Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

In the last post on bank insolvency we talked about how after becoming the receiver for a failed bank, the Federal Deposit Insurance Corporation (the "FDIC") can repudiate any of the bank's contracts, including construction loan agreements and revolving line of credit loan agreements.  So if you're on the receiving end of contract repudiation, what do you get?  Not much.  That's our topic today.

Dual Role of the FDIC

First we need to go off topic to clarify something important about the FDIC.  You see the FDIC acts in several capacities; they wear two hats so to speak.

 

• The FDIC's corporate capacity.  The FDIC acts in their corporate capacity when they oversee operating banks, collect deposit insurance premiums, and pay deposit insurance claims to depositors after their bank fails.  When you see those Suze Orman ads and posters, she's talking about the FDIC acting in their corporate capacity. (But does she have to turn her collar up like that to do it?)  And when the FDIC acts in their corporate capacity, they're acting with the full faith and credit of the FDIC
   
• The FDIC in their receivership capacity.  The FDIC acts in their  receivership capacity when they "resolve" a failed bank as the bank's receiver.  You see this most often when they take over and close a bank down.  When the FDIC acts in their receivership capacity, their liability to creditors of the bank they've taken over is limited to the assets of the bank they're receiver for.  Keep this limit in mind. It's very important later.  

Repudiation Claims Process

Under Section 11(e) of the Federal Deposit Insurance Act (the "FDI Act"), you can make a claim against the receivership estate for the damages you suffer because the FDIC repudiates your contract.  The "receivership estate" is law talk for the assets of the failed bank that the FDIC is able to marshal and turn into cash.

Repudiation of a contract is considered a breach of the contract.  But it's a special kind of breach. There's an unusual claims process for getting damages and the damages you can get are limited. 

Continue Reading...

• Email This
• Print
• Comments
• Share Link

In the last bank insolvency post I introduced you to some of the extraordinary powers of the Federal Deposit Insurance Corporation (the "FDIC") when they are appointed as receiver or conservator to resolve a failed bank.  Today we're going to focus on the FDIC's extraordinary power to repudiate contracts that the failed bank is party to.

Receiver Only

But first, a preliminary note.  From here on out, I'm only going to refer to the FDIC as receiver for a failed bank.  They're also sometimes appointed as the conservator under the Federal Deposit Insurance Act (the "FDI Act"). But that's not as often, and for our purposes, the difference doesn't really matter. Plus I'll wager that you get almost as tired of reading "receiver or conservator" as I get of writing it.

Contract Repudiation Power

Under Section 11(e) of the FDI Act, after being appointed receiver of a failed bank, the FDIC may unilaterally repudiate contracts that the bank was a party to on the Appointment Date. This is like when a debtor in a bankruptcy rejects a contract.  But there's important differences.   It's especially different if you, or someone else involved in your construction project, is the borrower under a repudiated loan agreement.  Think of contract rejection in bankruptcy as getting hit by a truck.  For reasons we discuss here, and will discuss in the next posts, FDIC repudiation of a contract affecting your project (think loan agreement here) is a locomotive coming along and hitting that truck.

Which Contracts May the FDIC Repudiate

The FDIC may repudiate any contract they want, as long as the FDIC, in their own discretion, decides that both:

• Continuing to perform under the contract will be burdensome for the FDIC, and
• Repudiation will promote the orderly administration of the failed bank's affairs

Unlike Section 365 of the United States Bankruptcy Code, where a debtor in bankruptcy may only reject executory contracts (i.e., parties must still perform parts of the contract), a contract doesn't need to be executory for the FDIC to repudiate it. And unlike in bankruptcy, the FDIC can partially repudiate a contract. For instance, they can repudiate future disbursements under a loan agreement, yet still require the borrower to repay principal disbursed before repudiation plus interest owed on that principal.

Continue Reading...

• Email This
• Print
• Comments (1)
• Share Link

The late California Supreme Court Justice Roger Traynor wrote about contract risk allocation over 60 yeas ago.  Other than my shortening the periods in his prose, this is what he said: 

The purpose of a contract is to place the risks of performance upon the promisor.  And the relation of the parties, terms of the contract, and circumstances surrounding its formation must be examined to determine whether it can be fairly inferred that the risk of of the event that has supervened  to cause alleged frustration was not reasonably foreseeable.  If it was foreseeable, there should should have been provision for it in the contract.  And the absence of such a provision gives rise to the inference that the risk was assumed.

                                                                                  -- Roger Traynor, Lloyd v. Murphy (Cal. 1944)


     

• Email This
• Print
• Comments
• Share Link

In FDIC Takeover: How It Affects Your Construction Project we started talking about the Federal Deposit Insurance Corporation (the "FDIC") and how they take over a failed bank.  Today we're going to talk about the history and background of the FDIC.  And that will lead us into talking about the FDIC's extraordinary powers.

The Great Depression and Creation of the FDIC

In the wake of the 1929 stock market crash the Great Depression was so bad that by March 1933 more than 9,000 U.S. banks failed.  The entire U.S. financial system was on the verge of melting down.  President Hoover and other government officials even feared that general anarchy could soon follow. 

 

Confidence in banks was at an all time low.  Panicked depositors withdrew money so fast that on the day after he was inaugurated, President Franklin Roosevelt declared a banking holiday - all U.S. banks shut down for the next 4 days while federal officials examined their financial condition. 

 The holiday stabilized the banking system and the crisis subsided.   After the holiday most banks re-opened and there were no more crises like 1933 again.  Part of the reason was new laws passed in the wake of the crisis that included setting-up the FDIC to insure bank deposits.

Bank deposit insurance programs in the U.S. go back as early as a New York state program that started in 1829.  Between 1866 and 1933, Congressmen has introduced 150 bills for bank deposit insurance in one form or another.  But it took the panic of 1933 to finally get deposit insurance enacted into law as part of the Banking Act of 1933, also known as the Glass-Steagall Act after its co-sponsors, Virginia Senator Carter Glass and Alabama Representative Henry Steagall.

Continue Reading...

• Email This
• Print
• Comments
• Share Link

You can't help but notice recent high profile bank failures like IndyMac and Washington Mutual.  In each case the Federal Deposit Insurance Corporation (the "FDIC") came in and took over those banks as they have many others.  According to a list composed by recession.org, 21 banks already failed in 2009 and 23 banks failed in 2008.  In Guessing How Many Banks Will Fail Time magazine reported that research firm RBC Capital Markets revised its estimate for U.S. bank failures in the next 3 years up from 200-300 to over 1,000.

With the looming prospect of more bank failures and FDIC takeovers, you can't help but wonder how they'll affect your construction project.  What will happen if the FDIC takes over: (1) the owner's construction lender or (2) the revolving line of credit lender for: (a) the prime contractor, (b) a critical subcontractor, or (c) an architect, engineer, or other designer?

With those kinds of questions in mind, in this post and the series that follows, we'll talk about how the FDIC take over process works, the FDIC's extraordinary powers, and how a takeover can affect your project (1) regardless of your role in the project (owner, designer, contractor, material supplier) and (2) regardless of whether it's your bank that the FDIC takes over.

Banking Insolvency

The first thing you must understand is that banks, thrifts, savings and loans, credit unions, and other "depository institutions" (collectively all together, "banks") don't go into bankruptcy.  Because they're so critical to the workings of the U.S. commercial system and stability of society in general, bank insolvencies are treated differently, under different laws, than regular business insolvencies.  So the United States Bankruptcy Code specifically excludes banks from becoming debtors under the Bankruptcy Code.

Instead, banking regulators and the FDIC "resolve" insolvent banks.  A state banking regulator will start resolution of an insolvent state chartered bank. Either the United States Treasury Department's Office of the Comptroller of the Currency or Office of Thrift Supervision will start resolution of an insolvent federally chartered bank.  They do this by putting an insolvent bank that's under their regulatory jurisdiction into a receivership or conservatorship.  Then they call in the FDIC to act as receiver or conservator for the insolvent bank.  That's when resolution of the bank hits the news media and you see a spot on how the FDIC just took over this or that bank today.

In The Next Bank Failure Post

In the next bank failure post, we'll talk about the FDIC, its history and some of its extraordinary powers that can make real big problems on construction projects.

 

• Email This
• Print
• Comments
• Share Link

In recent post, Florida Court Says Limitation of Liability In Consultant's Contract Is Unenforceable Against Individual Consultant Part -1, we talked about the recent Florida case on limitations of liability in a consultant's professional services contract - Witt v. La Gorce Country Club, Inc.   In that case, Florida's Third District Court of Appeal held that an individual consultant can't enforce the limitation of liability in his design firm's design services contract against the negligence claims of a dissatisfied client.  Today we'll talk about how that case could affect you if you're:

• An engineer, architect, other design professional, one of their insurers, or one of their lenders
  
• A prime contractor or subcontractor
• An owner
• A construction lender lending money to an owner
  

How Could This Case Affect You?

• If you're an engineer, architect, or other design professional.  This case is bad for you.  It re-affirms and expands the Florida Supreme Court's 1999 decision in Moransais v. Heathman.  That case says, among other things, that your professional firm can't contractually limit its liability for professional malpractice.  Under this new case, you can't limit your individual liability either.
  
  
Your insurers aren't going to like this case either.  If your firm has professional errors and omission liability insurance, the policy probably also covers you individually as an insured too.  This is one more liability you won't be able to contractually limit.  That increases your insurer's risk.  And that usually prompts your insurance underwriters to raise your premiums.

Continue Reading...

• Email This
• Print
• Comments (2)
• Share Link

This past Thursday the San Diego Chapter of the Associated General Contractors (the "San Diego AGC") sued the California Department of Transportation ("CalTrans") claiming that racial and gender contracting quotas under CalTrans's 2009 Disadvantaged Business Enterprise (the "DBE Program") are illegal.
 
Representing the the San Diego AGC, the Pacific Legal Foundation filed the Complaintstarting the lawsuit in the United States District Court for the Eastern District of California.  The lawsuit focuses on a March 4 internal CalTrans Memo from CalTrams Division of Local Assistance Chief, Denix D. Anbiah. 

The memo says that on projects receiving federal funds (this includes federal infrastructure stimulus grants), Caltrans must award at least 6.75% of contracts to women or a group composed of African-Americans, Asian-Pacific Americans, and Native Americans.  The group doen't include Latinos.

The lawsuit claims that that the DBE Program violates the 14th Amendment to the United States Constitution, The Civil Rights Act of 1964, various other federal statutes, and the California Declaration of Rights, a/k/a Proposition 290.

The San Diego AGC's lawsuit also asks the judge to enjoin CalTrans from adopting, enforcing, or attempting or threatening to enforce, the parts of the DBE Program that the San Diego AGC claims discriminates against, or grants  preferential treatment to, anyone based on race, sex, color, ethnicity, or national origin.

Tip to Jon Ortiz of the Sacramento Bee for breaking this story in his article California Challenged on Race-, Gender-Based Contracts.

• Email This
• Print
• Comments
• Share Link

• Email This
• Print
• Comments (1)
• Share Link

Yesterday, Florida's Third District Court of Appeals sitting in Miami issued their opinion in Witt v. La Gorce Country Club, Inc. holding that a limitation of liability in a consultant's professional services contract is unenforceable.

The Backstory

La Gorce Country Club, Inc. (the "owner") wanted to improve the irrigation of their golf course using reverse osmosis.  They hired the geology firm of Gerhardt M. Witt and Associates, Inc. (the "consulting firm") to consult on designing and installing a reverse osmosis system.  Consulting firm principal, Gerhardt Witt (the "individual consultant"), personally provided the consulting firm's services to the owner.


The consulting contract between the consulting firm and the owner included a limitation of liability clause limiting the consulting firm's liability, not just for breach of the consulting contract, but for other, non-contractual claims as well (e.g., professional malpractice, a/k/a negligently providing professional services.  Here's the entire limitation of liability:

In recognition of the relative risks and benefits of the project to both the owner and the consulting firm, the risks have been allocated such that the owner agrees, to the fullest extent permitted by law, to limit the liability of the consulting firm and its subconsultants to the total dollar amount of the approved portions of the scope for the project for any and all claims, losses, costs, damages of any nature whatsoever or claims expenses from any cause or causes, so that the total aggregate liability of the consulting firm and its subconsultants to all those named shall not exceed the total dollar amount of the approved portions of the Scope or the consultant's total fee for services rendered on this project, whichever is greater. Such claims and causes include, but are not limited to, negligence, professional errors or omissions, strict liability, breach of contract or warranty.

Continue Reading...

• Email This
• Print
• Comments
• Share Link

In the last post on consequential damages, Why Treat Consequential and Direct Damages Differently, we talked about why consequential damages are so much tougher to get.  In this post we'll talk about practical pointers and tips that you should keep in mind when you're dealing with consequential damages, especially when you're negotiating a contract.

Consequential Damages Are The Big Money

The biggest damages are usually consequential.  They're the "pain and suffering" of a breach of contract claim.  The owner's consequential damages for late completion of the Sands casino in the Perini case is the classic example.   Some examples of big consequential damages that litigants often ask for....

Owners asking for lost rents, lost sales, higher interest payments, extra loan fees, and  injury to the standing and reputation of the owner and the project.

Contractors asking for home office overhead, profits from work on other projects they had to turn away, lost bonding capacity, and injury to company standing and reputation.

Architects, engineers, and other design professionals asking for profits on work they had to turn away, extra expenses they incur devoting more professional time and resources to a project than expected, and injury to their professional standing and reputation.     

Because consequential damages involve big money, they usually arouse dogged and protracted disputes.  That's why early consequential damage planning is important.   

Proving Contemplation - Put It In Your Contract

From reading the earlier posts in this series you now recognize that if you're trying to get consequential damages, the first line of defense you must get through is proving that the other side contemplated your consequential damages at the time they entered into the contract.  There's several ways to do this.  But the easiest is putting proof of contemplation right in the language of the contract itself.  Where? 

Continue Reading...

• Email This
• Print
• Comments
• Share Link

In the last consequential damages post we talked about how direct damages and consequential damages get treated differently.  Today we're going to talk about why they get treated differently.  It's actually pretty simple - when people take more risk, they should get the opportunity to get more reward.

The Theory Of Why

It's pretty safe to assume that providers base the prices of their goods and services in part on the possibility that they'll have to pay damages to a customer if a good or service turns out to be defective.  And that part of pricing is usually based on the types, and the amounts, of damages they think are possible, or should think are possible - direct damages.

Now if a defect is going to cause the customer to suffer other types or amounts of damages - consequential damages - the provider's risk get s bigger, often exponentially.  And usually a provider who knows that they're taking on this greater risk will want the opportunity to adjust the price of their goods or services - raise the price so they get a bigger reward for exposing themselves to a bigger risk.

But if the provider doesn't know of the bigger potential risk, they can't consider raising their price.  It doesn't seem fair to stick a provider with bigger than expected risk without the opportunity for them to first consider asking for a bigger reward.  And that's why judges treat direct and consequential damages differently - to ensure that the provider gets the opportunity to consider the extra risk and the opportunity to ask for the bigger reward. How do they do that?  

Continue Reading...

• Email This
• Print
• Comments
• Share Link

I often get questions about whether someone must perform under a construction contract or an architects agreement, and what happens if they don't.  Will a judge, or a sheriff sent by a judge compel them? 

Over 110 years ago the late Justice Oliver Wendell Holmes gave the best answer I've seen in his article The Path of the Law:

Nowhere is the confusion between moral and legal ideas more manifest than in the law of contract...The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it - and nothing else.

The common law Justice Holmes refers to still holds as true as much today as it did in 1897. There's some exceptions, but I've yet to see one in the case of a construction contract.  Odds are you won't either.

• Email This
• Print
• Comments
• Share Link

In this past post I mentioned a bill (HB344) in the Illinois legislature to amend the Illinois Contractor Prompt Payment Act putting caps on retainage under private construction contract and subcontracts.  The legislative session has ended and the bill did not emerge from the Illinois's Senate Executive Committee and will not be enacted this spring.  We'll see if the bill returns later this year or in the next legislative session.  Stay tuned.

Interested in construction related bills that did pass the Illinois legislature this session?  Check out the Illinois Construction Law Blog's report on HB236 amending the Illinois Mechanics Lien Act.  Both houses passed the bill and it's now with Governor Quinn waiting for him to sign it.

If Governor Quinn signs this bill, prime contractors must give homeowners written notice within 10 days after recording a mechanics lien informing the homeowner that the contractor has recorded the lien.  Here's a legislative staff summary of  HB236:

Amends the Mechanics Lien Act to provide that:

• A contractor for improvements of an owner-occupied single-family residence must give the owner written notice within 10 days after recording a lien against any property of the owner.
  
• The notice is served when it is sent or personally delivered.
  
• If timely notice is not given and, as a result, the owner has suffered damages before notice is given, the lien is extinguished to the extent of the damages.
  
• The mere recording of the lien claim is not considered damages. These changes do not apply to subcontractors and only apply to contracts entered into after the effective date.

• Email This
• Print
• Comments
• Share Link

The American Institute of Architects is looking to hire a new lawyer to serve in a job as Associate Counsel for work on the AIA's Contract Documents. 

Duties include:

• Editing AIA Contract Document drafts to ensure (1) consistency within the document and with parallel language in other related documents, (2) grammatical accuracy, and (3) conformance to the AIA style for contract documents.

• Performing legal research, and preparing case briefs and legal memoranda as needed to clarify contract issues.

• Issuing document drafts to outside organizations for comment; organizing, synthesizing, and recording, or overseeing the recording of, comments for committee review; coordinating discussion of comments, and recording committee responses and action.

• Creating and maintaining accurate written and electronic records of drafts, correspondence, and meetings.

• Writing and editing AIA Contract Document user instructions and guides.

• Writing and editing promotional, educational, and explanatory material on AIA Documents for Institute newsletters, the AIA's Web site, and other publications.

• Preparing and editing PowerPoint presentations about AIA documents for AIA spokespersons.

• Preparing document synopses and abstracts.

• Editing documents for printing.

• Assisting in developing, reviewing, and testing upgrades to the AIA Contract Documents software application.

• Attending Documents Committee meetings (as scheduled) and preparing minutes at those meetings. Providing staff support to an assigned task group of committee members.

• Rotating with other Assistant Counsels, providing assistance to documents users regarding the content of AIA documents by via e-mail and phone, and recording questions and answers.

• Representing the Documents program at official AIA functions, like the AIA's annual leadership conference and National Convention.

Click here for more.

• Email This
• Print
• Comments
• Share Link

While we're in the midst of talking about consequential damages here, a name synonymous with them is disappearing.   

According to Business Wire, the Perini Corporation name is history starting today.  This follows a 2008 merger with Tutor-Saliba Corporation.  The new name will be Tutor Perini Corporation.

The Perini Case

The name Perini gained notoriety, or infamy, depending on your point of view, in 1992 when the New Jersey Supreme Court decided the case of Perini Corporation v. Greate Bay Hotel & Casino, Inc.  In that case Perini worked as prime contractor building a the now demolished Sands Casino in Atlantic City, New Jersey.  The original guaranteed maximum price was around $16,800,000, later increased to $24,000,000.  Perini's fee was only about $600,000.  But when Perini finished the work late, the owner claimed over $14,500,000 in damages for lost profits because of time that the casino was not open to the gaming public.

Perini and the owner went to arbitration and the arbitrators awarded the owner over  $14,500,000 in damages - much of them categorized as consequential damages (e.g., lost profits from missed casino operating opportunities).  Perini appealed the arbitrators' decision all the way to the New Jersey Supreme Court.  The New Jersey's Supreme Court's affirmed the arbitrators' award.  That decision forever became known as "The Perini case."  And with it the name Perini became synonymous with consequential damages.

The effects of the Perini case were so dramatic that when the American Institute of Architects revised the A201 General Conditions part of their standard form construction contract in 1997, they added a mutual waiver of consequential damages from both the owner and the contractor.

The Merger and Name Change

As with many mergers and acquisitions, not long after the deal closes names get changed. So it's become with the Perini Corporation.  Not completely gone, but no longer the same.

Whether you loved or hated the The Perini case, it's namesake has become a kind of cherished byword in construction industry and construction lawyer jargon.  I'll be sad to see it go.  But still, at least among construction lawyers, "Perini" will endure as the most used shorthand way to refer to consequential damages.

• Email This
• Print
• Comments
• Share Link