (TBOC) requires the following language to be included in the certificate of formation and company agreement: (1) the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the limited liability company generally or any other series; and (2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series shall be enforceable against the assets of a particular series.

BENEFITS & DRAWBACKS FOR CONTRACTORS

Explained further under the TBOC, each individual series is solely responsible for its own assets and liabilities, can have its own type of ownership and membership interest, can sue and be sued, can have its own separate business purpose, can enter into contracts, and can grant security interests. Thus, the liabilities, obligations, and debts of one series in the Series LLC structure do not affect the other series or the umbrella LLC.

1. Contractors who engage in different types of construction projects or operations can potentially benefit from the use of Series LLCs. For example, through the use of a Series LLC, a construction firm could effectively isolate the differing liabilities of engaging in commercial, industrial, municipal, civil or institutional work. Contract and tort liability associated with each contract or type of project will be quarantined from the other Series LLCs and overall umbrella, thus protecting important assets including equipment, real property, money, and so much more.

2. Series LLCs allow for great savings in cost and time, especially relating to formation documents and filing fees. In Texas, the statutory filing fee to create a Series LLC is $300, no matter how many series are created under the umbrella. Without implementing the Series LLC structure, a business owner would have to file this $300 fee for each LLC.

3. Series LLCs allow for flexibility in the management operation of the series. Each series under the Series LLC structure can have its own managers, members, membership interests, assets, and even business purpose. This allows each series to function essentially as an individual and separate entity.

The only current drawbacks are (1) this type of entity has not been adopted nationwide and is comparatively new and (2) the TBOC strictly requires the books and records of each series must be separately maintained as among the other series in the Series LLC. The insulation from liability between each series may be lost if the books and records are not maintained according to the strict parameters of the TBOC.

In sum, there are many factors to consider in deciding to utilize the increasingly popular Series LLC structure in Texas. For clarification or for guidance, it’s best to work with an experienced attorney.

Anti-Poaching and Wage-Fixing Agreements: Drawing the Line Between Competitive and Criminal

Posted in Business Management, Labor/Workforce

Originally published in Build Houston magazine.

In October 2016, the Antitrust Division of the U.S. Department of Justice (DOJ) issued guidance identifying poaching agreements and wage-fixing agreements as primary antitrust enforcement targets.  In April 2018, DOJ brought the Department’s first enforcement case over illegal anti-competitive employment related agreements.

In a market where skilled labor is in increasingly high demand, and the price of labor continues to rise, scrutiny of employment-related agreements is also on the rise.  Industries facing skilled labor shortages are natural targets of DOJ scrutiny, the construction industry is no exception.

Even under the Trump Administration, DOJ has made clear that it intends to zealously enforce the antitrust laws in labor markets and aggressively pursue information on additional violations to identify and end anticompetitive no-poach agreements that harm employees and the economy.  Principal Deputy Assistant Attorney General Andrew Finch stated that “the Division expects to pursue criminal charges” at the felony level for no-poach agreements.

From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace.  This is true even if the products and services that they sell do not necessarily compete in the same product market.  It is unlawful for competitors to expressly or implicitly agree not to compete with one another, even if they are motivated by a desire to reduce costs or obtain other efficiencies.

Accordingly, employers may not agree with competitors to refrain from hiring one another’s employees, or to hold wages or contract prices for certain contractors or sub-contractors to an agreed level.  Even mere conversations about these types of agreements, while inherently difficult to prove, are improper and could be illegal.

Agreements and information exchanges among employers that compete to hire or retain employees may be illegal. To avoid DOJ scrutiny its best to avoid:

  • Coordination related to salary, benefits or terms of employment.
  • Agreeing with another company to refuse to solicit or hire that company’s employees.
  • Exchanging company-specific information about employee compensation or terms of employment with another company.
  • Receiving documents that contain another company’s internal data about employee compensation

However, not all agreements among competitors to refrain from hiring each other’s employees are deemed per se unlawful.  Similar agreements that are reached in the context of a legitimate business transaction or collaboration (e.g., joint venture or the sale of a business) between companies may be viewed as reasonably necessary to achieve the purpose of the transaction or collaborative arrangement.  Thus, in the context of a larger legitimate business arrangement, no-poach provisions could be viewed as a valid ancillary restraint.  To be clear, the DOJ does not prohibit all agreements related to employee solicitation and recruitment.  In previous challenges to similar conduct, the DOJ has clarified that its enforcement actions do not prohibit non-solicitation provisions reasonably necessary for:

  • Mergers or acquisitions (consummated or unconsummated), investments, or divestitures, including due diligence related actions;
  • Contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers; and
  • The settlement or compromise of legal disputes.

Entering into anticompetitive no-poach agreements can also spark private antitrust lawsuits by those injured by the anticompetitive conduct.  In private antitrust actions, a prevailing plaintiff can recover three times their actual damages.  Thus, private antitrust lawsuits can expose defendants to significant monetary penalties.  Private antitrust actions often arise as follow-on complaints after a successful government case.

It is recommended to get guidance from counsel prior to discussing any of these issues with competitors or trade associations.

Fighting the Four Horsemen of the Workforce Apocalypse

Posted in Labor/Workforce

Co-author: Michael Kelsheimer
Published in TEXO InFocus Magazine

Since at least 2008, Flood, Fire, Famine and Pestilence have ravaged the construction workforce across America. In the downturn, many workers left the industry never to return. Others left the U.S. and have not returned.  Couple that with construction growth, a resistance to training workers who may leave for another dollar an hour, and seeming lack of interest in construction jobs by the current generation now entering the workforce, and you’ve got the makings of a big challenge.

Protect yourself on the contracting side before heading into the storm . . .

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Establishing Personal Liability Without a Guaranty

Posted in Collection, Construction Contracts

Co-author: Trevor Lawhorn
Published in Build Houston Magazine

When non-payment occurs, suppliers and service providers often first seek relief by suing for breach of contract. Unfortunately, many companies are undercapitalized or otherwise “judgment proof.”  A personal guaranty might mitigate this risk by providing an additional target, but guarantees are often difficult to obtain.  Even if one is signed, the guarantors may lack assets, perhaps deliberately so.  Judgement proof debtors and guarantors are especially frustrating when the case involves misappropriations of construction project funds or wrongful transfers of assets.  Texas law provides at least two statutory tort claims in these circumstances: the Texas Uniform Fraudulent Transfer Act (TUFTA) and the Texas Construction Trust Funds Act (the Trust Fund Statute). Continue Reading

Is Your Construction Business Prepared and Protected for ICE Undocumented Worker Audits?

Posted in Labor/Workforce

Co-author: Michael Kelsheimer
Published on ForConstructionPros.com

Understand and navigate the government’s amplified focus on undocumented workers to protect your business from escalating fines, jail time, delay damages and back-charges

Whatever your political views, undocumented workers and the businesses that knowingly or unknowingly employ them have been under the microscope since President Trump took office in January 2017.

According to U.S. Immigration and Customs Enforcement (ICE), between Oct. 1, 2017, and May 4, 2018, there were:

  • 2,282 employer audits opened, nearly a 60% jump from the 1,360 audits opened between October 2016 and September 2017,
  • 594 employers arrested on criminal immigration charges, up from 139 during the previous fiscal year, and
  • 610 civil immigration charges, compared to 172 in the preceding 12 months

Continue Reading

Section 232 Investigations: What Steel-Consuming Businesses Need to Know

Posted in Steel

In just the first four months of 2018, among a surge in trade complaints filed by domestic steel manufacturers against foreign rivals (a frequency not seen in over 15 years), and after a lengthy investigation by the Secretary of Commerce concluding “that the present quantities and circumstance of steel imports are ‘weakening our internal economy’ and threaten to impair the national security” of the United States, President Trump has issued two presidential proclamations—adjusting the imports of certain steel products by imposing a 25 percent ad valorem tariff (the “Tariffs”) on those steel products from all countries—granted a permanent extension to the Tariffs for South Korea, Argentina, Australia, and Brazil and has extended a final temporary 30 day exemption from the Tariffs to Canada, Mexico and the member countries of the European Union, the United States’ biggest trading partner. Continue Reading

The Storm After the Storm

Posted in Collection, Construction Contracts

Co-authors: Russell Jumper and Tim Fandrey
Published in Cleaning & Restoration Magazine

Just as the Texas coast assessed the magnitude of Hurricane Harvey’s damage, Hurricane Irma was taking shape in the Atlantic. Fewer than two weeks later, Irma would crash into the Florida Keys. Estimates put Harvey and Irma’s combined impact in excess of $275 billion. No small part of that amount will be required for cleaning and restoration services. Before Irma made landfall, even as Harvey hovered over the Houston area, restoration professionals from around the country arrived along the Texas coast to kick-start Texas’ recovery. For the people who lost their homes, possessions, and even family or friends, the focus turned to recovery. For some of the restoration professionals who helped, and continue to help, a second storm is forming: owner and insurer payment disputes. Like boarding up windows and setting out sandbags, there are some steps cleaning and restoration professionals can take in an effort to minimize the damage from the approaching payment dispute storm. Continue Reading

Protecting Yourself in a Volatile Labor Market

Posted in Labor/Workforce

 

Co-authors: JP Vogel and Tim Fandrey
Published in Build Houston Magazine

Texas is a hot-bed for construction. In 2016, according to the Virtual Builders Exchange, Texas was second only to New York in construction expenditures, spending $44.4 billion. And there is no sign that the proliferation of construction is slowing down.  New housing starts are up in Texas as a result of an influx of new employees moving to the area. The U.S. Census Bureau reported that Texas has experienced the largest population growth of any state between 2010 and 2016. This, in turn, increases demand on civil infrastructure thus requiring more construction. This explosion of growth in construction spending has taken place without consideration given to the rebuilding efforts arising from the aftermath of Hurricane Harvey. Continue Reading

A Myth About Delay – Revisited

Posted in Construction Contracts, Delay Damages

Construction lawyers routinely deal with delay claims. I have presented or defended more of them than I can remember.  That is why I was curious when, earlier this year, I received a series of email invitations to presentations on the use of “concurrent delay” as a defense to contractor or owner claims for delay damages on construction projects.  I’ve written about the subject in the past and wondered what, if anything, had changed.

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Softening a Hurricane’s Blow: Force Majeure and Builder’s Risk

Posted in Construction Contracts

 

Co-authors: Russell Jumper and Tim Fandrey

Hurricane Harvey caused severe destruction in Texas with its significant winds and historic rainfall. But Harvey may also prove to be a costly lesson for many project owners and contractors. As Texas begins to focus on recovery in the coming weeks, Harvey will further serve as a reminder to all construction industry stakeholders that hurricanes, and other “acts of God”, are risks that must be effectively managed during the pre-construction and construction phases of every project. While it is difficult to effectively avoid the risks attendant to a highly-destructive, low probability event that occurs on short notice, owners and contractors have two primary tools at their disposal to mitigate the effects of such an event: (i) contractual force majeure provisions; and (ii) builder’s risk insurance. Continue Reading