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Subcontractor Ordered to Repay Contractor for Faulty Construction Plus Lost Profits

in Columns/Law

By JAMES R. KELLER

James R. Keller

Missouri’s Southern District Court of Appeals affirmed on July 30 the decision of the trial court ordering a subcontractor to repay in full its contractor for faulty construction. The subcontractor also has to pay the contractor’s lost profits of 15 percent even though the owner had removed the work and never paid anything for the project.

The primary issue on appeal was whether the trial court applied the wrong measure of damages in the contractor’s breach of contract claim. The court of appeals determined the trail court correctly determined the damages.

The end result is that the owner paid nothing and received nothing of value. The contractor obtained an award for more than it paid the subcontractor, but of course it will have to pursue recovery if not voluntarily made. The court ordered the subcontractor to repay more than it had received.

The case is Fox Creek Construction, Inc. v. Opie’s Landscaping, LLC, 2019 WL 3423236, July 30, 2019.

The trial court, after a bench trial, ordered subcontractor Opie’s Landscaping, LLC. to pay $40,250 to contractor Fox Creek Construction, Inc.

The project was home remodeling for Mike and Annette Ensley. The opinion does not disclose the homeowners’ location, but it was somewhere in the Southern District of Missouri.

One portion of the remodeling project involved the construction of a waterfall outside Annette’s home library window.

The contract between the owners and their contractor was a cost-plus contract. This required payment to the contractor for the actual costs of the work plus an additional 15 percent as the contractor’s profit. (Many cost-plus construction contracts separately provide pricing for contractor overhead in addition to profits. In this case, the Southern District’s opinion only referenced profit.)

The contractor subcontracted with Opie’s to build the waterfall. Opie’s hired a specialist to do the work. The subcontract between Opie’s and Fox Creek was oral.

Oral construction contracts can be enforceable under Missouri law; they are not unusual. Their enforceability depends on the type of contract, its terms and circumstances. In this case, the appellate court did not know the terms. They were not part of the record on appeal. This did not seem to affect the final appellate decision.

Opie’s provided an estimate of $35,000 to build the waterfall. It took approximately one month for Opie’s to complete the work. The contractor paid Opie’s the $35,000 estimated price.

 

The homeowners returned from vacation shortly after the work’s completion. They experienced problems with the waterfall. First, the waterfall was in the wrong location. Opie’s addressed this problem by adding a second, smaller waterfall that could be seen from the library.

The homeowners discovered water flying down their driveway. The waterfall leaked so much that the pumps could not keep the waterfall flowing.

The leak was serious. Two months after the waterfall’s completion, the homeowners’ well pump was running 24 hours a day. This resulted in large electric bills during the summer months of June through August.

Unlevel rocks in the waterfall created another problem; they moved around instead of being stationary. The appellate court noted that someone described the workmanship as looking “shoddy.”

The subcontractor acknowledged it had used the wrong pumps, the wrong floats and the reservoir was too small. It claimed that all of these deficiencies could and would be fixed. The subcontractor also contended that natural evaporation of the water was the sole explanation for any water loss.

Frustrated, the homeowners contacted another contractor with extensive experience in water features, Fitzwater Design. Its owner looked at the waterfall. He noted that the problems included that the liner was showing, the water was falling over natural rock, a water hose was running continually and the reservoir size was too small.

Fitzwater recommended removing the waterfall and building a new one at an estimated cost of $35,000 to $40,000.

After a few more months, the homeowners told the subcontractor to remove the waterfall. Opie’s did this.

The homeowners neither paid the contractor the $35,000 nor the 15 percent additional profit that the contract called for if the waterfall had functioned correctly.

When the subcontractor refused to reimburse the contractor for the $35,000, the contractor filed a breach of contract lawsuit seeking $40,250. This represented $35,000 that had been paid to the subcontractor plus the contractor’s 15 percent lost profit.

Opie’s raised three points on appeal. The thrust of the subcontractor’s argument was that the trial court applied the wrong measure of damage.

Opie’s argued that the correct measure of damage under Missouri law was the costs to repair. The appellate court noted that the “fundamental flaw” with this approach was that Opie’s treated its damage claim as if it had contracted with the homeowners, when in reality its contract was with the contractor.

The appellate court rejected Opie’s argument that the contractor was only entitled to recover $2,500. Opie’s expert estimated this to be the cost necessary to repair the waterfall. The court stated that the cost to repair as a measure of damage is appropriate only when the subcontractor has substantially performed with some defects.

The trial court “implicitly” found that that was not the situation in this case. Opie’s had not substantially performed.

Rather, the trial court decided that Opie’s had breached its contract with the contractor. Opie’s did not contest this finding on appeal. The appellate court considered this concession important in its decision.

Because it was an uncontested fact that Opie’s had materially breached its contract, the contractor was entitled to cancel the contract and sue Opie’s for a total breach of contract.

Had Opie’s constructed a satisfactory waterfall, the homeowners would have been obligated to pay the contractor $40,250. Instead, they paid nothing.

Since the subcontractor did not return the $35,000 to the contractor, the contractor was entitled to recover $40,250 as full compensation for Opie’s breach.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He is also an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

City Immune from Construction Lawsuit after Pedestrian’s Fall off Retaining Wall

in Columns/Law
James R. Keller

Missouri’s Western District Court of Appeals recently dismissed a pedestrian’s lawsuit against the City of Lee’s Summit, MO for serious injuries after his fall in 2017 from an unguarded retaining wall. The court held the city was immune from the lawsuit, even if its actions or inactions were negligent.

The case is State ex rel. City of Lee’s Summit v. Garrett, 568 S.W.3d 515 (Mo. Ct. App. 2019), decided February 13.

The city did not own or operate the property where the retaining wall was located. But it did issue the building permit for the retaining wall.

The plaintiff, Kurt Pycior, claimed that the city negligently inspected the wall or did not inspect it at all.

He also sued various corporations that designed and/or built in 2009 and 2010 the retaining wall and parking lot below the wall. The appellate court ruled Pycior’s lawsuit will continue in Circuit Court against them and potentially will be scheduled for an upcoming trial.

The wall was located between two differently elevated portions of a parking lot. The parking lot was at Summit Fair Shopping District within the city limits.

The City of Lee’s Summit had adopted portions of the International Building Code, more commonly known as IBC, as its governing regulation for design and construction of retaining walls. The IBC provides that “Guards are required at retaining walls over 30 inches above grade when walking surfaces are within 10 feet of the high side of the retaining wall.”

Many municipalities have adopted the IBC in their public contracts. It is widely accepted as a standard – if not the standard – in the construction industry.

The city required the corporate defendants, who remain in the lawsuit after this decision, to obtain building permits. The city’s agent, according to plaintiff’s allegations, either did not inspect at all or failed to inspect the project site and the design plans.

The city did collect the appropriate permit fees and issued the building permits, thereby allowing the corporate defendants to construct the retaining wall. Pycior claimed that the as-built retaining wall did not conform with the building code because it did not include a guard, fence or barrier.

Due to the City of Lee’s Summit’s alleged negligent inspection or lack thereof, the plaintiff sought recovery for his injuries including the award of punitive damages.

The city moved to dismiss, claiming sovereign immunity. The trial court denied this request. The city then sought a writ of prohibition in the Western District Court of Appeals.

A writ of this sort, if granted, prevents the trial court from what it decided and requires it to do something else, generally the opposite of whatever it did.

A lawsuit against a city requires the plaintiff to show enough to prove there is a viable lawsuit that survives a city’s typical immunity. Missouri’s courts have routinely held that sovereign immunity is not for the municipality to plead and prove.

Rather, it is for the plaintiff to allege and to show with specificity that there are facts that merit an exception to the doctrine of sovereign immunity. Sovereign immunity, simply stated, prevents a lawsuit against the city because it is a city.

Loosely speaking, the concept dates way back to the idea that the king and queen could do no wrong, thus they were above the law and thus above any lawsuit. A more modern American version, of course, is the expression, “You can’t sue city hall.”

But sovereign immunity is not absolute. The critical distinction is whether the city engaged in governmental functions or proprietary functions.

Governmental functions are performed for the common good of all. Proprietary functions are performed for the special benefit or profit of the municipality. They involve a municipality providing services or conveniences to its citizens.

The distinction can be elusive. This helps to explain why various plaintiffs over the years believe they have had a viable lawsuit against a city.

There have been many lawsuits before, some successful, and there surely will be many to come in the years ahead.

In this case, the plaintiff maintained that the City of Lee’s Summit engaged in a proprietary function when it negligently inspected or failed to inspect the retaining wall and then issued its building permit.

The city’s code and regulations required that it inspect the retaining wall to ensure safety and compliance with the city’s code and regulations, including the IBC. This duty was mandatory, according to the plaintiff’s allegations.

The opinion does not indicate anywhere that the retaining wall complied with the IBC. Yet, this was not the determining factor regarding the city’s liability.

The appellate court noted that governmental functions do not become proprietary functions merely because they generate a profit or in this case a fee for a construction permit. Instead, the court focused on the general nature of the activity being performed.

The court found this activity to be governmental in nature.

The appellate court stated that the city may have been negligent in its actions or its failure to act. This negligence may even have caused a breach of the city’s duty of care to enforce its building code.

From a legal point of view, however, this did not matter. The City of Lee’s Summit was carrying out its governmental functions by enforcing the building code. Therefore, the city is immune from this lawsuit. In fact, the court found that the city had an “absolute defense of sovereign immunity.”

The court of appeals ruled that the trial court erred in not granting the city’s initial motion to dismiss the lawsuit. The appellate court’s writ of prohibition is now permanent. The city is removed from the lawsuit.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

Court Rules for and against Contractor and Subcontractor

in Columns/Law

BY JAMES R. KELLER

James R. Keller

Missouri’s Eastern District Court of Appeals decided for and against a contractor and its subcontractor. The opinion offers significant legal rulings on everyday construction issues including change orders for extra work, lien waivers and attorney fees.

The case is Parkway Construction Services, Inc. v. Blackline LLC, 2019 WL 1344401 (March 26, 2019).

The court placed the victory with the subcontractor, however, finding it to be the prevailing party. This finding allowed the subcontractor to recover attorney fees under its subcontract.

The fees exceeded by 11 times the amount awarded on the subcontractor’s claim. The Eastern District directed the trial court to reconsider these fees considering the overall dollar value of the recovery.

The project was the renovation of two apartment buildings at 2804-2820 South Compton Avenue in St. Louis, MO. Magnolia Halliday, LLC owned the property.

Magnolia hired Blackline as the general contractor. Blackline entered into a subcontract with Parkway to do the plumbing work for $96,000.

Blackline agreed to provide shower valves, faucets, tubs and sinks. Parkway’s scope of work included reworking existing drains lines, waste drains and vents (DWV). This improvement would allow for new fixtures.

The contract described Parkway’s objective was to provide a complete working plumbing system. But Parkway was unwilling to accept the risk of replacing all the DWV piping.

Thus, the parties stipulated that Parkway would be responsible for repairing or replacing up to a maximum of 50 percent of the DWV piping. This 50 percent threshold was not clearly defined.

The contract did expressly define extra work, however, as requiring prior written authorization from Blackline. Extra work is work not in the original contract scope.

The contract also contained an attorneys’ fee provision stating that the prevailing party was entitled to its reasonable attorneys’ fees, costs and expenses. The contract did not define “prevailing party.”

The project quickly fell behind schedule due to factors beyond Parkway’s control. Blackline continuously pressured Parkway to stay on schedule.

During the project Parkway emailed Blackline that it had reached the point of having repaired 50 percent of the stacks without any additional costs. It asked Blackline for direction going forward. Parkway stated it was a “tough job with a ton of additional costs we could not have foreseen.”

Blackline responded three days later. It disagreed that the 50 percent threshold had been reached.  Blackline contended that the entire job should be completed without exceeding the 50 percent allowance.

Parkway created two change order forms. One form related to the extra DWV work. The other form related to extra shower valve work.

Parkway submitted the shower valve change order form to Blackline before starting the work. Blackline approved in writing the extra work for $1,051.

Parkway submitted the DWV change order form only after completing the work. Parkway did not detail the precise hours spent on each task. It also did not receive in advance oral authorization to do the work.

When Blackline refused to grant the DWV change order request for extra work, Parkway stopped work.

Blackline then had to hire another plumbing contractor to complete the work.

As a partial attempt to resolve the DWV piping issue, Parkway executed a lien waiver in return for Blackline’s payment of $25,200. The waiver waived any claim for work through the date of the lien waiver.

Blackline also tendered to Parkway a check for $8,712.97. Blackline calculated this was the remaining amount due to Parkway after subtracting Blackline’s costs for hiring a second subcontractor to complete the job.

Parkway did not accept the check as payment, fearing this would preclude its claim for extra work.

At trial, Blackline admitted it owed Parkway $1,051 for the extra shower valve work and $8,712.97 under the contract as the remaining balance due. Parkway sought $79,449 relating to its extra work claim on the theory that Blackline benefitted from the work and if it did not pay it would be “unjustly enriched.”

Missouri case law supports recovery for work performed that was requested, but no formal contract was in place to cover the work. The claim is for quantum meruit or unjust enrichment.

The trial court found Blackline’s tender of $8,712.97 as final payment of the balance due to be a conditional settlement offer that Parkway did not accept. The court also noted Blackline’s behavior as “employing sharp practices to pressure Parkway to complete the project” and at the same time being “purposefully unresponsive to Parkway’s attempts at communication.”

Blackline prevailed on the DWV extra work claims. Blackline did not request the work as extra work.

The trial court also found that Parkway released its DWV claims by signing the lien waiver.

Parkway did recover on its contract balance and shower valve extra work claims. The work apparently was not subject to the lien waiver.

Finding Parkway to be the prevailing party, the trial court awarded attorney fees of $103,234.31.

Both parties appealed parts of the trial court’s rulings.

The appellant court decided that the lien waiver was enforceable and precluded Parkway from seeking any money for work it performed before the date on the lien waiver. The appellant court also decided that Parkway should have ceased work until it obtained written authorization pursuant to a change order to exceed the 50 percent threshold.

Despite these rulings, the appellant court found Parkway to be the prevailing party. The court noted there are many varied definitions and interpretations under Missouri case law as to who is the prevailing party.

In this case the court noted that Parkway’s evidence generally related to all its claims.  Thus, success on one was enough to be the prevailing party.

The Eastern District sent the matter back to the trial court to reexamine appropriate attorney fees and to make certain they were not excessively awarded given the success by the parties on various claims.

James R. Keller is counsel with Sandberg Phoenix & von Gontard, P.C., where he concentrates his practice on construction law, complex disputes, real estate and alternative dispute resolution. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285, jkeller@sandbergphoenix.com.

Eastern District Orders Insurance Company Back to Trial Court on its Refusal to Cover Homeowners’ Construction Policy Claim

in Law/Uncategorized
James R. Keller

BY JAMES R. KELLER

Missouri’s Eastern District Court of Appeals recently granted judgment for homeowners and against their insurance carrier on claims for construction damages to piers, a pole and the foundation of their home. The appellate court sent part of the dispute back to the trial court to consider further whether the insurance company’s refusal to cover a policy claim for these damages was vexatious.

The case is Cockerham v. American Family Mutual Insurance Company, 561 S.W.3d 862 (Eastern District, MO 2018).

The appellate court noted this was the first case in Missouri to directly address the issue of insurance coverage under a policy of this sort. The Missouri Supreme Court denied on Dec. 18 an application to consider the Eastern District’s opinion.

The Eastern District’s decision is now new law affecting all similarly worded insurance policies, at least in Missouri courts in the Eastern District.

Homeowners Robert and Stacia Cockerham sued their insurance provider, American Family Mutual Insurance Company, for damages relating to the construction of an addition to their residence. The addition was a celestial observatory.

The alleged damages involved a newly installed telescope support system attached to the foundation of their home and the homeowners’ loss of use of the observatory.

The homeowners purchased their home on Lakeshore Drive in Creve Coeur, MO in 2001. In 2005 they hired Nicholas Schalk and Schalk Construction, LLC to construct the observatory addition to their home.

The project included a telescope and its support system. Schalk had never before built such a system.

Schalk hired one subcontractor to install the piers and a separate subcontractor to pour concrete over the piers. The homeowners claimed the concrete subcontractor poured the concrete incorrectly, damaging the piers, the support system and the foundation.

The homeowners made a claim on their insurance policy to cover the losses. American Family denied coverage. It contended the claims were excluded from coverage or were not covered at all under the homeowner policy.

After cross motions for summary judgment, the trial court granted American Family’s motion in part by dismissing the homeowners’ claim for vexatious refusal to pay for the piers, pole and foundation damage. The homeowners appealed.

The appeal involved interpretation of the insurance policy and its various sections.  Typically, this is a question of law for judges, not juries, to decide.

The policy excluded defective construction in part C but it did cover “resulting loss” to property described in Part C that was “not excluded.”

The Eastern District found its job to be difficult. The policy required the appellate court to “decipher a rather prolix word puzzle.” Insurance policies tend to be complicated, layered with qualifiers, exceptions and exclusions.

American Family argued that it did not cover the loss because the homeowners’ losses were already excluded due to faulty construction. The “not excluded” clause did not apply, the carrier contended, since the coverage already was excluded.

Focusing on the “resulting loss” clause, the Eastern District rejected this argument. The policy did not define “resulting loss.” As Missouri courts typically do when the contract does not define a word whose meaning the parties dispute, the court turned to Webster’s Dictionary for guidance.

Webster’s Third New International Dictionary (1993), unabridged, defines the verb form of the word “result” as “to proceed, spring or arise as a consequence, effect or conclusion: to come out or have an issue.”

The court noted that the policy did not specifically state what a “resulting loss” may result from except to the extent such losses will not be covered that are “excluded or excepted” from the policy.

The Eastern District concluded that an ordinary purchaser of insurance would conclude that where one loss results from another loss caused by faulty construction, “such resulting loss is covered.”

Thus, the policy covered the damages to the piers, pole and foundation due to the incorrectly poured concrete. This includes the cost to remove and replace the bad concrete.

The Eastern District also found there were factual questions as to whether American Family’s refusal to pay on this claim was vexatious. This included a dispute as to whether the insurance company’s position denying coverage was willful and unreasonable.

The court’s finding means the dispute has returned to the trial court for further consideration regarding the piers, pole and foundation claims for vexatious refusal to pay.

The homeowners also had a claim for loss of use of their observatory. The policy, however, covered such a loss only when the property as a whole was uninhabitable, causing additional homeowner expenses.

The appellate court agreed with the trial court’s denial of this claim.

It was undisputed that the house was not uninhabitable – especially since the homeowners continued to live there.  They had no claim for additional living expenses because there were none.

The appellate court concluded that American Family clearly was not subject to a vexatious refusal to pay claim for loss of use. Since there was no coverage, the carrier’s position was proper.

The homeowners had additional assertions that the Eastern District found persuasive enough to raise more genuine fact questions meriting further trial court consideration.  They included that American Family’s representatives told the homeowners they did not need a builder’s risk policy to cover losses like the ones that occurred in this case, given the policy they had. The representatives included an adjuster who allegedly told them that “their losses would be covered.”

The appellate court also noted that the carrier did not cite the “resulting loss” clause in its defense when it filed its answer to the initial lawsuit. It did not rely on this clause in its briefs on the motions for summary judgment.

The insurance company relied solely on the faulty construction exclusion.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and alternative dispute resolution. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

Eastern District Affirms Abuse of Process Damages in St. Louis County Subdivision Lot Split Lawsuit

in Law

By JAMES R KELLER

Missouri’s Eastern District Court of Appeals recently upheld sizable attorney fee awards for a seller and against subdivision trustees. The court also found in favor of those same trustees and against a buyer of a residential lot in the City of Frontenac.

The dispute involved an attempted lot split for construction of another home. The case is Trustees of Clayton Terrace Subdivision v. 6 Clayton Terrace, LLC and Huey, Trustee, June 19, 2018.

The seller’s mother, Jane Huey, lived in a home on a 2.3-acre parcel known as Lot 6 Clayton Terrace. Lot 6 was part of a 22-lot subdivision in Frontenac established by plat in 1923.

Huey died in 2011. The seller was the trustee of her mother Huey’s estate, including Lot 6. The seller had not lived in the home on Lot 6 for decades. She listed Lot 6 with Janet McAfee Real Estate, Inc. in 2012. A few months later, Lot 6 was sold.

The subdivision had various recorded restrictions amended over time. One of them required a 15-day notice to all subdivision lot owners of a pending sale. This allowed the subdivision owners, who had a right of first refusal, the first opportunity to purchase the lot at the sale price of the original sale – subject to all its other sale terms and conditions.

If more than one lot owner decided to a timely purchase, all such purchasing owners would own the lot on a pro rata basis.

The realtor timely hand-delivered notice of the sale to all lot owners. The sale closed for $415,000. No lot owner made a claim to purchase. This was a key piece of evidence for part of the appellate court’s decision.

The seller had no notice of any objection to the sale. There were no signs for someone to claim an irregularity in the sale going forward. The seller disbursed the proceeds to the estate beneficiaries.

The buyer wanted Lot 6 for investment purposes. Meanwhile, he leased it to Kevin McGowan and his six children.

The family made considerable improvements to their new home. Among them were removal of walls, combining the kitchen and dining areas, adding bedrooms and an exterior door, removing trees, refinishing the swimming pool, adding a new heater and replacing/refinishing the concrete pool deck.

The subdivision indentures provided that each lot—no matter its size—can only have one house.

More than a year after the sale, the buyer filed an application with the City of Frontenac to subdivide Lot 6. The City’s Planning and Zoning Commission approved the lot split.  This would allow another house on the new lot.

Two months later, the subdivision trustees sued the seller and the buyer. Count I sought a declaratory judgment against the seller for alleged failure to follow the required 15-day notice of a pending sale. It alleged that the seller failed to accept the offer of lot owner Elizabeth Schwartz to purchase the property under the 15-day notice provision.

Count II sought to enjoin (prohibit) the buyer from building an additional home on Lot 6. The subdivision indenture prohibiting any lot split had been “a matter of public record for almost 85 years and was still in effect,” according to the appellate court. This was another key piece of evidence.

The seller made a counterclaim against the trustees for abusive process in bringing Count I.

The trial took place on stipulated facts with no jury. This means the parties agreed on the evidence. It was up to the judge to apply these facts to the law and decide who would prevail. A stipulated record is not typical in a case tried before a judge, but it does occur occasionally. It never happens in a case tried before a jury.

The trial court’s decision sparked this appeal. On Count I, the judge ruled the sale was proper and the trustees abused process by suing the seller. A claim for abuse of process requires proof that the defendant made an illegal, improper, perverted use of process, a use neither warranted nor authorized by the process. The claim alleges that a defendant had an improper purpose in exercising its action, and this resulted in damage.

The trial court found the seller’s attorney fees and costs due to the litigation in the amount of $119,243 to be fair and reasonable. And yet, the court only awarded her $60,000 with $40,000 of that amount to be paid by the buyer and the other $20,000 to be paid by the trustees. The buyer had no claim against the seller.  The seller had no abuse of process claim against the buyer, only the trustees.

In Count II, the trial court found for the trustees. This allowed the division of Lot 6 into two parcels with a house on each.

The case turned in large part on the testimony of the head subdivision trustee. He stated that the only reason for suing the seller was to have the buyer move out of the neighborhood and take “their schemes with them.” He also acknowledged that the trustees had no “beef with the seller.”

There also was no evidence that subdivision lot owner Schwarz had made an offer to purchase the lot. This lack of evidence probably sealed the trustees’ fate on this point.  Based upon this record, the appellant court increased the attorney fee award to the seller and against all trustees to its full amount of $119,243.

The appellant court decided that the trustees should prevail against the buyer and prevent the splitting of the lot based upon the subdivision indentures which prohibited any lot split.

The Eastern District decided that the trial court’s award of $203,915 in attorney fees and costs to the trustees was too high. It sent the case back to the trial court to determine a “more reasonable amount” to be paid by buyer, “if any.”

James R. Keller is counsel with Sandberg Phoenix & von Gontard, P.C. where he concentrates his practice on construction law, complex business disputes, real estate and alternative dispute resolution. He is also an arbitrator and a mediator. Keller can be reached at (314) 446-4285, jkeller@sandbergphoenix.com.

Eighth Circuit Court of Appeals Vacates $6 Million Jury Verdict Against Title Company on Mechanics’ Liens at Lake Condo Project

in Law
James R. Keller

By JAMES R. KELLER

The Eighth Circuit Court of Appeals recently vacated a jury verdict of $6 million in favor of a lender and against the title insurance company on a construction loan. The parties face a new trial with a different jury in federal court in St. Louis on this 13-year-old project.

The case is Captiva Lake Investments, LLC v. Fidelity National Title Insurance Co., 883 F.3d 1038 (8th Cir. 2018). This is a significant opinion about Missouri law from the nation’s second-highest court on construction lending, insurance coverage and mechanics’ liens.

The construction project was a condominium development at the Lake of the Ozarks in Sunrise Beach, MO that started in 2005.

National City Bank of the Midwest had loaned Majestic Pointe Development Co., LLC $21,280,000. National purchased title insurance for the project from Fidelity National Title Insurance Co.

Partway through construction, Majestic defaulted on the construction loan and went bankrupt. Captiva Lake Investments, LLC bought National City’s ownership interest in the project. Various contractors and subcontractors filed mechanics’ liens against the property.

Captiva (the lender) sued Fidelity (the title company) in 2009 asking Fidelity to protect Captiva on the mechanics’ liens. Fidelity agreed to defend Captiva under a reservation of rights. In turn, Fidelity sued Captiva alleging there was no coverage for the mechanics’ liens.

A reservation of rights is not unusual in the insurance industry. In this case, it meant that Fidelity would provide and pay for the defense of the lawsuit; it reserved the right to later disclaim there was insurance coverage.

Fidelity based its reservation on a specific exclusion contained in the title policy it had issued. The exclusion excluded from coverage claims based on liens that were “created, suffered, assumed or agreed to by the insured claimant.” In this case, that was Captiva.

After some procedural maneuvering in court, Captiva became the plaintiff in its claim against Fidelity for insurance coverage. The facts and claims are complicated.

The trial court judge did not allow Fidelity to present its exclusion defense to the jury.  The judge determined that there had to be evidence of intentional misconduct or inequitable dealings by National City (the original lender) to advance that defense, and there was no such evidence.

The Eighth Circuit noted “construction lending can be risky.” In case of bankruptcy, the lender’s loan is only protected by the unfinished project, “which is often worth far less than the money put into it.”

Title insurance protects the owner and insurer against defects in title that already existed before the date of the policy. It generally does not protect from events that occur after the date of the policy.

In this case, the title insurance policy was a standard 1992 American Land Title Association (ALTA) lender’s title policy. ALTA writes industry-standard policy forms that are used nationwide.

Fidelity issued the policy after the work had begun. Fidelity agreed to the lender’s deletion of standard policy language that excluded from coverage mechanics’ liens.

This created a risk to the title company that mechanics’ liens might be covered by its policy and that the liens might be given priority over Captiva’s deed of trust for the construction loan.

Missouri law gives priority to mechanics’ liens to protect unpaid contractors, subcontractors and material suppliers. These project partners may be the first in line to be paid before others, including the lender – even a lender whose loan predated any recorded mechanics’ lien. This depends in part on when the work first started in relation to the date of the construction loan.

This priority encourages those trades farther down the food chain to work. Otherwise, some would argue that nothing would get done on a construction project without up-front payment.

Since at least 1855, Missouri has followed the first-spade rule. This rule provides that the first day of work by any contractor, subcontractor or supplier is the operative first date of work for all of them as far as mechanics’ liens are concerned. The liens of all of them – no matter when filed (as long as timely filed) – revert for priority purposes to that first date.

If that date is before the date of the filing of the construction loan, all mechanics’ liens have priority over that lender. In this case, mechanics’ liens were filed after the date of the loan – but at least some of the work apparently preceded that date.

The Eighth Circuit stated that evidence was not presented to show that any work done before the policy date became part of a later lien.

Captiva did not provide any legal authority that applying the first-spade rule was determinative of whether unresolved mechanics’ liens rendered a title unmarketable.  Coverage for a title that is unmarketable allows the insured to be indemnified when there is a title defect that existed prior to the date of the policy.

There was another consideration in this case, however, besides mechanics’ lien priority and the first-spade rule.

The Eighth Circuit concluded that the jury should have been allowed to consider the lien exclusion contained in the policy without needing to find intentional misconduct or inequitable dealings by National City.

National City may have “allowed” or “suffered” the liens when it stopped funding the project. The general contractor – Kidwell Construction, Inc. – paid itself about $681,000 of a $1 million fee. This money was supposed to be deferred until the construction loan was repaid.

The schedule of values revealed there were insufficient funds to pay for finishes and site improvements. These events caused National City to stop funding the loan, leaving $1.2 million unpaid from the original loan.

Such evidence could persuade a jury that the “allowed” and “suffered” exclusion should apply, thereby releasing the title company from coverage even though the general exclusion for mechanics’ liens was not in the policy.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

Landowner Awarded Punitive Damages, Attorney Fees Against Contractor, Utility Company

in Columns/Law
James R. Keller

By JAMES R. KELLER

Missouri’s Southern District Court of Appeals recently upheld a jury verdict and court judgment in favor of the landlord and against Carroll Electric Cooperative Corp. for $12,224 in actual damages, $75,000 in punitive damages and $59,456 in attorney’s fees. The appellate court also upheld a separate judgment for the same amount in actual damages – but not punitive damages – against Seven Valleys Construction Co.

The case is Bare v. Carroll Electric Cooperative Corporation and Seven Valleys Construction Company, 2018 WL 1281114, decided March 13.

The judgment against Carroll Electric and Seven Valleys was for common-law trespass. The appellate court decided there was sufficient evidence to support the jury’s verdicts and the trial court’s judgments.

Carroll Electric had hired Seven Valleys to clear a right-of-way and pile resulting severed trees and brush on the edge of the right-of-way. Steven and Suzanne Bare were the co-trustees/owners of the land.

They granted an easement to Carroll Electric to clear and keep clear the right-of-way. The easement permitted the removal of trees and other obstacles outside of the right-of-way that were tall enough to interfere with transmission lines.

The landowner was concerned that the language in the easement contract seemed vague. The field service supervisor for Carroll Electric told the landowner that the language was in the easement contract so that Carroll Electric could “take danger trees.”

The landlord wanted this language removed. Carroll Electric’s representative would not do this but also said, “You have nothing to worry about.”

Carroll Electric’s design engineer had assured the landowner that the tree-clearing project could be done within 100 feet, the width of the right-of-way. Carroll Electric’s field service supervisor also told the landowner that if any damage occurred to landowner’s property beyond the right-of-way, then the landowner should “make a written claim to Carroll Electric and they would take care of restoring and repairing the damage.”

Without these promises, the landowner testified that she would not have signed the easement contract. The easement contract was one piece of paper. It guaranteed payment of $9,060 to the landowner for the easement.

The easement contract noted that logs would be left on the edge of the right-of-way for the landowner.

At trial, the Court received into evidence the one-page easement contract. It contained an additional hand-written note that stated: “Brush also to be left pushed off edge of right-of-way.”

Suzanne Bare testified at trial that she did not recognize the handwriting. She said the hand-written note was not on the easement contract when she signed it.

Carroll Electric’s field service supervisor testified that he added the hand-written note and it was on the easement before Suzanne Bare signed it.

The Southern District noted that the jury was entitled to believe or disbelief part or all of the testimony of any witness.

Steven Bare testified that he told Seven Valleys’ supervisor “not to clear anything wider than 100 feet.”

After the clearing crew had moved past the landowner’s property, the Bares went on an out-of-town trip. When they returned three days later, they discovered that a large area of their property had been bulldozed on what was previously a “fully wooded” section of their land.  In total, Seven Valleys’ work crew had removed 46 trees.

Contrary to the 100-foot limitation, Seven Valleys piled trees and lumber on the landowner’s property. Some of the trees had been placed on top of landowner’s fence, damaging the fence.  The landowner also discovered that other trees outside the boundary of the easement had been cut.

One of the issues on appeal was whether Carroll Electric controlled or had the right to control the activities of Seven Valleys. The appellate court noted that Seven Valleys’ contract permitted Carroll Electric to remove any employee of Seven Valleys. Carroll Electric could also force Seven Valleys to add employees to the project.

Further, Carroll Electric’s supervisor not only inspected Seven Valleys’ work, but he had the ability to correct work. The Southern District decided that there was substantial evidence supporting a finding that Carroll Electric’s control over Seven Valleys’ conduct “produced a trespass.”

The appellate court also considered whether the trial court errored by instructing the jury on punitive damages.

The Southern District concluded that the jury could reasonably find that Carroll Electric’s field service supervisor had added the hand-written note on the easement after it was signed by the landowner “to make it appear that the landowner had agreed to something that it had actually rejected.”

The Southern District further noted that he told Carroll Electric’s supervisor that he did not want any trees cleared beyond what they had agreed to in the easement. The supervisor replied that he would take any tree on landowner’s property that he wished.

With this evidence, the appellate court concluded that a reasonable juror could find that Carroll Electric’s conduct was outrageous by demonstrating a complete indifference to or a conscious disregard for landowner’s rights.

This is the legal standard to support an award of punitive damages under Missouri law. The Southern District, based on the standard and the evidence it considered, affirmed the award of punitive damages.

The Southern District also upheld the award of attorney fees pursuant to a Missouri statute. The statute provides that if a property owner prevails in an action for trespass against a rural electric cooperative, such property owner may be awarded reasonable attorneys’ fees, costs and expenses.

This statute also entitled the landowner to recover legal fees for the appeal including research in preparation of appellate briefs.

The appellate court sent the case back to the trial court to consider the reasonableness of the request for attorney fees and costs incurred by the appeal.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and alternative dispute resolution. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

Missouri Appellate Court Adopts Spearin Doctrine

in Columns/Law

By Jim Keller Herzog Crebs LLP

James R. Keller

In one of the most comprehensive and important construction decisions in years, the Missouri Court of Appeals for the Eastern District has found the Spearin doctrine applies in Missouri.  This is the first Missouri appellate court to definitively reach this conclusion.

The Spearin doctrine stands for the proposition that when a governmental entity includes detailed specifications in a contract, it impliedly warrants that if the contractor follows those specifications, the finished product will not be defective or unsafe and if the finished product turns out to be defective or unsafe, the contractor will not be liable for the consequences. The Spearin doctrine is widely accepted around the country, but no previous Missouri appellate court has specifically adopted or rejected this doctrine in a published opinion.

The case is Penzel Construction Company, Inc. v. Jackson R-2 School District, decided February 14, 2017.

This sweeping appellate opinion also discusses expert qualifications and the measure of damages through a total cost approach or modified total cost approach.  Missouri construction lawyers will be citing this case for years to come.

Penzel Construction Company, Inc. on behalf of Total Electric, Inc. brought a breach of contract action against Jackson R-2 School District based on breach of implied warranty for allegedly furnishing deficient and inadequate plans and specifications.

The District had entered into a contract with WNB Architects to build an addition to the Jackson High School. During the bidding process, the district furnished the plans and specifications for the project to Penzel, who gave a copy of the plans to Total Electric.

Neither Penzel nor Total Electric noticed any errors in the plans at the bidding stage. Based on the plans, Total Electric submitted a bid of $1,040,444 to Penzel to furnish and install electrical work for the project.

The district then entered into a contract with Penzel to be the general contractor. Penzel entered into a subcontract with Total Electric to provide electrical work.

Penzel’s claim at the trial court level pursuant to the Spearin doctrine was that the district impliedly warranted that the plans it furnished were adequate for completing the project and that the district breached the contract by providing inadequate and defective plans and specifications.

Alleged defects in the plans included inadequate low voltage switching and wire design affecting the gymnasium and some student areas, incorrect kitchen drawings, failure to specify emergency ballasts, failure to depict all the water heaters and circulating pumps requiring wiring, outdated products, non-compliance with building codes and an incorrect depiction of some site electrical work that actually was to be performed by others.

Total Electric’s claim was for labor loss of productivity and a 16-month delay in reaching substantial completion. Total Electric alleged that its damages were compounded by slow responses from the district and WNB as problems arose. Total Electric argued that it frequently had to wait weeks to months for a response.

This caused inefficiencies requiring Total Electric to pay workers for being on the project site with little or no work available to be performed. Total Electric also claimed higher hourly costs for manual labor due to trade labor wage escalation.

At the trial court level, the district brought a third-party claim against WNB.  The trial court granted motions for summary judgment on behalf of the district and WNB.

In reversing, the Eastern District concluded pursuant to the Spearin doctrine that if a contractor makes a bid in reliance on a governmental entity’s representations of what a project would entail, that contractor should not be punished—and the entity should not receive a windfall—because the entity’s renderings were defective.

The Eastern District also decided that Penzel was not required to use expert testimony to prove the plans were substantially deficient. Rather, testimony that the plans omitted critical components, called for outdated or non-existent products and failed to comply with building codes were issues that a layperson (or a juror) without any technical training could understand.

Also, Penzel could use two witnesses with 40 and 60 years of construction experience to testify that the electrical plans and specifications were deficient, even though neither one was a registered architect, licensed electrician or licensed engineer.

To prove Total Electric’s loss of productivity claim, Penzel used the total cost method or modified total cost method.

The total cost method requires proof of four elements: 1) the nature of the particular loss makes it impossible or highly impractical to determine any loss with a reasonable degree of accuracy; 2) the contractor’s bid or estimate was realistic; 3) the actual costs are reasonable; and 4) the contractor is not responsible for any added costs.

The modified total cost method is more flexible by allowing for adjustments to the total calculation of damages. The four-prong test is still used; however, it is merely a starting point and subject to adjustments to aid in proving the actual losses.

The appellate court concluded that the total cost method or modified total cost method may be an avenue to establish damages in this case.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator.

Missouri’s Supreme Court Reverses $8,000,000 Punitive Damage Verdict

in Columns/Law
James R. Keller

By James R. Keller

Missouri’s Supreme Court weighed in on another construction case in 2016 by a reversing a jury verdict in favor of the City of Harrisonville of $8,000,000 in punitive damages.

The case is City of Harrisonville v. McCall Service Stations d/b/a Big Tank Oil and the Missouri Petroleum Storage Tank Insurance Fund, 495 S.W.3d 738 (Mo. 2016), decided August 23.

The project was the cleanup from underground petroleum storage tanks at a service station in Harrisonville. An upgrade of an adjacent sewer system for the City prompted the cleanup.

Missouri, by statute, established the Missouri Petroleum Storage Tank Insurance Fund per Section 319.129. This Fund provides insurance to service station owners for the cleanup costs from spills and leaks from underground petroleum storage tanks.

McCall Service Stations d/b/a Big Tank Oil owned a service station. McCall informed the Fund in 1997 that significant gasoline had leaked into the soil around its tank system.

McCall and the Fund hired Bob Fine, an environmental engineer, to determine the extent of the leak. Fine notified the Missouri Department of Natural Resources that the leak was moving toward a nearby creek.

Fine prepared a plan to contain the leak by installing monitoring wells on streets next to the site. McCall thereafter sold the service station to Fleming Petroleum Corporation.

In 2003, Harrisonville decided to upgrade its sewer system given a growth in population. The City awarded a construction contract, after competitive bidding, to Rose-Lan Construction for a multi-million dollar sewer upgrade per a bond issue for this work.

During construction, Rose-Lan encountered contaminated soil next to Fleming’s service station and notified the Department of Natural Resources.

Fine, who had been monitoring the situation since 1997, confirmed that the underground storage tank was the source of the leak. He suggested that the most cost-effective approach would be to leave the contaminated soil in place and install petroleum-resistant pipe and fittings.

The City’s engineer estimated that to completely remove and replace the contaminated soil would cost more than $500,000. BV Construction submitted a bid of $190,226.38 to install the petroleum-resistant pipe per Fine’s approach.

The Fund obtained a lower bid of $175,161.41 from Midwest Remediation.

There were several discussions between the City and the Fund about the remediation and who would pay for it. Three representatives for the City felt based on the meetings that the Fund would reimburse the City for the remediation costs.

After these discussions, the City’s attorney sent a letter to the Fund’s representative that the City was going forward with Midwest in reliance on the “promise” that the Fund would pay the full amount of Midwest Remediation’s costs. The City then authorized Rose-Lan to subcontract with Midwest Remediation to install the petroleum-resistant pipe.

The Fund did not reimburse the City for the work—thus the lawsuit.

The City sued the Fund for fraudulent and negligent misrepresentation.  The City alleged it hired Midwest Remediation in reliance of the Fund’s representative’s express promise that the Fund would pay for the cost of Midwest’s work.

During trial, the City established that it incurred increased costs of $172,100.98 to complete the sewer upgrade project as a direct result of the contamination caused by McCall and Fleming. None of these costs would have been incurred had the City not encountered petroleum-contaminated soil.

The jury returned a verdict for the City of $172,100.98 in compensatory damages against McCall, Fleming and the Fund, $100 in punitive damages against McCall and Fleming and $8,000,000 in punitive damages against the Fund.

Regarding the Fund’s liability, Section 319.131 states that the Fund will pay all of any participants’ cleanup costs that are greater than $10,000 but less than $1,000,000 per occurrence and the Fund shall provide coverage for third-party claims involving property damage or bodily injury caused by leaking petroleum storage tanks.

The Missouri Supreme Court decided the City’s claims against the Fund did not fall within the statutorily authorized claims set out in Section 319.131.  The Fund is not authorized to provide coverage for claims that do not constitute a participant’s cleanup costs or involve third-party claims. The City’s tort claims were beyond the coverage provided by the Fund.

Despite this finding, the Supreme Court left in place the award of compensatory damages solely because the Fund had not appealed this portion of the jury’s verdict.

But the Supreme Court decided that since the City did not have a claim against the Fund for compensatory damages, even though they were awarded, the City could not recover punitive damages from the Fund.

There must first be actual damages to support the award of punitive damages.  Since the actual damages were not allowed by statute, the punitive damages could not be allowed either, the high court concluded. Thus, the Supreme Court reversed the $8,000,000 punitive damage award.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Subcontractor Denied Bond Claim Against St. Louis County

in Law

By James R. Keller

James R. Keller
James R. Keller

The Supreme Court of Missouri recently ruled that a subcontractor cannot pursue a bond claim against St. Louis County, but may pursue its mechanic’s lien claim against the leasehold interest of a company that acted as St. Louis County’s agent. The Missouri Supreme Court rarely decides construction cases involving bonds and mechanic’s liens, making this decision significant in how subcontractors will pursue future claims.

The case is Brentwood Glass Company v. Pal’s Glass Service, Inc., Clayco, Inc., Cornerstone VI, LLC, St. Louis County, National City Bank of the Midwest, N.A., Paul M. Macon, UMB Bank, N.A. and Victor Zarilli, 2016 WL 4444039, decided August 23.

St. Louis County had purchased property known as Six CityPlace Drive in Creve Coeur, Missouri, which the County had planned to develop as the headquarters of Smurfit-Stone Container Enterprises, Inc.

The County entered into a contract with Cornerstone to construct the project on the County’s behalf. Cornerstone acted as the County’s agent.

Clayco, Inc. was the general contractor for the project. Clayco entered into a subcontract with Pal’s Glass to supply glass and glazing work. Pal’s Glass entered into a sub-subcontract with Brentwood Glass for some of this work.

No contractor on the project obtained a bond that would comply with Section 107.170.2 of the Revised Statutes of Missouri. This section provides that all public entities (such as St. Louis County) must require every contractor for work on public property to furnish a bond to cover materials and labor.

Brentwood Glass filed a mechanic’s lien on the property in the amount of $1,061,464.08. Brentwood Glass then filed a nine-count petition against Pal’s Glass, Clayco, Cornerstone, St. Louis County, as well as various banks and individuals, seeking recovery on its mechanic’s lien and in one count pursuing an action against St. Louis County for its alleged failure to require a payment bond under Section 107.170.

Pal’s Glass admitted it owed $593,261.47. It consented to a judgment for that amount plus costs.

Because the property was owned by St. Louis County at the time Brentwood Glass began working on the building, Brentwood Glass could not pursue its mechanic’s lien against the County. Public property is not subject to a mechanic’s lien.

Cornerstone, however, held a leasehold interest in the property. Cornerstone is a private company and not a public entity.

The Supreme Court reversed the decision of the trial court and found that Brentwood Glass could pursue its mechanic’s lien against Cornerstone’s leasehold interest. The Supreme Court of Missouri sent back for further consideration by the trial court whether Brentwood Glass’s lien statement properly complied with Missouri law, which requires a “just and true” account of any money that is due.

The lien statement included potentially non-lienable items. Brentwood Glass admitted that its statement incorrectly included efforts to recover for payments that Clayco had paid directly to Brentwood Glass’s subcontractors and material suppliers.

The Missouri Supreme Court determined that the trial court must decide whether these non-lienable items were included in the lien statement with an intent to defraud or were honest mistakes. If honest mistakes, presumably the trial court will determine that the mechanic’s lien is proper.

Regarding the public bond claim against St. Louis County, Section 107.170.1 requires a bond for any “contractor” that “provides construction services under contract to a public entity,” but not a party that merely arranges for such services to be provided by others. The Supreme Court decided that Cornerstone did not provide construction services under its contract with the County. Therefore, Cornerstone was not a contractor within the meaning of Section 107.170.1.

The Supreme Court of Missouri also decided that even if this section required a bond, Brentwood Glass’s claim must fail because it did not name as a party in its lawsuit any individual officials of St. Louis County, but instead named as the defendant only St. Louis County. The court held:  “The decisive fact is that the County—a political subdivision—is immune from suit under the doctrine of sovereign immunity.”

The Missouri Supreme Court’s decision was far from unanimous. Two of the Justices, including the Chief Justice, filed concurring/dissenting opinions.  They believed that Cornerstone was a contractor within the meaning of the statute and therefore Brentwood Glass should have been able to pursue its bond claim. They also believed that Brentwood Glass should have been given the opportunity when the case is sent back to the trial court to amend its petition to name individual officials as defendants.

Three other Justices filed a different concurring/dissenting opinion. They believed that Brentwood Glass did not demonstrate substantial compliance with Missouri’s mechanic’s lien statute that requires a “just and true account.”  These three Justices believed that Brentwood Glass should not have been allowed to pursue its mechanic’s lien claim.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

 

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