The New Jersey Appellate Division recently issued an unpublished opinion involving the false certification by the principal of a general contractor of payments to a subcontractor. The ramifications of that conduct should be considered by all contractors.
The case, AACON Contracting, LLC v. Glenn Poppe, et al. (A-1500-11T2, July 30, 2012), involved a number of related companies, all owned by the same principal, Glenn Poppe. Poppe Construction, Inc. ("Poppe Construction"), entered into a subcontract with AACON Contracting, LLC ("AACON"), to provide masonry and concrete work for the construction of a new branch pharmacy for a national chain. Although Poppe Construction represented to AACON that it was the general contractor, Poppe Contracting, Inc. ("Poppe Contracting"), was the entity that actually had a contract with the owner.
During the project, the owner rejected a concrete floor poured by AACON and a dispute arose between AACON and Poppe Construction concerning the quality of the floor. Since Walter H. Poppe General Contractors had been the entity issuing checks, it withheld payments due to AACON under the subcontract with Poppe Construction. Another contractor was retained to repair the concrete floor.
Subsequently, AACON filed a construction lien claim on the property in the amount of $214,946, which was the subcontract amount less payments received by AACON. AACON later completed its work and received a direct payment of $39,400 from the owner, in exchange for discharging the lien. AACON and Poppe Construction then submitted their dispute to arbitration. Judgment was thereafter entered on the award against Poppe Construction in the amount of $156,704.
AACON then commenced litigation against Glenn Poppe, Poppe Construction, Poppe Contracting, and Walter H. Poppe General Contractors, alleging fraud, among other claims, in an attempt to hold each defendant responsible for the judgment obtained against Poppe Construction.
The trial court found that Poppe Construction executed the subcontract with AACON while representing that it had a contract with the owner. However, as set forth above, Poppe Contracting was the entity that contracted with the owner. Glenn Poppe represented to AACON that, because the owner had not paid Poppe Construction, there was no money to pay AACON. In reality, as found by the trial court, the owner had made payments to Walter H. Poppe General Contractors. Since these payments were a result of applications submitted by Poppe Contracting, which asserted that Poppe Contracting had paid AACON, and AACON relied upon the misrepresentations that payment would be forthcoming in continuing its work, the trial court determined that AACON was damaged as a result of such false representations. The trial court further found that AACON "established the elements necessary to pierce the corporate veil" of all the Poppe entities and therefore held Glenn Poppe personally liable.
The Appellate Division affirmed the trial court’s decision and found that the record confirmed that Glenn Poppe exclusively controlled all the "Poppe entities" and used the Poppe entities to avoid paying AACON. Accordingly, "there were sufficient grounds…to pierce the corporate veil and find defendants jointly and severally liable to [AACON]."
All contractors should carefully consider the two lessons to be learned from this decision. First, the Appellate Division permitted the subcontractor, AACON, to seek recovery of its judgment jointly and severally with the several related Poppe entities, even though AACON’s subcontract was with Poppe Construction only. Second, the Appellate Division has now determined that, by inducing an owner to issue payment by falsely representing that its subcontractors have been paid, a general contractor and its principal may be liable for fraud. Contractors should take care not to provide inaccurate information to owners about amounts paid to their subcontractors. Many owners will allow payment to be made after receipt of a monthly application, but that arrangement should be accurately reflected in any partial or final waivers or releases submitted by the contractors. Most importantly, principals and officers of general contractors should bear in mind that any individual who makes a false certification may be held personally liable to a subcontractor seeking payment for amounts due and owing.