May 21, 2013

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Colorado Court of Appeals: Mechanics’ Lien Had Priority Over Bank Lien But Lien Cannot Be Filed in Excess of Contract Price

March 21, 2013 by Leave a Comment

The Colorado Court of Appeals issued its opinion in Byerly v. Bank of Colorado on Thursday, March 14, 2013.

Excessive Mechanic’s Lien—CRS § 38-22-101(3).

Defendants Bank of Colorado and Delta Properties II, LLC (collectively, Bank) appealed the trial court’s judgment in favor of Daniel Byerly (Contractor). The judgment was reversed and the case was remanded with directions.

In 2006, Widwing Development, LLC (Developer) hired Contractor to help develop a residential subdivision in Timnath. It was a four-phase project with an extensive contract, including a compensation scheme that involved both cash payments and “Lot Compensation.” By late 2009, Developer had sold only half of the thirty-two villa home lots (valued at $110,000 each) and four of the seventy-six single family home lots (valued between $294,500 and $350,000). It had not paid Contractor’s monthly fee for several months. The Bank, which had issued construction loans to Developer, declared a default. Though Developer was in no position to do so, it sent Contractor a letter stating that as of January 5, 2010, Contractor had “earned” Lot Compensation for the first phase. The Bank later foreclosed and acquired the unsold land parcels. Neither Developer nor the Bank ever tendered Lot Compensation to Contractor.

In March 2010, shortly before the Bank’s foreclosure, Contractor recorded a mechanic’s lien on one of the parcels of land for $824,000 (later amended to $641,000) and filed a complaint in foreclosure, naming the Bank as an interested party. The amended lien included $84,000 of unpaid monthly fees and $557,000 in Lot Compensation. At trial, Contractor admitted that the conditions precedent to Developer’s duty to pay the Earned Cash Value portion of the Lot Compensation had not been met. Contractor also asserted a breach of contract claim against Developer and was awarded a default judgment based on eighteen months of unpaid monthly fees ($126,000), plus interest and costs.

Following a bench trial, the trial court made findings regarding the value of Contractor’s lien and concluded that the “full and accurate value” of Contractor’s services totaled $346,000, to which 12% interest was added, for a total of $417,095. The trial court also made findings regarding whether Contractor had knowingly filed an excessive lien under CRS § 38-22-128, and concluded he did not. The court found in favor of Contractor on his mechanic’s lien claim and ruled that Contractor’s lien was prior to the Bank’s lien.

On appeal, the Bank argued that the trial court erred in determining that Contractor’s lien was measured by the “value” of his services, rather than by the contract terms, and that it was unlawful to file a lien that exceeded the contract price. The trial court interpreted CRS § 38-22-101(3) to mean that when a contract is not recorded, a contractor may file a mechanic’s lien for the “value” of his or her services. The Court of Appeals found that interpretation to disregard the plain language of subsection 3 when read in the context of the entire subsection. Subsection 3 applies only to subcontractors and material providers, not to the direct contractor. Subcontractors are the only ones who would have occasion to do work that must be “deemed” to have been done for the owner, given that the direct contractor already has a contract with the owner. Thus, where a direct contractor performs services, the value of which is alleged to have exceeded the contract price, the contract price is the maximum amount for which a lien can be filed. Accordingly, it was error to find that subsection 3 allowed Contractor to file a lien in excess of the contract price.

The Bank also argued that it was error to determine that Contractor did not violate CRS § 38-22-128 by filing an excessive lien. The trial court found that Contractor could have reasonably anticipated receiving Lot Compensation after Developer informed him that he had “earned” it and, from Contractor’s perspective, it was not obvious that the conditions precedent for Lot Compensation could not occur and would never occur. The Court rejected these findings because there was no evidence in the record to support them. The judgment was reversed and the case was remanded for entry of judgment in favor of defendants.

Summary and full case available here.

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Colorado Supreme Court: Funds Disbursed to Limited Liability Company by Member Need Not Be Held in Trust Under Colorado’s Construction Trust Fund Statute

February 5, 2013 by Leave a Comment

The Colorado Supreme Court issued its opinion in Yale v. AC Excavating, Inc. on Monday, February 4, 2013.

Construction—Mechanics’ Liens—Statutory Trusts

The Supreme Court held that an LLC member’s voluntary injection of capital into the company in this case did not constitute “funds disbursed to [a] contractor . . . on [a] construction project” under CRS § 38-22-127(1). Therefore, such money was not required to be held in trust under that provision. The Court further held that the court of appeals erred in remanding the case for further proceedings to determine whether petitioner, a member and manager of the LLC, was civilly liable for theft under CRS §§ 38-22-127(5), 18-4-401, and 18-4-405, for using the funds in a manner inconsistent with the trust obligations of § 38-22-127(1). Accordingly, the judgment of the court of appeals was reversed.

Summary and full case available here.

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Colorado Court of Appeals: Insurance Company Had No Duty to Provide Coverage to Third Party Under Lapsed Commercial General Liability Policy

April 17, 2012 by Leave a Comment

The Colorado Court of Appeals issued its decision in TCD, Inc. v. American Family Mutual Insurance Co. on April 12, 2012.

Summary Judgment—Duty to Defend.

Plaintiff TCD, Inc. appealed the district court’s summary judgment in favor of defendant American Family Mutual Insurance Company (American Family), on the ground that the insurance company had no duty to defend TCD under a commercial general liability (CGL) insurance policy. The judgment was affirmed.

The developer, Frisco Gateway Center, LLC (Gateway), entered into a contract with TCD, the general contractor, to construct a building. TCD subcontracted with Petra Roofing and Remodeling Company (Petra) to install the roof. The subcontract required Petra to “indemnify, hold harmless, and defend” TCD against claims arising out of or resulting from the performance of Petra’s work on the project. Petra also was to name TCD as an additional insured on its CGL policy. American Family issued a CGL policy to Petra, with TCD as an additional insured. The policy was cancelled on June 10, 2007 for nonpayment of the premium.

TCD sued Gateway, seeking payment on the project. Gateway counterclaimed for breach of contract, negligence, and violation of the Consumer Protection Act. This action proceeded to arbitration and resulted in a binding award. As an additional insured under the CGL policy, TCD demanded that American Family defend and indemnify it in the underlying action, but American Family denied coverage.

TCD sued Petra and American Family, asserting claims for declaratory judgment, breach of insurance contract, breach of contract, and negligence. The district court entered a default judgment against Petra and granted summary judgment in favor of American Family.

On appeal, TCD argued that Gateway’s counterclaims were sufficient to raise a genuine issue as to whether American Family had a duty to defend it against those counterclaims. Alternatively, TCD argued it was entitled to have the Court of Appeals consider evidence not contained in the counterclaims that purportedly shows the insurance company had a duty to defend. Finally, TCD argued that CRS § 13-20-808, enacted three years after the CGL policy was cancelled, requires reversal. The Court rejected all three arguments.

TCD argued that Gateway’s claims constituted “property damage” covered by the CGL policy. The Court stated that defense and liability coverage in CGL policies issued to subcontractors generally is limited to property damage caused by an “occurrence.” In this policy, an “occurrence” is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In analyzing the counterclaims made by Gateway, the Court found no alleged “accident,” but found that Petra improperly installed the roof, resulting in defects that caused TCD to breach its contract with Gateway.

TCD argued that it should be allowed to go outside the “four corners” of the counterclaims and offer other evidence. The Court found the argument unpersuasive.

In May 2010, the legislature enacted HB 10-1394, codified as CRS § 13-20-808. The Court held that the statute was not retroactive, and therefore was inapplicable. The judgment was affirmed.

Summary and full case available here.

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2013-05-21 03:59:36