Michigan Homeowner Construction Lien Recovery Fund Runs out of Money

In a sign of the times, the Michigan Homeowner Construction Lien Recovery Fund is broke, and there is currently no way to replenish its coffers.

The Michigan Homeowner Construction Lien Recovery Fund (Fund) was created under Part 2 of the Michigan Construction Lien Act (MCL 570.1101, et seq) to provide protection when the homeowner, has in good faith, paid their licensed contractor for materials and labor and the contractor failed to compensate materialmen, subcontractors, and/or laborers.

The funding problem for the Fund stems from PA 497 of 2006,  an amendment to the Michigan Construction Lien Act, which repealed Section 201(2) of the Act effective January 3, 2007. This amendment, reportedly the product of a legislative compromise, eliminated the ability of the Fund to make a $50 special assessment when the  Fund fell below $1 million. Instead, the Fund can only assess members a $10 annual renewal fee.

Beginning in 2006 and continuing through July, 2009, the Fund experienced an unprecedented increase in claims. This increase closely mirrored the collapse of the housing market.  The Fund is currently involved in over 250 pending lawsuits involving more than 350 claims against it that total more than $18 million.  In 2009, Judgments against the Fund have averaged $123,800 per month.  By mid-October, there was only $524,000 remaining in Fund coffers.

On October 21, 2009, the Fund sought to consolidate all 250 of the pending lawsuits into one proceeding in Macomb County and proposed a pro rata distribution of the remaining money among all the lien claimants. The result would be pennies on the dollar.  The Fund’s (interpleader) motion was heard by Judge James Biernat, Sr. on November 2, 2009, but denied several weeks later in a written opinion.  

As things stand now, and absent legislative intervention, the Fund has advised that it will run dry within a few months. This will leave unpaid subcontractors and suppliers to fight things out with Homeowners, who  will find themselves stuck in the middle of dispute with their builder and at significant risk of paying twice for  improvements to their home.

For more information, contact Peter Cavanaugh or Gary Quesada, or visit their website -- http://www.michiganconstructionlaw.com/ 

Update: Michigan Lawyer's Weekly recently ran a piece about this issue in its February 1, 2010 edition. The cite, for any lawyers reading this, is 24 Mich. L.W. 265.

Cavanaugh & Quesada, PLC -- New Offices in Royal Oak

Attorneys Peter Cavanaugh and Gary Quesada have moved their  law practice to new and larger offices in Downtown Royal Oak at 1027 S. Washington Ave. Cavanaugh & Quesada, PLC serves the unique legal needs of the design and construction communities.

• Peter's practice is concentrated on business and construction law matters, including litigation, arbitration, and mediation of contract, construction lien and payment bond claims, and disputes involving owners, contractors, subcontractors, and suppliers. Peter also represents clients who specialize in water and wastewater construction projects, especially those projects involving the Detroit Water and Sewerage Department (DWSD).

• Gary's practice is concentrated on representing architects, engineers, owners and contractors in business and construction law matters, including litigation and arbitration of commercial, municipal and residential construction claims, copyright and risk management consultation. Gary also represents clients in the fields of photographic, sculptural, literary and film arts.

To find out how we can help you, please contact either Peter Cavanaugh or Gary Quesada at Cavanaugh & Quesada, PLC, 1027 S. Washington Ave., Suite A, Royal Oak, MI 48067, Tel: (248) 543-8320, Fax: (248) 543-8330 or for more information visit our website -- www.MichiganConstructionLaw.com

AGC of Michigan Announces Construction Law Webinar Series

As a follow-up to its October 30, 2009 seminar, AGC of Michigan has announced a series of lunchtime webinars featuring some of the authors of the recently-updated publication "Contractor's Guide to Michigan Construction Law" (Rev'd 2009).
  

Webinar 1 - January 20, 2010 - 11:30 to 1:00 p.m.

• Bids, Bidders and Bid Protests
  
• The Contract for Construction: Standard Forms and Common Risk Transferring Provisions; 
• Overview of State and Federal Prevailing Wage Law

Webinar 2 - February 10, 2010 - 11:30 to 1:00 p.m.

• Contract Changes / Differing Site Conditions
  
• Defective Plans and Specs
• Delays in Contract Performance
• Concepts in Business Valuation, Potential Financial Statement Impacts and More Accounting, Tax and Financial Issues

Webinar 3 - March 17, 2010 - 11:30 to 1:00 p.m.

• Estate and Business Succession Planning for the Contractor
•  Bankruptcy and the Construction Industry
• Dealing with the Media and Press in Corporate Crisis Situations
  

Click here for more information and to register for one or all of these webinars.

Michigan Bill Would Allow Private Investments in Public Projects

Crain's Detroit Business reports today that legislation has been introduced in the Michigan legislature that would encourage private investors to fund public transportation infrastructure.

House Bill 5461 would create the Private Investment Infrastructure Funding Act, under which municipalities could enter into collaborative relationships with other public entities to develop public facilities and could, among other things, solicit private sector investment for the financing of public facilities through a bid process.  Generally speaking, "public facilities" means transportation-related projects, including public transportation-related infrastructure, as well as other similar public infrastructure improvements.  The term "municipality" would apply to cities, villages, and townships. 

The concept, called private investment infrastructure funding, or PIIF, was first proposed by the Oakland County Business Roundtable and is being discussed as lawmakers, local officials and business look at ways to help with Michigan's transportation-funding straits.

Update:  A December 23, 2009 Editorial in the the Detroit Free Press (here) endorses the idea of private funding for public infrastructure projects.  On January 27, 2010, it was reported (here, and here) that the Michigan Department of Transportation (MDOT) is seeking design, build, finance and operate proposals for the Detroit River International  Crossing (DRIC) project in southwest Detroit.  Click here for a copy of the RFP. 

Further Update (June 2, 2010): H.B. 5461 has gone nowhere since it was introduced, however, legislation to enable the DRIC project, through the creation of Public Private Partnerships (P3) has been moving forward under two other bills, H.B. 4961 and H.B. 6128.   H.B. 4961 was approved by the Michigan House on May 26, 2010. 

AGC of Michigan Sponsor's Construction Law Seminar

On October 30, 2009, AGC of Michigan is hosting a seminar to address a number of pressing legal issues facing contractors today including payment, dispute resolution mechanisms, hiring and firing of employees, and bankruptcy.

This seminar will also launch the 3rd Edition of "A Contractor's Guide to Michigan Construction Law," which has been in the works now for almost a year. Participants will receive a copy of this important legal update.

Click here for more information about this seminar or to register.

E-Verify Regulations Upheld, New Verification Requirements to Begin September 8

A federal lawsuit filed last December, seeking to block implementation of federal regulations requiring verification of employee immigration status (reported here), has ended with a ruling in favor of the Department of Homeland Security.

As reported by FederalTimes.com,

"Judge Alexander Williams of the U.S. District Court for Maryland said in an Aug. 25 ruling that DHS didn’t break the law when it mandated that contractors use the system to check the employment status of their workers.

"The plaintiffs in the case, which include the U.S. Chamber of Commerce, argued that the law authorizing E-Verify prohibited DHS from requiring any group to use E-Verify, a Web-based system employers can use to check personal information such as Social Security numbers to confirm their employees are legally able to work in the U.S.

"The court ruling paves the way for the implementation of the rule, which had been delayed since January because of the case. The rule fulfills a Bush administration executive order mandating that contractors use the system to verify employment status to prevent illegal immigrants from performing government work.

"Starting Sept. 8, new federal contracts worth more than $100,000 will include a clause requiring contractors to use E-Verify to certify the employment eligibility of any current employees who will work under the contract. The rule also requires contractors to use E-Verify to certify the eligibility of all new hires regardless of whether they’ll work on behalf of the government. Existing contracts lasting more than six months can be modified to add the requirement, but only if the contractor agrees"

Court Appeals Rejects Narrow Constrution of "Common Work Area" for Crane Accident

The Michigan Court of Appeals recently reversed the grant of summary disposition to a Defendant finding that there were questions of fact as to whether the area where Plaintiff was injured could be construed as a common work area and whether the risk was posed to a significant number of workers.

In Alderman v J C Development Communities, LLC, 2009 Mich. App. LEXIS ____ (Mich. Ct. App. Aug. 25, 2009), Plaintiff sued Defendant, the general contractor of a subdivision project, when he was injured on the job site. He was employed by a subcontractor engaged to pour concrete basements for the project, which involved over 200 home sites, including 13 sites running along and parallel to electric power lines.

The subcontractor used a 65-foot crane to lift forms from its trucks and set them in place around each home's future basement. The forms would be set one day, concrete would be poured, and the forms would be removed by the crane the next day and replaced on the trucks. The crew would then move to the next site, and other subcontractors would continue with the next steps in the building process.

Plaintiff was part of a crew of 6 men working for the subcontract on Lot 273, one of the sites adjacent to the power lines. As the crane lowered one of the forms onto the foundation, it contacted a power line. A jolt of electric current flowed through the crane and down the chain to the form and the metal "whaler" Plaintiff was using to control the form from the ground. He was knocked unconscious and his hands and feet were severely burned.

The trial court determined the area where the accident occurred was not a common work area, as only workers from plaintiff's crew were exposed to danger from the possibility of the crane touching the overhead wires. The trial court opined, "[a]t most, six employees of one subcontractor were exposed to the risk of electrocution. This is not sufficient to establish a common work area." The Court of Appeals disagreed with this narrow interpretation:

While defendant focuses on the fact that the crane hit the power lines and endangered only plaintiff’s crew and only electrocuted plaintiff, the risk associated with the crane hitting the power line extended far beyond the specific lot where plaintiff was injured. Plaintiff’s crew may have been the only subcontractors working on lot 273 when the accident occurred, but the power lines did not merely run along the one lot. They ran along several lots under active construction, and electricity is commonly understood to be hazardous.

Reversed and remanded.

A copy of the slip opinion can be found here.

Court Upholds City Ordinance Assessing Costs against Owners of Abandoned Homes

The Michigan Court of Appeals recently upheld a challenge to a Battle Creek ordinance imposing a fee against the owners of abandoned residential property.

In Kenefick v City of Battle Creek, __ Mich App __ (2009) (approved for publication July 2, 2009), a city ordinance requiring owners of abandoned homes to pay a "monitoring fee" was challenged on grounds that it was both unconstitutionally vague and violated the Equal Protection Clause. Both arguments failed to persuade the Court of Appeals.

"When these common dictionary definitions are viewed in context of the language of the entire ordinance—the stated purpose of which is to eliminate dangerous and unsightly blight, we conclude that a person of ordinary intelligence would be placed on fair notice of what the ordinance requires or proscribes."

In addressing the Equal Protection Argument, the Court of Appeals applied the rational basis test and concluded the ordinance was constitutional.

"The ordinance’s stated purpose is to overcome the detrimental affects of neighborhood blight and reduce enforcement costs associated with the blight. This Court has held 'protecting and promoting public health, safety, and general welfare are legitimate governmental interests . . . and protecting aesthetic value is included in the concept of the general welfare.' (citation omitted) Thus, the general reduction of blight is undisputedly a legitimate governmental purpose."

A copy of the slip opinion can be found here.

Questions? Contact Peter Cavanaugh or call (248) 543-8320.

Michigan Seller Disclosure Act -- No Claim for Innocent Misrepresentation, Supreme Court Affirms Ruling

On June 17, 2009, Michigan Supreme Court entered an order affirming a 2008 Michigan Court of Appeals decision, which had held that Michigan law did not recognize claims for innocent misrepresentation under the Michigan Seller Disclosure Act (MCL 565.951, et seq).

As we reported in an earlier posting (here), Roberts v Saffell involved a claim that Defendant Sellers failed to disclose a termite infestation in the home they sold to Plaintiff Buyers. Plaintiff's claim was based on Defendant's "No" answer on their Seller Disclosure Statement in response to the question: "History of infestation, if any: (termites, carpenter ants, etc.)"

In affirming the Court of Appeals decision, the Michigan Supreme Court held:

the [Michigan Seller Disclosure Act] provides that a seller is “not liable for any error, inaccuracy, or omission in any information delivered pursuant to this act if the error, inaccuracy, or omission was not within the personal knowledge of the transferor . . . .” MCL 565.955(1). Thus, because a claim for innocent misrepresentation requires that a defendant make a false statement without knowledge of its falsity, the Court of Appeals correctly held that innocent misrepresentation does not constitute a viable cause of action under the SDA. Whether defendants did or did not possess personal knowledge of the infestation is a matter not before this Court as a result of plaintiffs’ abandonment of their fraudulent misrepresentation claim and their exclusive focus on their innocent misrepresentation claim.

Full Cite: Roberts v Saffell, 280 Mich App 397 (2008), aff'd, 483 Mich 1089 (2009).

Bottom line: Always have your own home inspection done before buying a house!

Questions? Contact Peter Cavanaugh or call (248) 543-8320.

Assignment of Contractual Rights without the Consent of the Engineer

By: Gary D. Quesada, Hon. Aff. AIA, J.D.
Principal Attorney, Cavanaugh & Quesada, PLC

When entering a contract, an Engineer cannot accurately assess its risks without being assured that the other party will in fact remain its contracting partner throughout the Project. Therefore, an important risk-management tool for Engineers is to prohibit the assignment of the contract without the Engineer’s written consent.

Management of Risk through Non-Assignment Clause

Most standard form contracts governing an Engineer’s professional services contain a “non-assignment” clause, which purports to prohibit either party from assigning its rights and obligations under the contract, without the written consent of the other. When utilizing the standard forms, scrutiny of the non-assignment clause is rarely deemed necessary, because a commonly held belief is that these “non-assignment” clauses absolutely prohibit assignment without consent, such that any attempted assignment will be void and to no effect, unless the Engineer has expressly granted its consent.

Oliver/Hatcher v. Shain Park

A new Michigan Court of Appeals case has cast significant doubt on whether the non-assignment clauses in the popular standard contract forms will serve to void an assignment, despite lack of consent.

In Oliver/Hatcher Construction v. Shain Park Associates UNPUBLISHED, COA No. 275500, SC No. 136803 (Application DENIED, December 23, 2008), the parties were operating under a AIA A201 General Conditions (1997). The Owner allegedly assigned all its contractual rights without the consent of the Contractor. The Assignee sent notice to the Contractor of alleged latent defects. The Contractor brought an action for declaratory judgment, arguing that the Assignee had no rights against it, because the assignment was without consent and therefore void.

The Trial Court agreed with the Contractor, but the Court of Appeals reversed. The Court of Appeals held that the language of the AIA A201 was consistent with the common law rule that if a party breaches a promise not to assign a contract, the breach gives rise to a cause of action for damages but does not render the assignment itself ineffective.

Heightened Attention to Contract Language for Non-Assignment Clauses

Given the result in Oliver/Hatcher, an Engineer that wishes to secure the identity of its contracting partner throughout the Project should be certain to include language expressly stating that “any attempted assignment by the Owner [or Architect] of its contractual rights or obligations without the written consent of the Engineer is void and of no effect.” Consideration should be given to whether certain rights may be exempted from this prohibition, such as the right to assign to a lender under certain circumstances, or the assignment of contractual proceeds.

The Engineer should expect the inclusion of language “voiding” an attempted assignment will likely be answered with a demand by a contracting partner that the prohibition be reciprocal. Therefore, the pros and cons of the language should be weighed depending on the circumstances.

Survey of Standard Contract Non-Assignment Clauses in Light of Oliver/Hatcher

If the reasoning of Oliver/Hatcher is applied by Michigan Courts in the future, it is doubtful that any of the recent or current versions of the most popular standard contract forms will serve to “void” an assignment made without consent.

1) AIA A201 (Both 1997 and 2007 versions)

General Conditions of the Contract for Construction

The contract in Oliver/Hatcher was the 1997 AIA A201. The language in the non-assignment clause has remained unchanged in the 2007 edition:

Section 13.2 Successors and Assigns

13.2.1 The Owner and Contractor respectively bind themselves, their partners, successors, assigns and legal representatives to covenants, agreements, and obligations contained in the Contract Documents. Except as provided in Subparagraph 13.2.2, neither party to the Contract shall assign the Contract as a whole without written consent of the other. If either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the contract.

(13.2.2 permits the Owner to assign the contract to an institutional lender providing construction financing for the Project without the Contractor’s consent.)

Comment: The AIA A201 provides for an exception, and also provides for a remedy in the case of assignment without consent. Specifically, if such an assignment is attempted, the original contracting party remains responsible for all obligations under the contract. The Oliver/Hatcher Court interpreted this language not as precluding an assignment but in fact contemplating one, as well as providing for the consequences of assignment.

2) AIA C401-2007

Standard Form of Agreement Between Architect and Consultant

An Engineer may be provided an AIA C401 when performing consulting services to an Architect. The language in AIA C401 does not include the exception, or the remedy contained in the AIA A201:

Section 10.3

The Architect and Consultant, Respectively, bind themselves, their agents, successors, assigns and legal representatives to this Agreement. Neither Architect nor Consultant shall assign this Agreement without the written consent of the other.

Comment: Under the foregoing language, the Engineer’s remedy may be limited to a cause of action for damages arising from the assignment. If the contract does not otherwise provide for it, the Engineer may wish to incorporate the terms from the AIA A201 section 13.2.1, which provides the Architect will remain bound even if an assignment is made (see above).

3) EJCDC 1910-1 (1996) and E-500 (2002)

Standard Form of Agreement Between Owner and

Engineer for Professional Services

The non-assignment language remained the same from the EJCDC 1910-1, 1996 edition to the EJCDC E-500 2002 edition:

Section 6.07 (Section 6.08 in the 1996 edition)

A. OWNER and ENGINEER each is hereby bound and the partners, successors, executors, administrators and legal representatives of OWNER and ENGINEER (and to the extent permitted by paragraph 6.07.B the assigns of OWNER and ENGINEER) are hereby bound to the other party to this Agreement and to the partners, successors, executors, administrators and legal representatives (and said assigns) of such other party, in respect of all covenants, agreements and obligations of this Agreement.

B. Neither OWNER nor ENGINEER may assign, sublet, or transfer any rights under or interest (including, but without limitation, moneys that are due or may become due) in this Agreement without the written consent of the other, except to the extent that any assignment, subletting, or transfer is mandated or restricted by law. Unless specifically stated to the contrary in any written consent to an assignment, no assignment will release or discharge the assignor from any duty or responsibility under this Agreement.

Comment: Similar to the AIA language, the standard EJCDC language appears to contemplate an assignment and provide a remedy, being the continued obligation of the assignor to its contractual duties. Therefore, although the EJCDC forms were not at issue in Oliver/Hatcher, prudence would dictate assuming a court will interpret the EJCDC language similarly to the AIA language.

4) ConsensusDocs 240

Standard Form of Agreement Between Owner and Architect/Engineer

While the ConsensusDocs do not have the history of either the AIA or EJCDC standard forms, a number of owners appear to be embracing these documents. The ConsensusDocs’ non-assignment language is more limited than either the AIA or EJCDC forms:

Section 10.3

ASSIGNMENT. Neither the Owner nor the Architect/Engineer shall assign their interest in this Agreement without the written consent of the other except to the assignment of proceeds

Comment: Applying the reasoning of Oliver/Hatcher to the ConsensusDocs language, it appears ConsensusDocs 240 provides nothing more than a promise not to assign without consent. A court may find that if a party breaches the promise under this clause, the breaching party is only exposed to a claim of damages arising from the assignment. Such damages may be difficult to identify and/or prove. Therefore, the Engineer will want to consider the issues raised in this article. Additional language may be advisable, which either voids any assignment or provides for the continued obligation of the assignor to the Engineer.

OMB Publishes Updated Guidance for Implementing ARRA

On April 3, 2009, the Office of Management and Budget (OMB) published (here) Implementing Guidance for the American Recovery and Reinvestment Act of 2009 ("Recovery Act").

This is the second installment of detailed government-wide guidance for carrying out programs and activities enacted in the Recovery Act. This updated guidance supplements, amends and clarifies the initial guidance issued by OMB on February 18, 2009 (Initial Implementing Guidance for the American Recovery and Reinvestment Act of 2009, M-09-10). Updates to the guidance are based on ongoing input received from the public, Congress, state and local government officials, grant and contract recipients and federal personnel.

Largest Construction Projects in Michigan, 2009 List

Crain's Detroit Business is out with the annual list of the Largest Construction Projects in Michigan for 2009 (here). Most of the projects in the Top 20 began several years ago, and are scheduled to complete in 2009 or early 2010. As in past years, school and hospital projects dominate the Top 20. The few commercial developments listed appear to be on hold.

New Ethics, Disclosure Rules for Federal Contractors

On December 12, 2008, new federal rules on mandatory disclosure and ethics and compliance went into effect. Among other things, the rule requires government contractors to disclose evidence of violations of certain criminal laws by their employees or subcontractors and to implement certain internal controls within their companies.

The new rule requires, for contracts and solicitations after the December 12, 2008 effective date, the insertion of the clause at FAR 52.203-13, Contractor Code of Business Ethics and Conduct, in all contracts in which the value of the contract is expected to exceed $5 million and the performance period is 120 days or more (a "covered contract").

For more information, click here.

The Federal Construction Contracting Blog has a number of posts here on these new regulations, tracking back to when they were first proposed.

Arbitration Award, Michigan Court of Appeals Clarifies Time to Confirm

The Michigan Court of Appeals recently clarified the deadline for confirming an arbitration award.  

In Greater Bethesda Healing Springs Ministry v Evangel Builders & Construction Managers, LLC, 282 Mich App 410 (2009), the Michigan Court of Appeals, explained that MCR 3.602(I) requires only that an arbitration award be filed with the court clerk within one year after the award was rendered, and has no bearing on the time period in which the award may be confirmed and entered as a judgment by the court. 

Prior to this case, courts had interpreted this court rule as requiring a party to confirm an arbitration award within one year from award. 

Click here for a copy of the slip opinion in this case. 

New Bill Would Allow Construction Liens on Public Property

On January 29, 2009, Sen. Dennis Olshove (D. Warren) introduced S.B. 140, which would allow construction liens to be recorded against government (public) property.

Specifically, S.B. 140 would amend Section 107 of the Construction Lien Act (MCL 570.1107) by adding a new Subsection (7):

(7) Real property owned or leased by a government entity or as to which a government entity contracts for an improvement is subject to a construction lien under this Act to the same extent as other real property.

That a constructions lien may not attach to public property is a well established principal under Michigan law. S.B 140 would be a significant departure from long-established precedent. See e.g., Kammer Asphalt v East China Twp, 443 Mich 176, 181, n. 10 (1993). ("materialmen and contractors may not obtain a mechanics' lien on a public building") (citing Knapp v Swaney, 56 Mich 345, 347; 23 NW 162 (1885) ("Public property cannot be the subject of a [Builders'] lien unless the statute shall expressly so provide; it is by implication excepted from lien statutes, as much as from general tax laws, and for the same reasons.") and Ford v State Bd of Ed, 166 Mich 658, 660; 132 NW 467 (1911) ("These creditors have no lien upon this public building.").

To track the progress of S.B. 140, click here.

Implementation of E-Verify Rule Delayed

Federal Computer Week reported on January 12, 2009 that -

"Enforcement of a new rule that requires federal contractors to use the Homeland Security Department’s E-Verify system to check employees' work eligibility has been postponed until Feb. 20, the U.S. Chamber of Commerce announced.

"DHS is delaying implementation from the original Jan. 15 starting date to Feb. 20 as a result of negotiations associated with a lawsuit filed by the chamber and other business groups, the chamber said in a Jan. 9 news release.

"Under President George W. Bush’s executive order, use of E-Verify was to be made mandatory for approximately 168,000 federal contractors beginning Jan. 15. The E-Verify regulation pertains to federal contracts of more than $100,000 and subcontracts of more than $3,000. A coalition of business groups led by the chamber is suing to keep E-Verify from being imposed on contractors."

Click here for the rest of the story. The lawsuit filed by the U.S. Chamber of Commerce was reported in an earlier post.