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

My colleagues Scott Smith, David Eisenberg, and I just published a short article about the Illinois Supreme Court's controversial LaSalle Bank, N.A. v. Cypress Creek 1, LP decision.  It focuses on three things:

• A summary of who was involved, what their respective stakes were, the positions they took, and how the Justices reacted to them to decide the case
   
• How this decision affects construction industry stakeholders, particularly construction lenders and anyone who may claim a mechanics lien (e.g., prime contractors, subcontractors, material and equipment suppliers, architects, engineers, and other design professionals)
   
• Initiatives in the Illinois General Assembly to amend the Mechanics Lien Act to change the results in future cases

And it's a  wrap-up on Construction Law Today coverage that started back here: Mechanics Lien Priority: Contractor vs. Lender - Part 1. Click this link to navigate on to our article. 

Also in the same Litigation & Counseling Alert, some of our other colleagues also wrote these companion articles that may interest you too:

• Insurance and Due Diligence in the Business Transaction
   
• Can a Forbearance Agreement Actually Help a Lender Collect from Its Debtor?

 

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LaSalle Bank, N.A. v. Cypress Creek 1, LP Decision from Illinois Supreme Court

In past posts we've been following this case as it wound its way through the Illinois judiciary up the the Illinois Supreme Court.  This morning, the Supreme Court issued this decision (PDF).  The Justices decided that a lender gets priority to the extent their loan proceeds paid for property improvement, regardless of whether the contractors paid with those proceeds timely, or properly, perfected mechanics liens. 

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The D'Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act (a/k/a 12 U.S.C. §1823(e)) were active in Sacramento late last month to deny a borrower's claim for reformation of her loan documents.  The decision: Magdaleno v. IndyMac Bancorp, Inc. (PDF).

Backstory: Magdaleno v. IndyMac Bancorp, Inc.

Catalina Magdelano borrowed money from IndyMac. Her mortgage broker assured her that the interest rate on her loan would be a 30-year fixed rate with interest at 1% per year. But the documents for the loan set an adjustable rate starting at 1% per year, with a 9.950% maximum. Then IndyMac failed and the FDIC was appointed as IndyMac's conservator. Ultimately, the FDIC transferred the borrower's loan to a new lender: OneWest Bank.

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How enforceable are contractual limitations of liability?   According to a panel of Illinois judges recently: very enforceable. Their decision: Zerjal v. Daech & Bauer Construction, Inc. (PDF)  

Summary: Zerjal v. Daech & Bauer Construction, Inc.

This decision concerns the limitation of liability in a home inspector’s contract.  But the principles involved affect building contractors, architects, engineers, other professionals, and anyone else who would also like to contractually limit their exposure.  And it's all the more compelling because these judges enforce the limitation not against a Fortune 100 company, but against that most sacred of judicially protected constituencies: the homeowner.

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Must a claim of mechanics lien identify the date when the contractor (or other lien claimant) last provided labor, other services (including design services), material, or equipment for a piece of property(all together collectively "work")? 

 

Yes in Cook County.  But no after the Appellate Court (Second District) decision in National City Mortgage v. Bergman (PDF) in these counties: Jo Daviess, Stephenson, Winnebago, Boone, McHenry, Lake, Carroll, Ogle, Lee, DeKalb, Kane, Kendall, and DuPage.

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In Mechanics Lien Priority: Contractor vs. Lender - Part 4, we talked about how the Perfected Contractors got priority to a part of foreclosure sale money, known as the added value pitcher, ahead of other rival creditors. Now we're going to talk about the Lender's attempt to get equal priority in front of the added value pitcher of foreclosure sale money.

Lender Seeks Enhancement Priority

In LaSalle Bank, N.A. v. Cypress Creek 1, LP (PDF), the Lender wanted to join the Perfected Contractors at the front of queue that had lined up before the added value pitcher (a/k/a queue Queue #2).  Why should the Perfected Contractors share space, and money, with the Lender?  According to the Lender: 

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Welcome to the second article in a three-part series on Illinois surety bonds, compliments of guest author Danielle Rodabaugh. Danielle is a principal for SuretyBonds.com and is discussing the three basic types of construction bonds:

  ●  Bid bonds

  ●  Performance bonds

  ●  Payment bonds

Today we will explore performance bonds.

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We've talked about statues of repose and how they affect construction projects in the past.  Well Melissa Dewey Brumback at Construction Law in North Carolina just published a superlative statute of repose piece: Statute of Repose: Putting your Risk to Bed.  I like Melissa's work so much, especially how she compares a statute of repose to a statute of limitation, that I have to mention it here and urge you to read it too.  Enjoy!

 

 Photo: The Repose by Aleksandra Nowak 2008

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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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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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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 1 we talked about the basics of priority and why it’s important.  At the end I promised to fill you in on the backstory of the Cypress Creek decision.  Here it is.

Backstory of LaSalle Bank, N.A. v. Cypress Creek 1, LP

It started when a developer (we'll refer to them as the "Owner") borrowed money from LaSalle Bank (the "Lender") to design and build a senior housing project outside of Chicago. To secure payment of principal, interest, and fees on the loan, the Owner gave to the lender, and the lender recorded, a mortgage against the project.

Later, the Owner entered into contracts with Eagle Concrete and the Edon Construction Company (together, the "Perfected Contractors").  Under these contracts, Eagle provided concrete and Edon provided carpentry.  Each then provided work on the project under their respective contracts.

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When both a mortgage lender and a mechanics lien holder foreclose against the same piece of property, who gets priority to the money paid at the foreclosure sale?  One recent Illinois judicial decision, LaSalle Bank, N.A. v. Cypress Creek 1, LP, says they both do, depending on what part of the property you're talking about:

• The lender's mortgage gets priority on the value of the property before improvement by designers and contractors
   
• The mechanics lien gets priority on value added to the property by improvements from designers and contractors
   
• Then, to the extent the lender pays off a designer or conractor who holds a properly perfected mechanics lien (each a "Payee"), the lender succeeds by subrogation to the priority of the Payee's mechanics lien.  By paying a Payee, the lender essentially buys the Payee's mechanics lien.  But that works only to the extent the lender pays off a Payee who holds a properly perfected mechanics lien.  The lender doesn't succeed, and doesn't get priority, just because they pay money to a designer or builder who provided lienable work, but didn't perfect a mechanics lien to secure payment

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Chris Birk from SuretyBonds.com recently interviewed Green Building Law Update's Chris Cheatham about how green building affects performance bonds and the DC green building law.  The interview is informative and I enjoyed listening.  It's 15 minutes well spent.  Click here to tune-in.

 

 

 

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The Arizona Supreme Court applied the economic loss rule (the "ELR") to bar a construction related claim for the first time last week. 

Overly simplified, the ELR is a judge-made rule that bars many extra-contractual claims for design and construction defects when those claims seek only damages for the cost to repair or replace defective work, not damages for death, personal injury, or damage to other property.

In Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc.  the Justices applied the ELR to deny an owner's claim against their architect for negligent design of an affordable housing project in Flagstaff, Arizona.

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Focusing locally today on my own hometown, this Crain's broadcast offers a sobering forecast for the Chicagoland residential real estate and construction markets.  Do you agree?  Watch the video, vote, and elaborate by posting a comment using the link below below.

 

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Judges to owner: demanding that your contractor foreclose their mechanics lien within 30 days or lose it forever waives your right to require arbitration.

 

The Backstory of Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc.

Unfortunately, the Illinois Appellate Court (Second District) decision in Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc. (PDF) doesn't give us too many background details.  Here's what we can gather: an owner entered into a contract with a contractor to provide some type of construction work for the owner.  The contract had an arbitration clause, presumably one that says that if the owner and the contractor get into a dispute, they must submit the dispute to binding arbitration instead of resorting to the courts.

The owner and the contractor got into a dispute.  The owner didn't pay.  So the contractor recorded a lien against the property they'd worked on.

Under Section 34 of the Illinois Mechanics Lien Act (PDF) an owner (and others too) can serve a written demand on anyone holding a mechanics lien against their property (a "mechanics lien holder") demanding that the mechanics lien holder sue to foreclose their mechanics lien within 30 days (a "Section 34 demand").  And if the mechanics lien claimant doesn't go to the clerk of the court and file their foreclosure complaint before that 30 days expires, the mechanics lien claimant forfeits their lien.

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AuggieV over at Building Green CT reports a Recent Surge In Connecticut Green Building News May Be A Good Sign.  Some of the things he mentions:

• Connecticut tied with Georgia for No. 1 in the fifth annual Global Green USA analysis and ranking of state Qualified Allocation Plans used by state housing finance agencies and guide annual distribution of federal Low-Income Housing Tax Credits

• Reckson (a division of SL Green Realty Corp.) installed a new 100 kilowatt photovoltaic solar panel system on the roof of their facility on Greenwich

• The state of Connecticut and Gateway Community College just broke ground on a $198M campus in downtown New Haven.  It's the largest construction project the state undertaken to date and its first public building designed gold LEED certification. The project is also estimated to employ 350 workers

• Nestle Waters North America announced they will move their headquarters from Greenwich to Stamford in late 2010. The company plans to renovate the new Stamford headquarters for LEED certification. They've already got nine LEED certified facilities. The Connecticut Department of Economic and Community Development is providing a $4M low-interest loan to equip the new building and Nestle Waters is also eligible for up to $5 million in tax credits

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The latest Krahl Construction developments:  Fifth Third Bank and Travelers Casualty and Surety Company of America each sued Krahl Construction's President in federal court last week. 

Fifth Third Bank had loaned money to Krahl before Krahl closed for business earlier this month.  Fifth Third's Complaint (PDF) alleges that Krahl's President personally guaranteed repayment of the loan but hasn't paid as required under the guaranty.

Travelers served as Krahl's surety providing payment and performance bonds on many of Krahl's projects.  With Krahl's closing and assigning their assets for the benefit of creditors, odds are some owners are going make claims under the performance bonds and some subcontractors are going to make claims under the payment bonds.  Travelers's Complaint (PDF) alleges that under an indemnity agreement between Krahl's President and Travelers, the President must reimburse Travelers for money that Travelers pays out to owners and subcontractors under the bonds.  Travelers claims that Krahl's President hasn't paid. 

And to try an ensure that Krahl's President's assets are available to pay future liability under the indemnity agreement, Travelers also asks the judge to enjoin the President from transferring, or encumbering, any of his money or other assets.

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A bill (HB2356) was introduced last week in the Arizona State Legislature that, if enacted, will require certain building and construction projects to achieve at least a silver LEED certification.

Bill Summary

Projects that will need to achieve at least a Silver certification:

• Each Major Project of a state agency, including state universities and colleges
• Each Major Project of a school board that receives state funding
• Each private Major Project that receives at least 50% of its funding from the state
• All existing public buildings under energy efficiency retrofitting of at least a 35% share of the total value of the existing building, regardless of whether the retrofitting project qualifies as a Major Project

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Crain's Eddie Baeb reported this morning that the Liquidation Process Starts For Krahl Construction.

Yesterday, the trustee of Krahl's assets, Howard Samuels of Rally Capital Services, LLC, sent this letter to Krahl's creditors announcing his appointment, providing a preliminary introduction to the assignment for the benefit of creditors process (frequently called an "ABC"), and asking Krahl's creditors to submit affidavits identifying their claims against Krahl and the amount of money Krahl owes them. Mr. Samuels's letter also gives a brief breakdown of Krahl's assets and liabilities. Krahl has significant assets, though most are intangible, like Krahl's accounts receivables for work they've provided. For more on recent Krahl Construction developments, go to last week's post announcing Krahl's ABC.

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A bill was introduced in the Washington State Legislature yesterday that will require LEED certification for sales and use tax deferral on select construction projects. If this bill (SB 6598) becomes law, projects will have to achieve a certain level of LEED certification to qualify for deferral of sales and use tax on materials and other components of the work. The higher the project's LEED certification, the greater the amount of sales and use tax that's deferred.

This chart identifies the percentage of sales and use tax each level of certification will deliver:

LEED Certification Level	Percentage of Sales and Use Tax Deferred
Platinum	100%
Gold	75%
Silver	50%
Less Than Silver	25%

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Serving search warrants earlier this month in a raid on Krahl Construction's headquarters, the FBI seized the Chicago company's computers and files. Several days later, company executives announced the company would shut its doors.

Then today Krahl set up a trust and assigned its assets into the trust for the benefit of its creditors. Howard Samuels of Rally Capital Services LLC will serve as assignee for the benefit of Krahl's creditors to oversee collection of debts owed to Krahl and payment of debts Krahl owes to others in what is akin to a private bankruptcy to wind up the company's affairs. More information is available in the Trust Agreement and Assignment available here.

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This past week the Chicago Tribune reported that resuming work on the Chicago Spire is one step closers. The Spire is a 150-story mixed use tower in Chicago designed by Spanish architect Santiago Calatrava that, when complete, will be the tallest building in North America. The Great Recession forced the Spire's developer, Dublin, Ireland based Shelbourne Development Ltd., to temporarily suspend work on the project.

But Shelbourne recently announced new tentative financing in the form of bridge and mezzanine loans. This financing will become active if Shelbourne can secure about $170M more that's necessary to restart work.

Additional financing candidates include Union Labor Life Insurance Co. and two trusts of the AFL-CIO union pension funds. They could each benefit directly from on return on investments in the project, and indirectly from mobilizing their members to erect the remainder of the project too.

Shelbourne also reports that about 30% of the Spire's 1,200 residential condominium units are already under contract for sale.

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This past spring 60 Minutes broadcast this segment on the failure of Heritage Community Bank in Chicago. Scroll down and watch CBS correspondent Scott Pelley take you through:

• FDIC officials secretly reviewing bids to buy the targeted bank through a Purchase and Assumption Transaction
• The FDIC bank closure crew preparing to go in and take over each branch on a Friday evening after the last customer leaves
• Explaining what's happening to the bank's president and employees at each branch
• Taking an inventory of the bank's assets, books, and records
• Re-opening the bank Saturday morning under the new banner of the purchaser: MB Financial
• FDIC specialists greeting depositors and reassuring them that their money is safe

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A couple of weeks ago we talked about how Pepsi mishandled a Complaint suing the company for allegedly stealing trade secrets resulting in a $1.26 Billion default judgment.

In Judge Scraps $1.26 Billion Judgment Against Pepsi, the Milwaukee Journal Sentinel's Bruce Vielmetti reports that the Honorable Jacqueline Erwin, the judge hearing the case, granted Pepsi's motion to vacate the default judgment. Judge Erwin will now hear the case "on its merits." And according to Pepsi's lawyers, the company has some very meritorious defenses.

Pepsi lawyers, executives, and shareholders must be pleased. The gentlemen who sued Pepsi - Wisconsin businessmen Charles Joyce and James Voigt - probably aren't so pleased.

Learning from our mistakes is good. Learning from the mistakes of others is better, and cheaper:

• Prepare to get sued by ensuring that you, your registered agents, and everyone in your organization knows how to recognize a Complaint and what to do with it after getting it.

• If you sue someone and they don't respond to the Complaint on time, don't ask for stratospheric damages. That'll just make it so much easier for the judge to grant your opponent's request to vacate. Joyce and Voight's odds would have been a lot better if their judgment was for $126,000, or maybe even $1.26 Million. But they never had a chance with that eye-popping $1.26 Billion. Remember: pigs get fat, hogs get slaughtered

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The Minneapolis-St. Paul Star Tribune's Jim Foti reports in I-35 Bridge Firm Settles Suits on Friday's settlement between Progressive Contractors, Inc. (the "contractor") on one side and State of Minnesota and the disaster survivors on the other. Terms of the settlement, approved Friday by Judge Deborah Hedlund, are confidential.

Kyle Hart, one of the contractor's lawyers, said the company's insurers "tendered the limits of the contractor's liability insurance." Chris Messerly, a lawyer for 103 survivors, suggested that the settlement isn't for a huge amount compared to claims against others with a role in the disaster. Others include the engineers who respectively designed and inspected the bridge: Jacobs Engineering Group, Inc and URS Corp. The state's lawsuits against Jacobs and URS, and URS's countersuit against the state, are still pending.

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YoChicago's Joseph Askins reports in Construction Checkup: Legacy at Millennium Park on construction progress at Mesa Development's Chicago residential condominium project known The Legacy at Millennium Park.

I confess I'm biased. I worked on contracts for this project with architect Solomon Cordwell Buenz and prime contractor Walsh Construction. Regardless of my own partisanship, or problems that may crop up in the Legacy's design or construction, this building adds a superlative aesthetic complement to the Chicago skyline. Go see the photos and see for yourself. Better yet, watch this slideshow of construction through the end of September 2009....

And if you're in Chicago at sunset, stop and gaze at how the sun and other edifices of the South Loop's skyline reflect off the the Legacy's mirror-like glass curtain wall. You might find yourself agreeing with me that it's one of the most captivating views in the city.

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In Price to PepsiCo for Not Being in Court: $1.26 Billion, the National Law Journal's Lynn Marek reports that an assistant in PepsiCo's legal department misplaced a Complaint costing the company $1.26 Billion. Yes, you read that correctly, $1.26 Billion!

What Happened?

In their Complaint, the plaintiffs - Wisconsin businessmen Charles Joyce and James Voigt - allege that PepsiCo misappropriated their trade secrets for bottling and selling purified water, like Aquafina. When PepsiCo didn't respond to the Complaint by the deadline set under the Wisconsin Rules of Civil Procedure, Joyce and Voight's lawyer asked the Clerk of the Court to enter a default in the case. Then they followed-up in unopposed papers to prove the amount of their damages. And voila - Joyce and Voigt got a judgment against PepsiCo for $1.26 Billion.

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Are you're interested the collapse of the I-35 bridge in the Twin Cities and the claims that have followed in its wake? Then if you haven't already, take a look at the Report prepared by the National Transportation Safety Board on the disaster. It's informative, goes into more detail than most of the press coverage, but it's still readable for people like me who aren't engineers (well at least the Abstract and Executive Summary sections at the beginning are).

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There's been a lot of recent decisions by judges applying the Illinois Home Repair and Remodeling Act (the "Act"). The Act is that statute requiring contractors working on people's homes to: (a) have a written contract, (b) include certain terms in the contract (e.g. price, insurance, dispute resolution), (c) give the homeowners a special brochure, and (d) get a receipt for giving the brochure. The judges in one case, Smith v. Bogard, held that homeowners needn't pay a contractor who fails to comply with the Act.

Well, Ashley Brandt over at the Illinois Construction Law Blog has done a great job analyzing two more recent decisions that go the other way:

• Artisan Design Build, Inc. v. Bilstrom from the Illinois 2nd District Appellate Court hearing an appeal from DuPage County
• K. Miller Construction Company, Inc. v. McGinnis from the Illinois 1st District Appellate Court hearing an appeal from Cook County

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In this past post and this past post too I mentioned a bill (HB344) in the Illinois General Assembly to amend the Illinois Contractor Prompt Payment Act putting caps on retainage under private construction contract and subcontracts.   

This bill stalled in the spring.  But it's active again.  It's been assigned to the Senate's Assignments Committee and will then go for further action from there.

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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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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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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.

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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.

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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.

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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.

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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.

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In a post last week I mentioned that the the Minnesota legislature passed bill HF420 amending amendments to Minnesota's Notice and Opportunity to Repair Law and sent them for Governor Pawlenty to sign.  Kevin Duchschere of the Star Tribune reported in an article this afternoon that the governor vetoed HF420.  It's now back to the legislature to see if they can muster up enough votes to override the governor's veto.

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In the last post we talked about the recent trial of the the the Indianapolis-Marion County Public Library's (the "owner") fraud claims against against New York based Thornton Tomasetti Engineering, Inc. (the "structural engineer").  Those claims stemmed from $50 Million in cost overruns to build the underground garage foundation of an addition to the Indianapolis Central Library.

The owner also sued the structural engineer on a litany of other claims, including negligence in providing structural design services.  But the trial didn't include the owner's negligence claims because they were dismissed before the trial started.  The owner appealed.  In this post we'll talk about the Court of Appeals's decision because it has important effects on the liability of architects, engineers, and other design professionals. 

Background

Recall from the last post that when hiring designers for the project, the owner contracted with architects Woolen Molzan and Partners, Inc. (the "architect") to be the project's prime designer.  The architect then sub-contracted with the structural engineer to serve as the project's structural engineering sub-designer.  The Owner never had a contract with the structural engineer. 

Recall also that the only damages the owner claimed were for repair, retrofitting, and delay costs.  The owner never claimed any damages for:

• Death or personal injury to anyone.
  
• Damage to the owner's property other than problems with the foundation and garage the structural engineer designed.  They did not claim damages for things like broken computers in the existing parts of the library or broken light poles in the library parking lot.
• Damage to the property of anyone else (e.g., damage to neighboring buildings or cars of library customers).

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In an article last week, Jon Murray of the Indianapolis Star reported that the Indianapolis-Marion County Public Library (the "owner") will not appeal a jury verdict of no liability on the owner's $50 Million fraud claim against against New York based Thornton Tomasetti Engineering, Inc. (the "structural engineer").  The case stems from cracks and gaps in the concrete members of the Indianapolis Central Library's new underground garage that also serves as the building's foundation. 

Though the owner will not appeal from the lost trial of their fraud claims, they are already appealing Judge Matthew Kincaid's pre-trial dismissal of their negligence and breach of contract claims.

The Backstory

In 1998, the owner hired architects Woolen Molzan and Partners, Inc. (the "architect") to design renovation of, and additions to, the main Indianapolis public library.  The architect contracted with the structural engineer to work as the structural engineering sub-designer on the project. The architect also hired Charlier Clark & Linard, PC (the "observer") to observe report on the construction work once it started.

Construction started in 2002 with Shook, LLC as the "prime contractor".  As construction progressed, significant problems developed with the rebar and concrete in the garage. In fact, after the completion of each concrete pour, numerous defects were discovered, including exposed steel reinforcement and voids in the beams and columns.

In February 2004, approximately a month after the prime contractor completed the two final major concrete pours, owner personnel discovered major voids in concrete beams and columns in the garage. Concerned about the structural integrity of the garage, the owner hired Construction Technologies Laboratories, Inc. (the "forensic engineer") to investigate the garage. The forensic engineer reported several design and construction defects in the garage. Representatives of the forensic representatives even believed that the garage was "at serious risk for structural failure if construction were allowed to continue."  The owner suspended work on the project on May 6, 2004. Continue Reading...

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The Texas House passed a bill (HB1657) in a 73-71 vote and sent it to the Senate.  If enacted, HB1657 will expand the types of claims injured construction workers can recover from property owners under Texas law.   

Earlier this year the Texas Supreme Court decided Entergy v. Summers.  Under that case, property owners who buy workers compensation insurance covering injuries to the employees of construction contractors they hire, in addition to their own employees, are immune from claims outside of those allowed under the Texas Workers Compensation Act.

In 2001, plant owner Entergy Gulf States, Inc. hired a contractor to work on one of their facilities.  One of the contractor's workers was injured while repairing a leak on a hydrogen generator.  The plant owner's workers compensation insurance policy covered the worker's injuries. 

The worker sued the plant owner.  The plant owner countered, saying they were immune from the worker's lawsuit under the Workers Compensation Act.  The Texas Supreme Court agreed. Because the plant owner's workers compensation insurance covered the worker's injuries, the plant owner enjoyed immunity under the Workers Compensation Act against the worker's lawsuit.

For several years Texas legislators have taken initiatives to amend the Workers Compensation Act.  The recent vote is the latest installment in their initiative.

The Entergy decision provides a lot of protection to those property owners whose workers compensation insurance insures injuries to their contractors' workers in addition to injuries to their own employees.  That protection will soon be gone if HB1675 passes the Senate and Governor Perry signs it.  

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In the last post I mentioned that amendments to Nevada's Notice and Opportunity to Repair law (SB349) might not pass this year.  According to the Mercury News's Home Defect, Malpractice Bills Die article today, they won't.

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Since the building boom that started in the mid-1990's, Minnesota, Nevada, and Colorado each enacted Notice and Opportunity to Repair statutes ("NOR Statutes") intended to reduce the volume and expense of residential construction defect litigation.  This past legislative season, legislatures in each of these states considered bills to amend their NOR Statutes.  One passed, one may pass, and the other died in committee.     

Minnesota

The Minnesota Legislature passed a bill (HB420) amending Minnesota's NOR Statute. This bill makes the following changes to Minnesota's NOR Statute:

• Construction contracts must re-state the statutory warranties already imposed under Minnesota's NOR Statute.
• The statutory warranties are non-waiveable.  Regardless of what language there is a construction contract, or other agreement between a contractor and an owner, attempted waivers of these warranties is void.   

The Minnesota Legislature sent this bill to Governor Pawlenty.  If he signs this bill, it will become law on August 1, 2009.
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The Illinois Senate is considering a bill to amend the Illinois Contractor Prompt Payment Act (the "Act") affecting when and how (1) owners pay prime contractors and (2) prime contractors pay their subcontractors.

If enacted, this bill (HB 0344) will:

• Limit retainage on private construction projects to a maximum of 5 percent of payments to prime contractors and subcontractors.
• Limit retainage after 50 percent completion to a maximum of 2.5 percent.

This bill has already passed in the Illinois House. The Senate Assignments Committee is now considering this bill.

If enacted into law, this bill will limit how much retainage owners and prime contractors may hold and when they may withhold it. This bill will also affect (1) construction lenders' relationships with their borrowers and (2) sureties' relationships with the contractors and subcontractors they bond.

If you would like to comment on this bill:

• Contact your Illinois State Senator and the members of the Senate Assignments Committee; and
• Contact the government affairs staff of interested trade associations like these:
• Associated General Contractors of Illinois
• The Builders Association
• Illinois Construction Industry Committee
• Building Owners and Managers Association International
• International Council of Shopping Centers

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In yesterday's post we talked about the recent case of Federal Insurance Company v. Konstant. That's the recent Illinois case upholding the section of an American Institute of Architects (the "AIA") architects agreement that imposes an early start to the statute of limitations on owner design defect claims. Today we'll talk about how that case could affect you if you're:

• An architect, other design professional, or one of their insurers.
• A prime contractor, subcontractor, one of their insurers, or a subcontractor default insurer.
• An Owner.

How Could This Case Affect You?

• If you're an Architect or other design professional. Those sections in your architects agreement imposing an early start on statutes of limitations will probably work. This is a big benefit because the Illinois statute of repose on design and construction defects is 10 years after the defective act or omission. But if those sections of your agreement work you turn the 4 year statute of limitations into a 4 year statute of repose. With only the most extraordinary exceptions, once 4 years passes after substantial completion, you're scott free. There's no compelling reason to think this would not apply to other design professionals like engineers. And because cases like this reduce the time that their insureds can be sued, this case benefits design professional errors and omissions liability insurers too.

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When an owner and a contractor enter into a construction contract using a form from the American Institute of Architects (the "AIA"), they usually agree to special terms that limit how the amount of time either side can pursue a claim against the other. I often wonder how courts react to these kinds of terms and whether they'll really enforce them.

One court said yes today. It was the Illinois First District Court of Appeals (an intermediate appellate court sitting in Chicago) in the case of Federal Insurance Company v. Konstant.

The Backstory

Thomas and Anita Croghan (the "homeowners") contracted with a Konstant Architecture Planning, Inc. (the "architect") to design a home in the Chicago suburb of Winnetka, Illinois using a standard form architects agreement from the AIA.  Section 9.3 of that agreement said:

Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.

The contractor substantially completed the home in 1997. But in 2002 the home suffered water and mold damage. The homeowners submitted insurance claims for the damage to their insurer, Federal Insurance Company (the "insurer"). The insurer paid the claims and was subrogated to the homeowners' claims against the architect. Then in September of 2005 the insurer sued the architect for breach of the architects agreement seeking damages for the cost to repair the water and mold damage.

The architect asked the trial court to dismiss the the lawsuit because the four year statute of limitations expired before the insurer filed the lawsuit. The trial court: (1) applied a 4 year statute of limitations, (2) decided that based on Section 9.3 of the architects agreement, those 4 years started in 1997 and expired before the insurer filed the lawsuit in 2005, and (3) dismissed the lawsuit. The insurer appealed.

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