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

If you've been around construction contracts or architects agreements for a while, you've heard someone mention "subrogation."  So what exactly is subrogation and how does it work?

Subrogation is pretty simple, yet it defies clear explanation. Here's one attempt:

Subrogation is a method whereby one who had involuntarily paid a debt of another succeeds to the rights of the other with respect to the debt paid

Hugh??

OK, maybe subrogation is one of those things better explained by example.

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There are new developments in the saga of Krahl Construction.  Recently, one of the owners Krahl provided work to sued what is now Krahl's estate under the company's assignment for the benefit of creditors.  The owner's complaint (PDF) alleges that:

   1. Krahl over-billed the owner by more than $3M to build a data center on the west side of Chicago

   2. Krahl used white out to alter subcontractors' invoices before submitting them to the owner for payment under an AIA A111+ A201 cost-plus with guaranteed maximum price contract

But the most eye-catching allegation: this owner, suspecting that Krahl over-billed them, tipped off law enforcement.  Perhaps that set things in motion for the dramatic search of Krahl's offices, seizure of the company's records, and closure a few days later back in January 2010?

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Yesterday, the US Supreme Court ruled that when (a) there's a dispute over whether the arbitration provision in a contract is enforceable, and (b) the contract says that the arbitrator should decide that question, then the arbitrator will decide that question.  As the lawyers say: if the contract says so, the arbitrator decides questions of arbitrability and whether the dispute is arbitrable.

Rent-A-Center v. Jackson: Backstory and Decision

In Rent-A-Center, West, Inc. v. Jackson (PDF), an employee sued his former employer for racial discrimination.  They had a contract providing that any employee claims related to his employment must be submitted exclusively to arbitration, not to a court.  The contract also said the arbitrator, not a judge, should decide any questions about whether to enforce the arbitration terms of the contract. 

To make a long story short, in a 5-4 vote, the Justices agreed that under the Federal Arbitration Act, the contract in this case should be enforced as written.  So, they sent the case back to the arbitrator to decide whether the employee's discrimination claims should be heard, and ultimately decided, in arbitration or in court.  A principal reason for the Justices' decision: the employee attacked the entire contract for being "unconsionable," not just the arbitration provision or the part referring arbitrability disputes to the arbitrator.  

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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 3 we talked about step 1 in the workflow of deciding priority, and dividing foreclosure sale money, between (a) a Lender's mortgage and (b) the mechanics liens of two Perfected Contractors.  Initially, priority goes to whoever got there first.  In LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF), the Lender initially won priority because they recorded their mortgage before either Perfected Contractor (a) contracted with the Owner or (b) started work on the project.

Now for step 2: changing priority based on "enhancement" to the project.  Specifically, giving partial priority to the Perfected Contractors because their work added value to the project that, presumably, helped fetch a higher price at the foreclosure sale.

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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 2 we talked about the backstory of the  LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF) decision: who was involved, what started the dispute, what was at stake, and how the first judge hearing the case decided.  Now it's time to talk about the appeals court judges' decision and why they decided the way they did.  This won't be easy or brief.  So we'll break it into a series of several posts.

The Perfected Contractors' First Request: Full Priority

The Perfected Contractors first asked the appeals court judges to grant each of their perfected mechanics liens full priority over the Lender's mortgage.  Requested result: the Perfected Contractors get paid in full from the foreclosure sale money before the Lender gets a penny.  Naturally, the Lender opposed this.

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