Colorado Court of Appeals Clarifies When the Statute of Repose is Triggered in Multi-Phase Construction Projects.

On February 2, 2012, the Colorado Court of Appeals answered two questions of first impression under the Construction Defect Action Reform Act (“CDARA”) in Shaw Construction, LLC v. United Builders Services, Inc., 2012 WL 311665 (Colo. App.).

Shaw Construction, LLC (“Shaw”), was the general contractor for a large residential project located in Stapleton. Shaw hired subcontractors to perform the construction work, including United Builders Services and MB Roofing (collectively “Subcontractors”). The project was completed in phases, and the last certificate of occupancy (“CO”) was issued on March 10, 2004. However, the project’s architect did not certify completion of all architectural construction until June 8, 2004.

The community homeowners association brought suit against Shaw on January 28, 2010 for alleged construction defects. Shaw filed its answer and third-party complaint against the Subcontractors on March 29, 2010. No CDARA Notice of Claim was sent to the Subcontractors at the time Shaw’s third-party complaint was filed.[1] The Subcontractors moved for summary judgment on the basis that the six-year statute of repose had expired prior to Shaw filing its third-party complaint. The trial court ruled in the Subcontractors’ favor and Shaw’s interlocutory appeal ensued.

The first question Shaw asked on appeal was a whether a notice of claim to a single construction professional tolls the statute of repose to every construction professional that worked on the project. The second question, was when the statute of repose begins to run in a multi-phase construction project.

The Colorado Court of Appeals rejected Shaw’s first argument that a notice of claim to Shaw would toll the statute of repose for all construction professionals that worked at the project. In making its ruling, the court analyzed the plain language of the statute and went through the legislative history of CDARA. The court found several reasons why this argument lacked merit, including that CDARA’s purpose was to streamline litigation and avoid a general contractor from “needlessly adding claims and parties.” If Shaw’s argument in this regard was accepted, it would not effectuate the changes sought by CDARA.

Next, the court was asked to decide when the statute of repose was triggered in a multi-phase construction defect action. The court's analysis turned on the definition of improvement, an undefined term used in Colorado's statute of repose, which would trigger the six-year limit on claims against construction professionals.[2] See C.R.S. § 13-80-104. Shaw argued that an improvement, for the purposes of triggering the statute of repose in a multi-stage construction project, means the date when the entire project is certified as completed by the architect of record. The Subcontractors argued that an improvement occurs either when each subcontractor’s respective work at the project was completed, or at the latest, when the last CO was issued.

The Court of Appeals held for the Subcontractors and affirmed the trial court's summary judgment ruling. Unfortunately, the court punted when it came to determining which of the subcontractors arguments would be the future of interpreting repose triggers in Colorado. Instead, the court found it unnecessary to determine if an improvement can be determined on a trade-by-trade basis, because the date the last CO was issued on March 10, 2004, and Shaw’s claims filed March 29, 2010 against the Subcontractors were properly dismissed using the latter repose trigger date. Id. at *8.

However, even with a lack of a definitive ruling on when exactly repose is triggered in this matter, the court's opinion cited several cases and provided statutory interpretation that may be insightful in determining a repose trigger date in other matters.  The court noted that “[o]ne quality of an improvement is permanence.” Anderson v. M.W. Kellogg Co., 766 P.2d 637, 641 (Colo. 1988). This is true, “even if the improvement can be removed.” Enright v. City of Colo. Springs, 716 P.2d 148, 150 (Colo. App. 1985). The Court also analyzed the “improvement” language from the statute of repose to be read that “a construction professional could be involved in only one component of a larger product, which would be the focus of 'substantial completion.'” Id. at *9. Finally, the court held, at least in this case, that “substantial completion” had occurred when the last building received a CO.^[3] Id. Combined with the court's previous discussion of CDARA intent, this portion of the opinion indicates the court would have held the statute of repose trigger is the last CO date, or the CO date for certain buildings/phases, if it had been appropriate to make such a distinction. 

While maybe not providing the black-letter law construction professionals and attorneys were seeking, this case has begun to clarify when the statute of repose begins to run in Colorado construction defect matters.

For more information regarding the Shaw decision, or the application of the statutes of limitation and repose in Colorado construction defect cases, you can reach Chad Johnson at johnson@hhmrlaw.com or by telephone at (303) 987-9815.

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[1] If a proper CDARA Notice of Claim had been sent to the Subcontractors before the statute of limitations and repose had expired, the statute of limitations and repose would have been automatically tolled for a period of no less than 60 days. See C.R.S. § 13-20-805.

[2] Presumably, the trial court held that Shaw could not take advantage of C.R.S. § 13-80-104(2), which lengthens the statute of repose if the claim arises in the 5^th or 6^th year after substantial completion, because Shaw had received a CDARA Notice of Claim on May 15, 2007, and filed its claims more than two years later.

[3] The court hedged its holding here by stating that Shaw failed to provide evidence or argument that the subcontractors continued to work after the last certificate of occupancy was issued. See Shaw at *9-10.

In Colorado, you may now be able to recover attorneys’ fees and costs expended in piercing a corporate veil.

In 2001, Swinerton Builders contracted with Beauvallon Corporation to construct The Beauvallon, a condominium building in downtown Denver. The contract, though amended, was an AIA Document A201, which included mandatory arbitration and a fee-shifting provision, which provided:

In the event of any litigation between the parties, the prevailing party shall be entitled to reimbursement for all reasonable attorneys’ fees, expert fees, court costs, and all other third-party costs of the litigation incurred by the prevailing party.

After construction, Swinerton instituted an arbitration proceeding against Beauvallon Corporation and Craig Nassi, individually. The claims included against Beauvallon Corp. included breach of contract and unjust enrichment. The sole claim against Mr. Nassi was for breach of contract, arising out of an alleged personal guarantee. Swinerton later voluntarily dismissed its claims against Mr. Nassi, without prejudice, but expressly noted its contention that Beauvallon Corp. might be the alter ego of Mr. Nassi.

Ultimately, the arbiters awarded Swinerton more than $1,000,000 in damages, interest, attorneys’ fees, and costs against Beauvallon Corp. The district court confirmed the arbitration award. In a separate action, Swinerton brought two claims against Mr. Nassi, the first seeking a declaratory judgment that Beauvallon Corp. was Mr. Nassi’s alter ego and that he was bound by the terms of the contract between Swinerton and Beauvallon Corp. and by the arbitration award. The second claim sought to pierce Beauvallon Corp.’s corporate veil. The district court found in favor of Swinerton and found that Swinerton could pierce Beauvallon Corp.’s corporate veil and hold Mr. Nassi personally liable for the arbitration award. The district court did not, however, award Swinerton its attorneys’ fees and costs in the action, finding that: “The attorney fees necessary for this [veil-piercing] action are separate and distinct [from the arbitration award fees], therefore, now awardable under the contract retroactively.” It is from this ruling that Swinerton appealed.

In Swinerton Builders v. Nassi, 2012 WL 310781 (Colo. App. February 2, 2012), the Colorado Court of Appeals reversed the trial court’s denial of award of attorneys’ fees and costs. In so ruling, the Court of Appeals noted: “Numerous courts have held that an action to pierce the corporate veil is not a separate and independent cause of action, but rather is merely a procedure to enforce an underlying judgment.” Id., at ¶ 13. The holding of the Court of Appeals was that:

[A] party who prevails in an action to pierce the corporate veil of a corporation may recover the attorney fees and costs incurred in that action if (1) the action was brought to enforce a breach of contract judgment against the corporation, and (2) the contract underlying the judgment authorized an award of fees and costs for enforcing the judgment against the corporation.

Id. at ¶ 1.

The Court of Appeals remanded the case to the district court for a determination and award of the appropriate amount of attorneys’ fees and costs to Swinerton.

If you have questions about the Swinerton Builders v. Nassi case, or generally about construction litigation in Colorado, you can reach David M. McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Another district court weighs in on the impact of HB 10-1394.

Recently, United States District Court Judge Miller ruled in favor of a motion for partial summary judgment in the case of Continental Western Insurance Company v. Shay Construction, Inc. Continental Western Insurance Company v. Shay Construction, Inc., 2011 WL 3236102 (D. Colo. 2011). Judge Miller’s order ruled on arguments between the insurance carrier (“Continental Western”) and the subcontractor (“Shay”) regarding the application of HB 10-1394, codified as C.R.S. § 13-20-808. It is important to review the underlying case before digging into Judge Miller’s order.

 

Milender White Construction Company (“Milender White”) was a general contractor on a project in Grand County, CO and in early 2008 entered into several contracts with Shay for the framing, siding, and related work on the project. Shay was insured by Continental Western under a commercial general liability (“CGL”) insurance policy. Continental Western canceled the policy on or about April 27, 2009 for non-payment.

 

 

Shay hired Wood Source, Inc. and Chase Lumber Company (collectively, the “Subcontractors”) to furnish materials, labor, and equipment for construction on the project. The Subcontractors filed suit against Shay alleging non-compensation for work and materials, seeking to enforce a mechanic’s lien. Both Milender White and Shay were named as defendants. In its answer, Milender White asserted cross-claims against Shay for breach of the contracts entered into in 2008. Milender White asserted many claims of breach, but there were four important claims to note: (1) Shay’s failure to perform work to the quality standards and requirements of the subcontract and contract documents; (2) Shay's performance of defective work, not in compliance with the requirements of the subcontract and contract documents and failing and/or refusing to correct deficiencies; (3) Shay’s failure to pay the Subcontractors; and (4) Shay’s failure to hold harmless and indemnify Milender White from claims originated by Shay’s Subcontractors.

 

 

The motion for summary judgment at issue, came about after Continental Western filed its complaint seeking declaratory judgment that the insurance policy does not cover Shay’s dispute with the Subcontractors or Milender White, particularly Milender White’s cross-claims. Continental Western was seeking summary judgment on the issue that the terms of the insurance policy did not include and/or expressly exclude coverage for the damages claimed by Milender White. Continental Western was also seeking summary judgment on Shay’s counterclaims (breach of contract, bad faith breach under insurance contract, and statutory bad faith) arguing that Shay was not entitled to a defense or indemnity in the underlying lawsuit brought by the Subcontractors.

 

 

The insurance policy stated, “We 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.” Coverage also applied to an “occurrence” defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurance policy also excluded several things, such as contractual liability, damage to property, and damage to your work.

 

 

Continental Western’s first argument essentially stated the insuring language, “those sums that the insured becomes legally obligated to pay as damages,” only applies to damages resulting from tort actions, not claims of breach of contract. Judge Miller denied this argument because Colorado courts have not spoken on the issue and the language could arguably be ambiguous, which must be construed against the insurer.

 

 

Continental Western’s second argument, however, received favorable support from Judge Miller. Continental Western argued that the claims in the underlying lawsuit are not born from property damage resulting from an “occurrence” (defined as an “accident”), but rather allege the failure to provide services as promised under a contract. The damage alleged is Shay’s own defective work and damage to work of other trades resulting from repair of Shay’s deficient work. Continental Western argued that generally, poor workmanship is not a covered occurrence under a GCL policy. General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. App. 2009). Despite being effectively overruled by HB 10-1394, C.R.S. § 13-20-808 signed into law on May 21, 2010, Judge Miller found the General Security case was persuasive law because the policy was canceled roughly a year earlier, and not in force on May 21, 2010. Because the policy had been cancelled before the statute's effective date, Judge Miller effectively found that the statute does not apply retroactively.

 

 

Judge Miller did concede that even with the application of General Security, the cross-claims may allege an occurrence under the policy. Milender White’s cross-claims allege that Shay’s defective work required repair, resulting in damage to work of other trades. Shay’s poor workmanship also brought on damage to a third party, which arguably falls within the definition of occurrence and thus within the scope of the insurance policy.

 

 

Judge Miller did, however, agree with Continental Western’s argument that the asserted claims which allege property damage and were not breach of contract claims, are excluded under the “damage to property” exclusion mentioned above. The policy’s specific language called for exclusions related to: “(j) Damage to Property . . . (5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or (6) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

 

 

It is important that Milender White gave notice to Shay of the deficiencies during construction and that Shay damaged the work of other trades while repairing is own work. Judge Miller found that exclusion (j)(5) applied to both Shay’s allegedly defective work and the damage allegedly caused to other trades when Shay performed repairs to its work. Furthermore, Judge Miller found that the (j)(6) exclusion regarding “your work” (defined as any work or operations performed by you or on our behalf) also applied to both Shay’s defective work and the damage it directly inflicted on other subcontractor’s work in its repair of its poor workmanship. Accordingly, Judge Miller found that the policy did not cover claims asserting breach of contract that do not involve property damage and the policy excluded the claims alleging property damage under exclusions (j)(5) and (6).

While Judge Miller’s finding is only an order in the district court and not an appellate court decision, it is sure to garner some attention. In the future, we will be following the issues as they are sure to reach the Colorado Courts sooner rather than later.

 

 

For more information about this case, contact Brady Iandiorio at iandiorio@hhmrlaw.com or by telephone at (303) 987-9816.

Higgins, Hopkins, McLain & Roswell Promotes Derek J. Lindenschmidt to Partner

Higgins, Hopkins, McLain & Roswell is pleased to announce the promotion to partner (with effect from January 1, 2012) of Derek J. Lindenschmidt.

Since joining the firm in 2006, Derek’s practice has focused on representation of construction professionals in a wide variety of both litigated and non-litigated matters, including the defense of developers and general contractors in complex construction defect lawsuits. He has defended against claims in all phases of development, from initial design through post-construction, and has been very successful in recovering from subcontractors in subrogation.

“Derek’s singular dedication to our clients has resulted in favorable outcomes in mediated, arbitrated, and litigated cases. His work ethic and drive has helped us further the firm’s continuing mission to reimagine the way construction claims are defended. I am delighted to have Derek as a partner,” said founding member David M. McLain.  Co-founder Sheri Roswell added, “Whether a client or a colleague, Derek is the one you want in your corner.  Personally and professionally, we are truly fortunate to have Derek on our team.”

“I am very excited and honored. HHMR prides itself on providing its clients with smart, yet aggressive representation. I am proud to be a part of a team whose number one goal is to look out for Colorado’s builders and developers in some very trying times,” commented Derek on his promotion.

ISO Rolls Out Colorado-Specific Insurance Forms in Response to the Colorado Anti-Indemnity Statute.

If you take a look at the bottom of any page of your (or your client’s) insurance contract, it is most likely a copyrighted form issued by Insurance Services Office, Inc. (ISO). ISO develops standardized insurance policy language and forms that most insurer companies use in order to create insurance policies for consumers. 

ISO has recently released several Colorado-specific forms with policy language that takes into account Colorado’s 2007 anti-indemnity legislation, C.R.S. § 13-21-111.5. The Colorado anti-indemnity law limits a defendant’s liability to “the degree or percentage of the negligence or fault attributable” to the defendant. Pursuant to this law, the forms limit liability coverage to injury or damage caused by the insured, or by those acting on the insured’s behalf.

What does this mean for you or your clients?

We previously discussed on this blog that it is more important than ever to procure the proper insurance for your construction business. You can find that entry here. Many general contractors and developers have relied on a few of their subcontractors to procure the correct insurance that pays for the defense of, and indemnifies, the general contractor and/or developer from any suits. However, C.R.S. § 13-21-111.5 limits each subcontractor’s indemnity share to the degree of fault they are held liable.

For example, it is not uncommon for one subcontractor to be found 70% at fault in a construction defect action. If this subcontractor did not procure the correct additional insurance in favor of the general contractor or developer, those parties would lose the ability for the AI carrier to pick up 70% of the costs of defending the suit.

What should you or your clients do?

If you are a general contractor or developer, you need to ensure every subcontractor[1] working on your projects is procuring both ongoing and completed operations coverage that includes you as an additional insured for both coverages. To do so, you should speak with your insurance coverage attorney and ensure your subcontractors are getting the following forms (or the equivalents) as a part of their policies:

1. A form CG 32 29 06 10, naming you as an additional insured, or a CG 32 27 06 10 (automatic additional insured status if agreed by contract), to cover ongoing operations, such as workers compensation litigation.

AND

2. A form CG 32 28 06 10, naming you as an additional insured, to cover completed operations, such as construction defect litigation.

The name of the general contractor or developer should appear either on the actual ISO form listed above or in the policy declarations, along with the subject project(s). Although it is common in the industry, you should not merely accept a checklist form from the subcontractor’s insurance agent that states the proper coverage is in the policy. You should request certified copies of the subcontractors’ policies and ensure that the policies are reviewed by your own insurance company, or an attorney that specializes in construction coverage matters. Alternatively, you can ask the subcontractors' insurance producers to sign a subcontractor insurance compliance form, certifying that the proper coverages are in place.

If you are a subcontractor, you need to speak with an insurance coverage attorney and demand your insurance company write you the above-referenced forms or the equivalents. If your current insurance company will not, shop around. The failure to procure the correct insurance could leave you with millions of dollars in uncovered liabilities such as the attorney fees and expert costs of the project owner, general contractor, and/or developer in any construction defect litigation. Please understand that this is not inserted here as a pitch for work. We are not coverage attorneys, we just happen to think this is a good idea.

If you would like to obtain copies of these Colorado-specific ISO forms, or have any other questions regarding risk management for your construction business, please contact Chad W. Johnson by phone at (303) 987-9815 or by e-mail at cjohnson@hhmrlaw.com.

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[1] Engineers, Architects, and Surveyors have different coverage forms.

Colorado's legislature is back in action. What does this mean for Colorado's construction professionals?

Yesterday was the first day of the 2012 legislative session of the Colorado General Assembly, which promises to be an exciting year.  From what we have heard around town (and from the mouth of a plaintiffs' construction defect attorney at an out-of-state seminar) there is likely to be a construction defects bill at the Capitol this year.  This attempt will likely take the form of a bill providing for the payment of attorneys' fees to homeowners and homeowners associations in residential construction defect cases.  Whether it happens or not, there are enough people talking about the prospect that it was picked up by The Denver Business Journal. 

For the roofers out there, you may want to pay attention to Senate Bill 12-038, "concerning measures to protect consumers who engage a roofing contractor to perform roofing services on residential property," which requires "residential roofing contractors to sign a written contract with customers that details the following:"

 - The scope of roofing services and materials to be provided;

 - The approximate dates of service;

 - The costs of the services;

 - The roofing contractor's contact information;

 - Identification of the roofing contractor's surety and liability coverage insurer and their contact information, if applicable;

 - The roofing contractor's policy regarding cancellation of the contract and refund of any deposit, including a rescission clause allowing the client to rescind the contract and obtain a full refund of any deposit within 72 hours after entering the contract; and

 - A written statement that if the client plans to use the proceeds of a property or casualty insurance policy to pay for the roofing work, the roofing contractor cannot pay, waive, rebate, or promise to pay, waive, or rebate all or part of any deductible applicable to the claim for payment for roofing work on the covered residential property.

Finally, despite meetings through the summer and fall, it looks as though the Colorado Association of Home Builders will not again support a bill to require pre-lien notices as a prerequisite to the validity of mechanics' liens. 

Stay tuned and hang on, it could be a wild ride. If you would like to discuss the prospects of the upcoming session, please call me at (303) 987-9813 or e-mail me at mclain@hhmrlaw.com. 

It is time to clarify that plaintiffs in construction defect cases cannot recover more than 100% of their actual damages.

Developers in Colorado could be facing more of an uphill battle than the economy.  Attorneys for homeowners’ associations have conceived a new argument whereby they seek to hold the developer liable for one hundred percent of the damages in a construction defect action as a fiduciary under Colorado law.  As most of us know, developers rarely participate in the actual construction work of any given project.  However, pursuant to Colorado’s Common Interest Ownership Act (“CCIOA”), board members appointed by the declarant developer are fiduciaries of the unit owners.  See 38-33.3-301, et seq.  Attorneys for homeowners’ associations argue that this designation of a declarant as a fiduciary creates a non-delegable duty to assure that there is no negligence in the construction of a home.  See Cosmopolitan Homes Inc. v. Weller, 663 P.2d 1041 (Colo. 1983). [1]  

Taking this argument one step further, attorneys for homeowners’ associations are now arguing that, in accordance with its non-delegable duty, a developer should not be allowed to allocate any liability to settling parties, including general contractors and/or subcontractors, which actually performed the work on a project.  If successful, the ultimate result of this argument precludes the developer from seeking a set-off for any of the settlements between the association and the settling parties, thereby allowing the homeowners’ associations to potentially recover more than one hundred percent of their claimed damages. 

In a recent construction defect suit, the plaintiff homeowners’ association successfully argued that the developer, as a fiduciary, has a non-delegable duty under CCIOA.  As a result, the association argued that the jury should not allocate any liability to the general contractor, which had already settled.  The jury then allocated one hundred percent of the liability for the claimed construction defects to the developer on the verdict form.  As a result, the developer was precluded from seeking a set-off for the amount of settlement between the general contractor and the association, which essentially allowed the homeowners’ association to recover from the developer what it had already recovered from the general contractor.            

While Colorado law would seemingly prohibit this outcome, those involved and/or interested in the home building industry are urged to speak up and get involved. Perhaps there should be an amendment to Colorado’s statute concerning pro rata liability that would explicitly preclude the ability to recover more than one hundred percent of a party’s claimed damages.  See C.R.S. § 13-21-115.5.  Currently, Colorado’s statute concerning contribution among tortfeasors provides that a release given in good faith to a person liable in tort for the same injury does not discharge any of the other tortfeasors from liability for their respective pro rata share of liability for the injury.  C.R.S. § 13-50.05-105.  Pursuant to Colorado’s pro rata statute, no defendant is liable for an amount greater than represented by the degree or percentage of fault or negligence attributable to such defendant.  C.R.S. § 13-21-115.5.  However, both statutes are silent on the issue of recovery, which is why many believe an amendment is necessary to preclude what is essentially double recovery by homeowners’ associations in construction defect actions.

 

Another way to skin the cat may be to make clear, statutorily, that C.R.S. § 13-21-115.5(6)(a)(I) means what it says, that “every construction business in the state is financially responsible under the tort liability system for losses that a business has caused.” This can be accomplished by making clear that developers and general contractors are not liable for the negligence of the subcontractors and design professionals they hire, but are only liable for their own negligence.

- Heather M. Anderson

 

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[1] The Colorado Supreme Court has also recognized that subcontractors are also under an independent to act without negligence in the construction of homes.  See A. C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005); see also Driscoll v. Columbia Realty-Woodland Park Co., 590 P.2d 73 (Colo. App. 1973).