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

An anonymous commenter left this question on a past post about the FDIC extending statutes of limitations:

What if the FDIC sells the loan to another bank (not FDIC)? When the purchaser wants to sue to enforce the note, does the statute of limitations for the subsequent note-purchaser begin running on: (a) the the ordinary starting date under state law or (b) the date the FDIC is appointed as receiver for the failed bank?

According to several judicial decisions in the wake of the last financial crisis of the late 80s and early 90s, the answer is: whichever is later. And that's almost always the date the FDIC is appointed as receiver.

 

The FDIC's transfer of a loan to a private purchaser doesn't change the LP Start Date. The purchaser may defer the LP Start Date just as the FDIC can. The purchaser may also postpone expiration of the limitations period the same as the FDIC can.

 

With so many banks failing recently, and the FDIC selling so many of their loans, this has become a compelling question. Thanks to our anonymous reader for asking it!

 

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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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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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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 the last bank failure post we focused on the basics of statutes of limitation - what they do and how they work. Today we're going to talk about how, after they get appointed as receiver for a failed bank, the Federal Deposit Insurance Corporation (the "FDIC") can extend the statute of limitations on claims they inherit from the failed bank.

The FDIC gets the power to extend statutes of limitation under Section 11(d)(14) of the Federal Deposit Insurance Act (the "FDI Act").

Here's what the FDIC can do.....

1. Defer the Start of Limitations Period

Recall from the last bank insolvency post that the first critical element affecting the statute of limitations is identifying when the "limitations period" begins to run (i.e., the first time the thumb presses down on the stopwatch's start/stop button to start the dial going round). Well, Section 11(d)(14) re-sets when the dial on the stopwatch starts. Ordinarily, the day the limitations period starts to run ("LP Start Date") is:

• For a breach of contract claim, the day when someone breaches the applicable contract.
• For most tort claims, the day when the victim first knows, or reasonably should have known, that someone's tortious conduct injured them.

But under Section 11(d)(14), the limitations period begins to run on the later of the following:

• The day the FDIC gets appointed as receiver for the failed bank "Appointment Date")
• The day when the claim "accrues" under state law. That's often the LP Start Date.

Often the limitations period on claims that the FDIC inherits from a failed bank won't start running until Appointment Date. If the limitations period stopwatch already started running on the claim before Appointment Date, once the bank fails and the FDIC is appointed as receiver, the dial on the stopwatch is re-set to zero.  It then begins running again, but it starts counting from Appointment Date.

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In the last bank insolvency post we talked about how after being appointed as receiver for a failed bank, the Federal Deposit Insurance Corporation (the "FDIC") may unilaterally insist on a stay of proceedings involving the bank (e.g., lawsuits).  Now we're going to focus on how the FDIC can extend statutes of limitation on the claims against people like you, and, in some cases, even revive claims after the statute of limitations has expired.

The "Limitations Period"

Before you really appreciate how extraordinary the FDIC's power to extend statutes of limitation really is, first you must understand what a statute of limitations is and how it works.  A statute of limitations sets a deadline for you to sue someone, or for someone to sue you.  Lawyers often call this the "limitations period".  If you don't sue someone before the limitations period expires, the person you sue can stop your lawsuit.  Or, if you're on the receiving end and get sued after the limitations period expires, the statute of limitations may be a defense against the lawsuit.  You may even be able to use the statute of limitations to get the lawsuit against you summarily dismissed at an early stage, instead of enduring discovery, trial, appeals, and the distraction and legal fees that go with them.

There are three critical elements affecting the limitations period:

• When does the limitations period begin to run?  Think of this as a thumb pressing the start/stop button on a stopwatch that starts dial sweeping around the face

• How long does the limitations period last (i.e., when does it expire)?  Think of this as the number of times the sweeping dial must go around the face of the stopwatch before the thumb presses the start/stop button again, stops the sweeping dial, and announces "all finished"!

• What can suspend the running of the limitations period? Think of this as intermediate events that sometimes make the thumb press the start/stop button and temporarily stop the dial from rotating around the face before it rotates enough times to be "all finished"
  

When A Claim "Accrues"

For most claims, the thumb doesn't start the limitations period until the claim "accrues".  Usually a claim accrues when you recognize, or reasonably should have recognized, that something someone else did has injured you (i.e., you suffer damages). 

But different types of claims accrue, and the limitations periods on those claims start, at different times.  For instance, the case of Hermitage Corporation v. Contractors Adjustment Company recognizes that most tort claims (e.g., negligence) accrue, and the limitations period starts to run, when the victim of the negligence knows, or reasonably should have known, that they suffered injury because of someone else's negligence.  But a claim for breach of contract accrues, and the limitations period on that claims starts running, when the contract is breached, regardless of whether the victim of the breach knows of the breach or has any way of knowing that the breach will injure them.   

Upcoming Posts 

In the next bank insolvency post we'll talk about:

• How the Federal Deposit Insurance Act postpones when a claim accrues
• How that postponement allows the FDIC to extend the limitations period on the claims of failed banks that the FDIC takes over as the failed bank's receiver 

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In the last post on bank insolvency we talked about how the Federal Deposit Insurance Corporation (the "FDIC") sets the priorities for paying out claims against failed banks how the bank's creditors can set their allowed claims off against the FDIC's pursuit of loan repayment. 

Today we're going to take a break from how the FDIC repudiates contracts and claims for repudiation damages.  We're going to focus on another one of the FDIC's extraordinary powers - imposing a stay on proceedings (i.e., court cases) the failed bank is involved in.  The FDIC gets this power under Section 11(d)(12) of the Federal Deposit Insurance Act.

Mandatory Stay of Proceedings

After the FDIC is appointed as receiver or conservator of a failed bank, they may request a stay in any judicial action, or proceeding, that the bank is a party to, or becomes a party to.  The stay may last 90 days if the FDIC is appointed as receiver, and 45 days if they're appointed as conservator.

According to at least one judicial decision, Praxis Properties, Inc. v. Colonial Savings Bank S.L.A, the judge hearing the case must grant the stay.  It's mandatory.  They don't have any basis or discretion to deny the stay, regardless of how compelling the reasons for making an exception.  And the stay applies to all parties in the proceeding, not just the bank and the parties adverse to the bank.

Duration of the Stay

But according to the Praxis case, the stay doesn't last for that long.  The 90 (or 45) days begins on the day the FDIC gets appointed as receiver (or conservator) for the failed bank, not when the FDIC asks the judge to stay the case or when the judge grants that request.  So if the FDIC waits until the Appointment Date plus 80 days to ask for a stay, the stay only lasts for ten more days.

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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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