Monthly Archives: October 2013

Mississippi’s “Stop Notice” Statute Declared an Unconstitutional Deprivation of Property

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Cable M. Frost – October 16, 2013

On October 10, 2013, the Fifth Circuit Court of Appeals, citing lack of procedural safeguards, affirmed a district court’s determination that Mississippi’s “Stop Notice” statute is unconstitutional because it deprives contractors of their property without due process. This holding effectively abrogates “lien rights” for first-tier subcontractors. Absent a challenge to this decision or a significant re-work of Mississippi’s stop-payment law, only contractors with a direct contractual relationship with an owner will have lien rights.

Traditionally, upon a payment dispute with a prime contractor, first-tier subcontractors could provide written notice to an owner and claim the benefit of Miss. Code Ann. §85-7-181 as a mechanism to bind funds due the prime in the hands of the owner. Upon receipt of a notice under §85-7-181, assuming the owner was still holding funds due the prime, the owner was statutorily required to withhold payment of funds in an amount sufficient to satisfy the amount alleged to be due and payable to the first-tier subcontractor. This holding of funds due a prime based on statutory notice provided by a subcontractor has now been determined to be unconstitutional.

The constitutionality of Miss. Code Ann. §85-7-181 arose in a case filed in the Northern District of Mississippi when King Construction of Houston, LLC (King) sent a stop-payment notice to the owner of an auto parts manufacturing facility claiming that it was owed over $260,000 by a prime contractor from California, Noatex Corporation (Noatex). Noatex challenged the stop-payment notice statute as facially invalid. Despite arguments presented by King and the state of Mississippi, as an intervening party, the district court determined that the “Stop Notice” statute was facially unconstitutional and violated the due process rights of Noatex.

The Fifth Circuit affirmed the district court’s determination that binding the funds due Noatex in the hands of the owner is an unconstitutional deprivation of property without due process and that Mississippi’s “Stop Notice” statute is facially unconstitutional. Specifically, the court noted that the “Stop Notice” statute is “profound” in its lack or procedural safeguards as it provides for no pre-deprivation notice or hearing and requires no posting of a bond or showing of exigent circumstances. The Fifth Circuit opinion is a short and interesting read and can be accessed here.

Given this development, subcontractors should seek legal assistance in determining how to proceed with existing and future payment disputes with prime contractors.

via Mississippi’s “Stop Notice” statute declared an unconstitutional deprivation of property – Lexology.

Contractors Get Relief with Construction Subcontractor Law after the US Appeals Court Strikes Down a Mississippi Law for “Stop Payment Notices” Issued by Subcontractors

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Robert E. Kohn – October 28, 2013

While contractors are having a hard time getting paid for the work they’ve done out-of-state, a recent lawsuit won by Kohn Law Group provides relief from unfair construction subcontractor law practices. On October 10, 2013, a U.S. Court of Appeals struck down the “stop notice” scheme in Mississippi, which spells relief for contractors with customers there and in other states — like California — that have a similar scheme.

Stop payment notices, under the construction subcontractor laws in Mississippi, California, Arizona, New Mexico, and Washington, allow subcontractors to force a customer to withhold monies that a prime contractor has earned. According to court documents, a company called Noatex Corporation in Torrance, Calif. hired a subcontractor to install conveyor systems in Mississippi for a customer there. After the customer became dissatisfied with the subcontractor’s behavior on the job-site, and told Noatex that the subcontractor could no longer work there, the subcontractor issued a “stop notice” to the customer. The notice stopped the customer from paying Noatex.

Noatex turned for help to an experienced attorney in Los Angeles, its long-time outside counsel, Robert E. Kohn of Kohn Law Group, Inc., and enlisted Wise Carter Child & Caraway, P.A. in Mississippi for local representation. The legal team concluded that the stop notice procedure was unconstitutional, and the federal courts agreed. The U.S. Court of Appeals explained, the subcontractor’s notice — which operated to stop Noatex from receiving payment from its own customer — “deprives the contractor of a significant property interest, the right to receive payment and to be free from any interference with that right.” That violated Due Process under the 14th Amendment of the Constitution of the United States. As a result, the stop notice was vacated, and the judgment declares that the notice has no effect on the money that the customer had withheld from Noatex.

A stop notice lasts indefinitely unless challenged in court or withdrawn voluntarily by the subcontractor, which means that going to court can be the only practical way for a prime contractor to get paid. The court rulings that invalidated the Mississippi law are now published. See Noatex Corp. v. King Constr., LLC, 864 F. Supp. 2d 478 (N.D. Miss. 2012), affirmed, — F.3d —, 2013 WL 5575468 (5th Cir. 2013). The stop notice law in the Noatex case was Section 85-7-181 of the Mississippi Code. In California, Section 8522 of the Civil Code authorizes a similar procedure. And similar laws are on the books in Arizona, New Mexico and Washington State. Now, contractors on jobs in any of those states can attack a stop payment notice in the same way that Kohn attacked the stop notice for Noatex.

Contractors Get Relief with Construction Subcontractor Law after the US Appeals Court Strikes Down a Mississippi Law for “Stop Payment Notices” Issued by Subcontractors.

Lenders and Post-Foreclosure Purchasers Have Standing to Make Construction Defect Claims for After-Discovered Conditions

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Buck Mann – Higgins, Hopkins, McLain & Roswell – August 8, 2013

The Colorado Court of Appeals has decided a case which answers a question long in need of an answer: do banks/lenders have standing to assert construction defect claims when they receive title to a newly-constructed home following a foreclosure sale or deed-in-lieu of foreclosure?  The decision was released on August 1, 2013, in the case of Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlack Geotechnical, Inc., Steve Pawlak, Daniel Hadin, and S K Peightal Engineers, Ltd. (Colorado Court of Appeals No. 13CA0519).

The background facts of the case are typical of a Colorado residential construction defect case generally.  A developer contracted for an analytical soil engineering report from a geotechnical engineering firm (H-P) which made a foundation recommendation.  The developer’s general contractor then retained an engineering firm (SPKE) to provide engineering services, including a foundation design. The general contractor built the foundation in accordance with the H-P and SPKE criteria and plans.

The house was not sold by the developer and went into default on the construction loan.  These events resulted in a deed-in-lieu of foreclosure to a bank-controlled entity which purchased the house for re-sale.  Shortly after receiving the developer’s deed, the bank-related entity discovered defects in the foundation that resulted in a construction defect suit against the two design firms and related individuals.  The defendant parties moved for summary judgment on the negligence claims, based on the economic loss rule.  The latter rule precludes the bringing of a tort/negligence claim based on a claimed breach of duty which also exists as a term of a contract between the parties.

The Court of Appeals decided this case on an interlocutory appeal by the defendants from the denial of summary judgment.  In reviewing the case, the Court relied primarily on the “independent duties” of construction professionals as applied in the prior cases of Cosmopolitan Homes v. Weller, 663 P.2d 1041, 1042-43 (Colo. 1983) and Yacht Club II Homeowners Ass’n. v. AC Excavating, Inc.,  114 P. 3d. 862 (Colo. 2005).

The Cosmopolitan case held that a successor homeowner could assert newly discovered claims against a builder-vendor which were latent and therefore not discoverable at the time of purchase of the home.  The separate Yacht Club II case held that there was an independent duty of due care owed by subcontractor construction professionals to homeowners to “act without negligence in the construction of homes.”  To get to its result in Mid Valley, the Court conflated the holdings of both prior cases, and even engaged in retrospective application of Cosmopolitan to the Colorado cases involving the economic loss rule, in order to circumvent its effects in Mid Valley.  In other words, this was more of a case about public policy and avoidance of technical defenses raised by builders than it was a legal analysis of the economic loss rule.

The arguments advanced by the defendants claimed that the economic loss rule should bar the negligence claims of the bank-related homeowner because it was not a “homeowner” in the conventional sense of that word.  The Court said, in substance, that the duties of Comospolitan and Yacht Club II owed by construction professionals were the same regardless of the nature or identity of the “homeowner.”   The Court also said that it could not decide whether the lender was the alter ego of the bank-related entity based on the record before it. Therefore such allegations were not deemed proven, nor were they assumed. However, the tenor of the opinion suggests that the identity of the homeowner was irrelevant to the policy analysis that followed.

In substance, the Court held that the technical arguments of the defendants about the bank-related entity’s standing and the application of the economic loss rule were trumped by the legal “duty” holdings of Cosmopolitan and Yacht Club II as they pertained to construction professionals.  Further, the Court made it clear in its discussion that it did not want to see a “windfall” dismissal of the claims accrue to a construction professional simply because the property owner was not a consumer or a more conventional owner.

While the case may be limited in its application because it was an interlocutory appeal, and because the factual record was not fully developed, it is the first indication that lenders, foreclosure investors, and even distressed property speculators may have the ability to assert construction defect claims as successors in title.  The case may yet be appealed to the Colorado Supreme Court for further proceedings, but its inclination for taking interlocutory appeals is very small.

For now, the appellate question of legal standing for successor owners (regardless of their identity) pressing tort claims has been answered, at least where latent and later discovered problems manifest for the first time after the ownership has been transferred. By logical extension of Cosmopolitan, such claims would be barred for a successor owner if the problems were manifest at the time of transfer.

via Colorado Construction Litigation: Lenders and Post-Foreclosure Purchasers Have Standing to Make Construction Defect Claims for After-Discovered Conditions.

Colorado State Legislature and Governor Hickenlooper Stop Insurers from Shortening the Statute of Limitations on Unsuspecting Policyholders

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David Furtado – October 22, 2013

On May 10, 2013, Governor Hickenlooper ended the ability of insurers to shorten the statute of limitations through provisions in contracts with their policyholders. The bill Governor Hickenlooper signed made changes to Colorado Revised Statute Section 10-4-110.8, now entitled Homeowner’s insurance–prohibited and required practices–estimates of replacement value–additional living expense coverage–copies of policies–personal property contents coverage–inventory of personal property–definitions—rules. Although most of the changes to the statute take effect on January 1, 2014, one of the changes, stopping insurers shortening the statute of limitations through language in its contract of insurance, was effective on the date Governor Hickenlooper signed the bill, May 10, 2013.

The statutory language added to Colorado Revised Statute Section 10-4-110.8 that disallows insurers from shortening the statute of limitations is contained in paragraph 12 of the statute and states:

(12)(a) Notwithstanding any provision of a homeowner’s insurance policy that requires the policyholder to file suit against the insurer, in the case of any dispute, within a period of time that is shorter than required by the applicable statute of limitations provided by law, a homeowner may file such a suit within the period of time allowed by the applicable statute of limitations; except that this paragraph (a):

(I) Does not revive a cause of action that, as of the effective date of this subsection (12), has already been barred by contract; and

(II) Applies only to a cause of action that, as of the effective date of this subsection (12), has not been barred by contract.

(b) On and after January 1, 2014, an insurer shall not issue or renew a homeowner’s insurance policy that requires the policyholder to file suit against the insurer, in the case of any dispute, within a period of time that is shorter than required by the applicable statute of limitations provided by law.

The above statute will not help a policyholder in which the shortened contractual statute of limitations period barred a lawsuit prior to May 10, 2013, but if the shortened contractual statute of limitations period had not time barred a policyholder’s claim prior to May 10, 2013, then the 3-year statute of limitations period regarding breach of contract claims would apply.

I say bravo to the Colorado State Legislature and to Governor Hickenlooper for protecting victims who are seeking to be made whole due to events that have occurred for which they have insured themselves. Insurers should never have been able to bury a provision within a contract that would shorten a statute of limitations. This statute brings consistency to our state as now every contract action must be brought within 3 years, not some arbitrary time period chosen by an insurance company.

via Colorado State Legislature and Governor Hickenlooper Stop Insurers from Shortening the Statute of Limitations on Unsuspecting Policyholders : Property Insurance Coverage Law Blog.

Can Two Experts File Just One Report?

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Robert Ambrogi – IMS ExpertServices – October 14, 2013

Federal courts prohibit expert witnesses from testifying unless they first file a written report of the opinions they will give and the facts they relied on in forming them. But is it ever acceptable for two separate experts to file a single, joint report?

Yes it is, according to a recent opinion of the 10th U.S. Circuit Court of Appeals. If two experts review the same materials, come to the same opinions, and are prepared to testify to all the opinions in the report, there is no reason to prevent them from filing a joint report, the court said.

The ruling came in a dispute between an accountant and his former clients. The accountant, Dale K. Barker Jr., had been retained by Larry and Patricia Sumrall to help resolve past-due federal taxes. Eventually, the Sumralls were required to pay the IRS $222,000 in taxes, penalties and interest.

After the IRS matter was closed, Barker and his accounting firm sued the Sumralls, alleging they owed him unpaid fees. The Sumralls counterclaimed against Barker, contending his work for them had been negligent and that he had breached his fiduciary duty.

After a bench trial, a federal district judge in Utah concluded that Barker’s services had been deficient and resulted in the Sumralls having to pay the IRS much more than they should have. The judge held that the Sumralls owed nothing to Barker but that Barker was liable to the Sumralls for their damages.

Experts File Joint Report

At trial, the Sumralls presented the testimony of two experts, each of whom agreed that the Sumralls could have settled the claim with the IRS for $151,704, or more than $70,000 less than they ended up paying to the IRS. In calculating the damages Barker owed the Sumralls, the judge relied on this testimony.

Barker’s appeal to the 10th Circuit raised a number of issues, including several involving expert testimony. In particular, he challenged the testimony of the Sumralls’ two experts. He contended that the trial judge erred in allowing them to file a joint expert report, arguing that Federal Rule of Civil Procedure 26 required each expert to file his own report.

Rejecting this argument, the 10th Circuit said that there is no reason that a joint expert report is “always and inherently impermissible.” In this case, the two experts had reviewed the same materials and, working together, reached the same opinions, the court noted.

“Because they were both prepared to testify to all the opinions in the report, we see no reason why it would be inherently impermissible for them to file a joint report,” the court said.

Little Precedent on Point

In reaching this conclusion, the 10th Circuit cited not a single case as precedent for the proposition that two experts may file a single report. Rather, noting that “co-authored expert reports aren’t exactly uncommon,” it cited three cases in which joint reports were filed.

In one, Miller v. Pfizer, Inc., 356 F.3d 1326, 1332-34 (10th Cir. 2004), the court in a wrongful death case appointed two independent medical experts to review the methodology and conclusions of the plaintiffs’ expert. The court’s order specified the materials these experts were to review. Upon completing their review, the two experts submitted a joint report.

In another, 103 Investors I, L.P. v. Square D Co., 372 F.3d 1213, 1215 (10th Cir. 2004), two fire experts filed a joint report regarding the cause of a fire in plaintiff’s building. Although the appellate decision noted this fact, it did not discuss it further or rule on the propriety of a joint report.

In the third, Ruff v. Ensign-Bickford Indus., Inc., 168 F. Supp. 2d 1271, 1286-87 (D. Utah 2001), two medical experts filed a joint report challenging the conclusions of plaintiffs’ medical expert. Here again, other than note that the report was filed jointly, the court did not discuss the propriety of it.

Not Always Appropriate

Although the 10th Circuit saw no problem with the joint expert report in this case, it noted that there are circumstances where a joint report “could prove problematic.” As an example, the court described a situation where “it isn’t clear whether both experts adhere to all of the opinions in the report and they do not delineate which opinions belong to which expert.”

The court pointed to a case out of New Mexico, Dan v. United States, 2002 WL 34371519 (D.N.M. Feb. 6, 2002), where a joint report was rejected. In that case, the plaintiffs submitted a joint report for two experts, a doctor and a nurse. The court rejected the report, not because it was joint, but because it constantly flip-flopped between the use of “I” and “we” in describing its conclusions, making it “difficult, if not impossible, to determine which witness is offering an opinion on what subject.”

The lesson of these cases, then, is that two experts can file a joint report, providing they line up on all fours. If they have reviewed the same facts or data, reached the same opinions, and are both prepared to testify to the same opinions, then a joint report is appropriate. But if they differ in what they reviewed or in the opinions they reached, they either should file a joint report that is clear and explicit about those differences or, better yet, file separate reports.

The case is Barker v. Valley Plaza, No. 12-4147 (10th Cir., Sept. 17, 2013).

via Can Two Experts File Just One Report? | BullsEye Blog.