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:
● 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
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?
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 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.
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:
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.
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.
Continue Reading...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.
Judges to owner: demanding that your contractor foreclose their mechanics lien within 30 days or lose it forever waives your right to require arbitration.
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:
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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.
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:
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.
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% |
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.
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.
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:
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.
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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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....
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).
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.
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. 
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.
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. 
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.
Breach of contract - failure to adequately inspect, analyze, and evaluate the structural condition of the bridge under contracts with the State to provide those servicesHow 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. 
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.
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.
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...
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.
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.
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:
How Could This Case Affect You?
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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