Monday, September 26, 2011

Another Colorado District Court Refuses to Apply HB 10-1394 Retroactively.

In Martinez v. Mike Wells Construction Company, 09CV227, Teller County District Court Judge Edward S. Colt refused to apply C.R.S. § 13-20-808 retroactively to provide coverage for the underlying construction defect allegations. According to the recitation of facts in Judge Colt’s March 2011 order, Martinez contracted with Mike Wells Construction to serve as the general contractor for the construction of a home. At that time, Mike Wells Construction was insured through ProBuilders Specialty Insurance Company, RRG. Disputes arose between Martinez and Mike Wells Construction, resulting in Martinez ordering it off of the project in mid-November 2007 and terminating its right to work there by letter dated November 28, 2007.

Mike Wells, the owner of the corporation, subsequently died. Martinez sued Mike Wells Construction in July 2009 for breach of contract and various claims relating to alleged defecting workmanship. Martinez provided notice of the suit to the special administrator of the probate estate. No answer having been filed, the court entered a default judgment against Mike Wells Construction and Martinez sought to garnish Mike Wells Construction’s ProBuilders insurance policy.

In framing the issues related to the cross motions for summary judgment filed by Martinez and ProBuilders, Judge Colt stated:

At its core, the issue here is whether Plaintiff may recover against ProBuilders for damages she incurred due to Mike Wells’ faulty workmanship.  Under General Security, supra, she may not recover, and summary judgment for ProBuilders is appropriate.  Should the Court apply the subsequently-adopted statute, which presumes that shoddy work is a covered event unless the property damage is intended and expected by the insured, then a different result is warranted.

In looking at the statute, Judge Colt noted that the editor’s note to the statute provides that “Section 3 of Chapter 253, Session Laws of Colorado 2010, provides that the act adding this section applies to all insurance policies in existence as of, or issued on or after, May 21, 2010.”  While Martinez obviously argued that the statute applies, ProBuilders argued that such retroactive application of the statute to an insurance policy which expired prior to its enactment would be unconstitutional.  The obvious issue, as framed in the order, was “what significance should be given to the legislative term ‘currently in existence?’”

After discussing various previous cases on the subject, Judge Colt found persuasive ProBuilders’ argument that the statute does not apply retroactively, and that:

the policy at issue, which would have expired not later than March 28, 2008, and which was purportedly terminated by written notice of the insurer on November 18, 2007, must be interpreted by the standards set out in General Security, supra.  There is no evidence that the Colorado legislature intended retroactive application, at least to policies which had already expired prior to the date of the legislation.

In applying the General Security standards, Judge Colt held:

The policy at issue before the Court does not, by its terms, cover faulty workmanship, and, following existing Colorado precedent, . . . , the substandard workmanship alleged by Plaintiff is not a fortuitous event resulting in an occurrence which would trigger coverage.  The insurer had no duty to defend under these facts, nor any duty to indemnify.  ProBuilders’ motion for cross summary judgment is granted, Plaintiff’s motion for summary judgment is denied.

As I stated in a previous blog entry, until there is appellate case law on the subject, I expect that there will be continued interest in any and all trial court orders interpreting or applying C.R.S. § 13-20-808. If you would like a copy of the order discussed in this entry, please send me an e-mail at mclain@hhmrlaw.com. Also, if you have any additional orders on point, I would very much like to see them. Please send me any orders you may have.

-- David M. McLain

Tuesday, September 13, 2011

Senate Bill 11-264: The Clarification of Lien Bonding Statutes

On July 1, 2011, Senate Bill 11-264 became effective, which legislatively overruled the Colorado Court of Appeals controversial decision in Weize Company, LLC v. Martz Supply Co. 251 P.3d 489 (Colo. App. 2010). A notice of lis pendens gives notice of pending litigation to persons potentially acquiring interests in the subject property. Hewitt v. Rice, 154 P.3d 408 (Colo. 2007). The recording of a lis pendens binds any subsequent purchaser subject to the litigation’s effect on the property, thereby discouraging purchases because of the potential for unknown consequences. Kerns v. Kerns, 53 P.3d 1157, 1165 fn. 6 (Colo. 2002). In Weize, the court held that a notice of lis pendens must be filed when a suit involves property until the completion of litigation, even when a proper bond is substituted for the lien.
In making its decision, the Weize court found the plain language of C.R.S. §§ 38-22-131(3) and 127(3) persuasive. According to the court, the two statutes collectively exclude lien release bonds from the types of bonds that are exempt from filing lis pendens. However, the court did not discuss the other sections of C.R.S. §§ 38-22-131 and 132 (collectively allow for the substitution of a bond in place of a mechanic’s lien and discharge of the lien) or C.R.S. § 38-22.5-11 (allows for the substitution of a bond in place of a real estate broker’s lien and discharge of the lien). Further, according to C.R.S. § 38-22-132, once a bond is properly substituted for a lien, there is no longer an action that affects the title to real property. Therefore, any filing of lis pendens would be in conflict with C.R.S. § 38-22-110 that requires relief be claimed affecting the title to real property before filing a notice of lis pendens.

In response to the Weize decision, SB11-264 was enacted to amend C.R.S. §§ 38-22-132, 38-22.5-111, and 38-35-110. The legislature now made it crystal clear that a proper bond is a suitable substitute for filing lis pendens. Therefore, owners of property subject to litigation are now again free to market their properly-bonded property without the burden of lis pendens on title.


 
The attorney who drafted this entry is no longer with the firm. For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com

Wednesday, September 7, 2011

Court retains jurisdiction over mechanic's lien case despite the merits being decided in arbitration.

This summer the Colorado Court of Appeals affirmed an interesting district court order concerning the court’s jurisdiction over a mechanic’s lien in a case ordered to arbitration. See Sure-Shock Electric, Inc. v. Diamond Lofts Venture, LLC, 2011 WL 2474513 (Colo. App. 2011). In that case, the defendant owned real property on which it constructed the Diamond Lofts. Sure-Shock was the electrical subcontractor for the construction project. Diamond Lofts Venture, LLC (“DLV”) allegedly did not pay Sure-Shock as required thereby prompting Sure-Shock to record a mechanic’s lien on the property and file a complaint for breach of contract, unjust enrichment, and foreclosure of the lien. Id. at *1.

DLV moved to stay the proceedings and compel arbitration pursuant to the contract between the parties. According to the contract between the parties, they agreed to arbitrate “[a]ny claim arising out of or related to the subcontract.” Id. at *1. The district court granted DLV’s motion and both parties participated in the arbitration. The arbiter found for Sure-Shock on its breach of contract and unjust enrichment claims, but did not mention foreclosure of the lien. The arbiter did, however, make detailed findings of fact concerning the filing of the lien, which included the amount of the lien and the date it was recorded. Id. The arbiter awarded Sure-Shock the principal amount claimed in the lien plus interest at the statutory rate of twelve percent from the date the lien was recorded, or October 17, 2007.

Sure-Shock then moved to confirm the arbiter’s award in the district court. The district court granted the motion thereby confirming the award as to the amount of Sure-Shock’s mechanic’s lien, and ordered Sure-Shock able to participate in the foreclosure of the lien. Id. DLV appealed this ruling. In its appeal, DLV argued that the parties’ agreement to arbitration divested the district court of jurisdiction to determine the “validity, amount and enforceability” of the lien. Additionally, DLV argued that, because Sure-Shock did not affirmatively raise an argument that the lien was procedurally valid in the arbitration, it was now barred from seeking a decree of foreclosure in the district court by the doctrines of claim preclusion and waiver. Id.

The Colorado Court of Appeals disagreed. The Court of Appeals explained that the arbiter, by determining the amount of debt owed by DLV to Sure-Shock on the underlying breach of contract and unjust enrichment claims, “necessarily decided the amount of any mechanic’s lien.” Id. The Court of Appeals also pointed out that the arbitration award noted the filing of the lien, the amount listed on the lien statement, the date the lien was filed, and awarded interest from that date. As such, the Court of Appeals “read the arbitrator’s award to conclude that Sure-Shock had established the right to a lien or claim under the mechanic’s lien statute.” Id. at *2.

The remaining issue concerned the procedural validity of Sure-Shock’s mechanic’s lien entitling it to a decree of foreclosure. The Court of Appeals believed Sure-Shock’s assertion in this regard was correct. That is, “submission of a facially proper notice of intent to file a lien and lien statement, time stamped by the county recorder’s office, satisfies a mechanic’s lien claimant’s initial burden of proving the lien’s procedural validity.” Id. Sure-Shock had attached its notice of intent to file a lien statement to its complaint, along with affidavits of service, and its statement of lien. While DLV moved to compel arbitration, DLV did not challenge the procedural validity of Sure-Shock’s lien.

The issue, as framed by the Court of Appeals, was whether the procedural validity of the mechanic’s lien may be decided by the court as part of the foreclosure proceedings, or whether Sure-Shock or DLV was required to raise it in the arbitration pursuant to their contract requiring all clams and disputes be submitted to arbitration. Id. The court noted that this question was one of first impression in Colorado while acknowledging Colorado law that allows only a court to issue a decree of foreclosure. Id.; see C.R.S. § 38-22-114.

The Court of Appeals concluded that the issue of procedural validity of a mechanic’s lien may be properly determined by the court. “Given that only a court is vested with the authority to foreclose a mechanic’s lien, it may concurrently determine any procedural validity issues connected with that foreclosure even when the underlying contract includes a broad arbitration clause, at least where, as here, neither party raised the issue in arbitration.” Id. at *3. According to the Court of Appeals, the procedural validity of a lien securing a debt arising from a breach of contract may be decided by the court even if the contract requires all disputes to be submitted to binding arbitration.

Heather M. Anderson is an associate of the firm, specializing in construction litigation.

Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.