Larger projects tend to offer better protections to contractors and owners through the issuance of sureties and bonds and the design professional is often left with the court system as the sole remedy for recouping payment either through an action for breach of contract, or to foreclose on a lien.Smaller projects offer similar pitfalls for design professionals… and depending on the amounts owed, recouping the money can seem daunting.
In situations where the fee is a fraction of the total project cost, consider the personal guarantee.It’s an additional agreement signed by an individual, not an LLC or a Corporation obligating the person to the debt owed.
A recent case from the Northern District, Kawasaki Motors, deals with these types of guarantees (albeit in a motor vehicle financing setting) and is illustrative of the shorter method recoupment on the guarantee can take.
In Kawasaki, two individuals had signed personal guarantees for the debts of a corporation that had contracted with the plaintiff.The corporation defaulted on its obligations and ended up owing roughly $76,000 to the plaintiff.The plaintiff had a judgment against the corporation and then sought the money from the guarantors that had signed agreements with the plaintiff guaranteeing the debts of the corporation.The defendants failed to contest the validity of the guaranties and the court ruled in favor of the plaintiffs on summary judgment finding that no issues of fact existed for trial where the contract for they guaranties was not contested and the defendants failed to put forward any reason to contest the amount claimed by the plaintiff.
Someone financing a project should be able to personally guaranty the 7% to 10% fee that the design professional will earn… especially on smaller commercial projects or residential ones.Given that the design professional usually will have completed the majority of its work before financing problems arise, an extra guaranty for those taking such a risk is a welcomed safety net.
Recently, we have reported on cases related to claims arising out of construction regarding converage under a CGL policy. Here is another that found no coverage under a standard CGL policy.These cases emphasize the need to evaluate their risk allocation and coverage needs for claims arising out of claims stemming from faults with the work that’s performed.
In Auto-Owners, the CGL carrier filed a declaratory action asserting that it did not owe coverage under a standard CGL policy to a subcontractor.The subcontractor wanted coverage in a suit filed against it for breach of contract, defective workmanship and negligence.The sub’s work on the project that led to the underlying dispute stemmed from the sub’s attempt to fix the sill plate at the top of the foundation.The sub was lifting the existing structure to get at the plate and the building slid off its foundation.The damage to the building was extensive and the city of Chicago ordered the building demolished.The GC sued the sub and the sub looked to its CGL carrier for coverage.
The court did not address the question of the accident’s categorization as an “occurrence” or as “property damage” under the policy.Instead, it looked beyond any argument that the action fell under the policy as both an “occurrence” and “property damage” (a contention not assumed in our previous entry on Lyerla) and found that two exclusions in the policy barred coverage:
“Even if the home sliding off of its foundation constitutes “property damage” resulting from an “occurrence,” Auto-Owners is not obligated to defend or indemnify Defendants for the resulting damage because any such damage fell under exclusions j(5) and j(6) to the policy. Exception j(5) excluded damage to the “particular part” of property on which Chorak was “directly or indirectly” performing operations if the damage arose from those operations, and exclusion j(6) excluded damage to the “particular part” of property that must be restored because Chorak's work was incorrectly performed on it.”Slip Op. at 2.
The court granted summary judgment to the plaintiff and found that no coverage existed due to the exclusions.Again, while no one plans on an accident affecting the project, or expects damage to occur, having coverage for this kind of event should be considered.
The background and facts of this matter can be found at our previously reported entry on the Kirkpatrick v. Strosberg opinion when it was handed down in April.On August 8, the Appellate Court released a modified opinion in the matter and withdrew the previous opinion.
Of note, the new opinion adds an issue previously unaddressed by the court and changes the appellate court's ruling on a previous decision about punitive damages in the case.
1)Upholding the trial court’s finding that the difference between the square footage depicted in their sales contracts and the square footage of the units as built did not amount to a breach of contract. Contract language indicating that the floor plan measurements were approximations was included in a rider to the sales contracts that stated:
“All dimensions on the attached marked-up floor plan dated __ are approximate and subject o adjustments due to the actual location of piping, electrical, studs, steel bar joists, and other building components.”
The court also found that the architect’s construction drawings were incorporated into the contracts another provision in the agreement and used that fact to bolster the determination that the plans attached to the sales contracts were approximations.
2)The Appellate court reversed its previous opinion that the plaintiffs were not entitled to the trial court’s award of $300,000 in punitive damages where the plaintiffs did not establish a basis for computing compensatory or actual damages.The court revised its opinion and stated that where the trial court expressly found that the plaintiff’s proved actual damages punitive damages would be allowed.It then addressed the issue of the excessive nature of the $300,000 in punitive damages where no compensatory damages were awarded and held that the damages were not excessive and cited several cases including the Illinois Supreme Court’s Lowe decision (225 Ill.2d 456, 870 N.E.2d 303) encouraging courts to keep the ratio of punitive damages in the single digits.Although the court had no compensatory damages to create a ration, the court found that an award of $83,000 in attorney’s fees in this matter compared in a 3.5 to 1 ration with the damages and was not excessive.
The court then affirmed the rest of the trial court’s determinations thus modifying its previous opinion to a full affirmation of the trial court’s findings by changing its decision about the award of punitive damages.
In a recent case from the Seventh Circuit the court found that no coverage existed in a CGL policy for a contractor sued by homeowners for breach of contract. (The opinion can be found here.)
The contractor had performed work on a residential project and the owners of the project sued him for breaching his construction contract by failing to complete the punchlist, and for liquidated damages guaranteed to them under the contract ($100 per day for every day the project went over the date required for completion of the punchlist items for the first 14 days and $150 for every day thereafter).The contractor tendered the claim to his insurer and coverage was denied.The contractor settled the suit with the owners for $53,000 and brought an action against the insurer for breach of contract and for violating the Illinois Insurance Code.The insurer and the contractor both moved for summary judgment on the matter and the district court concluded that the underlying breach of contract claim filed by the owners had not alleged either an “occurrence” or “property damage” as defined in the contractor’s CGL policy.
The definitions in the policy were:
That insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy:
applies to “bodily injury” and “property damage” only if:
1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and
2) The “bodily injury” or “property damage” occurs during the policy period.
“Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” is defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
Lyerla v. AMCO Ins. Co., at 2 - 3.
The Seventh Circuit agreed with the District Court’s decision and went on to note that Illinois law was replete with cases holding that allegations for breach of contract against an insured do not trigger coverage where the alleged defects resulting from the breach are considered the natural and ordinary consequences of the improper construction techniques of the contractor or its subs and therefore do not constitute “occurrences” within the definitions of most CGL policies.
The court also held that the damages alleged by the owners against the contractor for the costs they were forced to pay to complete the construction and the liquidated damages did not amount to “property damage” under the policy where they could not be considered damage to tangible property or damages resulting from “loss of use” by the owners.
The opinion serves to reaffirm the principal that the CGL policy doesn’t provide coverage for breach of contract claims and should put designers, contractors, and subs on notice that different policies should be procured if they would have coverage for these allegations.
A surety issues performance bonds to a contractor. A third-party signs an indemnification agreement with the surety, agreeing to indemnify the surety for the payments made on the bonds. The contractor breaches its contract for construction services and the surety pays out on the bonds. The payments were made between 1994 and 1996. The surety demands payment, the third-party refuses and in 2004, the surety sues for breach of contract stating that the third-party has breached the indemnity agreement.
That’s the start of the situation in Travelers Casualty & Surety Company v. James Bowman et al. (Ill. Sup. Ct. 2008, Doc. No. 103759). The trial court dismissed the action of the surety, Travelers, finding that section 13-214(a) which applies a four-year statute of limitations to certain construction actions applied. Travelers appealed and the appellate court held that the section 13-206 10 year statute of limitations applied to the action.
For those interested, section 13-214(a) and 13-206 read in relevant part as follows and are important to anyone contracting in the construction setting as they are the statutes of limitations usually found applicable to actions arising from disputes over construction agreements:
13-214(a)
“Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.”
13-206
“[A]ctions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing … shall be commenced within 10 years next after the cause of action accrued…”
Travelers asserted in the Supreme Court that the appellate court was right and that a 10 year statute of limitations was correct since they had brought a claim for breach of contract based on the indemnity agreement with the third-party. The third-party claimed that either the four-year statute of limitations applied, or that an even shorter two-year statute of limitations for contribution and indemnity expressed under section 13-204 applied.
The Supreme Court agreed with Travelers. The court noted that it is the nature of the liability to which a person is subject and not the nature of the relief sought by a party is the test for determining the character of a cause of action. In other words no matter what an attorney might call an action, it is the underlying nature of the action and the facts of the dispute that will determine what kind of action it is.
Here, although construction omissions had led to the payment by Travelers on the bonds, the payment on the bonds triggered obligations under the separate indemnity agreements with the third-parties and when the third-party refused to pay under the indemnity agreements, Travelers had a cause of action against them for breach of contract.
With regard to the second theory of a two-year statute of limitations, the Supreme Court held that the third-party was incorrect in claiming that any of its cases had ever held that a two year statute of limitations would ever apply to actions based on written indemnification agreements. The court stated that the claims of indemnity and contribution addressed under the section 13-204 addressed “cases involving the allocation of damages in connection with an underlying tort claim for injury to person or property.” It went on to state that such a claim based on indemnity was only for “implied indemnity” (where the law offers indemnity) not for the express indemnity (where the indemnity claim is based on an agreement providing that one party will indemnify the other).
“In sum, section 13–204 is applicable to claims for implied indemnity involving allocation of damages in connection with an underlying tort claim for injury to person or property, regardless of whether subsection (a) or (b) is at issue. Section 13–204 is not applicable to claims for express indemnification based on a written contract. Because the claim at issue is based on a breach of express indemnification provisions in a written agreement, it is subject to the10-year limitations period in section 13–206.” Slip. Op. at 12.
The court then held that the 10 year statute of limitation applied to the indemnity agreement.
We hope you enjoy the new site and address. Now that we're up and running, we'll continue to provide the same great content along with a new look. All the entries from the previous incarnation are now incorporated into the new blog and you can find them through the search function or through the topics listed at the right.
We'd love to hear what you think of our new design and welcome any comments or suggestions on how we can make this site better for our readers.
Malec
v. City of Belleville (5th Dist., Doc. No. 05-07-0456) is a case worth
noting.The City of Belleville adopted a
group of ordinances in 2006 that provided for the formation of a tax-increment-financing
district (TIF) pursuant to the TIF
Act.The city also adopted an
ordinance creating a business district, approved a redevelopment plan, tax
increment allocation financing for the Developers, a tax within the created
business district and authorized the use of general sales tax revenues to
reimburse the Developers for project development costs.A complaint filed by the plaintiff alleges
that these ordinances were to help finance a Wal-Mart, Lowe's, housing
development and some other businesses.
Plaintiff,
a taxpayer, brought suit challenging the city's enactment of the taxes under
the TIF Act.The district court
dismissed the plaintiff's claim, finding that he lacked standing to bring his
action as a taxpayer.The 5th
District reversed and found that if the actions of the city in creating the TIF
and business district did affect the general revenue of the city, then a
taxpayer would have standing.The court
also held that the taxpayer could challenge the creation of the TIF through
claiming that the areas that had been created did not meet the criteria of
being "blighted" as the Act required (under the act "blighted" is a term of art
that requires a area meet a myriad of factors in order to qualify for the TIF
districting).See 74.4-3(a) of the Act.The argument was that the areas would have developed as business
districts on their own, and as such, the creation of the special districts to
generate revenue that would be paid to the developers affected the general
revenue of the city because the city would have generated the revenue for
itself and would therefore have no need to pay developers to do it.(No mention of the timing was made, i.e.,
whether an argument that a development district would create business in a
matter of a year as opposed to a naturally occurring district developing over,
say, ten years).
While the
case is not a blow to the creation of the districts for development, it does
lend individuals another form of suit which could be used to slow down any form
of development relying on TIF funding and is a case we'll keep an eye on.
With all the clients and non-clients out there who have names they'd like to protect or logos they would want to preserve, there are two interesting articles about trademarks that are worthwhile.Posted within one day of each other, the Chicago Tribune and the Wall Street Journal are talking about the topic and offering advice on self-registration in a way that everyone can appreciate.
Nolessthan three court cases were reported on yesterday in the Chicago Real Estate Daily, each involves a high-profile project and some major players across the city in law, real estate, and architecture.
There's an interesting This American Life episode about the current mortgage crisis entitled "The Giant Pool of Money" (the link lets you listen for free).It's a primer on the current mortgage crisis and how we got into the mess that's currently being reported on across the internet.The effects are varied and will continue to expand, today's Wall Street Journal has a page one piece on the mortgage insurance industry and its own response to the crisis.The TAL is a must-listen and takes you through the history about how the financial industry's craving for investment instruments led to brokers offering mortgages with no money down to individuals without verifying salary histories.
While the spot is an introduction, it gives context for a recent case that should pique the interest of financers.
In First Franklin Financial Corporation v. Amerihome Mortgage Company (IL N.D. Doc No. 08 C 1089) we find First Franklin (a financer) suing Amerihome (a company acting as an independent mortgage broker for First Franklin) to recoup the monies from defaulted mortgages.Amerihome entered into an agreement with First Franklin to act as a mortgage broker.The agreement contained an indemnification provision and a provision requiring Amerihome to investigate and verify the information about an applicant's creditworthiness by asserting that the information contained in the application and supporting documentation for the loan was true.Sure enough, some of those applications were for borrowers who later defaulted on their loans.First Franklin filed an action against Amerihome alleging that Amerihome breached its agreement with First Franklin by submitting loan applications with false information and alleging that Amerihome has a duty to indemnify First Franklin for the losses incurred because of the breach.
This case is unique in that Amerihome is solvent.For too many lenders, the mortgage brokerages they have dealt with have since gone out of business, or have filed for bankruptcy.It is also unique in that Amerihome may be able to pay the amount First Franklin alleges it is owed, while smaller mortgage brokers would have a harder time coming up with the cash to satisfy a judgment for the amount of an entire mortgage deficiency.
Amerihome filed a motion to dismiss the action for indemnification claiming that the indemnity provision which the court denied and the case will now go forward.If you've heard the TAL piece, then it should come as no surprise that a company is going after the individuals that procured the investment for it in the first place, and of course it doesn't hurt that First Franklin apparently insisted on the indemnification provision in the first place. It will be interesting to see how actions such as this one continue to develop as institutions investigate ways to recoup their losses.
The First District has filed a new opinion relating to control exerted over an independent contractor by a GC in Gregory v. Beazer East, et al., (Doc. No. 1-06-3597). The court held in an asbestos related action that the facts surrounding the worker's employment in the construction of a facility back in 1970-71 did not give rise to a finding of liability in a construction negligence action. While the defendant (the facility owner) had the ability to stop work, monitor work, and control access to the site "these were simply general rights it had as the ultimate employer on the construction project."
Periodically, we see cases in which an owner will assert a claim against a design professional pursuant to the consumer fraud act. In an interesting case initiated pursuant to an act with similar provisions, the Second District has held that a corporation in the business of restoring vintage cars can qualify as an "Automotive Repair Facility" under the Automotive Repair Act. InMontgomery v. Nostalgia Lane, Inc., (Doc. No. 2-07-0661) this finding required reversal of a summary judgment in favor of the repair facility after the plaintiff sued for damages where the facility allegedly low-balled its bid and then ended up over-charging.
The tenants of a commission run trailer park were allowed to keep their claims against the commission for an unlawful taking and for inverse condemnation and beat a dismissal motion. In Mester v. Otter Lake Water Commission, (C.D. IL, Doc. No. 08-3080) the court found that there were facts and allegations sufficient to preclude a determination that the actions of the commission in limiting and restricting tenants rights and their ability to sell their lots or transfer ownership did not amount to an unlawful taking or condemnation.
In DOT v. Anderson, et al. (Doc. No. 3-07-0877), the Third District found that despite the private claims of an individual to ownership interest in a parcel, where the recorded documents showed title was vested in another, and that the common law requirement of possession use or control had not been met, the plaintiff was not an owner under the Eminent Domain Act.
Shari Shapiro, over at Green Building Law, has an article published at Green Buildings about an action filed by some HVAC providers against the City of Albuquerque to stop regulations passed by the city requiring higher efficiency heating and cooling units from going into effect.
BLAWG REVIEW #168 is up over at West Virginia Business Litigation and provides some interesting diversions. Notably, a few great links discussing legal writing and some entries about topics that came up in blogs last week. In general, this posting does not center around a theme as most of the review's tend to; it sums up some postings that were interesting to the author.
Major construction projects can lead to major construction disputes. These disputes typically involve numerous project participants. Because the disputesMore...
In situations where the fee is a fraction of the total project cost, consider the personal guarantee. It’s an additional agreement signed by an individual, not an LLC or a Corporation obligating the person to the debt owed. 
coverage under a standard CGL policy to a subcontractor.
2)
