Update on Retainage Laws

One of the most widely used “end of the project” leverage tools used by owners is retainage. Many times retainage can equal a contractor’s profit margin on a job. Getting withheld retainage back at the end of the job is essential. Far too often owners (and architects) forget that retainage is the contractor’s approved and earned money. In addition, since most prime contractor’s subcontract out the majority of the work (and in turn withhold retainage), much of the retainage is actually subcontractor retainage. Almost all construction contracts also set out the conditions under which retainage will be released, and give the owner the right to withhold retainage in the event of a dispute.

Tennessee’s retainage laws are located in the Prompt Pay Act (T.C.A. § 66-34-101, et. seq.) and can be summarized as follows: for any public or private project, retainage cannot exceed 5%; (2) if the prime construction contract exceeds $500,000, it is mandatory that the owner place the retainage into a separate, interest bearing escrow account with a third party; (3) the prime contractor is responsible to its subcontractors, if retainage qualifies to be escrowed (regardless of the subcontract amount), to ensure that a “project retainage account” is created; and (4) when deposited, retainage becomes the “property” of the contractor/subcontractor. These laws are mandatory and cannot be “waived” in the contract. The failure of an owner (or prime contractor) to comply is not only a criminal violation (Class C misdemeanor), but if the escrow mandate is ignored, the owner has to pay the contractor a daily penalty of $300 from the very first day that retainage was withheld and not escrowed. Legal fees for a bad faith violation can also be recovered. To be clear, this escrow rule also potentially exposes the prime contractor to the same $300 a day penalty from each and every subcontractor, regardless of the amount of the subcontract. In a recent case that settled, an owner who refused to escrow only $50,000 in retainage ended up paying the contractor a $300,000 penalty (1000 days X $300).

Most contracts allow an owner with set off or withhold retainage in the event of a dispute (defective work, liquidated damages, liens, a defunct contractor). There are provisions in the PPA which set out when an owner is required to release retainage (T.C.A § 66-34-204). Before a recent case, the “consensus” among lawyers was that these contract provisions govern. However, in Beacon4, LLC v. I & L Investments, LLC, 2016 WL 4545736 (Tenn. App. 2016)(cert. denied), the Eastern Court of Appeals held that notwithstanding and regardless of what the contract says about the ability of an owner to withhold retainage, an owner retainage release must occur within the earliest of the 3 statutory 90 day periods (issuance of a U&O permit; issuance of a certificate of substantial completion from the project architect; or when the owner begins to use or could have used the improvement). Yet another recent case held that the PPA is a “remedial” statute which should be liberally construed in favor of the beneficiaries of the retainage and prompt pay laws. Aarene Contracting LLC v Krispy Kreme Doughnut Corp, Case No. E2016-01155-COA-R3-CV (December 20, 2016).

To make these rulings clear, assume there is $100,000 in properly escrowed retainage, but it is discovered near the end of the project that the entire roof is defective and will cost $500,000 to repair. Assume further that the owner and lender did not require a performance bond. Under this scenario, the normal strategy of the owner (and lender)  would be to use the retainage to help pay for the repairs or, at the minimum, hold on to the retainage until the dispute is resolved. However, arguably under Beacon, even if the contractor is financially unstable (or even out of business), the owner would be required to fork over the $100,000 even when there is no guaranty that this money will be around when the dispute is finally resolved.

— David Taylor, a Nashville attorney with Bradley Arant Boult Cummings LLP is a member of the TBA Construction Law Section's Executive Council

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Supreme Court: Contractors Not Liable to Homeowners After Fire

A general contractor and two subcontractors are not liable to the homeowners after a fire destroyed their partially completed home, the Tennessee Supreme Court ruled. The court agreed with the trial court’s dismissal of the case based on insufficient evidence as to the cause of the fire. The cause of the 2012 blaze was unknown but was found to have started on the back deck of the house, making it accessible to the public and vulnerable to a number of potential fire starters such as arson, improperly discarded cigarette butts, electrical issues and more.
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Nashville Judge Rules Against ‘Eyesore’ Scrap Metal Yard

A federal judge in Nashville ruled against the scrapyard PSC Metals in a dispute between the company and its landlord, the Nashville Post reports. The two parties disagreed over an appraisal of the property, with the landowners believing that the appraisal should take into account what the land could be worth if it was rezoned from industrial to mixed use. Mayor Megan Barry has called the scrapyard an “eyesore” and former mayors have attempted to redevelop the property in the past.
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TBA Mashup and Mini Legal Hackathon this Friday

In conjunction with the Law Tech UnConference CLE this Friday, the TBA is also offering a variety of free events and programs for lawyers we’re calling a Mashup. One program will teach you about Legal Hackathons and see one in action. A Legal Hackathon is a collaborative effort of experts in the legal profession collaborating with a computer programmer to find a technology assisted solution to a problem in the legal industry. Join the TBA Special Committee on the Evolving Legal Market for a mini legal hackathon that will demonstrate the power of collaborative minds at work. We will have tasty beverages and snacks to help you get your collaborative juices flowing.  
Other programs that will be a part of the Mashup include Pro Bono In Action which will show you various pro bono programs you can participate in to help your fellow Tennesseans and Member Benefit Programs that will provide you information on  Fastcase 7, health insurance options for small firms, ABA retirement funds and professional liability insurance.
Please sign up now to let us know you are coming.

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Have You Heard About the TBA Mashup?

Interested in observing a legal hackathon or getting a hands-on demonstration of the new Fastcase 7 platform? Both will be part of the first TBA Mashup, a full-day of activities and free programming set for Feb. 17 at the Tennessee Bar Center in conjunction with the annual TBA Law Tech UnConference CLE program.

In addition to the hackathon and Fastcase 7 demo, the TBA Mashup will feature sessions on: 

  • Current State of Health Insurance for the Small Firms
  • Professional Liability Insurance - What to look for in YOUR Policy
  • A Demo of Fastcase TopForm, a powerful bankruptcy filing software
  • Retirement Planning Guidance from the ABA Retirement Funds
  • Pro Bono in Action: How to help with pro bono events and how to take part in online options

At the annual TBA Law Tech UnConference CLE program, you can take as many or as few hours as you need. Registration will be open all day. Payment will be determined at checkout based on the hours you need. Topics will include: 

  • Bill & Phil Tech Show
  • Ethical Considerations for Cyber Security in Law
  • Evolution of the Legal Marketplace
  • Making e-Discovery Affordable 
  • Drone Law
  • Encryption for Lawyers

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Register Now For TBA Construction Law CLE

Register now for the TBA Construction Law Section's Jan. 27 CLE: Construction Law Forum 2017. This compelling program will be held at the Tennessee Bar Center in Nashville and offers 5 general and 1 dual CLE credits.

This full-day seminar will be valuable for both new and experienced lawyers, and will cover various causes of action, including basic elements, procedure, how courts rule, and the interplay between the differing causes of action.

You may register online or by contacting the TBA at (615) 383-7421.

Section members will be meeting at lunch during the forum. If you are unable to attend the programming, but would still like to attend the luncheon, please contact Sections Coordinator Jenny Jones by Jan. 20. 

We look forward to seeing you in Nashville on the 27th!

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TBA President Urges Unity, Consensus Building in Profession

In the new Tennessee Bar Journal, President Jason Long discusses our divided country after the recent election, urging lawyers to be “united now more than ever in our commitment to the profession and its bedrock principles.” He writes that “we can provide that opportunity in a controlled and structured environment, operating within the framework of our democratic institutions. If there is an opportunity for consensus building and unity in today’s political climate, the legal profession can and should facilitate that.” Also in this issue, learn if you are protecting your clients’ electronic information enough, in the cover article by Trey Forgety. Brian Dobbs writes to help you understand the law of construction in Tennessee. Read the December issue.

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Bradley Expands to Southwest

Bradley Arant Boult Cummings LLP is opening its first Southwest office in Houston, the Birmingham-based firm announced today. “Our new Houston colleagues are recognized for their quality and service within the construction industry,” Bradley board chair and managing partner Beau Grenier said, “and they will be a solid anchor for us as we serve clients across many practice areas throughout the state from our new location.” Bradley operates eight offices in the Southeast, including one in Nashville.

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Court to Hear 7 New Cases

The Tennessee Supreme Court recently granted review of seven new cases dealing with a range of issues, including length of jury deliberations, identity of criminal offenses, repairmen’s liens, GTLA liability, ecclesiastical abstention and vicarious liability. The Raybin Supreme Court Hotlist reviews the cases and offers a prediction as to how each case may be decided.

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Road Building Company Agrees to $2.2M Fine in Fraud Suit

Mountain State Contractors, one of the state’s largest road building companies, agreed to pay a $2.25 million fine to settle fraud claims regarding minority contract work. The company is a subsidiary of Mt. Juliet-based Jones Brothers. An investigation was launched after a Jones Brothers executive claimed he was told to falsify documents to make it seem as if a minority contractor was doing work that was actually performed by Jones Brothers. Federal contracting laws require that a percentage of federally funded road projects go to small, minority or women-owned firms. Read more from The Tennessean

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New UT Program to Combine Law, Construction

The University of Tennessee’s College of Law is joining with its College of Engineering to develop a new graduate certificate program for students interested in the intersections of construction, engineering and law, The Daily Beacon reports. The 15-hour program is “designed to give lawyers a background in construction and engineering and to give engineers and construction professionals a background in law, specifically contract law.” Learn more about admission requirements and programming.

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Register Today for the 135th Annual TBA Convention

Join us on June 15-18 in Nashville for the 135th Annual Convention! Registration for the 2016 TBA Convention includes:

  • free access to all TBA CLE programming;
  • the Opening Reception;
  • the Bench Bar Programming and Luncheon;
  • Law School and general breakfasts;
  • the Lawyers Luncheon;
  • the Thursday evening Joint (TBA/TLAW/TABL) Reception;
  • the Thursday night dinner and entertainment at the George Jones Museum;
  • and the Friday night Dance Party.

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Diversity Scholarships Available for ABA Construction Law Forum in Nashville

The American Bar Association Forum on Construction law will be coming to Nashville April 28 – 30. Six diversity scholarships will be available to cover the cost of registration for women and minority construction lawyers, construction lawyers with disabilities and construction lawyers from the LGBT community, whose practices are based in Tennessee. Read more about the program and the details of the scholarship opportunity.

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UT Law Offers Grad Certificate in Engineering, Construction

The University of Tennessee College of Law launched its new Graduate Certificate in Contractual and Legal Affairs in Engineering and Construction. The 15-credit-hour graduate certificate is offered in conjunction with the UT College of Engineering. The program is designed to give lawyers a background in construction and engineering. “Law students will gain a greater perspective by taking classes with engineering students and individuals currently working in the construction field,” said Alex B. Long, associate dean for academic affairs and professor of law.

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Licensing Issues for Tennessee Contractors and Owners

Construction lawyers from across the state will meet tomorrow at the TBA Bar Center for a program focused on Licensing Issues for Tennessee Contractors and Owners. The forum is sponsored by the TBA’s Construction Law Section. Topics include licensing for commercial and residential contractors, dealing with the board for licensing and the Tennessee Consumer Protection Act. The forum will be held from 8:30 a.m. – 1p.m., providing 6.25 CLE credits.

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Madison County Closer to Jail Expansion Project

The Madison County Correction Partnership Committee unanimously approved the beginning stages of collecting bids for a future expansion of the county jail, The Jackson Sun reports. The request for qualifications will allow architecture firms to submit plans for expanding the Jackson-Madison County Criminal Justice Complex.

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Madison County Jail Expansion Considered

The city of Jackson could help finance a portion of a Madison County Criminal Justice Complex expansion in order for the building to house the Jackson City Court, according to the city and county mayors. Jackson Mayor Jerry Gist said talks are in the early phases because the county has not yet decided what it will do with the jail. The jail has undergone numerous studies from outside organizations to find a workable solution to its overcrowding problem, the Jackson Sun reports.

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A Look Back on the 'Days of the Dam and the Darter'

Cleveland Daily Banner writer Larry Bowers recalls the legal ins and outs of the snail darter controversy that involved the delay of construction of the Tellico Dam on the Little Tennessee River in 1973. Learn more about the little fish and the big dam in this 2009 Tennessee Bar Journal article.

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AG Says Nashville’s Local-Hire Rule Violates State Law

Tennessee Attorney General Herbert Slatery ruled yesterday that Nashville's local-hire mandate, which voters approved in August, is invalid because it violates state law, the Nashville Business Journal reports. According to Slatery, the city rule violates the Contractors Licensing Act of 1994, which prohibits municipalities and counties from imposing on state-licensed contractors any requirements in addition to those imposed by act. The same law also prohibits localities from discriminating against contractors licensed by the state “on the basis of the licensee’s nonresidency within the county or municipality.” Read the opinion.

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5 Lawyers Recognized for Service During Bar Year

Awards presented at TBA Convention in Memphis

NASHVILLE, June 29, 2015 – The Tennessee Bar Association (TBA) recognized five lawyers who provided especially distinguished service to the legal community during the past year. Each was recognized by then President Jonathan Steen.

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Hamilton County Jury Awards $20 Million to Developers

A Hamilton County Circuit Court jury today awarded $20,599,000 to the developers of Canyon Ridge on Lookout Mountain against a financial firm that allegedly secretly started working on a rival project. The jury also said the plaintiffs are due punitive damages. Attorneys tell that it is believed to be the largest verdict award in Hamilton County history.

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Nashville Lawyers Form New Firm

Four Nashville lawyers have joined together to form the law firm of Surber, Asher, Surber & Moushon. The firm will focus on personal injury, business and construction law, professional liability and insurance defense, and probate and conservatorship law. Joel Surber, Garrett Asher and Matt Moushon were formerly partners at Parker, Lawrence, Cantrell & Smith. Jennifer Surber formerly served as counsel to the Davidson County Probate Court and as Special Probate Master for the Seventh Circuit Court.

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Governor Signs 2 TBA Bills

Two pieces of the TBA’s legislative package were signed by Gov. Bill Haslam last week. SB877/HB1183, which originated with the TBA’s Construction Law Section, makes changes to two sections of the Mechanics’ and Materialmen’s Liens statute that are clerical and procedural in nature. SB144/HB620, which proposed technical changes to the for-profit and non-profit corporations code, was signed into law and has been enacted as Public Chapter 60.

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New Flipping Houses CLE

If the house your client flips floods, creaks or fails code violations, make sure you are ready to help. The new Flipping Houses CLE on May 18 will feature presentations from attorneys well versed on construction law and local government practice along with Cynthia Gibson, the executive vice president and chief legal officer at Scripts Networking Interactive, the company behind many popular DIY programs.

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TBA Legislative Initiatives Head to Governor for Signature

SB877/HB1183 passed the House chamber this week and is headed to the governor’s desk for signature. The bill makes changes to two sections of the Mechanics’ and Materialmen’s Liens statute that are clerical and procedural in nature. The proposal originated with the TBA’s Construction Law Section. In addition, SB144/HB620, which proposed technical changes to the for-profit and non-profit corporations code, passed both chambers this week. Finally, SB161/HB609, which would treat pension benefits the same as other marital property in divorce proceedings, passed the Senate and is set for a House vote on April 1. Find out more about important bills in the legislature at TBAImpact.

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