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

Last week Judge Deborah Hedlund hearing lawsuits arising from collapse of the I-35 bridge in Minnesota rendered an order denying an engineer's motion to be dismissed from one of those lawsuits.

The Backstory

The State of Minnesota contracted with Sverdrup & Parcel and Associates, Inc. to design the original bridge in 1962.  Construction of the bridge was complete in 1967.  Then, through a series of post-completion name changes and mergers, the Jacobs Engineering Group, Inc. purchased Sverdrup & Parcel. From here on in I'm going to refer to Sverdrup & Parcel, the Jacobs Group, and all of the names in between together as the "original engineer".

Before the collapse, URS Corp. (the "later engineer") and Progressive Contractors, Inc. (the "contractor") were both working on maintenance for the bridge.  After the bridge collapsed, the State and others sued the later engineer and the contractor.  They looked back to the original engineer's design and decided part of the blame also belongs to the original engineer too.  So they sued the original engineer for contribution and indemnification.  Basically, the later engineer alleged that the original engineer was at least partly to blame for the bridge collapse.  And because the original engineer' was partly to blame, the original engineer should reimburse the later engineer and the contractor for what they must respectively pay-out to the State and others. 

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In the last bank insolvency post I mentioned that not only can the Federal Deposit Insurance Corporation (the "FDIC") extend statutes of limitation, they can even revive some claims after the limitations period has already expired.  "You've got to be kidding me!!" you say.  I kid you not.

Under Section 11(d)(14)(C) of the Federal Deposit Insurance Act (the "FDI Act"), once the FDIC is appointed as receiver for the failed bank, the FDIC can revive the claims by the bank even if the statute of limitations on those claims already expired before the Appointment Date.  In L-3 Communications v. Clevenger, one judge suggests that Section 11(d)(14)(C), represents Congress's unambiguous intent to preempt state statutes of limitation and allow the FDIC to revive certain claims even after the limitations period has already expired.   

But Congress qualified and limited the FDIC's ability to revive claims too. It's not open season on statutes of limitation.

First Limitation: Limited Kinds of Claims

The FDIC can only revive claims arising from:

• Fraud
  
• Intentional misconduct resulting in unjust enrichment
• Intentional misconduct resulting in substantial loss to the bank
  

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In the last bank insolvency post I gave you the first of two examples of how the Federal Deposit Insurance Corporation's (the "FDIC") can use Section 11(d)(14) of the Federal Deposit Insurance Act (the "FDI Act") to extend the limitations period on claims against a prime contractor for defects in a building's curtain wall.  Today I'll give you the second example.  This time it's the FDIC extending the limitations period on claims against a surety under a performance bond.

Example #2 - FDIC vs Surety

First, assume all of the facts from yesterday's example.  Now add that the prime contractor provides a performance bond to the original owner.  Under the bond the surety guarantees the prime contractor's performance under the prime contract.  The bank is a co-obligee under the bond (meaning that the bank can enforce the bond too). The bond is on the American Institute of Architects Form A312 - 1984 Performance Bond.

After taking over as receiver for the failed bank (nearly 3 years after the prime contractor last provided any work on the project), the FDIC also sues the surety because the curtain wall gaps breach an express warranty in the prime contract.

Like the prime contractor, the surety asks the judge to dismiss the FDIC's lawsuit because the FDIC filed it too late.  The surety says that Section 9 of the bond shortens the the time to submit claims under the bond to 2 years after the earlier of: 

• Prime contractor default under the prime contract, and 
  
• When the prime contractor stopped work on the project

The FDIC filed their lawsuit more than 2 years after the prime contractor last worked on the project.  So the surety urges the judge to dismiss the FDIC's lawsuit because the FDIC filed it after that deadline expired.
 
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In the last bank insolvency post I promised to give you some hypothetical examples of how the Federal Deposit Insurance Corporation's (the "FDIC") power to extend statutes of limitation works.  Here's the first.  The second comes tomorrow.

Example #1 - FDIC vs. Prime Contractor

Imagine a prime contractor working on an office building project in my hometown - Chicago.  They have a prime construction contract with the owner (from here on in I call this owner the "original owner" because there's going to later owners that come along later). 

The original owner gets a loan from a bank to pay for part of the construction.  As security for repayment of the loan, the bank takes (1) a mortgage against the building, (2) a collateral assignment of the tenants' rents, and, most importantly for us, (3) a collateral assignment of the original owner's rights under the prime construction contract, including the warranties.

During construction some of the curtain wall subcontractor's workers don't comply with all of the manufacturer's instructions for installing parts of the curtain wall panels.  This creates gaps in the joints between some of the curtain wall panels allowing water and air to seep into the interior of the building. 

A couple of months after the prime contractor substantially completes the project, some tenants complain to the original owner about water and drafts coming into their premises.  Based on the tenant's complaints and the reports of consultants that the original owner hired, the original owner discovers that the gaps in the curtain wall joints are the likely source of the problem.  The day the original owner discovers that is the original LP Start Date.
 
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In Vacating Arbitration Awards: Reasons In The Federal Arbitration Act Are The Only Way For Now - Part 1, we talked about the background facts and the judges' decision in Saipem America v. Wellington Underwriting Agencies Limited.  That was the case about claims for damage to an oil drilling platform while in transit from Texas to Israel.  Today we're going to talk about some of the lessons from the Saipem decision and how they could affect you.

• If you're going to have an arbitration clause in your contract, you need to think about what you want it to cover and ensure its language expresses your intentions.  If you have a dispute with your counterparty, the verbal perimeter you establish in your arbitration clause will decide which disputes get arbitrated, which disputes don't, and which ones you spend time and money on disputing whether they get arbitrated.

• Do you want to narrowly circumscribe the claims that get arbitrated?  For instance, arbitrate only claims for beach of your contract.  But keep in mind that if you pick this option, you may wind up with a dispute where some of the claims (breach of contract) get arbitrated, but others (negligence) don't.  If that happens you might have to can pay for two parallel proceedings - one in arbitration and one in court.  And those proceeding may even yield contradictory decisions.
  
• Or do you want a broader sweep on which claims go to arbitration?  For instance, all of claims the could arise from your relationship with your counterparty, regardless of classification (e.g., fraud, violation of statutes, interference with other contracts you have with third-parties).
  

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The United States Securities and Exchange Commission (the "SEC") recently sued Maynard Jenkins, former chief executive officer of CSK Auto Corporation ("CSK"), to reimburse CSK and its stockholders for more than $4 million worth of bonuses and stock sales while CSK was allegedly committing accounting fraud.  Are you asking yourself "so what's that have to do with me in the construction industry?"  Read on and I'll tell you.

According to the SEC's Complaint, during part of Mr. Maynard's tenure at CSK (parent of auto part stores Checker Auto Parts, Schucks Auto Supply, and Kragen Auto Parts), the company contracted for deferred vendor allowances (i.e., rebates) from various auto part suppliers.  The more CSK bought from a supplier, the bigger the allowance.  Receiving allowances lowered CSK's cost of purchasing inventory.  That lowered CSK's cost of goods sold, giving a higher profit margin on sales allowing them to report higher revenue to investors.  But trouble started when some suppliers didn't pay their allowances.
  

The SEC alleges that CSK executives hid uncollectible allowances instead of writing them off as required by Generally Accepted Account Principles.  That resulted in CSK reporting better than actual performance to investors.  Later, CSK had to re-state their earnings for 2002, 2003, and 2004.  

The SEC claims that under the "clawback" provisions in Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX"), Mr. Maynard must give back to CSK:

• Bonuses he received within 12 months after this under-reporting occurred
• Profits he made on the sale of CSK stock during that period
  

And why should you or I in the construction industry care about the SEC suing a former auto parts store executive?

• For many years various sectors of the construction industry have used rebates, refunds, and discounts like CSK's vendor allowances to sell building materials and equipment.  Prime contractors, subcontractors, and material suppliers have all enjoyed these kinds of subsidies and incentives that lower their costs and increase their profit margins.  Executives at some could "overlook" writing-down unpaid incentives like management at CSK did.  And executives of those who are publicly could also hear from the SEC, just like Mr. Maynard.

     

• The SEC isn't alleging that Mr. Maynard broke any other securities laws.  They're not suing Mr. Maynard for securities fraud. And the Department of Justice hasn't charged him with any criminal offense under the securities laws (though the DoJ did charge others involved).  Perhaps this signals a more aggressive SEC enforcement policy, going after reimbursement from executives under Section 304 of SOX without alleging fraud or other securities law violations?  In any event, the SEC is serving notice to executives at publicly traded companies that the agency can come and try to clawback money made while under-reporting uncollectible allowances, rebates, and similar incentives; regardless of whether there's any other violation of the securities laws.
  

  

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My colleagues, Dennis Powers and Ty Laurie, just hosted a presentation about mothballed construction projects in collaboration with consultants James Schmid and Melissa Dimitri from Grant Thornton.
 

The speakers explained nuts and bolts options for owners, designers, contractors, and material suppliers when it becomes necessary to suspend work mid-stream on a construction project amid a recession.   They also addressed issues that potential purchasers of a mothballed project face, along with issues purchasers will need to address with their lenders.
 

If you didn't attend in person or view the live webcast, you can listen to the audio and follow the PowerPoint until September 4, 2009.  Or you can click and view just the PowerPoint slides.

 

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The U.S. Court of Appeals for the 5th Circuit (hearing cases in Texas, Louisiana, and Mississippi) just issued a new arbitration decision re-affirming that the reasons for vacating an arbitration award in Section 10 of the Federal Arbitration Act (the "FAA") are the only reasons for vacating an arbitration award governed by the FAA. 

The case is Saipem America v. Wellington Underwriting Agencies Limited.  Making the case a little more remarkable, retired U.S Supreme Court Justice Sandra Day O'Connor was one of the judges who heard and decided this case.  (Even after they retire from the Supreme Court, justices still hear cases in lower federal courts).

Factual Backstory

The owner of an offshore oil drilling platform in Texas (the "owner") hired an international oil equipment installation and transport contractor (the "prime contractor") to move the platform to Israel and install it there.  The prime contractor bought insurance from several insurers (collectively, the "insurers") to insure the load-out, transportation, and installation of the platform.

The prime contractor entered into a subcontract with Saipem America, Inc. (the "subcontractor") to act as the prime contractor's maritime warranty surveyor.  And the owner also entered into a separate contract with the subcontractor.  Under that contract the subcontractor acted as the owner's "certified verification agent" during transportation and installation of the platform. 

The subcontract included the following arbitration provision:

Any dispute arising out of or in connection with this Subcontract which cannot be amicably settled shall be referred to arbitration in The Hague, The Netherlands, in accordance with the Rules of the International Chamber of Commerce currently in force. Any settlement agreement or arbitral award shall be final and binding upon Parties.

The platform got damaged between Texas and Israel.  The owner and prime contractor made insurance claims against several of the insurers.  The insurers then looked for who might be responsible for the damage.  They wanted to make subrogation claims to get back at least part of the money they just paid-out to the owner and prime contractor.
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Yesterday, in Minnesota Sues Engineers Alleging Defective Pre-Collapse Inspection and Evaluation of I-35W Bridge we talked about the State of Minnesota's lawsuit against the engineers who inspected and evaluated the I-35W bridge that collapsed two years ago killing 17 people and injuring more than 30. 

Following-up on that post, in the article Companies Sued In Bridge Collapse Gain New Work, the Associated Press reports that despite the disaster, the State of Minnesota has contracted for about another $6.2 million worth of work with URS Corp., the engineering firm that the State alleges in their lawsuit was at least partially responsible for the bridge collapse.

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According to the article Minnesota Sues Engineering Firm, Alleges Faulty Analysis of I-35W Bridge by Bill Salisbury at TwinCities.com, the State of Minnesota is suing for defective inspection and analysis of the I-35W bridge that collapsed two years ago.  The state is suing URS Corp., the engineering firm the state hired to inspect and report on the condition of the bridge.


This past Wednesday the State filed a Complaint Complaint against the engineer in Hennepin County District Court alleging claims for:

• Breach of contract - failure to adequately inspect, analyze, and evaluate the structural condition of the bridge under contracts with the State to provide those services

 

• Negligence - failure to comply with the engineering standard of care in inspecting, analyzing, and evaluating the structural condition of the bridge that, in part, caused the bridge collapse

• Statutory Reimbursement - seeking reimbursement of money the State has paid to collapse survivors out of a special fund established by the Minnesota Legislature

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