Construction Law Year in Review: Selected Cases From 2009

Category | Briefing Papers

This briefing paper discusses noteworthy legal decisions involving construction law issues that arose last year in the Minnesota Court of Appeals, the United States District Court for the District of Minnesota, and the United States Court of Appeals for the Eighth Circuit. The cases are organized by the following topics: contracts, design, mechanic’s liens, arbitration, evidence, and liability.

CONTRACTS

M.M. Silta, Inc. v. Cleveland Cliffs, Inc., 572 F.3d 532 (8th Cir. 2009).

Fabyanske, Westra, Hart & Thomson won a verdict in excess of $7.3 million for M.M. Silta, Inc. in an action against a mining company, Cleveland Cliffs, Inc. Silta, a salvage company, purchased 248 industrial circuit breakers for $10 each from Cliffs during a liquidation sale at a mine owned by Cliffs. When Silta attempted to pick up its breakers some months later, it was told that the breakers had been sold to a third-party in connection with Cliffs’ sale of the mine. Cliffs offered to refund the $2,480 purchase price. Silta declined, insisting that it wanted the breakers instead, and sued Cliffs for breach of contract.

At trial, Cliffs argued that Silta breached the contract first by failing to pick up the breakers in a timely manner. Cliffs also argued that if it had breached the contract, damages amounted to no more $500 in scrap value for each breaker because the parties had not contemplated that the breakers might be resold. The jury disagreed, finding that Cliffs breached the contract and that Silta was entitled to the fair market value of $27,500 for each of the 248 breakers, resulting in a total award in excess of $7.3 million.

Cliffs appealed, contending that the trial court incorrectly instructed the jury that termination of the contract required reasonable notice, that the contract was invalidated by the doctrine of mistake, and that the damages were disproportionate. The appellate court upheld the verdict, explaining that even if the trial court’s notice instruction was technically incorrect, the mining company’s defense of prior breach was unlikely to succeed because the contract did not require Silta to pick up the breakers within a certain period of time. The appellate court further held that resale was foreseeable and that damages were reasonable in light of Cliffs’ experience as a sophisticated commercial entity and its failure to introduce evidence challenging Silta’s assessment of the fair market value of the breakers.

Valspar Refinish, Inc. v. Gaylord’s Inc., 764 N.W.2d 359 (Minn. 2009).

Gaylord’s Inc., a manufacturer of truck-bed covers, entered into a contract with Valspar Refinish, Inc., a paint-coating supplier, in which Gaylord’s agreed to purchase all of its paint exclusively from Valspar for five years. In the event of default, the contract required that the non-defaulting party give the defaulting party a 60-day written notice and an opportunity to cure before terminating the contract. Gaylord’s conducted testing and identified problems with Valspar’s paint before entering into the contract. Valspar assured Gaylord’s that the problems would be resolved, and the parties executed the contract. Gaylord’s, however, encountered numerous problems with Valspar’s paint during performance of the contract. The parties attempted to solve the problems, but no solution was found and Gaylord’s terminated the contract without providing written notice. Valspar sued Gaylord’s for breach of contract. In its defense, Gaylord’s argued that the contract did not require written notice, or, in the alternative, that Valspar had waived its right to written notice when it met with Gaylord’s in an attempt to resolve Gaylord’s oral complaints. Gaylord’s also asserted fraud and negligent misrepresentation claims against Valspar based upon pre-contractual assurances by Valspar that problems with its paint would be resolved.

The Minnesota Supreme Court held that the contract clearly and unambiguously required the non-defaulting party to send written notice of default before terminating the contract. An email sent by Gaylord’s did not qualify because, pursuant to the contract, the written notice had to be hand delivered or mailed with proof of delivery. The court also concluded that Valspar had not waived its right to require written notice. Waiver is the intentional relinquishment of a known right. Although knowledge and intent may be inferred from conduct, Valspar’s attempts to cooperatively resolve product performance, without more, were insufficient to constitute waiver. The court dismissed Gaylord’s fraud claim because fraud requires a false representation about a past or existing material fact and reliance on that false representation. Valspar’s assurances that problems with the paint would be resolved were predictions of future results, not statements of past or existing facts. Moreover, Gaylord’s could not claim reliance on Valspar’s assurances when it conducted its own independent testing of the paint. Finally, the court concluded Gaylord’s was barred from bringing a negligent misrepresentation claim against Valspar because Minnesota Statutes section 604.101 prohibits a buyer of goods from bringing a misrepresentation claim against a seller unless the misrepresentation was made intentionally or recklessly.

DESIGN

Granite Re, Inc. v. City of LaCrescent, MinnComm Untility Construction Co., et al., 2009 WL 2982642

(D. Minn. 2009).

Fabyanske, Westra, Hart & Thomson obtained a judgment in excess of $1.7 million for MinnComm Utility Construction Co. in an action against the City of LaCrescent for failure to provide adequate plans and specifications in connection with a contract for installation of a water and sewer pipeline under the Mississippi River. The City’s engineer designed the project without adequately determining the depth of the water bodies, the effect of the local scour, the sufficiency of the soils, and the proper minimum cover for the pipeline. The City also failed to disclose a number of possible drilling obstructions discovered when preparing the plans and specifications, including wing dams, bridge abutments and footings, and shipwrecks. MinnComm encountered undisclosed obstructions during drilling and asked for additional time and extra costs to complete the project. The City denied these requests, declared the contractor in default, and terminated the contract.

At trial, MinnComm sought damages arising out of the defective plans and specifications and the City’s wrongful termination of the contract. The City argued that MinnComm was not entitled to recovery because the City did not assert control over MinnComm’s means and methods of work and MinnComm was to blame for the problems encountered during construction. The court decided in favor of MinnComm based on the long-standing rule that where an owner provides plans that the contractor must follow, the owner impliedly warrants that the plans are sufficient for their intended purpose and the builder is entitled to recover damages that arise from reliance on such an implied warranty. The court found that the City failed to provide MinnComm with a constructible design because it withheld critical data regarding known obstructions and it provided for insufficient minimum cover over the pipeline. The court ordered the City to pay MinnComm for costs incurred in attempting to comply with the defective plans and specifications, including lost profits and prejudgment interest, for a total award of more than $1.7 million.

MECHANIC’S LIENS

Premier Bank v. Becker Development, LLC, 767 N.W.2d 691 (Minn. App. 2009), review granted

September 16, 2009.

Fabyanske, Westra, Hart & Thomson prevailed on a mechanic’s lien claim at the Minnesota Court of Appeals and recently argued its case to the Minnesota Supreme Court on behalf of Kuechle Underground, Inc. Kuechle filed a blanket mechanic’s lien on a multi-lot development. There were two types of mortgages on the development. The first, recorded before Kuechle’s first date of work, was a development loan mortgage that covered the entire development. The second, recorded after Kuechle’s first date of work, were construction loan mortgages that covered only three of the lots. The bank released its development loan mortgage when it issued the construction loans, making Kuechle’s mechanic’s lien prior to the bank’s construction loan mortgages on those three lots.

Kuechle proceeded to foreclose against the three lots for the full amount of its blanket mechanic’s lien. The bank argued that Kuechle must apportion its lien and could only foreclose against the three lots for a fraction of its total lien claim. The district court and the court of appeals both ruled in Kuechle’s favor. The court of appeals noted that Minnesota’s mechanic’s lien statute is silent as to whether a blanket lien claimant can assert its entire claim against less than all of the properties. The court recognized the equitable principles that apply in the enforcement of mechanic’s liens and held that allowing Kuechle to enforce the full amount of its lien against the three lots would comply with the lien statute’s purpose of protecting the rights of those who furnish labor and materials to an improvement of real estate. The court also acknowledged the fact that the bank could have but did not require Kuechle to remain a junior lienholder on the construction loan mortgages, and noted that a professional lender’s failure to consider priority was not an excusable mistake. The bank appealed and the supreme court’s decision is pending.

LeMaster Construction, Inc. v. Woeste, et al., 2009 WL 1048194 (Minn. App. 2009).

LeMaster Construction, Inc. performed work on the Woestes’ home to repair significant damage caused by a fire. The Woestes terminated LeMaster part way through the project because they found LeMaster’s work to be of substandard quality and improperly performed. LeMaster filed a mechanic’s lien against the Woestes’ home for more than $350,000 and brought suit to foreclose on its lien. The Woestes counterclaimed by alleging breach of contract, slander of title, and conversion. Slander of title occurs when (1) a false statement is made concerning the real property owned by the plaintiff, (2) the false statement is published to others, (3) the false statement is published maliciously, and (4) the false statement concerning title to the property caused the plaintiff to suffer pecuniary loss in the form of special damages. In support of their slander of title claim, the Woestes alleged that LaMaster’s mechanic’s lien contained numerous inaccuracies with respect to the amount owed and that the filing of the lien caused pecuniary loss, including damages related to an inability to refinance their home at more favorable rates.

After a seven-day trial, the district court ruled in favor of the Woestes and ordered LeMaster to pay the Woestes damages in excess of $300,000, including more than $160,000 for slander of title. The district court specifically found that LeMaster’s lien was published with malice because it contained sums owed for things clearly not lienable under Minnesota law, such as claims for liquidated damages, contents handling, items that were intentionally overcharged, amounts related to fraudulent invoices from subcontractors, work that was not completed, and work that was already paid for. LeMaster appealed, arguing, among other things, that the district court erred when it found that LeMaster’s lien was filed with malice. The appellate court rejected this argument, explaining that the element of malice is satisfied by a reckless disregard concerning the truth or falsity of a matter, despite a high degree of awareness of probable falsity or doubts as to its truth. The appellate court upheld the district court’s findings that the lien was carelessly prepared without regard to the law by an employee who was grossly incompetent to perform this function. In doing so, the appellate court noted that LeMaster’s employee testified that she knew nothing about what could properly be included in a mechanic’s lien, yet she knew the legal effect on the homeowner of filing such a large lien.

ARBITRATION

Southeastern Stud & Component, Inc. v. American Eagle Design Build Studios, LLC, et al., 588 F.3d 963 (8th Cir. 2009).

A subcontractor, Southeastern Stud & Component, Inc., brought suit against a prime contractor, American Eagle Design Build Studios, LLC, over a payment dispute. Although the subcontract contained a clause allowing American Eagle to elect arbitration, American Eagle did not initially move to compel arbitration. Instead, American Eagle participated in the litigation for more than one year before moving to compel arbitration. Although courts favor arbitration, a party may waive its right to arbitration if it (1) knew of an existing right to arbitrate, (2) acted inconsistently with that right, and (3) prejudiced the other party by these inconsistent acts. The appellate court held that American Eagle waived its right to arbitration because (1) it drafted the contract, including the arbitration clause, and the law clearly allowed arbitration in this situation, (2) it substantially participated in litigation and did not do all it could reasonably have been expected to do to make the earliest feasible determination of whether to proceed judicially or by arbitration, and (3) Southeastern was prejudiced because it incurred expense and experienced substantial delay in connection with the litigation.

EVIDENCE

Miller v. Lankow, et al., 2009 WL 4910258 (Minn. App. 2009).

A buyer purchased a home in a transaction in which the sellers disclosed mold and moisture-intrusion problems that had allegedly been remediated. The buyer, Miller, later discovered moisture intrusion and mold in some of the same areas of the home that had been remediated. Miller immediately contacted the repair contractors to inform them of his discovery. The repair contractors visited the home and gave opinions as to the possible cause of the moisture and mold, but did not offer to remedy the problem. Several months later, Miller sent letters to the repair contractors alleging that their remediation work was defective, resulting in continued moisture intrusion and mold. Miller encouraged the contractors to inspect the home and offer possible solutions in order to avoid legal action. Miller also sent a letter to the sellers alleging that they had misrepresented facts regarding remediation and demanding that they contact him in order to avoid a lawsuit. Miller received no response and sent a final letter to the contractors and the sellers instructing them to immediately schedule any further inspections because repairs would be under way in seven days. One of the repair contractors visited the home eight days later, and the entire exterior of the home had already been removed.

Miller brought suit against the sellers and the repair contractors about a month after his last letter. Miller had never provided any of the parties with notice of his intent to proceed with repairs prior to his final letter. The district court found that spoliation of evidence had occurred when Miller proceeded with repairs on such short notice. Spoliation is the destruction of relevant evidence by a party. The district court sanctioned Miller by excluding all physical evidence of the alleged damage to the home and any expert reports relating to moisture intrusion and mold. The district court then dismissed Miller’s claims based on its conclusion that the claims could not be supported without the excluded evidence.

Miller appealed and the Minnesota Court of Appeals affirmed the district court’s decision. In doing so, the court of appeals rejected Miller’s argument that the repairs occurred only after he provided the parties with adequate notice. The appellate court concluded that Miller first failed to tell the contractors that he believed they were at fault for the damages, and then failed to disclose his specific repair plan. The appellate court further noted that a plaintiff can avoid sanctions for spoliation of evidence by giving sufficient notice of a claim with an opportunity to make repairs, to prepare for litigation, and to prevent the prosecution of claims after it is too late to investigate them. Miller did not meet this standard because he did not give actual notice of the nature and timing of repairs that lead to the destruction of evidence, and he failed to provide a reasonable amount of time for the parties to inspect and preserve evidence.

LIABILITY

Malcolm v. Franklin Drywall, Inc., 2009 WL 690082 (D. Minn. 2009).

The trustees of several union fringe benefit funds sued Franklin Drywall, Inc., Master Drywall, Inc., and Philip Franklin for delinquent fringe benefit contributions and liquidated damages. Philip Franklin was the sole director, officer, and shareholder of Franklin Drywall.Franklin’s wife owned Master Drywall. The trustees obtained a judgment in excess of $1 million against Franklin Drywall and Master Drywall. The trustees sought to hold Franklin personally liable for these damages under a legal theory known as “piercing the corporate veil.”

Ordinarily shareholders of a corporation are not personally liable for the debts or obligations of the corporation; however, a court will “pierce the corporate veil” and hold a shareholder personally liable if the corporate form is used to commit fraud or when the corporation is the “alter ego” of the sole shareholder. There is a two-step approach under the alter ego theory. First, the court considers the relationship of the shareholder to the corporation and the extent to which the corporation was operated as a separate legal entity. The court will consider the following factors: insufficient capitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency at the time of the questioned transaction, siphoning of funds, nonfunctioning of other officers and directors, absence of corporate records, and existence of the corporation as a facade for individual dealings. Second, if these factors weigh in favor of finding personal liability, the court considers whether shielding the shareholder from personal liability would result in injustice or fundamental unfairness.

The court addressed each factor and found there was no justification in holding Franklin personally liable. Franklin Drywall’s financial difficulties did not result from undercapitalization and although there were multiple transactions between Franklin Drywall, Franklin’s family, and Franklin, the transactions were documented and recorded. Franklin Drywall also employed a certified public accountant and a controller to handle its finances. The court further held that Franklin could not be personally liable for the debts of Master Drywall because Franklin was not a shareholder, officer, or director.

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