Texas Bars Contractors’ Premises-Liability Claims Against Owners Even Where the Owners Were Partially At Fault

The Texas Supreme Court recently applied a statutory bar to contractors’ claims for premises liability against property owners. The statute invalidates the injured contractor’s claims even if the injuries were caused by the negligence of the owner or another contractor, as long as the injured contractor was working on construction, renovations, or repairs to the property at the time of the injury. Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015) (interpreting Tex. Civ. Prac. & Rem. Code ch. 95).

Chapter 95 of the Texas Civil Practice and Remedies Code sets forth circumstances in which an owner is not liable for negligence claims brought by independent contractors or their employees. The relevant portion of Chapter 95 states that an owner is not liable for injury or property-damage claims by a contractor that constructs, repairs, renovates, or modifies an improvement to the property, unless the owner exercises or retains control over the manner in which the work is performed, has actual knowledge of the danger or condition, and fails to adequately warn the contractor. Tex. Civ. Prac. & Rem. Code § 95.003.

In Abutahoun, the plaintiff was the estate of a construction worker who contracted and died from mesothelioma as a result of asbestos exposure. The decedent was an employee of an independent contractor that installed asbestos insulation around pipes on the owner’s property. The owner’s own employees were also performing similar tasks. The actions of the employee, independent contractor, and owner’s employees all contributed to the decedent’s death. In the trial court, there was a jury verdict in favor of the plaintiff in excess of $2.5 million. The trial court justified its decisions by distinguishing the negligent acts of the independent contractor and the negligent acts of the property owner, and holding the owner liable for its comparative negligence.

The owner appealed, arguing that Chapter 95 does not make such a distinction and that all of the plaintiff’s claims should be barred. Interpreting the statute, the Court agreed with the owner that as long as the injured party was performing construction, renovation, or repair, it could not sue the owner in negligence for that injury even if the owner’s negligence caused the injury.

The Court did not express an opinion on the exceptions to Chapter 95, which would allow an injured contractor to sue the property owner for negligence if the property owner had control over the independent contractor’s work, knew of the dangerous condition, and failed to warn the contractor. This exception was not at issue in the case - the plaintiff argued only that Chapter 95 did not apply at all.

Abutahoun v. The Dow Chem. Co., No 13-0175 (Tex. May 8, 2015).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for his help with preparing this post.

Claims against a general partner for partnership debts do not accrue until after the judgment against the partnership

The Texas Supreme Court recently held that Texas partnership law does not require a plaintiff, seeking to enforce a partner’s liability for partnership debt, to bring a claim against the partner within the limitations period on the underlying claim against the partnership. Am. Star Energy and Minerals Corp., v. Stowers, --- S.W. 3d ----, 2015 Tex. LEXIS 151 (Tex. Feb. 27, 2015). 

The four respondents (collectively the “Partners”) formed a general partnership (the “Partnership”) in Texas. In 1980, American Star Energy and Minerals Corporation (the “Creditor”) entered into an agreement with the Partnership to manage certain oil and gas properties. In the early 1990’s, the Creditor sued the Partnership for breach of that agreement and eventually prevailed on its claims. After various appeals, the Creditor’s judgment against the Partnership became final in 2009. 

In June 2010, the Creditor brought an action against the individual Partners to satisfy the debts the Partnership owed to the Creditor. In response, the Partners asserted that the action was barred by the four-year statute of limitations that applies to the underlying breach-of-contract claim. The trial court agreed and granted summary judgment in favor of the Partners.

The Texas Supreme Court analyzed whether the statute of limitations barred the Creditor’s cause of action against the Partners, which depended on when the action against the individual Partners accrued. General partnerships are entities distinct from the partners, but partners are jointly and severally liable for the partnership’s obligations. TEX. BUS. ORGS. CODE §§ 152.056, 152.101. A creditor seeking to hold a partner liable may either join the partner in the suit against the partnership or file a separate lawsuit against the partner. However, the creditor cannot obtain a judgment against the partner assets until at least 90 days after the judgment has been rendered against the partnership. Id. at §152.305.

The Supreme Court was left to establish a rule of accrual for partner liability suits. Generally, a cause of action accrues “when facts come into existence [that] authorize a claimant to seek a judicial remedy.” Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W. 3d 194,202 (Tex. 2011). When the Legislature employs the term “accrues” without an accompanying definition, the courts must determine what cause of action accrues and thus when the statutes of limitations commences to run. Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351-52, 354 (Tex. 1990). Here, a creditor cannot obtain a judgment against a partner until 90 days after the judgment is issued against the partnership. Thus, the Court found that the Creditor’s claims did not accrue until the 90-day period after the judgment against the Partnership had expired. Summary judgment in favor of the Partners was reversed and remanded.

This case has benefits and drawbacks for partners in general partnerships. On the one hand, it extends the period in which creditors of the partnership may seek to enforce the judgment against the partners. Given that civil lawsuits can take years to reach judgment, this de facto extension of the limitations period could be significant. On the other hand, this ruling removes some incentive for the creditor to join the partners to the original lawsuit with the general partnership. The creditor may obtain its judgment against the partnership before deciding whether to incur the additional time and expense of seeking judgments against individual partners. 

Texas Supreme Court Allows General Contractor to Compel Arbitration Against Developer Despite Asserting Counterclaims and Participating in Discovery

In a recent decision involving a dispute over a construction project, the Texas Supreme Court held that the developer had to arbitrate its claims against the general contractor, even though the general contractor filed counterclaims and responded to discovery requests. G.T. Leach, LLC v. Sapphire V.P., LP, 2015 Tex. LEXIS 273 (Tex. 2015).

Sapphire V.P., LP (“Developer”) contracted with G.T. Leach, LLC (“General Contractor”) for the development of luxury condominiums (the “Project”) on South Padre Island. In July 2008, Hurricane Dolly tore through the island causing significant damage to the Project. Developer filed suit against its insurance brokers, alleging claims for negligence and breach of contract. Developer alleged that, eight days before the hurricane hit, the brokers allowed a builder’s risk insurance policy to expire and be replaced by a permanent insurance policy, even though construction of the Project had not yet been completed. More than two years later, the brokers designated several other responsible third parties. These parties included the project general contractor, General Contractor, two subcontractors, and an engineering contractor. Developer amended its petition to name these parties and defendants, also alleging their negligence and contractual breaches resulted in construction defects that caused the Project to sustain water damage that resulting in uncovered losses.

After pursuing pretrial motions and participating in discovery, General Contractor moved to compel arbitration and stay the litigation. General Contractor relied on an arbitration agreement in its general contract with Developer. The brokers, subcontractors, and engineer (collectively, the “Other Defendants”) also moved to compel arbitration, relying on the general contract (even though they never signed that contract) and their own subcontracts with General Contractor.

The trial court denied all of the motions. The defendants pursued an interlocutory appeal, the court of appeals affirmed, and defendants subsequently petitioned the Supreme Court for review.

The Texas Supreme Court took up several issues. First, the Court analyzed whether General Contractor could compel arbitration. Specifically, the Court examined whether General Contractor had waived its right to compel arbitration by participating in pretrial proceedings and discovery. In Texas, a party may waive its right to enforce an arbitration agreement implicitly, though conduct inconsistent with an intent to enforce the right. See Perry Homes v. Cull, 258 S.W.3d 580, 590-91, 594 (Tex. 2008); Moayedi v. Interstate 35/Chisam Rd., LP, 438 S.W. 3d 1, 6 (Tex. 2014). A party asserting implied waiver as a defense to arbitration has the burden to prove that the other party “substantially invoke the judicial process,” which is conduct inconsistent with a claimed right to compel arbitration, and the inconsistent conduct caused the non movant detriment or prejudice. Perry Homes, 258 S.W. 3d at 593-94. Whether a party has “substantially invoked the judicial process depends on the totality of the circumstances.” Id. at 589-90. Relevant factors include: (1) how long the party waited to move to compel arbitration; (2) how much discovery it conducted before moving to compel arbitration; and (3) whether the party asserted affirmative claims for relief in court. Id. at 590-91. “Merely taking part in litigation” was not enough to rise to the level of substantially invoking the judicial process.

Here, General Contractor’s counterclaims were compulsory and purely defensive in nature–that is, “use it or lose it” type claims. Moreover, General Contractor never sought judgments on the merits of the case. General Contractor sought to transfer venue, but venue challenges do not relate to the merits of the case. See Richmont Holdings v. Superior Recharge Sys., LLC, 2014 Tex. LEXIS 1211 (Tex. 2014). In addition, General Contractor filed motions for continuance, to quash depositions, and to designate responsible third parties (a procedure available to tort defendants in Texas that does not involve adding any parties). The Court found these actions were defensive rather than offensive in nature. A party’s litigation conduct aimed at defending itself and minimizing its litigation expenses, rather than taking advantage of the judicial form, does not amount to substantial invocation of the judicial process. Finally, Developer complained of an excessive delay in seeking arbitration. However, General Contractor moved to compel arbitration three months after it had been joined. The Court found that three months, while lengthy, was not an unreasonable delay amounting to waiver.

The Court then examined whether Developer proved it suffered unfair prejudice as a result of General Contractor’s litigation conduct. In this context, detriment or prejudice referred to an “inherent unfairness caused by a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage.” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 635 (Tex. 2008). Here, General Contractor did not serve a single request for production, interrogatory, or deposition notice, therefore not giving it any more of an advantage that it otherwise would have obtained by switching back and forth. In summary, the Court held that General Contractor did not implicitly waive its right to compel arbitration.

The Court analyzed several other interesting issues in the case, including whether the issue of whether the General Contractor’s claims were timely under the language of the arbitration provision had to be resolved by arbitration (it did), and whether subcontractors and other parties who had not signed the arbitration agreement could compel arbitration (a complex issue, but they could not in this case).

Thanks to Ian Fullington at Griffith Davison & Shurtleff, P.C. for his assistance with preparing this post.

Misuse of Construction Trust Funds May Prevent a Contractor From Discharging Its Liability in Bankruptcy

In a recent bankruptcy case in Texas, the court rejected a contractor’s attempt to discharge its liability for violation of a construction trust-fund statute. Tag Invs., Ltd. v. Monaco (In re Monaco), 514 B.R. 477, 2014 Bankr. LEXIS 3276 (Bankr. W.D. Tex. 2014). The trust-fund violation established that the contractor had breached its fiduciary duties to the trust beneficiaries with either actual knowledge of wrongdoing or reckless disregard to the risk that the conduct would violate the contractor’s duties. This was sufficient to reject a discharge under § 523(a)(4) of the Bankruptcy Code.

In many states, funds paid by an owner to a contractor to pay for subcontractors’ work are considered statutory “trust funds.” See, e.g., Tex. Prop. Code §§ 162.001, et seq. The contractor is deemed to be a “trustee” with certain fiduciary duties to the “beneficiaries” of the trust funds, including the subcontractors. Violation of the statute occurs when the contractor intentionally or knowingly does not apply the funds in the manner required under the statute. This can lead to civil liability and, depending on the statute, potential criminal prosecution. Such liability applies not only to the contractor, but to any officers, directors, or agents who control or direct the trust funds.

If such violations occur, the contractor may attempt to discharge its liability to the owner for the misapplied payments through bankruptcy proceedings. If the subcontractors have perfected liens against the owner’s property, the owner faces the risk of paying twice for the subcontractors’ work without any possibility of collecting reimbursement from the contractor.  

To reduce this risk, the owner has the option to challenge the discharge of the debtor’s liability. Section 523 of the Bankruptcy Code prohibits discharge of a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. 523(a)(4). If successful, the owner may then seek to recover the misapplied funds from the debtor (which could be the contractor, its officers, its directors, and/or its agents).

In the Monaco case, a contractor and several individual officers sought to discharge debts in bankruptcy that included claims asserted by an owner based on the debtors’ misapplication of trust funds. The contractor failed to pay several subcontractors despite receiving the funds to do so from the owner. The bankruptcy court found that the debts were not dischargeable, as the owner had shown that the debtors misapplied funds with sufficient knowledge to meet the requirements of § 523(a)(4) of the Bankruptcy Code. In particular, this finding was based on evidence that one of the officers submitted written certifications that all subcontractors and suppliers had been paid, when he knew they had not. These false certifications were intended to obtain payment from the owner and conceal the misapplication of the trust funds. Thus, the discharge was denied as to the officer who had signed the certifications. Another officer evidently was permitted a discharge because, though she likely knew the subcontractors had not been paid, she did not sign false certifications or engage in other conduct suggesting intentional violation of the trust-fund statute.

Bankruptcy proceedings can impose significant obstacles to the successful pursuit of claims against the debtors. Statutory fiduciary duties can serve as an important tool to owners seeking to overcome these obstacles.

On The Dispute Resolver: A Contractual-Liability Exclusion to Insurance Coverage Might Not Apply to Defective-Work Claims Against a Contractor.

The Dispute Resolver has a recent post of interest to owners:

The U.S. Court of Appeals for the Fifth Circuit recently held that, under Texas law, an insurer could not exclude coverage for property damage claims against a general contractor that were based on violations of express warranties of good workmanship and repair. Such claims did not fall within the typical contractual-liability exclusion used in the general contractor’s commercial general liability policy (“CGL policy”). The Fifth Circuit reversed the district court and rendered summary judgment in favor of the homeowners asserting the insured’s rights, remanding for a determination of attorneys’ fees.

Crownover v. Mid-Continent Cas. Co., --- F. 3d ----, No. 11-10166, 2014 U.S. App. LEXIS 20737 (5th Cir. Oct. 29, 2014), on reh’g from 757 F. 3d 200 (5th Cir. 2014).

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Be Careful What You Ask For: Understanding the Applicability and Enforcement of an Arbitration Clause

The following post is courtesy of Daniel Dorfman at Harris Winick Harris, LLP.

A Texas Court of Appeals has recently handed down an important opinion addressing the applicability and enforceability of arbitration provisions. The case offers important lessons to developers and owners in the construction industry whose contracts generally contain arbitration provisions. Seven Hills Commercial LLC v. Mirabal Custom Homes Inc., No. 05-13-01306-CV, --- S.W. 3d ----, 2014 Tex. App. LEXIS 8705 (Tex. App.--Dallas Aug. 7, 2014, no pet. h.). 

The appeals court in the Seven Hills decision made clear that even non-signatories to an arbitration clause may be compelled to arbitrate their disputes, depending upon the terms of the contract.  This means that corporate owner representatives can compel or be compelled to arbitrate claims pursuant to agreements that they did not enter into, or which they may not even had knowledge of before the claims arose.

Moreover, the Seven Hills case demonstrates that it is permissible for a court to make the initial determination as to whether claims asserted by any individual actor are subject to arbitration, by comparing the arbitration clause to the claims being asserted.  In other words, the court in Seven Hills served as a gatekeeper to arbitration: It simply determined that the arbitrator has the primary responsibility to decide whether parties to a dispute are bound by an arbitration provision.