Category: Mechanics Lien/Construction Law

Defective Lis Pendens In Wisc. Suit Doesn’t Warrant Contempt Sanctions Against NY Lawyer – Seventh Circuit Says

imageThe Seventh Circuit recently considered the scope of civil contempt of court and the range of permissible sanctions for an out-of-state attorney who misfiles a document that potentially impedes the sale of real estate.

In Trade Well International v. United Central Bank, (http://caselaw.findlaw.com/us-7th-circuit/1691932.html) a New York attorney admitted temporarily in Wisconsin to pursue a Federal case there mistakenly filed a construction lien when he meant to file a lis pendens in a replevin suit seeking the return of furnishings his client provided to a Wisconsin hotel.  The lien clouded the hotel’s title and put a wrench in the defendant’s efforts to sell it to a third party.

As a sanction for the faulty filing, the district judge revoked the lawyer’s pro hac vice status (this allows a lawyer from state to practice temporarily in another), held him in contempt and fined him $500.  The lawyer appealed.

Held: Reversed. The sanction was too harsh.

Q: Why?

A: Under Wisconsin law, a lis pendens must be filed whenever legal relief is sought affecting real property that could confirm or change interests in that property.  The lis pendens must be filed in the register of deeds for the county where the real estate is located.  Fixtures are classified as real property by Wisconsin statute.

When a lis pendens is filed, a subsequent purchaser or lender on the property is bound by the proceedings in the same manner as a party to the lawsuit.

A lis pendens prepared by a member of the Wisconsin Bar doesn’t have to be authenticated. But where a non-member of the Wisconsin Bar prepares it, the lis pendens must be authenticated (sworn to under oath by a public officer of the State).

The purpose of the lis pendens is to give constructive notice to third parties that there is a pending judicial proceeding involving real estate.  A  lis pendens differs from a construction lien in that (unlike the construction lien) it doesn’t create a lien on real property.

Here, the attorney’s lis pendens was facially deficient since it referenced Wisc’s construction lien statute and it wasn’t properly authenticated.

The court then discussed the applicable contempt of court nomenclature.  A contempt sanction is civil if it is “remedial” but criminal if “punitive.” Where a litigant or lawyer is punished for out-of-court conduct, the contempt is “indirect.” For criminal contempt, the court must give notice to the party that it is being charged (with criminal contempt) and must ask the government to prosecute the contempt.

Before holding someone in civil contempt, the court must specify what “unequivocal” court order or command was violated by the person being sanctioned.  An order of contempt is immediately appealable.

Reversing the district court’s contempt finding, the Seventh Circuit held it was unclear whether the contempt finding was criminal or civil since the trial judge didn’t specify in the order.

The record also showed that the attorney was at most negligent: he mistakenly recorded a lis pendens that referenced (but shouldn’t have) Wisconsin’s construction lien statute. The Seventh Circuit stressed that negligence or hasty drafting isn’t enough to support a finding of bad faith under the law.

Since the district court couldn’t articulate the basis for its contempt finding against the NY attorney and because there was no evidence of intentional conduct by him, the contempt sanctions were improper and the contempt order was vacated.

Take-aways:

1/ Out-of-state counsel must familiarize himself with applicable law in the jurisdiction he’s temporarily admitted to practice in and should probably retain local counsel to assist who is more versed in the specifics of the forum/foreign jurisdiction;

2/ A contempt order must specify whether it’s civil or criminal and must explicitly reference the court order that was violated;

3/ Criminal contempt has a due process component: the sanctioned party must be given notice and an opportunity to be heard and the government must prosecute the formal civil contempt proceeding.

Direct Damages, Loss of Use Damages and the Defective A/C System: A Florida Tale

AC

A prosaic fact pattern involving a busted home air conditioning system sets the stage for a Florida court’s nuanced discussion of the policy reasons that underlie compensatory damages and the differences between direct damages and loss of use (delay) damages.

In Gonzalez v. Barrenechea, 2015 Fla.App.LEXIS 647 (Fla.3d DCA Jan. 21, 2015), the plaintiff homeowner sued the defendant HVAC contractor for installing a defective home air conditioning system.  He sued for damages incurred in paying another contractor to install a new system (direct damages) and also sought loss of use damages for the 20 months it took for the new system to be installed and during which time the homeowner had only sporadic use of the home.

The trial court entered judgment for about $80K in direct damages and denied the plaintiff’s claim for loss of use damages.  Plaintiff appealed.

Held: Direct damages affirmed; trial court reversed on loss of use damages.

Plaintiff sought lost use damages of $15,500 per month – the reasonable rental value of a similar home according to plaintiff’s real estate appraiser expert.  The trial court disallowed the delay damages because the appraiser didn’t factor in plaintiff’s limited use of the home – including storing furniture there, parking cars in the garage, and allowing a family member to intermittently sleep in the home.

Under Florida law, a homeowner who loses the use of a structure because of delay in completion is entitled to damages for lost use.  The measure of damages for delay in completing construction are measured by the rental value of the building under construction during the delay.

Typically, a plaintiff trying to recover loss of use damages must offer expert testimony from a real estate appraiser (or someone similar) who testifies as to the reasonable rental value of the structure in question.  The damages testimony must be reliable. However, where the expert witness’s testimony is based on faulty comparables, the loss of use testimony is unreliable.

Reversing the trial court, the Florida appellate court held that none of the limited uses of the home was significant enough to negate the rental value assigned by plaintiff’s expert.  The court even pointed out that parking cars and storing furniture on the site may have even saved the plaintiff money.

Procedurally, the court held that since plaintiff made out a prima facie case for loss of use damages, the burden shifted to the defendant to establish a set-off to the claimed damages.  And since the defendant didn’t plead set-off in defense of the plaintiff’s complaint, it was barred from doing so on appeal.

There was also a policy reason for the appeals court’s reversal on the loss of use damages.  Acknowledging that failing to offset the delay damages by the limited uses during the 20-month delay period, the court noted that the law favors a “small windfall” for the plaintiff over a “large windfall” to defendants like the sued HVAC contractor.

The dissenting judge found that the trial court properly denied loss of use damages.  Since plaintiff’s expert based his rental value on flawed comparable data (a home that didn’t include the various limited uses made by the plaintiff), his damage evaluation of $15,500 per month was entirely lacking in evidentiary support.

Afterwords:

A troubling result from a defense standpoint and a boon to contract plaintiffs.  The court seems to have reversed the parties’ applicable burden of proof.  The plaintiff clearly failed to meet his burden of establishing the rental value of the home during the 20-month delay period by relying on a deficient “comp” (comparable property).  Because of this, the plaintiff’s delay damages should have been $0.

That aside, this case shows the importance of timely asserting affirmative defenses.  In hindsight, the defendant contractor probably should have asserted a set-off defense: that plaintiff’s loss of use damages should have been reduced by plaintiff’s periodic use of the property over the 20-month time span.  The defendant’s failure to allege a set-off made it impossible for the appeals court to reduce plaintiff’s claimed damages.

 

Mechanics’ Lien Claim Defeated Where Contractor Fails to Provide Proper Contractor Affidavit

Pyramid Development, LLC v. DuKane Precast, 2014 IL App (2d) 131131, vividly illustrates the importance of diligent record-keeping practices on construction projects and the dire financial consequences that can flow from a failure to do so.  It emphasizes how crucial it is for a contractor to comply with Section 5 of the mechanic’s lien act – 770 ILCS 60/5 (the “Act”) – the section that requires a contractor to give the owner a sworn statement that lists all persons providing labor and materials on a project.

The plaintiff contractor sued to foreclose a mechanics lien on several townhomes it was hired to build and also sued a subcontractor for defective concrete work supplied to the project.  After a bench trial, the court nullified the lien because it was negated by damage to the property.  Plaintiff appealed.

Result: Plaintiff’s lien is defeated because it didn’t comply with Section  5.

Reasons:

– The purpose of the Section 5 affidavit is to put the owner on notice of subcontractor claims;

– An owner has the right to rely and act upon a contractor’s section 5 affidavit unless the owner has reason to suspect the notice is false or knows that it’s false;

– An owner is protected from subcontractor claims where they’re not listed on the contractor’s affidavit unless the owner knows of the subcontractor omissions or has colluded with the contractor to exclude the subcontractors;

– Section 5 provides that it’s the owner’s duty to ask for and the contractor’s obligation to supply a sworn statement listing all parties furnishing lienable work on the property and the amounts owed to them;

– Where an owner doesn’t request a Section 5 affidavit, the contractor isn’t required to provide one;

– An owner’s previous acceptance of a flawed Section 5 affidavit doesn’t waive the contractor’s compliance with that section. (i.e., Just because an owner has accepted deficient affidavits in the past, doesn’t mean the contractor doesn’t have to comply with Section 5, e.g.)

(¶¶ 26-29).

Here, the property owner had a pattern of accepting faulty Section 5 affidavits. The plaintiff’s principal admitted that the names and amounts on the affidavits were often wrong and the amounts inflated.  Plaintiff also conceded that it routinely named itself as a subcontractor when it didn’t actually do any of the work on the townhomes.

The court held that since the plaintiff’s section 5 affidavits were facially erroneous, the lien claim was properly defeated.

The court also affirmed judgment against the plaintiff on its breach of contract claim. In a breach of contract suit involving construction services, a contractor is held to the “substantial performance” standard: he must perform in a workmanlike manner and a failure to do so is a breach of contract. (¶ 35).

A breach of contract plaintiff must also prove money damages.  And while he doesn’t have to do so with mathematical certainty, he still must offer some basis from which the court can compute the damage with reasonable probability. (¶ 37).

Here, the plaintiff didn’t meet his burden of proving damages.  Its record-keeping was scatter-shot and rife with discrepancies.  The plaintiff’s numbers didn’t match up and it couldn’t explain myriad invoice errors at trial.  This failure to carry its burden of proving damages doomed the plaintiff’s breach of contract claim.

Take-aways:

Accurate record-keeping is essential; especially on high dollar projects with multiple contractors;

Where an owner requests a section 5 affidavit, the contractor must supply one;

An Owner’s past acceptance of a faulty affidavit won’t excuse contractors duty to strictly adhere to section 5.