Lessons Learned from A to Z (Sort of) in 2007

Lessons Learned from A to Z (Sort of) in 2007

April 1, 2008

By Kristine Kroenke

This briefing paper discusses 24 legal decisions from 2007, which highlight construction law issues that arose in Minnesota courts last year. The cases are listed alphabetically by topic, which topics include arbitration, bidding, contracts, contract changes, damages, design professionals, indemnity, insurance, mechanic’s liens, payment, pleadings, procedure, settlement, statute of repose, and torts.

Arbitration: Arbitration Is A Matter of Contract And A Party Cannot Be Required To Submit To Arbitration

Liberty Mutual Ins. Co. v. Mandaree Public School Dist., 503 F.3d 709 (8th Cir. 2007)

Mandaree Public School District (“MPSD”) and Tooz Construction, Inc. entered into a contract under which Tooz would remodel and expand a public school. Under the contract, a standard AIA form, disputes between MPSD and Tooz would be resolved by arbitration pursuant to the Rules of the American Arbitration Association.

To secure Tooz’s performance under the contract, Tooz obtained a performance bond from Liberty Mutual Insurance Company. The bond incorporated the construction contract by reference but also stated that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction [where] the work is located” (emphasis added).

When a dispute arose, Tooz initiated arbitration, and Mandaree attempted to join Liberty Mutual in the proceedings. Liberty Mutual, however, refused to submit to arbitration.

The district court determined that Liberty Mutual could not be compelled to arbitrate and the Eighth Circuit Court of Appeals affirmed. The Eighth Circuit determined that it was relevant that the bond contained a provision contemplating that disputes would be resolved in court and that the incorporation clause did not mandate that the surety arbitrate. The Eighth Circuit noted that a contrary rule would permit a bond obligee to compel an unwilling surety to arbitrate defenses unique to the bond.

Bids: Obtain Pricing Before Bid or Risk Losing Contract

Midland Glass Co. v. Aluma Spec., Inc., 2007 WL 1248031 (Minn. Ct. App. 2007) (unpublished)[1]

Midland Glass was awarded a subcontract to replace windows for a project of Minneapolis Public School District, Special District No. 1 (“MPSD”). The MPSD listed only two manufacturers of the products in its specifications: EFCO and Duracraft. Each product is exclusively distributed by only one distributor in Minnesota. Midland Glass did not obtain a price quote for either the EFCO or Duracraft products before submitting its bid; instead, intending to use EFCO products, it based its bid based on an estimate using other EFCO products. After winning the bid, Midland Glass contacted EFCO to inquire about the purchase of the products, but EFCO refused to sell the products to appellant because Midland Glass had not requested a quote before the bid deadline. The EFCO representative considered a sale to Midland Glass under these circumstances to be unethical. When Midland Glass then tried to obtain the specified product from Duracraft, Duracraft’s response was the same. When Midland Glass could not obtain the specified product, its contract was terminated.

Midland Glass brought an action alleging the Duracraft and EFCO and their distributors unlawfully conspired in their refusal to sell the product to Midland Glass. A private business generally has a right to deal, or refuse to deal, with whomever it chooses, as long as it does so independently. Because there was no evidence that MPSD, Duracraft, EFCO, or their distributors ever communicated with one another regarding the sale of the specified products to Midland Glass, the Court determined that Midland Glass’s conspiracy claim failed and affirmed the granting of summary judgment to the defendants.

Contract: Failure To Object To Invoices Can Create An Implied Promise To Pay

Westside Eauipment Installers, Inc. v. North of Sixty Flying, Inc., 2007 WL 2107197 (Minn. Ct. App. 2007) (unpublished)

Westside Equipment Installers entered into a written contract with North of Sixty Flying, Inc. (“North of Sixty”) for the sale and installation of petroleum-dispensing equipment. Westside performed the work, plus some extra work, but the extra work was not memorialized in writing. North of Sixty paid Westside for the contract equipment in February 2004 and paid Westside for th4e contract labor after Westside made some repairs that were necessary because the owner failed to properly filter the fuel. North of Sixty failed to pay Westside for the extra work. Outstanding unpaid invoices were $14,020.17, plus interest. Westside then filed a mechanic’s lien and a notice of lis pendens.

Westside initiated an action to foreclose the lien. On Westside’s motion for summary judgment, the district court awarded Westside its full claim amount, plus costs, disbursements, and $23,241.50 in attorneys’ fees. The district court dismissed North of Sixty’s counterclaims, including a claim for slander of title.

The Court of Appeals affirmed, holding that North of Sixty produced no evidence, other than its own assertions that the problems with the pumps were caused by any negligence or failure in Westside’s installation. North of Sixty was also liable under Westside’s alternative accounts stated claim. The owner received six separate invoices over the course of 10 months, but failed to object.

Contract Changes: Contractor Entitled To Extra Compensation For Constructive Change Based on Contractor’s Reasonable Reading Of Defective Contract Terms

ACE Constructors, Inc. v. United States, 499 F.3d 1357 (Fed. Cir. 2007)

ACE Constructors, Inc. entered into a contract with the United States Army Corps of Engineers to build a structure at Biggs Army Airfield in Fort Bliss, El Paso, Texas. During performance of the contract, ACE encountered numerous difficulties, was required by the Corps of Engineers or by the actual conditions to alter its construction procedures, and experienced additional costs. ACE filed several claims for its additional costs based on unforeseen conditions and defective specifications.

After a five-day trial, the Court of Federal Claims awarded an equitable adjustment to ACE in the Amount of $1,383,009, with statutory interest, and ordered the return of liquidated delay damages assessed against ACE in the amount of $246,130. The United States Court of Appeals for the Federal Circuit affirmed, analyzing several of ACE’s specific claims.

The contract set forth two methods of measuring the smoothness of the contracting paving – straight-edge and profilograph testing – the latter being the more expensive option. ACE bid using the straight-edge method contending that profilographic testing was optional under the contract. However, during performance of the contract, the Corps required profilographic testing until it eventually agreed that straight-edge testing was better suited for the project. The court determined that the specification was defective, since the project was not suited for profilographic testing. ACE was therefore entitled to its additional costs.

ACE also asserted a claim for additional costs when the Corps required ACE to use a more expensive type of concrete technique, slip-form paving, rather than the type on which it based its bid, fixed-form paving. Fixed-form paving entails pouring wet concrete into preset metal or wooden forms, whereas slip-form paving relies on temporary forms and relatively dry concrete. The court determined that although the Corps designed the project for a slip-form paver, it simultaneously approved a fixed-form paver; therefore, the design specification was defective and ACE was entitled to its additional costs.

Damages: Evidentiary Foundation Necessary To Support Damage Claim

O’Byrne v. Lumber One, Avon, Inc., 2007 WL 1599175 (Minn. Ct. App. 2007) (unpublished)

O’Byrne was awarded work on Phase Two of a 36 home project. O’Byrne was terminated after receiving work orders on 16 of the lots and after it had performed work on seven of them. O’Byrne was paid for part of its work on Phase Two and filed a mechanic’s lien for the remainder. He also brought a breach of contract claim for all of the lots.

At trial, the jury awarded O’Byrne a total of $166,036: $50,960 in damages for the 16 work-order lots and $115,076 for the 20 non-work-order lots. Lumber One moved for judgment as a matter of law, for a new trial, or for remittitur. The district court granted conditional remittitur and reduced O’Byrne’s damages to $103,530, and awarded Lumber One a new trial if O’Byrne did not accept the remittitur. O’Byrne accepted the reduced award. Lumber One, however, appealed. So, O’Byrne cross-appealed.

The Minnesota Court of Appeals determined that the district court did not abuse its discretion in granting the motion for remittitur where the evidence O’Byrne offered at trial was not based on any documentary support, but was strictly based on his previous experience. The court of appeals also determined, however, that the district court did abuse its discretion in determining the remittitur amount when it adopted a 35% profit basis without specifying the evidentiary foundation for that basis. The court of appeals therefore reversed the $103,530 damage award and remanded for reconsideration the evidence of damages.

Damages: Fraud Damages Are Not Determined By The Cost of Repair

Flatten v. Mattson, 2007 WL 2177896 (Minn. Ct. App. 2007) (unpublished)

Mattson sold a home to Tony Flatten in August 2004. In Mattson’s “Seller’s Property Disclosure Statement,” he reported that the only place the roof had leaked was above the dining room and that such leak had been fixed. Shortly after Flatten moved in, there were heavy rains, and the roof leaked. Flatten examined the attic and found several large plastic tubs filled with water, apparently placed there to collect rainwater that leaked through the roof. Flatten stated that the existence of the plastic tubs had not been disclosed to him.

After Flatten was awarded $7,555 in conciliation court, the Mattsons challenged the award in district court. Flatten then brought a formal complaint alleging violation of Minn. Stat. § 513.55 (2004) for failure to disclose material facts about the home and that false representations had been made regarding the roof. The Mattsons claimed they had no idea the plastic tubs were in the roof.

At trial, a contractor estimated the total cost to repair the roof would be $30,000. Following the close of Flatten’s case, the Mattsons moved for dismissal arguing that Flatten had used the wrong measure of damages; the measure of damages should be the diminution in value, not the cost of repairs. The district court denied the Mattsons’ motion and awarded the Flatten $30,000.

The Minnesota Court of Appeals reversed determining that the district court had erred and used the wrong measure of damages. If a claimant prevails on a claim of false representation in the sale of real property, the claimant may be awarded its out-of-pocket losses. This is measured as the difference in value between what was given and what was received. If the property is worth what the claimant paid for it, he cannot recover. The only evidence presented regarding the value of the home was what Flatten paid for it. Because Flatten did not produce any evidence of the value of the house received, he failed to meet his burden of proof.

Design Professionals: Strict Requirements For Statutory Expert Affidavits

Brown-Wilbert, Inc. v. Copeland Buhl & Co., 732 N.W.2d 209 (Minn. 2007)

The plaintiff commenced civil actions alleging, among other counts, malpractice against an accountant, which had advised two individual companies regarding the companies’ merger. Because the plaintiff alleged professional malpractice, it was required to serve on the defendants, pursuant to Minn. Stat. § 544.42 (2006):

(1) with its complaint, an affidavit of expert review, certifying that its counsel had reviewed the facts of the case with an expert who reached the opinion that the defendants had deviated from the standard of care causing injury to the plaintiff. Minn. Stat. § 544.42, subds. 2(1) and 3(1); and

(2) within 180 days after service of the complaint, an affidavit of expert disclosure, signed by counsel, naming the experts that counsel expected to call at trial and providing “the substance of the facts and opinions to which the expert is expected to testify, and a summary of the grounds for each opinion. Minn. Stat. § 544.42, subds. 2(2), 4.

The plaintiff failed to include an affidavit of expert review when it served its complaint. The failure to serve an affidavit of expert review “within 60 days after demand for the affidavit results, upon motion, in mandatory dismissal.” Id, subd. 6(a). The defendants did not make a separate demand for an affidavit of expert review, but defendants served interrogatories on the plaintiff demanding disclosure of plaintiff’s experts. Plaintiff answered the interrogatory providing the names of the experts and that the experts were “expected to testify as to the conclusions set forth in the Complaint.”

More than 180 days after the plaintiff commenced the action, defendants moved to dismiss contending that plaintiff had not met either the requirements of the expert review affidavit or the expert disclosure. With its response to defendants’ motion, plaintiff filed both an affidavit of expert review and an affidavit of expert disclosure.

The Minnesota Supreme Court concluded that the defendants’ interrogatories did not constitute a demand for an expert affidavit because they did not refer either to Minn. Stat. § 544.42 or “expert review” and that defendants’ motion to dismiss was the first demand. Therefore, the court concluded that plaintiff’s affidavit of expert review was timely. However, the court also concluded that the affidavit of expert disclosure was untimely and that plaintiff’s interrogatory answers were insufficient because they failed to answer how the experts would use the facts in the complaint to arrive at opinions of malpractice and causation as required under the statute. The court expressly declined to adopt a good faith standard for compliance with the statute “because it would inject a subjective element into the requirements for an affidavit of expert disclosure.”

Design Professionals: Architects Do Not Automatically Owe Clients A Fiduciary Duty

Carlson v. SALA Architects, Inc., 732 N.W.2d 324 (Minn. Ct. App. 2007)

In August 2000, the Carlsons hired SALA Architects to design them a single-family home. The Carlsons were drawn to SALA, and in particular SALA’s architect, Dale Mulfinger, because of their expertise in the design of “cottage” style homes. After entering into an agreement, SALA assigned another architect, David Wagner, to work on the design. Wagner was an experienced architect, but he was not licensed as an architect in Minnesota. By September 2001, after various revisions of the design, the Carlsons concluded that SALA was not complying with the agreement to design the cottage style home they wanted. They terminated the project after they had paid SALA $292,000 in fees for SALA’s architectural services.

In 2004, the Carlsons sued SALA for breach of contract and professional negligence and sought the return of what they had paid. SALA moved for summary judgment, which the district court denied. The court then, on its own, granted summary judgment to the Carlsons and ordered disgorgement of all of the fees that the Carlsons paid to the architect. The court ruled that it was undisputed that Wagner was not a licensed architect in Minnesota and, therefore, as a matter of law, SALA had committed professional negligence.

The Minnesota Court of Appeals determined that summary judgment for the Carlsons was improper and reversed and remanded. The court of appeals determined that the district court improperly made factual determinations, including its conclusion that SALA held Wagner out as a licensed architect. Indeed, several SALA invoices listed Wagner as a “draftsperson.” Minnesota Statutes § 326.14 (2004) permits unlicensed persons to engage in architectural work as long as a licensed architect takes responsible charge of the work.

The court of appeals further agreed with SALA that the district court erred as a matter of law, when it determined that there is automatically a fiduciary duty between architect and client. The court held that whether a fiduciary relationship exists is a fact question.

Indemnity: Enforceability of Indemnity Clauses

Schipper v. Dahl Trucking, Inc., 2007 WL 1892939 (Minn. Ct. App. 2007), rev’w denied (Minn. Sept. 18, 2007) (unpublished)

Schipper owned Midwest Cargo, which owns and operates a truck. In 2003, Schipper, as contractor, entered into a contract with Dahl Trucking, Inc. to provide freight transportation. Under the contract, Schipper received 75% of the gross revenue generated. The contract stated that the contractor expressly waived any claim or cause of action against Dahl Trucking, Inc. as a result of the death or injury of the contractor or contractor’s employees in connection with the contract and agreed to hold Dahl harmless and indemnity Dahl from such a claim.

On July 21, 2003, Schipper and a Dahl employee were hauling asphalt in Iowa and the Dahl employee’s truck collided with Schipper’s truck. As a result, Schipper was injured and his truck was damaged. Schipper brought a negligence action against Dahl and the driver. The district court granted Dahl’s motion for summary judgment determining that the exculpatory clause was unambiguous and enforceable. Schipper appealed asserting that the exculpatory clause was unenforceable because it was ambiguous and contravened public policy.

“Exculpatory clauses are enforceable if they (1) are not ambiguous; (2) do not purport to protect against intentional, willful, and wanton acts; and (3) do not contravene public policy.” The Minnesota Court of Appeals determined that the indemnity clause in the contract was not ambiguous and held that the clause did not contravene public policy because there was no evidence of a disparity of bargaining power, and because the service provided was not a necessary or public service. Because the clause only waived all claims with respect to Dahl, the court of appeals remanded on the issue of whether Schipper waived his claim against the driver.

Indemnity: Indemnity Provision for Claim “Arising Out Of” Subcontractors’ Work or Activities Does Not Make Subcontractor Liable For Another’s Negligence Or Wrongful Acts

Howard Homes, Inc. v. Keeler Stucco, Inc., 2007 WL 4234628 (Minn.Ct.App. 2007) (unpublished)

Homeowners commenced arbitration against Howard Homes, Inc. (“HHI”) after an inspection of their home revealed moisture intrusion, defects, and code violations in the stucco and exterior openings of the home. Specifically, the homeowners claimed that door and window openings were not constructed, and stucco was not applied, as required by the building code.

HHI tendered defense of the claim to the subcontractors responsible for framing and window installation and for application of the stucco. HHI then brought a declaratory judgment action against the subcontractors requesting a declaration that the indemnity clause in the subcontracts was valid and binding. The indemnity clause required that subcontractors “shall protect, defend, hold harmless and indemnify [HHI] … from and against all claims… arising out of or in any way relating to the work services or activities of [the subcontractor].” The district court granted HHI’s motion for declaratory judgment, holding that the indemnity clause is valid and enforceable and therefore requires that subcontractors defend HHI for claims arising from the subcontractors’ negligence.

The Minnesota Court of Appeals found no merit in the subcontractors’ argument that the “arising out of” language in the indemnity clause made the subcontractors liable for the negligence or other wrongful acts of HHI, or makes the clause ambiguous. The court of appeals, therefore, determined that the district court correctly concluded that Minn. Stat. § 337.02 [which invalidates an indemnification in a building and construction contract except to the extent that the injury or damage is attributable to the negligence of the promisor or the promisors’ independent contractors, employees, agents, or delegates] did not invalidate the indemnity provision. The court of appeals also determined that there was no merit in the subcontractors’ argument that because HHI was liable to homeowners for the completed project it cannot recover losses caused by the faulty workmanship of the subcontractors.

Insurance: After-The-Fact Re-creation of Events Does Not Create An “Occurrence”

Walnut Grove Partners, L.P. v. American Family Mutual Insurance Co., 479 F.3d 949 (8th Cir. 2007)

Walnut Grove was the landlord of a commercial property, which was leased to a law firm. In January 2007, the tenant notified Walnut Grove about mold and employee illness. The tenant had previously notified Walnut Grove of mold as early as August 2001. In May 2002, mold testing conducted by the tenant revealed significant problems and Walnut Grove notified its insurer, American Family Mutual Insurance Company. In July, after attempted remediation, the tenant terminated the lease because the premises were untenantable. In August 2002, Walnut Grove made a claim of loss to American Family, which denied any obligations of defense or indemnity.

Walnut Grove brought an action against American Family claiming that American Family owed Walnut Grove a duty of defense and indemnity for the mold claim. The district court granted American Family’s motions for summary judgment, determining that there was no coverage under the policy. The Eighth Circuit Court of Appeals affirmed determining that there was no “occurrence,” which the policy defined as “an accident.” Because Walnut Grove had notice of the mold at least six months prior to the date of the alleged loss (Walnut Grove alleged a sudden April 2002 water intrusion caused the mold), the mold in this case did not constitute “an undesigned, sudden, and unexpected event” as required for coverage under the policy.

Insurance: Each Claim By A Separate Individual Is A Separate Occurrence

Acuity Insurance Company v. R&H Painting, Inc., 2007 WL 4303791 (Minn. Ct. App. 2007) (unpublished)

R&H Painting is a commercial/industrial painting contractor with business liability insurance from Acuity Insurance Company. The insurance policy states that it covers property damage claims resulting from its painting operations. The deductible amount “applies to all damages sustained by any one person or organization because of property damage as the result of any one occurrence.”

In 2003, R&H Painting had an overspray incident that resulted in damage to 15 cars owned by individual owners, 13 of whom made claims to Acuity Insurance. By letter dated January 12, 2004, Acuity charged R&H Painting only one $250 deductible.

R&H Painting had two more overspray incidents in June and September 2004, which resulted in property damage. The June 2004 overspray incident resulted in 8 claims and the September 2004 incident resulted in 43 claims. This time, Acuity charged R&H a deductible for each of the 8 claims, or $2000 and for each of the 43 claims, or $10,750. Based on the earlier 2003 incident, R&H only paid to Acuity one deductible for each of the June and September 2004 incidents.

The Minnesota Court of Appeals determined that because the damage was sustained by individuals under separate claims, pursuant to the plain language of the insurance policy, each claim was an occurrence. Therefore, R&H was obligated to pay a $250 deductible for each car damaged.

The Minnesota Court of Appeals also determined that Acuity’s prior conduct in the 2003 painting incident did not change the result under the reasonable expectations doctrine because the reasonable expectations doctrine only applies to contracts with ambiguous language or contracts with hidden exclusions. The court determined that was not the case here.

Mechanic’s Liens: One Year Foreclosure Deadline Applies Only To Mechanic’s Lienholders

Mavco, Inc. v. Eggink, 739 N.W.2d 148 (Minn. 2007)

Plaintiff Mavco timely filed a mechanic’s lien on the Eggink’s property and timely commenced a mechanic’s lien foreclosure action and timely filed a notice of lis pendens. A few days before Mavco filed its complaint, summons, and notice of lis pendens, the Egginks granted a mortgage on their property to Wells Fargo Bank. More than two months after Mavco commenced its lien foreclosure action, Wells Fargo recorded its mortgage. Mavco later learned of Wells Fargo’s mortgage but did not join Wells Fargo in its foreclosure action within the one year timeframe required by Minn. Stat. § 514.12, subd. 3 (2006).

The Minnesota Supreme Court concluded Minn. Stat. § 514.12, subd. 3, which provides “no person shall be bound by any judgment in such action unless made a party thereto within the year”, only means that all mechanic’s lienholders must be joined within the one year time deadline. Thus, Mavco could join Wells Fargo in the lien action with its lien superior to Wells Fargo’s mortgage because Mavco’s notice of lis pendens was recorded prior to the mortgage.

Mechanic’s Liens: Attorneys’ Fee Award Must Be Proportionate To Amount of Lien

Southside Plumbing & Heating, Inc. v. Plourde, 2007 WL 1412969 (Minn. Ct. App. 2007) (unpublished)

Southside Plumbing filed a mechanic’s lien in the amount of $1,251.33 and subsequently filed a complaint seeking to foreclose on its lien. It was undisputed that Southside Plumbing was owed the $1,251.33, but settlement discussions broke down over how much Southside Plumbing would be paid in interest, costs, and attorneys’ fees. At the summary judgment hearing, the district court awarded Southside Plumbing a total of $9,312.25 – $1,251.33 for the lien; $918.42 for costs and disbursements; and $7,142.50 in attorneys’ fees.

On appeal, the Minnesota Court of Appeals applied the Jadwin v. Kasal, 318 N.W.2d 844 (Minn. 1982) factors and reversed and remanded determining that the award for attorneys’ fees was disproportionate to the interest to be protected and was therefore unreasonable. Notably, in settlement, Mahoney had offered $3,159.99 to Southside Plumbing, but Southside Plumbing refused and demanded $4,000. Southside Plumbing’s attorneys’ fees increased to $7,142.50 by the time of the summary judgment hearing.

Mechanic’s Liens: Work Is Not Covered Under A Mechanic’s Lien Until Pre-Lien Notice Given[2]

LeMaster Construction, Inc. v. Seamus Mahoney, 2007 WL 1599192 (Minn. Ct. App. 2007) (unpublished)

LeMaster was hired to perform repairs on Mahoney’s home after a fire. During the remediation, Mahoney orally requested upgrades to the work that had been approved by Mahoney’s insurance company. When Mahoney failed to sign written change orders, LeMaster ceased work and filed a mechanic’s lien. Mahoney’s insurer eventually paid LeMaster for structural repairs, but Mahoney paid nothing to LeMaster.

The district court determined that there was no contract between LeMaster and Mahoney, but awarded LeMaster a total of $22,526.81 for completed demolition work and for work done pursuant to change orders under quantum meruit. The district court also awarded LeMaster $10,000 in attorneys’ fees of LeMaster’s $23,093.90 attorney fee claim.

The Minnesota Court of Appeals affirmed. It agreed that no contract existed between LeMaster Construction and Mahoney because essential terms were missing in the agreement and terms were left open for future negotiation regarding improvements LeMaster Construction made to Mahoney’s home. Because there was no contract, a separate pre-lien notice had to be served on Mahoney. Any work performed before the pre-lien notice was given was not covered by the lien. The court of appeals also affirmed the district court’s determination that because Mahoney received a benefit from LeMaster Construction’s work, LeMaster was entitled to quantum meruit damages.

Payment: Bank Assumed No Duty To Pay Contractors Insurance Proceeds

Superior Construction Services, Inc. v. Moore, 2007 WL 1816096 (Minn. Ct. App. 2007) (unpublished)

Superior Construction Services, Inc. and Specialty Contracting Services, Inc. were contractors that repaired Ovetta Moore’s home. Moore’s casualty insurer issued checks, which were made payable to Moore, the contractors, and the mortgage bank. Moore sent the checks to the bank, unendorsed. The bank returned the checks to Moore, requiring Moore to follow a procedure before the bank would relinquish its interest in the proceeds, which required, among other things, that the contractors provide lien waivers and sign the checks. The contractors signed the checks and provided the lien waivers and the homeowner sent the checks and lien waivers to the bank. Following an inspection, the bank issued a check to the homeowner only.

The contractors were not paid. They sued and alleged, among other things that the bank was negligent for failing to exercise reasonable care when it issued a check only to the homeowner. The district court granted the bank’s motion for summary judgment, concluding that the bank did not owe a duty to the contractors. The Court of Appeals affirmed determining that the bank was protecting its own interests and that the assumed duty theory also did not apply because the contractors had only suffered financial loss. The assumed duty theory only applies when there is property damage or personal injury. The court also determined that the bank had not assumed any special relationship toward the contractors, which had not entrusted their safety to the bank and had not instructed the bank to direct the funds to them rather than the homeowner.

Pleadings: The Importance of Pleading the Correct Claim

Mate Precision Tooling v. Carrier Corporation, 2007 WL 3580 (Minn. Ct. App. 2007) (unpublished)

Mate Precision Tooling purchased a rooftop HVAC system from NS/I Mechanical Contracting Company, which NS/I also installed. Mate suffered property damage when a pipe in the sprinkler system burst. A forensic engineer hired by Mate opined that the sprinkler pipe froze after an ice and snow blockage in the HVAC unit’s exhaust stack caused the unit to malfunction. The engineer further opined that the blockage could have been prevented if the HVAC unit had been “equipped with an appropriate exhaust stack suitable for cold regions.” Mate sued NS/I alleging that NS/I’s failure to recommend and install a severe-weather exhaust stack was the direct and proximate cause of the property damage.

During discovery, Mate informed NS/I that it had retained an expert with a new theory regarding the cause of the malfunction. NS/I refused to engage in discovery on Mate’s new theory because Mate had not pleaded this theory in its complaint. Several months after the discovery deadline had passed, Mate moved to amend its complaint.

The district court denied leave to amend based on its determination that NS/I would be prejudiced because the proposed amendment would substantially change the complaint from one theory to encompass any negligence theory. The district court also determined that Mate delayed in bringing its motion to amend as the evidence on which the new theory is based was available to Mate when it filed its complaint. The district court also determined that the amendment would not relate back to the original complaint and would therefore be barred by the statute of limitations. Finally, the district court granted NS/I’s motion for summary judgment because Mate had not produce any evidence to support the forensic engineer’s conclusion regarding the failure of the HVAC system. The Minnesota Court of Appeals affirmed on each of these points.

Procedure: No Access To I-35W Site By Law Firm Where Procedural and Substantive Requirements Not Met

In Re I-35W Bridge Collapse Site Inspection, 243 F.R.D. 349 (D.Minn. 2007)

The United States District Court, District of Minnesota, denied on procedural and substantive grounds, a motion by the Schwebel, Goetz, & Sieben law firm to inspect the I-35W Bridge Collapse site when the bridge was under the exclusive jurisdiction of the National Transportation Safety Board (“NTSB”). Schwebel, Goetz, & Sieben was hired by three of the people injured and by the families of two of the people killed when the I-35W bridge collapsed.

The district court determined that the procedural requirements of Fed.R.Civ.P. 27 had not been met. Rule 27 requires that the petition must be filed by a person who expects to be a party to a lawsuit and the petition must identify the prospective party and the party to be sued. The petition must also show that a federal court will have jurisdiction and that a complaint could not be filed. The Schwebel firm did not identify any party, made no jurisdictional showing, and provided no explanation why it could not file a complaint.

Substantively, the district court also determined that the order sought by the Schwebel law firm was not necessary to prevent injustice. The district court stated, “It is difficult to believe that a walk-through of the site by three lawyers and two expert witnesses is likely to discover evidence that will not be discovered by what will undoubtedly be a lengthy and exhaustive investigation by the government.” The court was also concerned about the impact of the motion on the recovery effort that was then ongoing when the order was issued. Finally, the court determined that the Schwebel firm was not without a remedy; it could request access from the NTSB.

Settlement: Owner’s Release of General Contractor in a Pierringer Release Prevents GC from pursuing Claims For Contribution and Indemnity

Goetzmann v. Domestic Development, Inc., 2007 WL 446914 (Minn. Ct. App. 2007) (unpublished)

General Contractor, Domestic Development, Inc. (“DDI”) built a home that was purchased by the Goetzmanns in 2000. The home was substantially complete on April 29, 1993. In March 2004, the Goetzmanns discovered water-intrusion damage to their home. As a result, they brought suit against DDI in May 2004, asserting claims of negligence, breach of statutory warranty, and breach of contract. In February 2005, DDI initiated third-party actions against several subcontractors. The Goetzmanns never asserted any direct claims against the subcontractors.

The Goetzmanns and DDI negotiated a settlement of the Goetzmanns’ claims on June 29, 2005, referencing a Pierringer release pursuant to Pierringer v. Hoger, 124 N.W.2d 106 (Wis. 1963) and Frey v. Snelgrove, 269 N.W.2d 918 (Minn. 1978). In exchange for DDI’s payment of $147,500 to the Goetzmanns, the parties released each other from any and all claims, and the Goetzmanns assigned any claims that they had or might have against the subcontractors to DDI. DDI, in turn, agreed to hold the Goetzmanns harmless to the extent of any indemnity or contribution claims. The Goetzmanns signed the settlement agreement in July 2005 and received the settlement proceeds.

Based on the settlement agreement’s reference to a Pierringer release, the subcontractors moved for summary judgment. DDI and the Goetzmanns revised the settlement to remove the Pierringer language. The district court granted summary judgment determining that the first settlement agreement applied. The district court described the revised agreement as DDI’s attempt to “recreate a cause of action that was previously extinguished by a release.”

The Minnesota Court of Appeals determined that the district court did not err in determining that the original settlement agreement controlled because the Goetzmanns had signed it and received the settlement proceeds a few months before the summary-judgment hearing. The Minnesota Court of Appeals also determined, however, that the result was the same under either agreement because both agreements were modified Pierringer releases. Under a Pierringer release, DDI could not pursue contribution or indemnity from the subcontractors because, in settling with the Goetzmanns, DDI had not paid more than its fair share.

The court also concluded that the builder’s claims against the subcontractors were barred by Minnesota’s ten-year statute of repose under Minn. Stat. § 541.051 (2002). Based on Weston v. McWilliams & Assocs., Inc., 716 N.W.2d 634 (Minn. 2006), the Court of Appeals affirmed on this issue as well because DDI’s claims for contribution and indemnity did not accrue and were not brought within ten years of completion of the homes; therefore, such claims were time barred.

Note: Minnesota Statutes § 541.051 was amended in 2007. Defendants seeking contribution and indemnity claims against other parties can now bring such claims within two years of (1) settling a claim, or (2) being sued by the plaintiff, whichever comes first. The Minnesota Court of Appeals reached a similar result in Strand v. Allied Insulation Supply Co., 2007 WL 2365088 (Minn. Ct. App. 2007) (unpublished).

Statute of Repose: New Home Warranty Claims Accrued Before August 1, 2004 Are Not Barred By the 10 Year Statute of Repose

Sletto v. Wesley Construction, Inc., 733 N.W.2d 838 (Minn. Ct. App. 2007)

The Slettos discovered mold and water damage in their home in 2003, about 10 years after they purchased the home and 13 years after the home was built by Wesley Construction, Inc. The Slettos notified Wesley and hired a contractor to repair the home. In November 2004, the Slettos sued Wesley, alleging breach of statutory warranties under Minn. Stat. § 327A.05 (2004) and five other common law claims.

Wesley moved for summary judgment alleging that the statute of repose barred the Slettos claims. The statute provides that, unless a defect is concealed through fraud, a common law construction claim cannot “accrue more than ten years after substantial completion of the construction.” Minn. Stat. § 541.051, subd. 1(a) (2006). The district court concluded that the statute also applied to both the Slettos common law and statutory warranty claims and therefore dismissed the Slettos claims.

The Court of Appeals determined first that the amendment to Minn. Stat. § 541.051, which changed the language of the accrual of a homeowner’s claim, was prospective only. Therefore, because the Slettos claim accrued in 2003, the amendment did not apply to the Slettos’ claims. Therefore, the court of appeals reversed and remanded on that issue. The Court of Appeals affirmed the dismissal of the Slettos’ common law claims because they survived only if the Slettos proved fraudulent concealment and the Slettos did not even establish a genuine issue of material fact on that issue.

Note: This decision does not affect statutory home warranty claims brought on or after August 1, 2006.

Gomez v. David Williams Realty & Construction, 2007 WL 3257202 (Minn. Ct. App. 2007) (unpublished)

Homeowners challenged the grant of summary judgment to the defendants dismissing new home warranty claims because they were barred by the statute of repose in Minn. Stat. § 541.051, subd. 1(a) (2004). The home was substantially completed on October 19, 1994. Between 1995 and 1999, the homeowners contacted the builder several times regarding leakage after rains. The builder made several attempts over several years to fix the problem, but it was never fully corrected. Finally, in 2004, the homeowners wrote to the builder’s insurance broker.

In August 2004, the homeowners engaged Private Eye, Inc. (“PE”) to perform a moisture analysis. PE reported that moisture probes indicated high moisture readings and recommended further exploration to determine if there was any structural damage. The homeowners forwarded the October 12, 2004 report to the insurer, which indicated that the homeowners needed to have a structural engineer substantiate the existence of structural damage to the home. The homeowners hired Air Tamarack to conduct the structural analysis. Air Tamarack found serious structural and fungal infestation and several building code violations and poor building practices. The homeowners provided the February 2, 2005 Air Tamarack report to the insurer and provided written notice to the builder. The homeowners then sued the builder on November 8, 2005.

The builder, and a subcontractor that was joined in the litigation by third-party complaint, moved for summary judgment arguing lack of notice under Minn. Stat. § 327A.03 (2004) and the two-year statute of limitations under Minn. Stat. § 541.051, subd. 1(a) (2004). In its reply brief, the builder also argued that the PE report did not state that there was structural damage and the Air Tamarack report was issued more than 10 years after the warranty date of October 19, 1994. The district court granted the motion for summary judgment.

On appeal, the Minnesota Court of Appeals affirmed in part, reversed in part, and remanded. The court determined that under Minn. Stat. § 541.051, subd. 1(a) (2004), the cause of action must accrue within 10 years, which means the breach must be discovered within 10 years. However, the court of appeals also determined that the district court erred when it determined, as a matter of law, that the homeowners’ claim did not accrue within 10 years of substantial completion of the home.

Bruber v. Harvey Homes, Inc., 2007 WL 4303724 (Minn. Ct. App. 2007) (unpublished)

In 1989, the Brubers contracted with Harvey Homes, Inc. to build their home. The construction was complete in early 1990. In June 2004, the Brubers noticed damage caused by moisture and water-infiltration problems on exterior walls, including areas around several windows. Soon after discovering the damage, the Brubers provided notice to a former employee of Harvey Homes, who informed the Brubers that Harvey Homes was out of business. In September 2004, the Brubers notified Harvey Homes’ former insurance agent about the discovery of water intrusion. A report by Thomas Irmiter of Forensic Building Science, Inc. detailing numerous construction defects and code violations was issued in June 2005.

In October 2005, the Brubers brought a claim under Minn. Stat. § 327A.05 (2004) as well as common law negligence claims against Harvey Homes, Marvin Windows, and other parties. Harvey Homes filed a third-party complaint against Marvin and other subcontractors.

In August 2006, Harvey Homes moved for summary judgment on all of the Brubers’ claims arguing that the statute of repose for claims arising out of the defective an unsafe condition of an improvement to real property barred the claims. The Brubers argued that the statute of repose was tolled because Harvey Homes had fraudulently concealed the damage. The district court granted summary judgment for Harvey Homes determining that the Brubers’ claims were time barred and the Brubers did not raise a genuine issue on their fraudulent concealment claim. The district court determined that installing the siding and bricks was not something “of an affirmative nature designed to prevent, and which does prevent, discovery of a cause of action.” The Minnesota Court of Appeals agreed that the Brubers did not produce any evidence that Harvey Homes knew about any code violations or that its statement was intentionally false.

The court of appeals also determined, however, that the 2002 version of Minn. Stat. § 541.051 did not bar the Brubers’ statutory warranty claim if the claim accrued before August 1, 2004. A statutory warranty claim accrues “when the homeowner discovers, or should have discovered, the builders refusal or inability to ensure the home is free from major construction defects.” The court of appeals reversed and remanded so that the district court could determine when the claim accrued.

Torts: Loaned Servant Doctrine Has Particular Requirements

Lundstrom v. Maquire Tank, Inc., 509 F.3d 864 (8th Cir. 2007)

Lundstrom, an employee of Truck Crane Service Company, was severely injured at a job site by a heavy metal object that fell 140 feet onto his arm when equipment was being packed for transport. The heavy metal that fell was owned by Maguire Tank, a general contractor, which had employed Truck Crane to lift into place various parts of a water tower. Lundstrom collected workers’ compensation and then sued Maguire Tank, asserting its negligence caused his injury. Maguire Tank asserted that, under the loaned servant doctrine, it was Lunstrom’s special employer and therefore was protected from liability beyond workers’ compensation.

The loaned servant doctrine provides that “if an employer lends an employee to another for the performance of some special service, then that employee, with respect to that special service, may become the employee of the person to whom his services have been lent.” This doctrine requires that (1) the loaned employee has made a contract for hire, express or implied, with the special employer, (2) the work being performed is that of the special employer, and (3) the special employer has the right to control the details of the work.

The district court granted Maguire Tank’s motion for summary judgment and concluded that Lundstrom was a loaned servant of Maguire Tank. The Eighth Circuit Court of Appeals reversed and remanded. Under the loaned servant doctrine, a contract for hire is made only if the employee consents to the alleged special employment relationship. Second, at the time Lundstrom was injured, Lundstrom had already completed all of his work for Maguire, except to drive away. He was waiting to leave the site when he was injured. Thus, the court concluded it was error to find as a matter of law that Lundstrom was doing Maguire’s work. Finally, Maguire did not actually exercise detailed control over Lundstrom.

Torts: Expert Testimony Needed To Establish Claims For Emotional Distress

Wittwer v. Enbridge, Inc., 2007 WL 152533 (Minn. Ct. App. 2007) (unpublished)

While Defendant Murphy Brothers, Inc. was using high water pressure to test an oil pipeline that ran across the farm of Plaintiff Terri Wittwer, the line ruptured and exploded. The blast was loud and spewed rocks, water, and debris over 100 yards on Wittwer’s property. The explosion also terrified Wittwer.

Wittwer sued Murphy Brothers, Inc. and the other defendants for emotional distress on theories of negligence and negligent and reckless infliction of emotional distress. The district court granted the defendants’ motion for summary judgment as to all of Wittwer’s emotional distress claims because Wittwer failed to present evidence as to the nature and severity of her emotional distress or of a causal link between her alleged injury and the accident. The district court also limited Wittwer’s request to amend her complaint to add claims for trespass, invasion of privacy, and punitive damages to an additional claim for trespass.

The Minnesota Court of Appeals affirmed. Testimony of an individual is not sufficient to establish a claim for emotional distress. Testimony of an expert was necessary to show the causal connection. The court of appeals also determined that the district court did not abuse its discretion in not allowing an invasion of privacy claim because that is an intentional tort and there was no evidence that Murphy Brothers engaged in any intentional tortious act.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

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