You’re the authorized agent of a North Carolina county that has entered into an $8 million contract with a general contractor for the construction of a new administrative building. The performance bond issued on behalf of the GC is in the statutory form, and therefore applies not only to base scope, but also to “any and all duly authorized modifications of said contract…notice of which modifications to the Surety being hereby waived[.]” N.C. Gen. Stat. § 44A-33(a). The penal sum of the bond corresponds to the contract’s original value — i.e., $8 million.
As the GC begins mobilization, you’re informed that the county has obtained the funding necessary to build an additional wing to the building. That work had been an alternate in the bidding process, but was rejected by the county when the bids came in higher than the architect’s estimate, leading the county to award a contract to the GC for base bid work only. Now that the additional funding has been appropriated to the project, the $500,000 additional wing can be added to the GC’s scope of work by change order.
You discuss the scope change with the GC, who’s excited about the additional work. A change order is executed, and requires the GC to provide notice of the change to the surety. You’re told such notice has been given. The County now has $8.5 million in protection under the performance bond, right?
Not so fast, Sparky.
In an unpublished decision released this past Tuesday, the N.C. Court of Appeals (“COA”) has construed a letter by an electrical subcontractor announcing its transition from a corporate entity to a limited liability company as a guarantee of obligations incurred by the corporate predecessor. The letter announced as follows:
Let it be known that on the 8th Day of September, 2006 WielTech Electric Company became a manager-managed Limited Liability Company between organizers Benjamin Joseph Wieland and Jennifer Dawn Fortenberry. From this date forward any and all business transactions, accounts or any other business relationship formed for WielTech Electric Co. by Tony C. Height, Catherine Robertson or any other person shall be transferred wholly into the newly formed LLC and the two individual organizers.
A supplier of WielTech sued the successor entity, its managers and others for past due invoices owed by WielTech. The supplier argued that the announcement letter constituted a personal guarantee satisfying North Carolina’s statute of frauds. For the non-lawyers who may be reading this, the “statute of frauds,” codified at NCGS c. 22-1 (2009), requires a “special promise to answer the debt … of another person” to be in writing. The successor entity and its managers defended the lawsuit on the grounds that the letter was too ambiguous to serve as a “special promise” to answer for the debts of the predecessor. The COA sided with the supplier, holding that the language in the announcement letter stating that all accounts “shall be transferred wholly” to the individual organizers constituted a payment guarantee satisfying the statute of frauds.
- Image by Naypong via FreeDigitalPhotos.net
I don’t want to speculate too much about the motivations of the organizers of the successor LLC in the WielTech decision, other than to say that based on an affidavit I have read in the record on appeal, WielTech and its principals may have been maneuvering to salvage their business after being stiffed by a bankrupt general contractor to the tune of just under $200,000. In any event, and to the extent the WielTech folks were attempting to wrap-up the business affairs of one corporate entity and transfer assets to another entity without also assuming the obligations of the predecessor, suffice to say, mission most definitely not accomplished.
The takeaway? In an environment where getting paid for labor provided and materials furnished isn’t getting any easier, creditors and their attorneys will aggressively utilize all legal remedies available to them — piercing the corporate veil, successor liability theories such as the “mere continuation” doctrine, personal guarantees, the Uniform Fraudulent Transfer Act, etc. — to track down sources of potential recovery. To those trying to avoid payment obligations, caveat scriptor. That letter you want to send to retain your customer base in the midst of a corporate transition might say a whole lot more than you think.