Builder sues SugarHouse for $14M: Update

[Adds subcontractor comment, see 'Update' below] SugarHouse Casino cut the ribbon in May 2016 on an expansion that more than doubled the size of the only state-licensed gambling complex in Philadelphia.

More than a year later, many of its builders are still trying to get paid for the work they said they did.

The Delaware Avenue center, by Penn Treaty Park between the river and I-95, added a string of restaurants, a seven-story parking garage, an Event Center for concerts, weddings and corporate gatherings, the Poker Night in America room, scores of new poker and table game seats, hundreds of new slot machines, and 500 full-time positions, taking the total workforce to 1,700, in a city hungry for job growth..

Last week Skanska USA Building Inc., the New Jersey-based American arm of the global Skanska construction and general contracting group, sued SugarHouse owner Sugarhouse HSP Gaming LP, based in Chicago, in Common Pleas Court, seeking $14 million for work performed at SugarHouse by Skanska and subcontractors.

Skanska says SugarHouse agreed to pay $123 million for the work, following changes agreed to by both sides early in the project. But according to Skanska, later changes ordered by SugarHouse — for the kitchens used by Geno's Steaks and Saxbys Coffee, for new waterproofing and changes to ceilings, the big chandelier and the armored car bay and more — added $8 million in costs that SugarHouse hasn't paid. The casino also deducted more than $1 million in claimed  "liquidated damages" from its payments, according to Skanska.

The contractor says it has been paid only $118 million, and has gone to court for the balance. "We can't comment on pending litigation," SugarHouse spokesman Jack Horner told me.

It's not just Skanska. "There are subcontractors with balances that are awaiting payment," Mason Avrigian Jr., partner at Post & Schell PC in Philadelphia, who is representing Skanska, told me.

A check of Common Pleas Court filings shows that, since last fall, at least a dozen subcontractors who worked on the SugarHouse expansion have also filed mechanics' liens seeking payments totaling more than $10 million, at least some of which they are also trying to collect from Skanska. I have talked to other builders who say they are also owed money and are considering their options.

"It is the obligation of the general contractor to pay the subcontractors," said SugarHouse's Horner. "Unfortunately, the general contractor has not done so, and the subcontractors have filed liens to protect their interests. It is important to SugarHouse that the subcontractors who built our expansion are compensated fairly and that our general contractor meets its obligations to them."

[Update 8/7: Two subcontractors, neither of whom has filed liens, contacted me after reading the casino's statement. Each asked that I not quote them by name: "It has become common practice in commercial construction for subcontractors to have to 'sign away their rights'" on big construction jobs, giving up leverage that would have made it less difficult to try to collect directly from project owners, one told me. ""Most every general contractor has a clause in their Subcontract Agreement that states, 'Payment to subcontractors is conditioned upon their having received payment from the owner.' This what we call a 'pay if paid' clause."

[The first subcontractor said many feel they have no choice but to wait — borrowing, paying interest and losing profits to keep workers paid — until the owners and general contractors are ready: "If the subcontractors don't sign agreements with this type of language, they lose the work" to others who will sign. "Many subcontractors simply cannot afford to walk away from potential work."

["We wish it were illegal," said another subcontractor. Instead "it is standard in our industry." The casino "has been opened for over a year, while we have not received any payments for over 14 months," the second subcontractor added.  This subcontractor suggested casino reps should sit down with Skanska and the unpaid subcontractors and "come to a settlement," enabling builders to avoid the "enormous legal fees required to defend our interest."]

The dispute takes place amid signs that gambling industry growth may have flattened in the region — even as Pennsylvania state officials in Harrisburg have been pushing to expand gambling, so they can raise more gambling taxes to help fill a $2 billion state budget gap. In a report last week, S&P Global Ratings analyst Timothy Little warned that existing casinos in Pennsylvania and neighboring states have brought in all the likely gamblers they can expect to attract, and that increasing casino capacity "will only exacerbate the narrowing competitive advantage of new properties being developed in the region."

How often are contractors in court seeking payment after a big job gets done? "Unfortunately, a lot of these larger projects do go to disputes because of issues," Avrigian said. He added that contractors would rather spare the cost of litigation.

Mechanics' liens, filed when subcontractors don't get paid, represent a claim on the property where they worked, and typically have to be paid before a property can be sold or used as collateral, which may not be much leverage when an owner has no near-term plans to sell or expand. In Philadelphia, court records show that some subcontractors have a dozen or more mechanics' liens against clients they say didn't fully pay them.

The opening of one of the biggest public construction jobs in the region in recent years, the $400 million State Correction Institute–Phoenix in Skippack, Montgomery County, has been delayed two years amid disputes between the state's representatives and two national contractors hired to oversee the work; some subcontractors on that job have sued the general contractors, and some have privately complained that they have had to borrow money to meet payroll while waiting for money that's due them.

It shouldn't take legal action to get paid every time, says Shawn R. Farrell, a partner at Cohen Seglias Pallas Greenhall & Furman in Philadelphia, which represents several SugarHouse subcontractors. Farrell represents Emms Electric, a family-owned union electrical contractor in Boyertown, which says it is owed $214,000 for work on SugarHouse. "This is not normal," Farrell told me. "I don't see a resolution anytime soon."

Other mechanics' liens filed for payment over work at SugarHouse include: