07 February 2012

Court of Appeals issues notable construction law opinions

The Colorado Court of Appeals issued several opinions last Thursday that may be of interest to those who litigate construction claims. I have included the court’s new citation format, though I retain doubts about whether it will catch on.

In Swinerton Builders v. Nassi, 2012 COA 17, the court held that a builder could enforce a contractual fee-shifting provision against an individual found liable as the alter ego of a corporate developer. The parties had previously executed a contract, based on the AIA A201 form, which granted attorney fees to the prevailing party in the event of a dispute. After an arbitrator found that the developer, Beauvallon Corporation, had breached its contract, the builder filed suit in Denver District Court to enforce the arbitrator’s award. The court allowed the builder to pierce the corporate veil and hold Beauvallon’s president, Craig Nassi, liable for the award as the company’s alter ego, but it denied the builder’s request for attorney fees. The Court of Appeals reversed and ruled that, once the corporate veil was pierced, Nassi became liable for all of the corporation’s contractual obligations, including the fee-shifting clause.

In Colorado Special Districts Property & Liability Pool v. Lyons, 2012 COA 18, the court affirmed dismissal of bad faith claims against a public insurance entity on governmental immunity grounds. The case arose from several banks’ claims for damages arising from a developer’s sale of construction bonds. Two of the developer’s directors, William S. Lyons Jr. and William S. Lyons III, requested that a state insurance pool defend and indemnify them. The insurance pool filed a complaint for declaratory relief, and the Lyonses counterclaimed for bad faith. The court found that the Lyonses sought relief in tort, that the pool was a public entity, and that the pool had not waived its sovereign immunity. As such, the Colorado Governmental Immunity Act precluded the claims.

Finally, in Shaw Construction, LLC v. United Builder Services, Inc., 2012 COA 24, an interlocutory appeal from a summary judgment ruling, the court held that the statute of repose for a multi-phase condominium development could begin to run when a discrete component of the project was completed, and that the Construction Defect Action Reform Act (CDARA) only tolled the statute of limitations and repose for those parties who had received a notice of claim. The case began in 2007 when the community’s HOA served Shaw, the general contractor, and other parties with a notice of claim under CDARA. The HOA later filed suit, and it named Shaw as a defendant in 2010. Shaw then filed a third-party complaint against its subcontractors and served them with its own notice of claim the following day. The subcontractors moved for summary judgment based on the six year statute of repose, arguing that they had completed their work at least six years and nineteen days before Shaw had filed its complaint, and the trial court agreed.

On appeal, Shaw argued that the trial court had erred because (a) the project as a whole did not reach completion until several months after the subcontractors finished their work, and (b) the HOA’s 2007 notice of claim had tolled the statute of repose as to all parties. The Court of Appeals rejected both arguments. The court first reviewed the legislative history of CDARA and concluded that its tolling provisions were only intended to apply to those parties that had received actual notice of a claim for defective construction. The court then held that the statute of repose should be measured from the date that a particular “improvement to real property” reached substantial completion, not from the date that the entire project was completed; because Shaw offered no facts to suggest that the subcontractors had performed work on their improvement within the six years preceding the filing of Shaw’s third-party complaint, the court ruled that summary judgment was proper. The court also approved the holding of Thermo Development, Inc. v. Central Masonry Corp., 195 P.3d 1166, 1170 (Colo. App. 2008), wherein another division had concluded that the 2001 CDARA amendments were merely intended to extend the statute of limitations for indemnity claims, not the statute of repose. Judge Jones concurred in the result but dissented from the panel’s decision to entertain interlocutory review of the ruling.

Personally, I can understand the reasoning of the decision in Shaw, but I feel that it raises troubling policy issues. Statutes of limitations and repose are intended to discourage stale claims, not bar meritorious causes of action or create extra litigation. Restricting a general contractor’s right to recover indemnity from culpable subcontractors hurts the construction industry by forcing innocent builders to bear the cost of others’ mistakes, and by encouraging contractors to sue numerous potential parties at the outset of a case. In this regard, I do not believe that the Shaw and Thermo Development opinions accurately reflect the intent of CDARA’s drafters, and I hope that future court decisions correct this.

Update: The Colorado Supreme Court overruled Shaw and Thermo Development in 2017, as discussed in this article.