As if contractors needed another thing to be wary of in 2021, December saw the conclusion of a multi-year fraud scheme with the conviction of four men for allegedly selling false payment bonds for major construction projects.
Alexander Robert Xavier, Timothy Castracane, Robert Michael Wann, and Henry John Hattendorf were all sentenced to multiple years in prison by the United States District Court in the Southern District of Florida in December 2021 for their roles in the fraud. On top of the prison time, three of the perpetrators were ordered to pay more than $2.6 million in restitution.
According to the indictment against the quartet, the group generated fake gold certificates and offered similarly fraudulent surety bonds to contractors based on these certificates. Throughout 2015, the group allegedly defrauded two contractors and one joint venture, affecting multiple businesses based in New York and New Jersey (the firms themselves have only been identified by the initials KVM, JHR, and AMC).
Apparently, this fraud didn’t just impact private work, either, as some of the affected work was on public projects, like work done on the Goethals Bridge Road in Staten Island, New York.
This isn’t the only fraud-related penalty levied against the people involved, as well: Despite receiving a six-year sentence, alleged scheme leader Alexander Robert Xavier is reportedly already serving a 12-year sentence in federal prison after being convicted of selling false performance bonds to the US Department of Labor and Army in 2008.
Proper payment bonds can be helpful for contractors throughout the industry, and even though they’re not as common on private projects, contractors are required to secure bonds on most federal and state construction projects.
“On a private construction project, if a subcontractor or supplier doesn’t receive payment, they can file a mechanics lien on the property,” notes construction attorney Matt Viator. “But when a payment bond is present, that bond effectively takes the place of the property for the purpose of making a non-payment claim. Instead, anyone who isn’t paid will need to file a claim with the surety, rather than securing their interest with the property itself.”
Such bonds can help keep properties clear of liens, as claims over non-payment are made against the payment bond, which may appeal to some private projects.
“While rare for the most part, private projects can be bonded from the jump,” says attorney Nate Budde. “Large enough or sufficiently sophisticated parties may require bonds on the project to keep the property clear of liens. Generally, only the largest private companies or property developers are going to require construction jobs to be fully bonded — but if they are, any potential lien claimant will be forced to attempt to recover against the bond, rather than against the property itself.”
Budde adds that certain companies may be more eager to secure a bond than others depending on the project itself — and the success of mechanics liens in securing payment plays a big part in it.
“There are many reasons why this may be desired, but the main practical reason for obtaining a payment bond on a private project to avoid liens is so that the property may be sold, refinanced, or mortgaged without the worry of a mechanics lien (especially from a hidden party) gumming up the works.”
Levelset’s previous coverage of Xavier’s fraud cases noted that the presence of such schemes means that a payment bond is not necessarily always going to be enough to a secure a project, with Matt Viator noting that “On these projects, subcontractors expect a property owner that is unlikely to default on payments and the safety net of a surety bond claim if issues arise. Clearly, that is not always the case…All of this is to say that a subcontractor should not rest easy just because there are payment bonds at play.”
Keeping ahead of the situation can be paramount for making sure that you can avoid the situation going south if you’re not sure about the veracity of the payment bond.
“If you wait to investigate the identity of a surety just before a bond claim deadline (when tempers may be shorter), you may find it harder to get — which, unfortunately, can impact your ability to make a claim,” Budde said.