Wednesday, July 17, 2019

Appellate Court reverses district court’s finding of alter ego in Sedgwick Properties Development Corporation v. Christopher Hinds (2019WL2865935)

Division V of the Colorado Court of Appeals addressed, for the first time, corporate veil-piercing in the context of a single-member, single-purpose LLC that is managed under a contract by another company.  On July 3, 2019, the Court of Appeals reversed the order of the Honorable Ross B. Buchannan, Denver District Court Judge (17CA2102), who held that Plaintiff/Appellee Christopher Hinds satisfied the elements required to pierce the corporate veil of Sedgwick Properties Development Corporation (“Sedgwick”). 

Background

Defendant 1950 Logan, LLC (“1950 Logan”) was the developer of a building located at 1950 Logan Street, in Denver, called The Tower on the Park (“Project”), which contained 141 individually owned condominium units.  The Project was completed in 2006.  1950 Logan was a single-purpose entity created for the construction of the Project, which is a common practice in the construction industry.  After the units were sold in 2006, the LLC wrapped up operations.

Sedgwick is a Chicago based corporation and was the initial manager for 1950 Logan.  It had no ownership interest in 1950 Logan.  1950 Logan paid Sedgwick a fee in exchange for development services, which included marketing, general coordination of construction of the development of the Project, and lender management.  Sedgwick did not invest, loan, or otherwise provide any monies to 1950 Logan for any purpose.  As it was not an owner, Sedgwick did not receive, nor was it entitled to, any partnership distributions from 1950 Logan.

In October 2011, Plaintiff/Appellee, Christopher Hinds, purchased a unit in the Project from a previous purchaser.  This was five years after 1950 Logan completed the Project.  Mr. Hinds, who uses a wheelchair, bought the unit assuming the seven handicap parking spaces would be available for his use, in addition to the parking spot in the general parking area that was part of his unit purchase.  The handicap parking spots, which were individually deeded and owned by 1950 Logan, were sold to residents of the Project after it was determined that no handicap residents required a handicap parking space.  The sales of these parking spaces were recorded, and Mr. Hinds was on record notice of this public record when he bought his unit.

At the time of the sale of these parking spots, Colorado law did not prohibit their sale.  C.R.S. § 42-4-1208(3)(b) stated that the owner of private property available for public use “may request” the installation of official signs identifying parking spaces reserved for persons with disabilities.  The parking lot at the Project was not available for public use.  In 2014, Mr. Hinds and his attorney, Joseph Salazar, a state representative, sponsored House Bill 14-1029 to repeal and replace this law.  When signed into law by Governor Hickenlooper, this law removed the provision above, making the law clear that any handicap parking spot, whether on public or private lot, must allow handicap parking.  Furthermore, section 2(e)(III) was added to require “real property with multiple-family dwellings affixed and with reserved parking shall retain the reserved parking as commonly owned for the tenants…This…does not prohibit the sale of all commonly owned property so long as the reserved parking is not severed from the other elements.”  Thus, when the parking spots were sold, the existing law suggested such a sale was not unlawful.

Prior to the change in the handicap parking law, in 2013, the Colorado Civil Rights Commission (“CCRC”) filed an action against 1950 Logan, 1950 Logan Condominiums Condominium Association (“Association”), and its management company, St. Charles Town Company (“St. Charles”), with claims that each violated Christopher Hinds’ civil rights.  The Complaint alleged seven claims of violations of Colorado’s Fair Housing Act, C.R.S. § 24-34-501, et seq.  (“FHA”).  The allegations stated that 1950 Logan, as developer of the Project, sold seven handicap designated parking spaces and one non-designated parking space to owners with no disabilities.  The Association and St. Charles eventually settled the claims with the CCRC. 

As 1950 Logan was a long since defunct company, with no assets, it did not respond to the CCRC’s complaint.  As such, the CCRC chose not to pursue 1950 Logan and dismissed its claims against 1950 Logan.  Mr. Hinds filed a Motion to Intervene to pursue 1950 Logan.  On December 10, 2014, the district court issued an Order for Default Judgment in favor of Intervenor Christopher Hinds against 1950 Logan.  Mr. Hinds issued a Writ of Garnishment to Sedgwick.  Sedgwick responded that it had no personal property owed to or owned by 1950 Logan in its possession or control.  Intervenor filed an Affidavit and Traverse of Creditor against Sedgwick.  On December 5, 2015, the district court ordered a hearing on the traverse and found that Mr. Hinds properly put into issue whether Sedgwick is the alter ego of 1950 Logan.

On June 20, 2017, the court held a traverse hearing.  The underlying facts were not contested because default had entered, and the court treated the allegations as established for purposes of the hearing.  On June 22, 2017, the district court found that Intervenor had satisfied the elements to pierce the corporate veil against Sedgwick, citing In re Phillips, 139 P.3d 639, 644 (Colo. 2006) and Martin v. Freeman, 272 P.3d 1182 (Colo. App. 2012).  Pursuant to C.R.C.P. 103(8)(3)(A), the court held Sedgwick liable to 1950 Logan and entered judgment in favor of 1950 Logan against Sedgwick for the use and benefit of Mr. Hinds.

Sedgwick’s Appeal

Sedgwick filed its appeal asserting the traverse hearing violated its right to due process and that Hinds had not satisfied the elements to pierce the corporate veil.  While the appellate court found no due process violation, it found Plaintiff/Appellee did not present sufficient evidence to support a finding that Sedgwick was 1950 Logan’s alter ego.  The Court reversed the district court’s order without addressing the other elements required for piercing the corporate veil. 

Due Process. The Court disagreed with Sedgwick’s claim that the traverse hearing was insufficient to protect Sedgwick’s due process rights.  The Court found nothing in Colorado law prohibits a judgment creditor from asserting a claim to pierce the corporate veil in a garnishment proceeding.  Sedgwick Properties at ¶ 10.  The Court found the garnishment proceeding adequately protected Sedgwick’s due process rights.  Id. (citing Maddalone v. C.D.C., Inc., 765 P.2d 1047, 1049 (Colo. App. 1988)).  Sedgwick Properties at ¶ 12.  Garnishment procedures under C.R.C.P. 103 accord with due process and fully protect a garnishee who denies liability for debt  as a garnishee is treated no differently than if it had been sued directly on the debt.  Sedgwick had the right to deny the debt, engage in discovery, and have an adverse hearing in which Mr. Hinds must prove the allegations by a preponderance of the evidence.  Id

Corporate Veil-Piercing of a Single-Member, Single-Purpose LLC.  Colorado’s appellate courts had not previously addressed corporate veil-piercing in the context of a single-member, single-purpose LLC that is managed under a contract by another company.  Sedgwick Properties at ¶ 16.

Burden of Proof.  The Court first addressed the burden of proof for veil-piercing, which has been the subject of inconsistent judicial precedent.  In Phillips, supra, the Colorado Supreme Court said the burden of proof is clear and convincing evidence.  But the same court in Griffith v. SSC Pueblo Belmont Operating Co. LLC, 381 P.3d 308 (Colo. 2016), concluded the language from Phillips was mere dictum and applied C.R.S. 13-25-127(1) to find the burden of proof in any civil action shall be by preponderance of the evidence.  Sedgwick Properties at ¶ 19. A year later, in Stockdale v. Ellsworth, 407 P.3d 571, (Colo. 2017), Colorado’s Supreme Court held the standard to pierce the corporate veil is clear and convincing evidence.  The appellate court noted there was no reasoning provided by the Colorado Supreme Court as to why the burden of proof is contrary to that set out in C.R.S. § 13-25-127(1).  Therefore, the appellate court concluded this language from Stockdale was dictum and applied Griffith’s ruling that the burden is by preponderance of the evidence, as required by statue.  Sedgwick Properties at ¶ 20. 

Elements of Veil Piercing.  A court must conduct a three-party inquiry:  1) whether the corporate entity is the alter ego of the person or entity in issue;  2) whether justice requires recognizing the substance of the relationship person or entity sought to be held liable and the corporation over the form, because the corporate fiction was used to perpetrate a fraud or defeat a rightful claim; and 3) whether an equitable result will be achieved by disregarding the corporate form.  Sedgwick Properties at ¶ 21, (citing Phillips at 644).  The majority opinion focused on the first element.  In determining the alter ego of an entity, courts consider a variety of factors, including whether:  1) the corporation was operated as a distinct business entity;  2) funds and asserts were commingled;  3) adequate corporate records were maintained;  4) the nature and form of the entity’s ownership and control facilitated misuse by an insider;  5) the business was thinly capitalized;  6) the corporation was used a mere shell;  7) legal formalities were disregarded; and 8) corporate funds were used for noncorporate purposes.  Sedgwick Properties at ¶ 32, (citing Phillips at 644).

The appellate court found the district court’s analysis floundered on the assumption that a single-member, single-purpose LLC is subject to the same veil-piercing analysis generally applied to corporations, without taking into account the characteristics of such LLCs.  The court noted a dearth of precedent addressing those characteristics, citing C.R.S. § 7-80-107(2) - the failure of an LLC to observe the formalities or requirements relating to the management of the business is not in itself a ground for imposing personal liability on the members.  Sedgwick Properties at ¶ 34.  Where, as here, management of the LLC is provided under contract by a management company, traditional veil-piercing factors may be even harder to apply.  Sedgwick Properties at ¶ 37.

The appellate court concluded that the record, considered as a whole, did not support an alter ego finding that would permit piercing 1950 Logan’s corporate veil.  The evidence showed numerous real estate projects for which Sedgwick provided the same types of development services it provided for 190 Logan.  The district court framed the first issue as “whether…the LLC is the alter ego of its manager,” apparently referencing Sedgwick.  Sedgwick Properties at ¶ 40.  It was unclear to the appellate court if the district court recognized that Sedgwick was the manager under a management contract and was not an owner-manager of the LLC, as defined by C.R.S. § 7-80-102(8).  Id

In review of the alter ego findings, the appellate court addressed the following elements:

1.      Ownership, Control, and Unity of Interest.  The appellate court took issue with the district court finding that Sedgwick controlled 1950 Logan when the evidence showed Sedgwick had no interest in this entity.  Sedgwick was hired under a contract to provide management services only, as permitted by C.R.S. § 7-80-102.  Sedgwick Properties at ¶ 43.  The district court did not find that Sedgwick and its principal, Marty Paris, were the alter egos of each other.  The appellate court felt the district court “conflated the two in concluding that Sedgwick’s assets are available to satisfy the judgment against 1950 Logan – even though it found that Sedgwick had no interest in 1950 Logan.  Sedgwick Properties at ¶ 45.  The court’s findings did not show control by Sedgwick beyond what would be expected under the contractual role of manager of the LLC.  Also, the appellate court noted the court appeared to ignore other evidence that showed Sedgwick did not exercise control over 1950 Logan, to include evidence that Sedgwick had no ownership interest in 1950 Logan, never made a profit from the Project, and had no assets of 1950 Logan.  Sedgwick never controlled the $30 million borrowed from institutional investors to build the Project and had its own assets and bank accounts.  Sedgwick Properties at ¶ 48.  The appellate court held, “The record simply does not support the court’s finding that Sedgwick had the type of ownership and control over 1950 Logan necessary to establish alter ego status.”  Sedgwick Properties at ¶ 49.

2.      Failure to Observe Corporate Formalities.  Regarding the corporate formalities, the appellate court noted that LLCs are operated with less formality than traditional corporations and may not have meetings of members or managers, or observe other procedures required for corporations.  Sedgwick Properties at ¶ 52, (citing 1 Stephen A. Hess, Colorado Practice Series: Methods of Practice & 5:9, Westlaw (8th ed. database updated May 2019)).  Compared to a corporation, there is no requirement for annual meetings of the members of an LLC under the LLC Act.  Id.

3.      Whether the Entity’s Form Facilities Misuse by an Insider.  The district court found that multiple entities were rolled into one for purposes of operation and for purposes of filing a single tax return.  C.R.S. § 7-80-107(3) states an LLC’s status for federal tax purposes does not affect its status as a distinct entity.  Sedgwick Properties at ¶ 53.  Even if true, those circumstances did nothing to establish Sedgwick as an alter ego of 1950 Logan.

4.      Mere Shell.  The district court found 1950 Logan did not constitute a mere shell.  Sedgwick Properties at ¶ 55, (citing Phillips, supra at 644). 

5.      Capitalization.  Undercapitalization of the LLC is one indicator that may support piercing of the corporate veil.  McCallum family, L.L.C. v. Winger, 221 P.3d 69, 76 (Colo. App. 2009).  The appellate court did not agree with the district court’s heavy reliance on its finding that 1950 Logan was thinly capitalized.  1950 Logan owned the land for the Project, raised more than $1 million from investors, obtained $30 million in funding from major institutional lenders, and paid off the loans.  Sedgwick Properties at ¶ 58.  These facts showed 1950 Logan was not thinly capitalized.  The appellate court cited a series of cases to show undercapitalization, such as the inability to procure a loan, the entity never had assets, a net worth, or bank accounts, or the capital was illusory or trifling compared with the business to be done and the risk of loss.  Id.  A lender would not have provided the loans if 1950 Logan could not repay the loan during the useful life of the LLC.  Sedgwick Properties at ¶ 59.  The district court was critical because 1950 Logan lacked funds to pay a judgment entered in favor of Mr. Hinds.  However, the record showed by the time judgment had entered, 1950 Logan had, years before, satisfied its single purpose and had wound down operations.  The appellate court held, “Undercapitalization is not determined whether a single-purpose LLC might be able to pay liabilities that are incurred only after the LLC has reached the end of its useful life and has ceased operating.”  Sedgwick Properties at ¶ 60.

6.      Commingling of Assets and use of Corporate Funds for Noncorporate Purposes.  The only evidence the district court relied on for a finding of asset commingling was a settlement of the Association’s construction defect lawsuit.  Several named defendants jointly entered into the agreement, which the district court recognized was a “drafting convenience.”  Because the settlement funds came from 1950 Logan’s bank account to extinguish liability, if any, of Sedgwick and the other defendants, the district court concluded 1950 Logan’s funds were available to Sedgwick.  Sedgwick Properties at ¶ 61.  The appellate court found no legal authority that supports a conclusion that a joint settlement of potential liabilities is an indicator of alter ego status.  On the contrary, it found that it is common knowledge among lawyers and judges that joint settlements that benefit unrelated parties often take place, especially where cross-claims among the settling entities may be anticipated.  Sedgwick Properties at ¶ 62. 
The appellate court concluded the evidence presented to the district court was insufficient to establish, even by a preponderance of the evidence, that 1950 Logan is the alter ego of Sedgwick and remanded the case to the district court for entry of judgment for Sedgwick. 

Concurring Opinion

Judge Jerry N. Jones concurred and added that the district court’s findings should lead to the conclusion that Mr. Hinds also failed to prove the second requirement for piercing the corporate veil – that the corporate form was used to perpetrate a fraud or defeat a rightful claim.  Sedgwick Properties at ¶ 66 (citing Phillips, supra at 644 (quoting Contractors Heating & Supply Co. v. Scherb, 432 P.2d 237, 239 (Colo. 1967)).  In Martin, supra, the appellate court held this requirement can be shown even if there was no wrongful conduct in the use of the corporate form.  Sedgwick Properties at ¶ 67.  Judge Jones dissented in Martin and continues to believe that the majority’s holding is contrary to the Colorado Supreme Court precedent.  Id.  In his view, that precedent requires a showing that the corporate form was used in a manner that, if not criminal, was at least unlawful or intended to defeat a claim.  Id. (citing Martin at ¶ 33).  In this case, the district court found there was no evidence of fraud and no wrongful motive or intent.  Sedgwick Properties at ¶ 68.  Absent such evidence, there is no basis to conclude that 1950 Logan’s corporate form was used to perpetrate a fraud or defeat a rightful claim.  In a footnote, Judge Jones noted that he did not fault the district court for relying on the majority’s decision in Martin.


Conclusion

The appellate court found that a single-member, single-purpose LLC, managed by a separate management company, must undergo the same analysis as any other limited liability company, and not a corporation.  In addition, it provided further, and much needed, context into the elements of piercing a corporate veil, especially concerning the elements of ownership, control, and unity of interest, and capitalization.  

For additional information regarding Sedgwick Properties Development Corporation v. Christopher Hinds or about construction defect litigation in Colorado, generally, you can reach Frank Ingham by telephone at (303) 653-0046 or by e-mail at ingham@hhmrlaw.com

Monday, June 24, 2019

MIND THE APPEAL OR: A LESSON FROM AUTO-OWNERS INSURANCE CO. v. BOLT FACTORY LOFTS OWNERS ASSOCIATION, INC. ON TIMING INSURANCE BAD FAITH AND DECLARATORY JUDGMENT INSURANCE CLAIMS FOLLOWING A NUNN-AGREEMENT


By Jean Meyer

On May 30, 2019, Judge Richard Brooke Jackson of the United States District Court for the District of Colorado offered an insightful lesson to the parties in Auto-Owners Insurance Co. v. Bolt Factory Lofts Owners Association, Inc.[1] on the importance of ripeness in declaratory judgment insurance actions and bad faith counterclaims. The case arrived in front of Judge Jackson based on the following fact pattern.

A homeowner association (Bolt Factory Lofts Owners Association, Inc.) (“Association”) brought construction defect claims against a variety of prime contractors and those contractors subsequently brought third-party construction defect claims against subcontractors. One of the prime contractors assigned their claims against a subcontractor by the name Sierra Glass Co., Inc. (“Sierra”) to the Association and all the other claims between all the parties settled. On the eve of trial involving only the Association’s assigned claims against Sierra, the Association made a settlement demand on Sierra for $1.9 million. Sierra asked its insurance carrier, Auto-Owners Insurance, Co. (“AOIC”), which had been defending Sierra under a reservation of rights letter, to settle the case for that amount, but AOIC refused. This prompted Sierra to enter into a “Nunn-Agreement” with the Association whereby the case would proceed to trial, Sierra would refrain from offering a defense at trial, the Association would not pursue any recovery against Sierra for the judgment, and Sierra would assign any insurance bad faith claims it may have had against AOIC to the Association. (“Nunn-Agreement”)

Sierra informed AOIC about the existence of the Nunn-Agreement for the first time on the Friday before the trial was set to commence. On the following Monday, AOIC petitioned the trial court to intervene in the lawsuit and continue the trial in the hopes of protecting its rights under its insurance policy. A hearing was held, and the trial court judge held that the Agreement was valid under Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010). A two-day bench trial followed, and the court awarded the Association $2,489,021.91 (“Judgment”).

Two months after the trial, AOIC filed a declaratory action in the United States District Court for the District of Colorado seeking a declaration that AOIC did not owe any obligations or payments to Sierra or the Association, a declaration that Sierra breached the relevant insurance policy by failing to cooperate with AOIC, and a declaration that the Judgment was not enforceable against AOIC (“Declaratory Action”). Shortly after filing the Declaratory Action, AOIC also filed an appeal with the Colorado Court of Appeals asking the Court of Appeals to reverse the trial court’s denial of its petition to intervene and asked the Appellate Court to vacate the Judgment. Adding to the mix, the Association and Sierra contemporaneously answered the Declaratory Action and filed counterclaims alleging that AOIC was liable for breach of contract and statutory and common law bad faith claims.

AOIC thereafter moved to dismiss Sierra and the Association’s counterclaims in the Declaratory Action arguing that the claims were not ripe for review considering the pending appeal. After providing a thorough review of relevant authorities, Judge Jackson concluded that not only were the counterclaims premature considering the pending appeal, the Declaratory Action itself was also untimely and he dismissed the Declaratory Action in its entirety without prompting by either Sierra or the Association.

Judge Jackson reasoned that because the ripeness doctrine asks whether a controversy is certain and not contingent on future events, the Declaratory Action counterclaims were premature considering the pending appeal. If the Appellate Court were to overturn the trial court’s decision and vacate the Judgment, the Declaratory Action counterclaims would be rendered moot. In his own words, “[b]ecause the injury will remain speculative until the final decision of Colorado’s appellate court is issued, these counterclaims are unripe.” Because the grounds for Sierra and the Association’s counterclaims was the imposition of excess judgment, which remained uncertain until the Appellate Court ruled on AOIC’s petition to vacate the Judgment, any claims that relied on that Judgment were premature. Similarly, because AOIC filed an appeal seeking a ruling that the Judgment was not enforceable against AOIC, if AOIC were to be successful in its appeal, part of the relief requested in the Declaratory Action would no longer be necessary.

In summary, practitioners should neither rush to file insurance bad faith claims nor declaratory judgment actions following a Nunn-Agreement and subsequent judgment before the time for filing an appeal has expired. Parties should not file either claim where there is a pending appeal challenging the underlying judgment. 

For additional information regarding Nunn-Agreements or about construction defect litigation in Colorado, generally, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at meyer@hhmrlaw.com.




[1] 18-CV-01725-RBJ, 2019 WL 2299756, at *1 (D. Colo. May 30, 2019)

Monday, April 29, 2019

2019 Legislative Session


Two bills under consideration as the end of the session nears contain significant changes to Colorado’s Consumer Protection Act (“CCPA”).  The bills broaden remedies, make more conduct a breach of the CCPA, and include purely private transactions in the type of conduct that falls within the scope of the CCPA.  The bills are House Bill 19-1289 (“House Bill”) and Senate Bill 19-237 (“Senate Bill”).  As of April 29, 2019, the House Bill has passed the House.  The Senate Bill has not progressed past introduction.  It is unclear if both houses of the legislature will have an opportunity to vote on either or both bills before the session ends.

The House Bill makes a person liable for CCPA violations based on conduct engaged in “recklessly,” not just knowing conduct.  No definition of the term “recklessly” is provided in the House Bill, but Colorado’s attorney general testified “recklessly” “means a company or person acted with reckless disregard for the truth.  (Page 2).  No explanation was given of what the word “reckless” in the definition of “recklessly” meant in this context.

Another provision of the House Bill adds a “catch all” prohibition that labels as a deceptive trade practice knowingly or recklessly engaging in any unfair, unconscionable, deceptive, deliberately misleading, false or fraudulent act or practice.  There is no indication how a person could “recklessly” engage in “deliberately misleading” acts or practices.

Another change to Colorado law in the House Bill is the removal of the significant public impact requirement.  That change would subject purely private disputes for transactions in the course of a person’s business, vocation or occupation to the CCPA.  CCPA remedies include treble damages if bad faith is shown by clear and convincing evidence.

The House Bill allows recovery of interest from the date the claim accrued.  One of the accrual dates available to a claimant is the date the false, misleading, or deceptive act or practice occurred.  C.R.S § 6-1-115.  Thus, on its face the House Bill may allow construction defect plaintiffs to collect pre-judgment interest on CCPA claims, perhaps overturning Goodyear v. Holmes, 193 P.2d 821 (Colo. 2008) in circumstances where the action remains timely even given an early accrual date.  Reasonable attorneys’ fees, with some limits in certain cases, are also available on a CCPA claim.  Due to the substantial broadening of the scope of the CCPA and the remedies available under the CCPA, use of the CCPA in civil litigation will likely increase significantly if the House Bill passes.

The Senate Bill allows private plaintiffs to recover $500 per violation if that amount is greater than actual damages or three times actual damages where bad faith is shown by clear and convincing evidence.  It also allows recovery in a class action of actual damages sustained by the class, reasonable costs and fees; and injunctive or declaratory relief.  CCPA remedies are currently not available in class actions.

For more information regarding Colorado’s Consumer Protection Act, or construction litigation in Colorado, you can reach Steve Heisdorffer by telephone at (303) 653-0044 or by e-mail at heisdorffer@hhmrlaw.com.

Friday, April 26, 2019

Scholarships Available for the 2019 CLM Claims College - School of Construction

I am pleased to have been invited to serve on the Executive Council and Faculty for this year’s CLM Claims College – School of Construction, which will be held at the Marriott Baltimore Waterfront from Wednesday, September 4, 2019 through Saturday, September 7, 2019.

As a result of my service I am able to offer scholarships (registration fee only) to industry professionals (insurance - risk, adjusters, claims, etc. and corporate) interested in attending. Please e-mail me by if you would like to take advantage of the free registration scholarship offered by CLM.

The education of claims resolution professionals is important to the CLM. That’s why CLM established the Claims College in 2012 and enlisted some of the industry’s best professionals to create and teach courses. Since its inception, hundreds of students have attended the Claims College and nearly 300 have earned their CCP (Certified Claims Professional) designation.

The College presents courses in eight three-level specialty schools and three one-level schools with more on the horizon. Schools include: Casualty Claims, Claims Mediation, Construction, Cyber Claims, Extra-Contractual Claims, Insurance Fraud, Leadership, Professional Lines, Property Claims, Transportation, and Workers Compensation. Students must pass all three levels of a school to earn their CCP. Each level consists of reading materials, in-class instruction, group projects, and an exam. 


Construction claims present complexities in claim handling, are often multiparty cases with cross claims and third-party claims between and among the numerous defendants, intertwined with issues involving insurance coverage. The stakes for these types of cases are high as the damages claimed can be in the multi-millions

Competent construction claims handling requires an understanding of the distinct legal and practical issues between commercial and residential claims. The construction claims world is an unfriendly place for the claims professional who has not been properly trained and exposed to these issues.

The School of Construction will provide adjusters with the knowledge, tools, and understanding required to navigate these complex claims. Professionals seeking to expand their knowledge of construction risk concepts and seasoned professionals looking to move into construction claims are encouraged to attend.


The Claims and Litigation Management (CLM) Alliance is the only national organization created to meet the needs of professionals in the claims and litigation management industries. Founded in 2007, the CLM currently has more than 45,000 Members and Fellows—a number that grows by hundreds each month.


Thursday, March 14, 2019

What are the most commonly claimed issues in construction defect litigation?

By: David M. McLain

As a lawyer that has spent his career defending against construction defect claims, one of the most common questions I get when counseling clients regarding risk management is: “What are the most commonly claimed issues in construction defect litigation?” Until very recently, my answer to this question has been based on my own experience and knowledge on the subject, and only vaguely reliant on empirical data.

Recently, two engineers, Elizabeth Brogan and William McConnell, along with Caroline Clevenger, an associate professor at the University of Colorado, Denver, wrote a paper entitled “Emerging Patterns in Construction Defect Litigation: A Survey of Construction Cases.” The authors analyzed 41 multifamily construction defect cases litigated in 2015, 2016 and 2017, mostly in the Denver metro area.

The authors classified the 55 most prevalent alleged defects into the following categories: structural issues; civil issues; building envelope issues; roof issues; deck, balcony and porch issues; fire protection issues; and miscellaneous issues. The authors then identified the 10 most commonly claimed construction defects, which occurred in over half of all of the cases analyzed. These defects included:

Civil Issues:
  • Inadequate grade adjacent to foundation (68%)
  • Inadequate slope grading (improper management of concentrated flows) (61%)
  • Flatwork or structures inhibiting drainage (59%)
Building Envelope Issues:
  • Non-compliant clearance between siding, stone veneer or stucco and hard surfaces or grade (73%)
  • Non-compliant weep mechanism in stone or stucco at horizontal terminations (71%)
  • Non-compliant flashing (base, head, sill, clearance, blocked or improperly sloped) (68%)
  • Improper water table construction (rowlock, stone, stucco, EIFS, precast or other) (71%)
  • Non-compliant moisture management integration (weather resistive barrier, self-adhered membrane or other) (71%)
  • Non-compliant isolation to penetration and dissimilar materials (76%)
Roof Issues:
  • Non-compliant roof flashing (diverter, rake, head, chimney, air handling units, jacks, etc.) (54%)
The authors further investigated each of these issues to describe specifically what the homeowners associations claimed to be non-compliant; the potential damage, issue or concern with the non-compliance; the code allegedly violated; and the repair proposed by the homeowners associations’ experts. Needless to say, this paper is full of valuable information for any home builder, developer, contractor, architect or subcontractor who is interested in improving its risk management program.

To the extent that you are already working with a third-party QA/QC provider during the design and construction phase of your projects, or are considering doing so, I think it would make sense to review this with those inspecting your projects to ensure that there is a high correlation between the items for which they are inspecting and those things that appear with the most frequency in construction defect litigation.

For additional information or about construction defect litigation in Colorado, generally, you can reach David M. McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Thursday, February 28, 2019

Colorado House Bill 19-1170: Undefined Levels of Mold or Dampness Can Make a Leased Residential Premises Uninhabitable

By Steve Heisdorffer

One of the 407 bills the Colorado legislature is considering as of the date of this blog post is House Bill 19-1170, the Residential Tenants Health and Safety Act, which can be found at https://leg.colorado.gov/bills/hb19-1170 and clicking on the link for the recent bill text.  The bill passed the House on February 26 and is in the Senate for consideration. The bill currently adds two substantive conditions to those conditions that make a residential premises uninhabitable.  One is the lack of functioning appliances that conformed to applicable law when installed and that are maintained in good working order. The second is “mold that is associated with dampness, or there is any other condition causing the premises to be damp, which condition, if not remedied, would materially interfere with the health or safety of the tenant…,”  referred to here as “the mold or dampness provision.”  The bill also amends various procedural provisions of Colorado law to make enforcement by a tenant easier and broadens tenant remedies.  The bill grants jurisdiction to county and small claims courts to grant injunctions for breach.  This article focuses on the mold or dampness provision.

The mold or dampness provision is vague and will likely lead to abuse.  First, there is mold everywhere.  While expert witnesses routinely testify about the level of exposure that is unacceptable, no generally accepted medical standards for an unacceptable level of mold exposure currently exist, and each person reacts to mold differently.  There is no requirement in the bill that mold exposure exceed levels that are generally considered harmful by experts in the field, or even in excess of naturally occurring background levels.  Second, some sources estimate that there are over 100,000 different species of mold.  No harmful effects have been shown for many species of mold, while other species of mold are considered harmful.

It could be argued that the provision that the condition “materially interfere with the health or safety of the tenant…” provides the standard for the level of exposure and the type of mold.  Unfortunately, there are wide disagreements about what level of exposure would “materially interfere” with health or safety, and what may be completely benign to the average person may interfere with the health and safety of a specific individual.

More troubling, our society’s general concerns about mold have helped create a cottage industry of self-proclaimed mold experts willing to make dubious claims under oath.  The medical community in general has been slow to discipline doctors that are willing to testify without any scientific support that cancer, memory loss, autism and other diseases or conditions were caused by mold exposure. The same general concerns about mold have led to the creation of several laboratories that provide mold test results of no known medical value-- for the right fee.  In short, in the current climate, the limitation that the alleged mold or dampness materially interferes with the health or safety of the tenant is no limitation at all.

For additional information regarding House Bill 19-1170 or about construction defect litigation in Colorado, generally, you can reach Steve by telephone at (303) 653-0044 or by e-mail at heisdorffer@hhmrlaw.com.

Tuesday, February 26, 2019

HHMR Seeks Full Time Office Clerk/Receptionist


Higgins, Hopkins, McLain & Roswell, LLC, has an immediate opening for a full time Office Clerk/Receptionist. The position requires a candidate who will enthusiastically welcome the opportunity to learn new skills and energetically assist other staff members and attorneys as a team player. The right candidate must have a professional and courteous demeanor. Office experience a plus.

Skills and qualifications:
  • Knowledge of Microsoft Word, Excel, and Outlook
  • Able to work independently
  • Self-motivated
  • Highly organized
  • Solid verbal and written communication skills

Additional Duties (may include but not limited to):
  • Light kitchen duties
  • Supply ordering
  • Answering phones
  • Greeting clients
  • Filing/clerical
  • Creating miscellaneous notebooks
  • Assisting attorneys and legal assistants as requested

Interested candidates should submit their resume and references to:
Ms. Lauren Parks, parks@hhmrlaw.com

NO CALLS OR AGENCIES

Tuesday, February 12, 2019

Expansion of Statutes of Limitations and Repose in K-12 and Municipal Construction Contracts

The purpose of this whitepaper is to bring attention to a trend in K-12 and municipal construction contracts, which expands the time periods for law suits against construction professionals.

Introduction and Background

Under Colorado statute, the period of time within which a legal action for construction defects may be brought against a construction professional in Colorado is two years from when the claimant (or its predecessor in interest) discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect (the “Statute of Limitations”), but in no case may an action be brought more than six years after substantial completion of the improvement, unless the claim arises in the fifth or sixth year after substantial completion, in which event the action may be brought within two years of such date, i.e., up to eight years after substantial completion (the “Statute of Repose”).  See C.R.S. § 13-80-104.  While the triggering events differ for the Statute of Limitations and Statue of Repose, the periods are intended to run concurrently to limit the period of time an action may be brought against construction professionals for construction defects to, at most, eight years after substantial completion.  Importantly, these limitations periods may be expanded by agreement. 

Prior to 1986, Colorado law provided for a 10-year Statute of Repose.  However, in 1986, Colorado’s legislature shortened the Statute of Repose time limit to the current six (or up to eight) year period.  In 1986, Colorado also redefined the date the claim arises from the date the defect was discovered or should have been discovered to the date the physical manifestation of a defect was discovered or should have been discovered.  Therefore, after 1986, the two-year limitations period could begin to run when a claimant should have discovered the manifestation of a defect, even if the claimant did not recognize that a defect existed. 

The reasons for these changes, as described by members of the Colorado legislature at the time, were as follows:
1.      Relieve construction professionals of the prospect of potentially open-ended, indefinite liability for their acts or omissions;
2.      Encourage the timely resolution of construction disputes while preserving property owners’ rights;
3.      Encourage diligent investigation of the cause and extent of the problem;
4.      Curb perceived abuses related to construction-defect litigation; and
5.      Stabilize the costs of insurance and insurance products for construction professionals.

These changes have, in fact, helped to encourage the timely resolution of construction defect disputes, resulted in an efficient insurance market for commercial general liability and completed operations insurance coverage, and a competitive construction market – all of which help contribute to lower costs of construction in Colorado.

Recent Trend in the Wrong Direction

In recent years,there has been a trend in K-12 construction contracts (as well as other municipal and local government construction contracts) which expands the potential liability of construction professionals beyond the current Statutes of Limitations and Repose.  Several school districts have expanded the Statute of Limitations to 6 years (after discovery of the defect) and the Statute of Repose up to 16 years (or in the case of Cherry Creek, a potentially unlimited Statute of Repose period).  These school districts have also changed the language of the limitation period so that it does not begin to run until actual discovery of the defect (rather than the physical manifestation), thus, reversing the changes made by the legislature in 1986.  A table summarizing examples from recent K-12 construction contracts is attached as Attachment 1.  Relevant excerpts from these construction contracts are attached as Attachment 2.

It is important that construction professionals in Colorado be aware of these contract provisions because they greatly expand the liability of construction professionals and disrupt the industry standards on which construction professionals (and their insurers and other related industries) rely.  Further, such negative trends tend to lead to inequitable risk shifting which is harmful to the industry.  The reasons such contract provisions are harmful to the construction industry in Colorado include:

 Potential expiration of insurance coverage.  Completed operations periods under most commercial general liability policies are capped at the statute of repose or ten years.  Therefore, a construction professional may be left without insurance coverage against a construction defect claim brought outside that period.

Destabilizing the insurance market.  Longer and inconsistent limitations and repose periods destabilize the market for insurance in Colorado as insurers attempt to price the increased risk of such longer periods on a contract-by-contract basis.

Prejudices construction professionals’ ability to defend themselves.  Construction professionals rely on project documentation and personnel to defend against defect claims.  It will be more difficult to locate project documents and personnel (witnesses) (who may no longer be available or remember the project) to defend lawsuits filed up to 16 years or longer after substantial completion of a project.

Construction professionals are more likely to be blamed for improper maintenance.  Construction professionals may face claims for issues which are, in reality, caused by improper or inadequate maintenance.  The passage of time increases the difficulty in distinguishing between damages caused by improper maintenance versus improper construction.

Unfair to allow claimants to sit on their claims.  A longer Statute of Limitations period means a claimant can sit on its hands and wait to bring an issue to the attention of a construction professional for up to six years after the claimant became aware of the issue, which runs counter to the public and industry interests in timely investigating and resolving problems.

Attachment 1
School District
Statute of Limitations
Statute of Repose
Lewis Palmer
6 years

10 years w/ extension of 6 years if discovered in 10th year

Douglas
6 years

15 years after final completion

Cherry Creek

6 years from SC or date of discovery, whichever is longer

None
Adams
6 years

10 years w/ extension of 6 years if discovered in 10th year

Aurora Public Schools
6 years

10 years w/ extension of 6 years if discovered in 10th year

Weld
6 years

8 years w/ extension of 2 years if discovered in 5th or 6th year

District 49
6 years

15 years from final completion and acceptance



Attachment 2
Lewis Palmer

GC 59.00

LIMITATION OF ACTIONS

Any actions against the Contractor, its subcontractors, suppliers, or others providing materials or services for the Project, brought to recover damages for injury to person, damage to property (including loss or damage to property on the Project itself), or defects in materials caused by the design, manufacture, supplying, planning, supervision, inspection, construction, or observation of construction of the Project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fully discovered. In no case shall such an action be brought more than ten (10) years after the date of final completion and acceptance of the Project; provided, however, that in any case where the cause of action arises during the tenth year, such action shall be brought within six (6) years after such cause of action arises and the nature and extent are fully discovered by the Owner.
Douglas County
Short form contract - 10.2 Limitation of Actions - Any actions against the CM/GC, his employees or agents brought to recover damages for injury to person or defects in or damage to property, including the Work itself, caused by the administration, superintendence or efforts of the CM/GC or those under his control relating to this Project shall be brought within six (6) years after such claim for relief arises and is discovered by the Owner.
Regular General Conditions - GC - 53.00 LIMITATION OF ACTIONS
53.01 Any actions against the Contractor, his subcontractors, suppliers or others providing materials or services for the project, brought to recover damages for injury to person, damage to property or defects in materials caused by the design, manufacture, supplying, planning, supervision, inspection, construction or observation of construction of the project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fully discovered. In no case shall such an action be brought more than fifteen (15) years after the final completion and acceptance of the project.

Cherry Creek





13.4.3 shall be added and shall read as follows:

Notwithstanding any other provision of these General Conditions, the statute of limitations for the filing of any and all claims arising pursuant to the Work and Contract Documents shall be six (6) years from the date of Substantial Completion as defined in subparagraph 8.1.3 or the date of discovery of the claim, whichever is later, or such longer period as may be permitted by law.

ARTICLE 13 - MISCELLANEOUS PROVISIONS / 13.7 TIME LIMITS ON CLAIMS
13.7.1 Add the following to the end of the first sentence of the Paragraph: or the Date of Actual Knowledge of the Cause or Claim by the Owner, whichever is later.

Adams 12

GC 53.00 LIMITATION OF ACTIONS
Any actions against the Contractor, its subcontractors, suppliers, or others providing materials or services for the Project, brought to recover damages for injury to person, damage to property (including loss or damage to property on the Project itself), or defects in materials caused by the design, manufacture, supplying, planning, supervision, inspection, construction, or observation of construction of the Project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fulldiscovered. In no case shall such an action be brought more than ten (10) years after the date of final completion and acceptance of the Project; provided, however, that in any case where the cause of action arises during the tenth year, such action shall be brought within six (6) years after such cause of action arises and the nature and extent are fully discovered by the Owner.
Aurora Public Schools
GC-54.00 LIMITATION OF ACTIONS
Any actions against the Contractor, its subcontractors, suppliers, or others providing materials or services for the project, brought to recover damages for injury to person, damage to property (including loss or damage to property on the project itself), or defects in materials caused by the design, manufacture, supplying, planning, supervision, inspection, construction, or observation of construction of the project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fully discovered. In no case shall such an action be brought more than ten (l0) years after the final completion and acceptance of the project; provided, however, that in any case where the cause of action arises during the tenth year, such action shall be brought within six (6) years after such cause of action arises and the nature and extent are fully discovered by the Owner.
Weld County
GC-54.00 LIMITATION OF ACTIONS
Any actions against the Contractor, its subcontractors, suppliers, or others providing materials or services for the Project, brought to recover damages for injury to person, damage to property (including loss or damage to property on the Project itself), or defects in materials caused by the design, manufacturesupplying, planning, supervision, inspection, construction, or observation of construction of the Project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fully discovered. In no case shall such an action be brought more than eight (8) years after the date of final completion and acceptance of the Project; provided, however, that in any case where the cause of-action arises during the fifth or sixth year, such action shall be brought within two (6) years after such cause of action arises and the nature and extent are fully discovered by the Owner.
District 49
GC - 53.00 LIMITATION OF ACTIONS
53.01 Any actions against the Contractor, his subcontractors, suppliers or others providing materials or services for the project, brought to recover damages for injury to person, damage to property or defects in materials caused by the design, manufacture, supplying, planning, supervision, inspection, construction or observation of construction of the project shall be brought within six (6) years after such claim for relief arises and the nature and extent are fully discovered. In no case shall such an action be brought more than fifteen (15) years after the final completion and acceptance of the project.

This whitepaper comes from Henry Bangert and our friends at Beltzer Bangert & Gunnell, LLP.  

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.