Colorado Oil and Gas Conservation Commission Approves New Setback Rules

The following comes from a recent Capitol Close-Up, a legislative update from Amie Mayhew, Chief Executive Officer - Colorado Association of Home Builders:

On February 11^th, the Colorado Oil and Gas Conservation Commission (“COGCC”) voted 8-1 to approve a new set of setback rules.  One substantive change is to the effective date in Rule 604, which will be August 1, 2013 rather than July 1, 2013. A brief summary of the rules as they impact CAHB members is below:

·                     Designated Setback Locations for Oil and Gas Locations will be 500 feet from building units, 1,000 feet from High Occupancy Building Units, and 350 feet from Designated Outside Activity Areas;

·                     Waivers are required from Building Unit owners within 500 feet of a proposed Oil and Gas Location in Urban Mitigation Areas.  If waivers cannot be obtained, the operator can seek a variance from the Director, and if not granted, have a hearing before the Commission;

·                     Rule 604(b)(2) exempts Existing Surface Use Agreements or Site Specific Development Plans;

·                     Rule 604(b)(3) exempts Surface Development after August 1, 2013 pursuant to a Surface Use Agreement or Site Specific Development Plan;

·                     Rule 604(c) Mitigation Measures will be required within Designated Setback Locations statewide.

CAHB also was persuasive in arguing for the inclusion of setback exception language (“grandfathering”) of Existing Surface Use Agreements or Site Specific Development Plans and for future Surface Development Pursuant to Surface Use Agreements or Site Specific Development Plans in the final Rules as adopted by the Commission in Rule 604(b)(2) and 604(b)(3).  COGCC staff did not include these two exceptions in their initial draft rules, and it was made clear that the inclusion of these exceptions was a result of CAHB’s efforts.  CAHB also succeeded in maintaining the exception for Existing Surface Use Agreements or Site Specific Development Plans as a mandatory exception through the use of the word “shall” rather than a permissive exception through the use of the word “may” as advocated by several parties and supported by some Commissioners.

Finally, CAHB, along with other parties and stakeholders, was influential in eliminating the consent requirement from adjacent land owners.  While waivers are still required in Urban Mitigation Areas, a variance process now exists, eliminating the veto power of adjacent land owners as the initial draft Rules had provided.

CAHB was extremely influential in both the stakeholder and the rule-drafting processes.  While firmly opposed to the setback distances, CAHB’s narrow definitions of High Occupancy Building Units in the 100 Series Definitions tied to other statutory definitions were incorporated, drastically reducing uncertainty in the application and impact of the 1,000 foot setbacks.

Please contact Amie Mayhew at the CAHB office with any questions or concerns you have.  Amie can be reached by phone at (303) 691-2242 or by e-mail at amie@hbacolorado.com.

Colorado HB 13-1090: Concerning Payment of Amounts Due Under a Construction Agreement

On January 17, 2013 Representative Fischer introduced House Bill 13-1090 into the Colorado House of Representatives. HB 1090 was assigned the House Business, Labor, Economic and Workforce Development Committee.

The bill, sponsored by Senator Tochtrop in the Senate, sets the following requirements for both private and public construction contracts:

• The owner and contractor must make regular progress payments approximately every 30 days to contractors and subcontractors for work actually performed.
• To receive the progress payments, the contractor and subcontractor must submit a progress payment invoice plus any required documents.
• A contractor must pass on the progress payment to the subcontractor within 5 days or by the end of the billing cycle.
• Interest accrues on unpaid progress payments.
• A contract may extend a billing cycle to 60 days, but the contract must duly warn of this.
• An owner or contractor may only retain 5% of each progress payment to ensure work is done properly.
• If a subcontractor's work is done before the whole project is done, the subcontractor may apply to be paid the retained 5%. The owner and contractor must pay the retainage if the work is done correctly and the subcontractor gives waivers and the proper documents.
• A person who retains from a payment must give the contractor or subcontractor a chance to cure the default.
• The owner and contractor must pay for changes made to the contract. If they cannot agree on the price, the person doing the work may bill monthly at cost plus 15% or terminate performance.
• A contractor or subcontractor is authorized to suspend performance after 15 days’ notice if the owner or contractor fails to make progress payments.
• After suspending performance, the contractor or subcontractor is obliged to resume work after being paid for the work and reasonable costs and interest.
• A contractor or subcontractor may not suspend performance if the failure to make a payment is due to a failure of the contractor or subcontractor or a dispute about the construction.
• The bill voids any provision in a construction contract that does not comply with these requirements.

There is a lot of opposition to the bill from within the construction industry, mostly framed as a dispute between general contractors, developers, and owners on one side and subcontractors on the other. The bill was originally scheduled for hearing this afternoon, but has been given late bill status and taken off of the calendar. It is my understanding that it was taken off the calendar so that an amendment could be drafted to remove public projects, with the hope of reducing the opposition to the bill.  

The Colorado Supreme Court holds that loans made to a construction company are not subject to the Mechanic’s Lien Trust Fund Statute

In a prior blog post, we summarized the Court of Appeals decision in the case of AC Excavating, Inc. v. Yale, ___ P. 3d. ___, 2010 WL 3432219 (Colo. App. Sept. 2, 2010) which provided an interpretation of the Colorado Mechanic’s Lien Trust Fund Statute, C.R.S. § 38-22-127 (hereafter “the Trust Fund Statute”).  A divided Court of Appeals reversed the trial court, and held that capital loans infused into a limited liability company which performed construction could be subject to the provisions of the Trust Fund Statute. 

The Court of Appeals reasoned that this determination was necessary because the statute was considered applicable to “all funds disbursed on a construction project.” Additionally, the Court of Appeals held that the intent of the provider of funds was not relevant, and that the statute applied “irrespective of the [originator of the funds]’s intended use of the funds.”

This decision was reviewed by the Colorado Supreme Court in an opinion released on February 4, 2013, and it reversed the Court of Appeals’ decision. See, Yale v. AC Excavating, Inc., ___ P. 3d. ___, 2013 WL 441895 (Colo. Feb. 4, 2013). The Supreme Court strongly disagreed that loaned or infused capital funds which were obtained by the general contractor entity were “funds disbursed on a construction project,” simply because some of the infused monies were used for operational purposes to pay down specific project obligations.  The Supreme Court held, contrary to the Court of Appeals, that only certain funds were subject to the constraints of the Trust Fund Statute and that capital loans were not included among such funds and sources of funds.

The Supreme Court’s decision was one of statutory construction applied to largely undisputed facts.  In holding that capital funds received or loaned to a contactor entity were not subject to statutory claims under C.R.S. § 38-22-127,  the Court stated that the Trust Fund Statute requires that contractors and subcontractors hold only certain funds in trust for payment of subcontractors, laborers, and suppliers.  The funds held in trust for those purposes are limited to all funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract on any construction project.  

This applied interpretation of the statute necessarily excluded any funds that were received to fund general operations of a construction company, as distinct from funds received in the usual course of payment for work performed in connection with construction.  The Supreme Court also held that the testimony of a company manager for the construction company concerning the purpose and source of the funds in question was proper evidence to be heard by the trial court.  The Court further held that a construction business does not hold all funds in trust, even where the company is generally in the construction business, has only a single project, and has only a single bank account for that project.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com

Colorado Court of Appeals Enforces Limitations of Liability In Pre-Homeowner Protection Act Contracts

Keirns Construction Co. (“Keirns”) hired Landmark Engineering, Ltd. (“Landmark”) to provide a geotechnical investigation and foundation designs for two duplexes Keirns built in Larimer County.  Keirns and Landmark signed one contract in 2001 for the geotechnical work and two separate contracts in 2005 for the foundation design of the two duplexes.  Each contract contained an identical “risk allocation clause,” which had language specifically limiting Landmark’s liability to Keirns.  The risk allocation clause also had language specifically prohibiting claims against individuals and only allowing claims against a corporation. 

After the two duplexes were built, foundation problems developed, and Keirns filed suit against Landmark for breach of contract and negligence.  Keirns also filed suit against two individual employees of Landmark, Wayne Thompson and Larry Miller, for negligence. Messrs. Thompson and Miller performed the geotechnical and design services pursuant to the contracts.

Landmark and Messrs. Thompson and Miller filed a motion seeking to enforce the risk of allocation clauses in the contracts, thereby limiting Landmark’s liability.  Messrs. Thompson and Miller also filed a summary judgment motion seeking their dismissal from the case based on the prohibition in the risk allocation clause against asserting claims against individuals.

The trial court granted both motions, limiting Landmark’s liability pursuant to the risk allocation clause and dismissing Messrs. Thompson and Miller.  Keirns appealed the trial court’s rulings on these two motions, asserting that the 2001 contract was not enforceable or, in the alternative, that the court had incorrectly interpreted both contracts.

The Court of Appeals ruled that the 2001 contract, which had not been signed by Landmark, was enforceable because it was fully performed by both Keirns and Landmark, even though the contract itself stated that it “shall not constitute an agreement between the parties until executed by [Keirns] and Landmark.”[1]  Keirns’ undisputed acts in performing the contract were held to amount to an unequivocal admission that the agreement was enforceable and binding.

The Court of Appeals next examined Keirns’ claims that the risk allocation clauses were ambiguous, and therefore unenforceable.  None of the contracts defined the term “claim,” but the Court of Appeals found nothing in the contracts indicating that the parties intended the word “claim” to have any definition other than its ordinary meaning.  The court therefore held that the term “claim,” as used in the risk allocation clauses, was not ambiguous.  The court applied the same common-sense analysis to the use of the term “corporation” in the risk allocation clauses, and found that Messrs. Thompson and Miller, as individual defendants, had been properly dismissed from the lawsuit.

In an interesting footnote to its reasoning, the court addressed Keirns’ additional contention that even if the risk allocation clauses did not allow claims against individual employees of Landmark, Keirns ought to be allowed to pursue an independent cause of action for negligence against Messrs. Thompson and Miller.  The court noted that while Colorado’s economic loss rule recognizes an independent duty of care owed by homebuilders and subcontractors to homeowners, that duty has not been found to extend to employees of homebuilders or subcontractors.

Officers and directors of construction companies should be aware, however, that the corporate officer responsibility doctrine still applies, as described in Hoang v. Arbess, 80 P.3d 863 (Colo. App. 2003).  If Messrs. Thompson and Miller had been officers or directors of Landmark, they may have been personally liable for any individual acts of negligence, even if such acts were committed on behalf of Landmark.

In light of C.R.S. § 13-20-806(7)(a), the Colorado Homeowner Protection Act (“HPA”), the ruling in this case enforcing a limitation of liability clause for a residential project is very short lived and may only be applicable to contracts entered into before April 20, 2007, when the HPA was enacted.  For individual employees of homebuilders or subcontractors, however, this ruling is a reassuring affirmation that there is no case law in Colorado extending the independent duty of care in residential construction projects to employees of builders.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] Keirns Const. Co. v. Landmark Engineering, Ltd., 2010 WL 1380158 (Colo. App. 2010).