Contractor’s Common Law Indemnity Claim Against Architect and Engineer Fails

Posted by: Hilger Hammond On: 16th October 2014 | no responses.

wood constructionBy Aileen Leipprandt

A general contractor’s common law indemnification claim against the project architect and structural engineer was dismissed where the general contractor could not establish that it was liable for the wrongdoings of either the architect or structural engineer. Sachse Construction & Development Co, LLC v AZD Associates, et al (Mich Ct. Appeals 2014). 

In this case, Sachse Construction & Development was the general contractor for a condominium project located in Royal Oak. The condominium association sued Sachse claiming numerous construction defects. Sachse, in turn, sued the project architect and the structural engineer asserting a variety of theories including (1) common-law indemnification; (2) third-party beneficiary; (3) unjust enrichment; and (4) negligence.

As to its common law indemnity claim, Sachse argued that the damages sought by the condo association were the result of the malpractice of the architect and engineer, not Sachse. The trial court disagreed with Sachse, ruling that the evidence presented did not establish any claim by the condominium association for damages caused by the architect or engineer. Instead, the association had sued Sachse for construction defects solely related to Sachse’s work. The trial court dismissed Sachse’s indemnity claim and Sachse appealed.

The Court of Appeals upheld the trial court’s ruling, affirming the longstanding principle that in order to prevail on a claim for common law indemnification, the party seeking indemnity must show: (1) that it has been held liable for the acts of another, and (2) that it is “free from fault in the underlying wrongful act that gave rise to the liability at issue.”

Contractor Enjoys Decisive Win in Noteworthy Construction Lien Case

Posted by: Hilger Hammond On: 29th April 2014 | one response.

1221951_27660008 - CopyBy Aileen Leipprandt

Perseverance pays off.

Such was the lesson learned by a general contractor pursuing a lien foreclosure claim on condominium property. In a comprehensive 21-page opinion addressing numerous aspects of the Michigan Construction Lien Act and its interplay with the Michigan Condominium Act, the Michigan Court of Appeals affirmed a contractor’s construction lien rights. C.D. Barnes Associates, Inc. v Star Heaven, LLC et al (April 2013). In October 2013, the Michigan Supreme Court declined to hear further appeals in the case.

This case arises out of a failed construction project undertaken by the developer, Star Heaven, LLC, for which Flagstar Bank provided mortgage financing and Barnes served as the general contractor. When Star Heaven acquired the site, the site consisted of 19 partially completed apartment buildings. Star Heaven hired Barnes to finish construction. Barnes began work in the summer of 2005; a few months later, Star Heaven recorded a Notice of Commencement (NOC), using a metes and bounds property description. In May 2006, Barnes provided Star Heaven with a sworn statement indicating that the property was “free from claims of lien.” Shortly thereafter, Star Heaven recorded a Master Deed, redefining portions of the property as a condominium. Flagstar Bank then recorded a mortgage against the property, well after the first day of physical improvement. The project eventually failed leaving Barnes owed $360,000. Barnes recorded 9 liens against the property – 6 liens identified specific condo units; 3 liens used the comprehensive metes and bounds legal description from the 2005 NOC.

In the ensuing lien foreclosure action, Flagstar contested the priority and validity of Barnes’ liens. The trial court rejected each of Flagstar’s arguments and ruled in favor of Barnes. Flagstar appealed. In a detailed analysis, the Court of Appeals for the most part affirmed the trial court’s ruling.

First, the Court of Appeals held that Barnes’ sworn statement substantially complied with the Lien Act even though the language did not precisely mirror the statutory language that the “property is free from …the possibility of construction liens.” Furthermore, the sworn statement was not the equivalent of a lien waiver and did not extinguish the right to claim a lien.

Second, the court analyzed the interplay between the Construction Lien Act and the Condominium Act. Even though the Condo Act may have required Barnes to use individual unit descriptions in its claims of lien, the Lien Act required Barnes to use the legal description in the NOC; therefore, the form of Barnes’ liens, using the metes and bounds legal description, substantially complied with the Lien Act and was appropriate.

Third, again assessing the competing requirements of the Lien Act and Condo Act, the appellate court concluded that Star Heaven’s recording of the Master Deed after the NOC was recorded did not require Barnes to record separate liens against each individual condo unit. The appellate court noted that both the Condo Act and the Lien Act provide that a lien for work done on a condominium unit attaches only to that unit. However, when Barnes began construction (and correspondingly, when Barnes’ lien rights arose under the Lien Act), Barnes was providing improvements to a project defined by the metes and bounds description in the NOC, not a condominium.

Fourth, Star Heaven hired Barnes to serve as general contractor for the entire project, not on a unit-by-unit basis. Therefore, Barnes was not required to separately lien each unit. Because Barnes did not have to record separate liens, Barnes’ liens were timely filed within 90 days of its last improvement to the project, as opposed to an individual unit. Likewise, Barnes’ liens attached to Star Heaven’s interest in the entire project, not just those units that Barnes improved within 90 days of recording its liens.
Fifth, even though some of the units that Barnes liened had been sold, Barnes was not required to apportion or reduce its lien amount by the value of improvements provided to these sold units. Instead, Barnes could satisfy its entire lien out of the remainder of the interest held by the developer in the property at the time Barnes recorded its liens.

Finally, Barnes was entitled to a judgment directly against Flagstar Bank for those attorney fees Barnes incurred related to Flagstar’s contest of Barnes’ liens.

The comprehensive Court of Appeals decision represents a decisive victory for contractors and serves as controlling authority for future cases. The lesson learned – it is critically important on condominium projects to understand and comply with the technical requirements of the Construction Lien Act vis-à-vis the Condominium Act.

Condominium Association’s Improper Notice to Unit Owner Invalidates Foreclosure Sale

Posted by: Hilger Hammond On: 4th December 2012 | no responses.

condominiumA condominium unit owner successfully set aside the foreclosure sale of his condo unit by claiming improper notice in Borosh v Woodhill Condominium Association (Oct. 2012).  Plaintiff, Mr. Borosh, owned various properties in Michigan and California.  At various times, Mr. Borosh fell behind in paying condominium fees on a unit in Michigan.  The condominium association recorded a lien and later foreclosed for the unpaid dues.  Borosh failed to redeem the property and the unit was sold at a sheriff’s sale for about $5,000.  Shortly after the sale, Borosh offered to buy back the property; however, the association refused his offer.

Borosh sued the association claiming that it failed to follow the notice requirements set forth in the condominium bylaws and therefore the sheriff’s sale was invalid.  Borosh did not dispute that he received notice of the sale.  Instead, he argued that he did not receive notice of his right to request a judicial hearing by bringing suit against the association, the particular notice required by the condo bylaws.  The association claimed Borosh was not prejudiced by the technical defect in notice since he knew about the sale and since the association substantially complied with the bylaws.

The appellate court sided with the condo unit owner.  In so doing, the court chastised the association because it had insisted on strict compliance with the association bylaws, accelerated Mr. Borosh’s dues and proceeded with foreclosure despite Mr. Borosh making a partial payment and offering to fully redeem the property within a month after the redemption period had expired.  Since the association insisted on strict compliance from Mr. Borosh, “it should not then be surprised or be found to object when the other party to the contract seeks to hold it to strict compliance as well.”

Lessons learned –in any matter involving condominium governance, one must carefully consider the requirements of the Master Deed and Bylaws.   Foreclosure proceedings are technical; every “i” must be dotted and every “t” must be crossed.

Mortgage Has Priority Over Condominium Association Lien

Posted by: Hilger Hammond On: 13th November 2012 | no responses.

Whoever Stands at the Front of the Line Eats First
By Aileen Leipprandt
A first mortgage recorded against a condominium unit has priority over a condominium association lien, even if that mortgage is later assigned, says the Michigan Court of Appeals in Coventry Parkhomes Condominium Assoc. v FNMA (October 2012).   In Coventry, Walsh owned a condominium unit.  She entered into a mortgage with JP Morgan Chase Bank in 2005 and JP Morgan later assigned the mortgage to FNMA.   In 2009, the Coventry Condominium Association recorded a lien on Walsh’s unit for unpaid association fees and dues.  The association then sued to foreclose its lien arguing that its lien had priority over mortgage originated by Chase and later assigned to FNMA.  The appellate court disagreed.  Applying the plain language of the Michigan Condominium Act which gives priority to the “first mortgage”, the court of appeals found that the assignee (FNMA) was entitled to stand in the place of its assignor (Chase), including for purposes of priority rights.  Furthermore, because FNMA only held a security interest (mortgage) in the property, it could not be liable to the condo association for unpaid assessments, fees and costs.  The moral of the story – whoever stands at the front of the line eats first.