Baldwin Haspel Burke & Mayer LLC

Construction Law Update – January 2014


The Construction Law Update is published by Baldwin Haspel Burke & Mayer, LLC for the benefit of its clients and others having interest in the construction industry. It includes discussions of Louisiana state and federal court decisions, legislative developments, and tax issues concerning construction-related matters. To subscribe to BHBM’s electronic Construction Law Update, please click here. For further information on the decisions and legislative developments, contact John Stewart, Jr. at (504) 585-7846 – jstewart@bhbmlaw.com.

At the end of this newsletter, you will find a section titled Tax Law Alert. It contains a snippet from Baldwin Haspel Burke & Mayer’s most recent Tax Law Alert, which provides information on updates and changes in tax law on both the state and federal level. To subscribe to BHBM’s electronic Tax Law Alert, please click here. For information on tax-related issues, please contact Andrew Sullivan at (504) 585-7734 – asullivan@bhbmlaw.com.

LIABILITY OF A MEMBER OF AN LLC

The Louisiana Supreme Court reversed the judgment of the Third Circuit Court of Appeal which affirmed the judgment of the district court holding the sole member of an LLC personally liable for construction defects for work contracted by the LLC. In this case, Mary P. Ogea contracted with Merritt Construction, LLC to build a home. Travis Merritt, the sole member of the LLC, signed the contract on its behalf. Merritt himself operated a bulldozer to prepare a dirt pad upon which the slab was poured for the foundation. A subcontractor then poured the slab. Significant problems with the foundation were discovered later. Ogea sued both the LLC and Merritt individually. The district court rendered judgment in favor of Ogea and against the LLC and Merritt personally. It found Merritt personally performed some of the defective foundation work, and failed to properly supervise the subcontractor who actually poured the concrete, providing the basis for Merritt’s personal liability. The court of appeal affirmed the trial court decision. The Louisiana Supreme Court granted an application for a writ to address the extent of the limitation of liability afforded a member of an LLC, and reversed the court of appeal.

The Supreme Court decision focused on the statutory exceptions to the shield of limited liability for members of an LLC. The exceptions are for fraud, breach of professional duty, or other negligent or wrongful acts. Of primary interest are the exceptions for breach of professional duty and other negligent or wrongful acts.

No evidence was submitted to support the proposition Travis Merritt operated as a professional as recognized under the Louisiana law. The evidence did not show Merritt was individually licensed, and the court did not reach the question of whether an individual properly licensed as a contractor could be considered a professional.

As to a negligent or wrongful act, four factors are considered: whether the conduct could encompass a tort, whether there was criminal conduct, whether the conduct was required by, or was in furtherance of, a contract, and whether the conduct fell outside the individual’s capacity as a member of an LLC. A tort on the part of an officer or agent of a corporation or LLC encompasses the breach of a personal duty owed to the claimant. It must be something more than a duty inherent in an LLC’s contract not to engage in poor workmanship. Actionable liability can exist if conduct constitutes a crime. The court found that engaging in the business of contracting without a valid contractor’s license is a crime, i.e., a misdemeanor, which would weigh in favor of holding the member personally liable, if he personally acts in the capacity of a contractor without proper licensing authority accorded to him or the LLC. Here, the record did not support the proposition the LLC was not licensed. The focus in determining the existence of a civil duty for the violation of a statute which would constitute a crime is whether the statute was intended to protect a particular plaintiff from the type of harm which ensued. As to the contract issue, if the reason a member is engaged in the questionable conduct is to satisfy a contractual obligation of the LLC, the member would more likely qualify for the protection of the general rule of limited liability. If a member acts outside his capacity as a member of an LLC, that weighs in favor of removing the protection of limited liability.

The court found there was no evidence of a violation of a duty owed in tort. Merritt’s individual activities fell within the contract. A showing of poor workmanship arising out of a contract entered into by the LLC, in and of itself, does not establish a negligent or wrongful act as that terminology is used in the statute. There was no evidence showing there was a violation of a criminal statute intended to protect the claimant from the type of harm which ensued. Further, there was no evidence suggesting Merritt acted outside of the structure of the LLC.

The LLC statute provides a general rule of limitation of liability which operates as a presumption that members are not personally liable for the liabilities of an LLC beyond the member’s capital contributions. The statutory exceptions establish a criteria for rebutting that assumption. Ogea failed to carry her burden at trial. Ogea v. Merritt, No. 2013-1085 (La. 12/10/13), 2013 WL 6439355.

PIERCING THE CORPORATE VEIL AND DAMAGES FOR EMOTIONAL DISTRESS

In a construction setting, the Louisiana Fourth Circuit Court of Appeal considered the issue of whether members of a limited liability company could be held liable for debts of the LLC. The court reviewed the requirements for such liability. Although the vast majority of decisions considering the issue do so with respect to shareholders of a corporation, the analysis is the same for members of an LLC. When liability is found, the corporate veil is considered to have been pierced. To determine if the corporate veil should be pierced, the court considers five non-exclusive factors: 1) commingling of corporate and shareholder funds; 2) failing to follow statutory formalities for incorporating and transacting corporate affairs; 3) undercapitalization; 4) failure to provide separate bank accounts and bookkeeping records; and 5) failure to hold regular shareholder and director meetings. The analysis must be applied individually to each shareholder or member to determine if the veil should be pierced as to that individual. The fact that one individual owns a majority of stock in a corporation does not in itself make that individual liable for corporate debts.

Louisiana courts are reluctant to hold a shareholder, officer, or director of a corporation personally liable for corporate obligations in the absence of fraud, malfeasance, or criminal wrongdoing. Generally, unless the directors or officers of a corporation purport to bind themselves individually, they do not incur personal liability for the debts of the corporation. Corporate agents are generally not liable for corporate debts and the burden of establishing the contrary is on the corporate credit.

When a party seeks to pierce the corporate veil, the totality of the circumstances is determinative. A primary consideration is to prevent the use of the corporate form in defrauding creditors. That does not mean, however, that fraud must be asserted in order to pierce the veil. If there is fraud, a plaintiff is allowed a separate cause of action against an individual shareholder who knows of the fraud and has both equal decision making power and participation in the business – even if that shareholder did not have any interactions with the plaintiff whatsoever that gives rise to a violation of the contract. A shareholder cannot escape personal liability from fraud by knowingly benefitting from the fraudulent actions of other members of the business.

A party suing for violation of a contract is entitled to collect damages for emotional and mental anguish if the contract was intended to satisfy that party’s emotional interest. The court found, in this instance, the construction contract to build a new home for plaintiffs following Hurricane Katrina satisfied that intent. The court also found the conduct of the defendants was egregious, causing much emotional pain and suffering. The court awarded both homeowners damages of $300,000.00 each for emotional pain and suffering. Provosty v. ARC Construction, LLC, 2012-1015 (La.App. 4 Cir. 3/20/13), 119 So.3d 23.

DENIAL OF MANDAMUS RELIEF FOR PAYMENT OF RETAINAGE

The Town of Richwood contracted with Foster Construction, Inc. to build a multi-purpose facility. All payments were made pursuant to the contract, except the retainage. Foster sued Richwood for the payment. In a supplemental and amending petition, Foster requested mandamus relief under L.R.S. 38:2191D. The trial court denied mandamus relief. Foster appealed.

A writ of mandamus can issue to require a public body to perform a ministerial duty, rather than a discretional act. A writ of mandamus may be sought through a summary proceeding which provides for expedited consideration. L.R.S. 38:2191D states that any public entity failing to make any progress stage payments arbitrarily or without probable cause, or any final payment when due shall be subject to mandamus to compel the payment of the sums due under the contract up to the amount of the appropriation made for the award and execution of the contract.

L.R.S. 38:2191D was not enacted until after the project was completed and after the lawsuit was filed, but before the supplemental and amending petition was filed requesting a writ of mandamus. The Town of Richwood argued it did not have funds to pay the retainage, and the statute did not apply since the project was completed before it was enacted, and it was not retroactive. Further, even if it applied retroactively, Foster would not be entitled to relief because no funds had been appropriated by the Town of Richwood for payment of the balance owed. The mayor of the Town of Richwood testified the prior administration borrowed money to pay the Town’s debts. Funds remaining from that loan were used to partly fund the project. When funds from the loan were depleted, the Town of Richwood made two payments to Foster from its general fund.

The court of appeal held it did not have to determine whether the statute could be applied retroactively. It found there was no evidence funds for the project had been appropriated by the public entity for the project as required by the statute, and rejected Foster’s suggestion that accepting the bid and signing the contract was the equivalent of an appropriation. Other law requires that an ordinance be adopted to appropriate funds for a public entity’s expenditures. It was Foster’s burden to prove the Town of Richwood appropriated the funds and it was entitled to mandamus relief. Although public entities are required to pay obligations under public contracts, the record did not support mandamus relief. Foster Construction, Inc. v. Town of Richwood, 48,171 (La.App. 2 Cir. 6/26/13), 117 So.3d 607.

CONSEQUENCES OF DEFAULT

The Fourth Circuit Court of Appeal recently held that a general contractor did not breach its contract with a subcontractor which it had placed in default by paying a sub-subcontractor to finish the work. The subcontract provided that upon default the contractor could remedy the default by whatever means it may deem necessary or appropriate.

The court of appeal also held that the general contractor was not responsible to pay the subcontractor for outstanding costs. The subcontract stated that upon its termination, the general contractor could cause the entire remaining work to be finished and the materials furnished by another subcontractor, and in that event, the subcontractor would not be entitled to any further payment, depending upon whether the final cost exceeded the amount of the subcontract. Stallings Construction Company, Inc. v. Klein Steel, Inc., 2012-1482 (La.App. 4th Cir. 3/27/13), 112 So.3d 389.

PUBLIC BID PROTEST REJECTED

In February 2012, the East Feliciana Parish Police Jury advertised for bids for road repairs. Bids were received on March 15, 2012. Gilchrist Construction Co., LLC submitted the lowest bid, but its bid was rejected as being as non-responsive since it failed to comply with the requirement of the advertisement that the bid be submitted in triplicate. On March 20, 2012, the Police Jury voted to award the contract to the second low bidder, Coastal Bridge Company, LLC. On March 28, 2012, Gilchrist filed an application for a preliminary injunction and a petition for permanent and mandatory injunction, declaratory judgment and for damages. In the alternative, it asked that all bids be rejected for the failure of the Police Jury to comply with the provision of the Public Bid Law which mandates that the public entity provide bidders with the option to submit bids electronically. Gilchrist subsequently stipulated that it abandoned its effort to enjoin the award of the contract to Coastal, but proceeded with its request that the award of the contract be declared null and void for failure of the Police Jury to comply with the option of electronic bid filing. The trial court found the rejection of Gilchrist’s bid as non-responsive was valid. Gilchrist appealed.

It was undisputed the Police Jury did not comply with the Public Bid Law in failing to provide bidders with the opportunity to electronically file bids. It was also undisputed that Gilchrist failed to file its bid in triplicate. Gilchrist attempted to remedy that defect by submitting two additional copies of its bid to the Police Jury on March 23, 2012 in accordance with another statute. The court of appeal found Gilchrist’s subsequent compliance with the statute was not the equivalent of compliance with the advertisement for bids that bids be submitted in triplicate. Because Gilchrist was not the lowest responsible and responsive bidder, it could have no right of action to contest the award of the contract to another entity. The court found the statutory requirement allowing the electronic filing of bids had nothing to do with the reason Gilchrist’s bid was rejected. Further, no bidder, including Gilchrist, raised a complaint about the lack of the option at any time during the bidding process. Gilchrist was considered to have waived its objection to the failure to include the electronic filing option. Gilchrist Construction Co., LLC v. East Feliciana Parish Police Jury, 2012-1307 (La.App. 1 Cir. 7/11/13), 122 So.3d 35.

INVALID LIEN

John and Kristi McClain contracted with Mustang Homes to build a house in Minden, Louisiana. A notice of the contract was not filed. Mustang subcontracted part of the work to Urban’s Ceramic Tile, Inc. Mustang failed to pay Urban for its materials and labor. Urban filed a lien under the private works act, and subsequently sued to enforce its privilege. The McClains averred the lien was not timely, and invalid. They moved for a writ of mandamus directing Urban to deliver a written request to the clerk of court to cancel the claim or privilege, and requested attorneys fees. The trial court granted the writ of mandamus, and ordered Urban to pay attorney fees.

When a notice of contract has not been filed, the time period for filing a lien is 60 days following a notice of termination of the work, or substantial completion or abandonment of the work, if a notice of termination is not filed. The McClains contended the lien was filed more than 60 days after substantial completion, and was untimely. Urban argued there were defects in the work that prevented the project from being substantially complete, and the lien was timely.

The court of appeal held the court, in determining whether substantial completion occurred, may examine the extent of defects or non-performance, the degree to which the purpose of the contract is defeated, the ease of correction, and the use or benefit of the work to be performed. It found the defects relied upon by Urban did not defeat the intended use of the house, and the district court did not abuse its discretion in finding the project was substantially complete on the date represented by the McClains.

L.R.S. 9:4833 provides that if a statement of claim or privilege is improperly filed, or the claim or privilege preserved by the filing of a statement of claim or privilege is extinguished, an owner may require the person who has filed the statement of claim or privilege to give written request for cancellation directing the recorder of mortgages to cancel the statement. The request to the recorder of mortgages to cancel the statement must be delivered within 10 days after the written request. Any person who, without reasonable cause, fails to deliver the written request to the recorder of mortgages is liable for damages and for reasonable attorneys fees incurred in causing the statement to be cancelled. The court of appeal held that although the record contained some evidence to show Urban’s conduct was not unreasonable, it did not submit sufficient evidence to that effect. The court held it must defer to the district court’s vast discretion, and affirmed the district court’s finding Urban’s failure to deliver a written request of cancellation when requested was without reasonable cause. The decision does not state whether Urban was asked to give written request of cancellation of the lien before the McClains sought a writ of mandamus and attorney fees. The judgment of the district court was affirmed. Urban’s Ceramic Tile, Inc. v. McLain, 47,955 (La.App. 2 Cir. 4/10/13), 113 So.3d 477.

AWARD FOR UNJUST ENRICHMENT

USA Disaster Recovery, Inc. performed emergency road clearing work for St. Tammany Parish which was essential to search and rescue efforts following Hurricane Katrina. It was not paid for the work, and sued St. Tammany Parish to recover under the open account law and for unjust enrichment. St. Tammany Parish opposed the claim contending USA was not authorized to do the work. The trial court rendered an award in favor of USA for unjust enrichment, although it was less than the amount for which USA sued. St. Tammany Parish appealed.

The work was done for the parish sheriff. The court of appeal found the sheriff’s representative advised USA he could not pay for the work, and the USA representative stated he was confident the Parish would pay for it, but there was no verification by the Parish. The court of appeal held USA performed the work at its own risk, and relief for unjust enrichment was not, therefore, available. Further, unjust enrichment relief was not available since another legal remedy existed. USA sought payment under the open account law, and alternatively, for unjust enrichment. The court of appeal held it was not the success or failure of the other cause of action, but rather its existence that determines whether there can be an award for unjust enrichment. Although USA failed to prove it should be awarded relief under the open account law, it availed itself of that remedy, and unjust enrichment could not have been pled in the alternative.

The Louisiana Supreme Court reversed. It held USA performed the work under the direction of the sheriff’s office. The district court evaluated the elements of a claim for unjust enrichment, and made factual findings that each of the elements were met. The five elements of a claim for unjust enrichment are 1) an enrichment; 2) an impoverishment; 3) a connection between enrichment and the impoverishment; 4) an absence of cause or justification for the enrichment and impoverishment; and 5) no other remedy at law. In reversing the district court’s judgment, the court of appeal made factual findings of its own that three of the five elements for unjust enrichment had not been satisfied. The court of appeal did not adhere to the manifest error standard of review, and instead, substituted its own judgment for that of the fact finder. The court held the district court’s ruling was not manifestly erroneous, and reinstated the judgment of the district court. USA Disaster Recovery, Inc. v. St. Tammany Parish Government, 2013-0656 (La. 5/31/13), 2013 WL 2361009.

MAJOR STRUCTURAL DEFECTS AND THE NEW HOME WARRANTY ACT

The Louisiana Supreme Court recently had an opportunity to review the provisions of the New Home Warranty Act (NHWA) regarding major structural defects. The NHWA provides a five-year peremptive period for filing claims under the NHWA for major structural defects due to noncompliance with building standards or due to other defects in materials or workmanship not regulated by building standards. The peremptive period simply for defects due to noncompliance with building standards or defects not regulated by building standards is one year.

The NHWA defines a major structural defect as any actual physical damage to designated load-bearing portions of a home, including, among other things, walls, caused by failure of designated portions which affects their load-bearing functions to the extent the home becomes unsafe, unsanitary, or is otherwise unlivable. In this particular case, there was extensive water intrusion which caused actual physical damage, namely, rotting and deterioration of the studs and stucco system, which left the load-bearing walls severely compromised and subject to collapse. The damage, accordingly, affected the load-bearing functions of the walls to the extent the home was unsafe, unsanitary or otherwise unlivable. There is no requirement that the failed component of a wall also be load-bearing. The damages were caused by a non-compliance with building standards. The five-year peremptive period was applicable. Shaw v. Acadian Builders and Contractors, LLC, 2013-0397 (La. 12/10/13), 2013 WL 6474946.

NEW HOME WARRANTY ACT WAS NOT THE EXCLUSIVE REMEDY

Chad Melton built a home in Walker, Louisiana. Melton and his wife occupied the home for approximately nine months before selling it to James and Lisa Stutts. The Meltons gave the Stutts a Residential Property Disclosure statement in conformity with the Residential Property Disclosure Act (RPDA), L.R.S. 9:3196, et seq., which stated there were no known defects in the roof. However, before the sale, the Meltons discovered there were defects in the roof. Sixty days prior to selling the house to the Stuttses, they entered into a settlement with the roofing manufacturer, Atlas Roofing Corporation. Rather than replace the roof, the Meltons kept the money, cleaned the color bleeding on the walls and driveway, and installed gutters to prevent further color bleeding.

The Stuttses, after they purchased the home, noticed color bleeding on the walls which was determined to be the result of defective roofing materials. They contacted Atlas who advised them the Meltons had previously discovered the defects, and entered into a settlement with Atlas to pay for a replacement roof which exhausted all rights under the warranty. The Stuttses sued the Meltons for fraud in not disclosing the defective condition of the roof in the Residential Property Disclosure statement, and by covering up the defective condition rather than replacing the roof. The Stuttses paid for the costs for replacing the roof, or the amount the Meltons received in the settlement with Atlas, and attorneys fees. They moved for summary judgment on their fraud claim. The Meltons opposed the motion contending the New Home Warranty Act (NHWA) provided the exclusive remedy. The NHWA provides the exclusive remedy for claims arising under it.

The trial court granted the Stuttses’ motion, finding the Meltons liable under the RPDA. After a trial, the district court found the Meltons guilty of fraud, and awarded damages of $15,503.00, plus $12,000.00 in attorneys fees. The Meltons appealed. The court of appeal reversed the summary judgment and money judgment finding the Stuttses’ sole remedy was under the NHWA, and any claims under the NHWA were untimely. The Stuttses applied to the Louisiana Supreme Court for a writ of certiorari. The Supreme Court granted the application.

The Supreme Court found the Stuttses did not allege any claims under the NHWA, but alleged the Meltons were liable under the RPDA and for fraud. The RPDA applies to the transfer of interests in residential property, but does not apply to transfers of such property which has never been occupied. Here, the residence was initially occupied by the Meltons, and the RPDA was applicable. The RPDA requires that the Residential Property Disclosure statement be provided by a seller to a purchaser, and must disclose known defects in the property. The court found the Meltons committed fraud in not disclosing the defects in the roof, and the Stuttses were entitled to damages.

The RPDA does not provide for an award of attorneys fees. Louisiana Civil Code article 1958 provides that a party against whom rescission of a contract is granted because of fraud is liable for damages and attorneys fees. The Stuttses did not seek rescission of the contract with the Meltons, but the court found their claim was essentially for rescission of the contract of sale of the roof, and the Stuttses were entitled not only to damages, but attorneys fees. The judgment of the court of appeal was reversed, and the judgment of the trial court was reinstated. Stutts v. Melton, 13-0557 (La. 10/15/13), 2013 WL 5788757.

TAX LAW ALERT

EXPIRING TAX PROVISIONS/2014 ESTATE PLANNING

The Joint Committee on Taxation published a new document entitled “List of Expiring Federal Tax Provisions 2013-2024.” This list details the expiration of certain tax credits, tax deductions and other miscellaneous items. A copy of this report can be found here. As you are likely aware, one of the most important provisions for businesses which expired at the end of 2013 is the bonus depreciation provision contained in IRC §168(k). Additionally, the increases in IRC §179 expense limitations have expired as well, meaning that the IRC §179 limit for 2014 is $25,000 (adjusted for inflation).

The annual exclusion for 2014 remained the same as 2013, $14,000. The lifetime exemption amount has increased from $5,250,000 in 2013 to $5,340,000 in 2014. Additionally the top estate tax rate has increased from 35% in 2013 to 40% in 2014. Thus, it is extremely important to encourage your clients to properly craft their estate plans to minimize the impact of a 40% estate tax rate.

NEW TANGIBLE PROPERTY REGULATIONS

The Treasury Department promulgated final regulations providing guidance on the application of IRC §162(a) and IRC §263(a) to amounts paid to acquire, produce or improve tangible property. The new regulations will affect most taxpayers that acquire, produce or improve tangible property.

The regulations provide guidance on which costs must be capitalized in connection with the acquisition or production of real or personal property. The general rule is that unless an expense qualifies as a material or supply, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures. Generally, a UOP is composed of “functionally interdependent” components.

Amounts paid to acquire materials and supplies generally are deductible in the year they are consumed. Materials and supplies are tangible property for use in the taxpayer’s operation that are not inventory. Such items include a UOP costing $200 or less; a UOP with an economic useful life of 12 months or less; a component to maintain, repair or improve a UOP, including rotable, temporary and standby emergency spare parts; and fuel, lubricants and water reasonably expected to be consumed in 12 months or less.

The new regulations also contain a de minimis safe harbor for deductions, the amount of which varies depending on whether the taxpayer has an Applicable Financial Statement (AFS). An AFS includes a financial statement required to be filed with the Security and Exchange Commission (SEC), a certified audited financial statement accompanied by the report of an independent certified public accountant, or a financial statement required to be filed with a federal or state governmental agency. Thus, reviewed or compiled financial statements do not qualify as an AFS. For taxpayers with an AFS, the safe harbor applies to property that does not exceed $5,000 per invoice or per item as substantiated by the invoice. For taxpayers without an AFS, the safe harbor per invoice, or per item substantiated by an invoice, is $500. There must be a written capitalization policy in place prior to the beginning of the tax year for a taxpayer electing to use the safe harbor. The election is made by attaching an annual election statement with a timely filed original return including extensions. The safe harbor does not apply to inventory or land.


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