Opinion
FSTCV166028187S
08-07-2017
Baker Concrete Const., Inc. v. A. Pappajohn Co.
UNPUBLISHED OPINION
MEMORANDUM OF DECISION RE APPLICATION FOR PREJUDGMENT REMEDY
Kenneth B. Povodator, J.
Background
In late 2015, Seaboard Realty filed for bankruptcy, initiating a cascade of related litigation by lenders and contractors (among others). This is one such case.
In connection with a project in Stamford, a Seaboard-related entity entered into a contract with the defendant, and the defendant entered into a subcontract with the plaintiff. The plaintiff was to provide services and materials for the project, with a base price of $4,600,000 (subject to changes and adjustments as might be needed or might occur). At or around the time of the bankruptcy, the plaintiff claims that it was owed by the defendant the amount of $756,195.59, representing the amount due and unpaid under its subcontract with the defendant for this project.
There have been some variations in the amount being claimed. The figure just cited by the court is set forth in the proposed complaint. In subsequent filings, the figure has been stated to be $757,381.01, and the plaintiff contends that the defendant acknowledges that the plaintiff is owed (subject to the issues in this dispute) $745,198.41.
The plaintiff has filed an application for prejudgment remedy, seeking to attach the defendant's assets in an amount commensurate with the amount claimed to be owed. The issue before the court is not the amount that might be due--the disagreement between the parties appears to be no more than 1-2%--or the related issue as to whether the plaintiff provided the claimed materials and services. The underlying issue is a matter of contract interpretation and application of potentially-relevant legal principles. In simplified terms, the issue is: Under the contract between the parties, who was at risk of nonpayment by Seaboard?
Discussion
The risk of nonpayment/insolvency is pervasive, if not always recognized. In construction, a mechanic's lien may be available, and in connection with public works projects, a payment bond is statutorily required given the unavailability of a mechanic's lien in such projects. Depending upon equity in the property, however, a mechanic's lien may be insufficient (especially if a project has been financed with a mortgage placed on the property as a first lien).
Just recently, a chain of bridal shops went into bankruptcy, leaving numerous customers shocked and with no ready recourse, especially with respect to having a gown for their weddings. See, e.g., story at http://www.latimes.com/business/la-fi-alfred-angelo-20170803-story.html .
The situation in the current case involves a contractual provision which the defendant claims shifts the risk to the plaintiff when the property owner has gone into bankruptcy or is otherwise insolvent and unable to pay its debts. Specifically, the contractual provision at the center of this dispute provides:
11.3.1 Progress payments to the Subcontractor for satisfactory performance of the Subcontractor's Work shall be made only to the extent of and no later than ten (10) working days after the receipt by the Contractor of payment from the Owner for the Subcontractor's Work. The Subcontractor agrees that the Contractor shall be under no obligation to pay the Subcontractor for any Work until the Contractor has been paid by the Owner. The payment provisions of this Agreement are subject to the condition that the Contractor receives, in good funds from the Owner, progress payments in at least the amounts payable to the Subcontractor on account of Work done by the Subcontractor on this Project. The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner. The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor, and thus the Subcontractor agrees that payment by the owner to the Contractor for work performed by the Subcontractor shall be a condition precedent to any payment obligation of the Contractor to the Subcontractor. The Subcontractor agrees that the liability of the surety on Contractor's payment bond, if any, for payment to the Subcontractor, is subject to the same conditions precedent as are applicable to the Contractor's liability to the Subcontractor. Notwithstanding anything to the contrary appearing herein or in the Prime Contract between Owner and Contractor, including the terms above, Contractor shall not withhold payment to the Subcontractor if the Owner fails to pay Contractor because of (a) issues arising out of or related to work performed or not performed by Contractor or another subcontractor or (b) disputes between Contractor and Owner over the work that does not involve the fault or neglect of Subcontractor.
In its initial opposition to the application for a prejudgment remedy (#130.00), the defendant emphasized certain language in the foregoing passage, and the court will " extract" that emphasized language, as it is the true focus of attention (the balance providing the context that is or may be necessary):
The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner. The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor, and thus the Subcontractor agrees that payment by the owner to the Contractor for work performed by the Subcontractor shall be a condition precedent to any payment obligation of the Contractor to the Subcontractor.
The plaintiff contends that this provision, and other provisions similarly worded, have been held to be unenforceable as a matter of law, and therefore the provision should not be given effect in this case. Rather, the plaintiff argues that the provision is a timing issue (or should be interpreted and applied as such) rather than a risk-shifting provision, and that if the defendant were not paid in a reasonable period of time after the work was performed by the plaintiff, the plaintiff nonetheless would be entitled to be paid--with a reasonable time being the " outside limit" for payment. The defendant, in turn, claims that the plaintiff is misreading or misinterpreting appellate and other authorities, and that there is no public policy preventing enforcement of the risk-shifting set forth in this provision.
As a preliminary matter, the parties have discussed, to some extent, the burden of proof with respect to the plaintiff's claim and the opposing position adopted by the defendant. There appears to be no disagreement concerning the plaintiff's burden being probable cause. There is some dispute as to whether the defendant has the burden of proving a defense by a preponderance of the evidence. As suggested by the defendant, the real question for the court is whether the burden of proof is even meaningful under these circumstances, where the issue is not whether work and materials were provided, not the value of the work and materials provided, not whether payment was made, but rather whether this contract provision shifts the risk of nonpayment by the owner from the defendant--the party that contracted directly with both the plaintiff and the owner--to the plaintiff. The court does not believe that the competing contractual interpretations truly implicate this issue. Only if the court were to conclude that neither party had convinced the court--to the extent that there is a factual (burden of proof-invoking) issue implicit in contract interpretation--by a preponderance of the evidence might the court need to resolve this technical dispute.
Turning to the legal analysis at hand, the court must note that the plaintiff purports to rely on two appellate-level decisions in Connecticut that do not appear to stand for the propositions claimed.
The plaintiff cites and discusses Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc., 239 Conn. 708, 687 A.2d 506 (1997). On page 2 of #132.00, the plaintiff cites Blakeslee (239 Conn. 719) for the proposition that " [i]t is against public policy to allow Papajohn to hide behind his contractual provision to indefinitely avoid payment." There is no such language in the decision--at page 719 of the decision, the court was identifying 5 arguments that had been presented by the plaintiff in that case (and amicus American Subcontractors Association), and the arguments identified included a claim relating to public policy. At page 10 of #132.00, the plaintiff initially moderates its interpretation of Blakeslee, acknowledging that the court did not actually determine the enforceability of a " pay when paid" (or " pay if paid") provision, but then states that " [t]he court stated that 'such a clause merely sets the time for payment and should be viewed only as postponing payment by the general contractor for a reasonable time after requisition . . . so as to afford the general contractor an opportunity to obtain funds from the owner.'" Again, that is not language being utilized by the court as claimed by the plaintiff; the reference is to a partial recitation of the fourth of the five arguments presented to the court that the court was identifying.
The plaintiff also cites and relies upon DeCarlo and Doll, Inc. v. Dilozir, 45 Conn.App. 633, 698 A.2d 318 (1997), stating that in that decision, the Appellate Court " recognized the majority rule that a 'pay when paid' clause merely postpones the general contractor's payment obligation for a reasonable time, but not indefinitely. While payment may be postponed for a reasonable time so that the obligor can attempt to obtain payment from the third party, it does not excuse the obligor's duty to pay if the obligor ultimately is not paid by the third party. Id. "
The court believes that the characterization of DeCarlo as recognizing a majority rule is an overstatement. The only time the court mentioned, much less discussed, a " pay when paid" provision in a contract is in footnote 4, comparing the language at issue in that case with a " pay when paid" provision (because the language in DeCarlo did not relate to payment by an owner but rather financing being obtained). Further, the Massachusetts case, cited in that footnote, recognizes the very distinction between DeCarlo and this case.
Footnote 4 in DeCarlo stated:
The clause " subject to payment with all outstanding payments to be paid in full at time of financing" can be compared with a " pay when paid" clause used by contractors in the construction industry. These clauses, which appear in construction subcontracts, generally state that the subcontractor is to be paid after the contractor receives its payment. See Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc., 239 Conn. 708, 718, 687 A.2d 506 (1997). The Massachusetts Supreme Court has held that a " pay when paid" clause stating that " payment [to the subcontractor] will be made on monthly requisitions for progress payments 'within 10 days after [the owners'] payment of such monthly progress payments . . . [has] been received by' [the general contractor]" was " merely a setting of a time of payment and not as creating a condition precedent to payment." A.J. Wolfe Co. v. Baltimore Contractors, Inc., 355 Mass. 361, 365, 244 N.E.2d 717 (1969). That court went on to hold that the aforementioned clause merely sets the time for payment, and " should be viewed only as postponing payment by the general contractor for a reasonable time . . ." Id., at 365-66, 244 N.E.2d 717.
Not mentioned in the plaintiff's brief or in DeCarlo is a distinction recognized in the Massachusetts case being cited; a more complete recitation of the relevant language in A.J. Wolfe makes the point quite clear:
We interpret art. II(a) merely as setting the time of payment and not as creating a condition precedent to payment. In the absence of a clear provision that payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner, such a provision should be viewed only as postponing payment by the general contractor for a reasonable time after requisition (and completion of the subcontractor's work mentioned in the requisition) so as to afford the general contractor an opportunity to obtain funds from the owner. (Emphasis added.) 355 Mass. 365-66.
In other words, A.J. Wolfe relied upon the absence of language present in the contract before this court.
As suggested earlier, the facts in DeCarlo are distinguishable in a material way. In this case, the pre-condition that is claimed to be a trigger for payment is payment by the owner; in DeCarlo, the precondition was obtaining financing. The major rationale for the decision in DeCarlo was that the claimed condition was solely in the control of the prospective payor. Indeed, upon close examination, DeCarlo also contains language allowing the parties to assign risk explicitly:
In addition, this obligation was in the control of the defendant, and, therefore, he will not be excused by his nonperformance. Where a debt has arisen, liability will not be excused because, without fault of the creditor and due to happenings beyond his control, the time for payment, as fixed by the contract, can never arrive. The present case, like virtually every case involving discharge from an obligation to perform, concerns the issue of which party bears the loss resulting from an event that renders performance by one party uneconomical. Determining whether the non-occurrence of a particular event was or was not a basic assumption involves a judgment as to which party assumed the risk of its occurrence . . . In making such determinations, a court will look at all circumstances, including the terms of the contract . Since impossibility and related doctrines are devices for shifting risk in accordance with the parties' presumed intentions, which are to minimize the costs of contract performance, one of which is the disutility created by risk, they have no place when the contract explicitly assigns a particular risk to one party or the other . Viewing the contract as a whole, we conclude that the clause " subject to payment with all outstanding payments to be paid in full at time of financing" is not a condition precedent but a date of payment set by the defendant. (Internal quotation marks and citations, omitted; emphasis added.) 45 Conn.App. 642-43.
The plaintiff also relies upon a number of trial court decisions, starting with Titan Mechanical Contractors, Inc. v. Klewin Building Co., J.D. Hartford, CV 07-5009771 (October 30, 2007) [44 Conn.L.Rptr. 429, ]. The decision recognizes uncertainty as to whether the proper characterization of the language at issue:
The opposing memoranda of law devote much attention to whether this article should be interpreted as a " pay if paid" provision or a " pay when paid" provision, generally agreeing that if it is interpreted as " pay when paid" payment might be required " within a reasonable time." Because the language in the article is somewhat ambiguous, and the contested payments involve retainages in a private rather than a public contract, it is concluded that the language in the article should be characterized as a " pay when paid" type of provision.
There was little discussion/analysis; the court concluded that the language was solely directed to timing. This court does not agree that the current language can be so characterized. (The court also was dealing with summary judgment in which the existence of any factual determination to be made with respect to a material issue would not have been permissible; here, the court is expected/required to make factual determinations as appropriate.)
The plaintiff also relies upon R& L Acoustics v. Liberty Mutual Insurance Co., J.D. Fairfield at Bridgeport, CV00 0380506S, (Sept. 27, 2001). R& L Acoustics does contain an extensive discussion of the issue, and much as the court does above, found DeCarlo to be distinguishable.
The plaintiff overlooks the extensive distinguishing features of R& L Acoustics . First, the case apparently involved a governmental project, as the court noted and discussed the application of the so-called Little Miller Act, which requires payment bonds in connection with governmental projects. (See especially footnote 1 of the decision.) Given the rationale and purpose for the Little Miller Act, a " pay if paid" provision might well be contrary to the public policy behind the statutes and therefore might not be deemed enforceable in that particular context. In any event, the court noted that there remained open the question of whether payment would be made by the owner (" it is still possible that the owner will pay HRH/Atlas").
The same applies to the plaintiff's reliance on Blakeslee Arpaia Chapman v. EI Constructors, Inc., J.D. Litchfield, CV0040938, (February 21, 1995). Note, too, that a claim of nonpayment in the context of a governmental project is almost never going to involve insolvency of the owner (the governmental entity) but rather insolvency of the general contractor (or just be a matter of delay or a contested obligation to pay).
Further, the court discussed the relevant language of the contract before it, and concluded that it was not intended to absolve the contractor of the obligation to pay the subcontractor, nor assign to the subcontractor any risk of nonpayment:
The facts of this case are distinct from those of DeCarlo & Doll, Inc. v. Dilozir because in this case, the pay-when-paid provisions explicitly state that HRH/Atlas' receipt of funds from State Street is a condition precedent to HRH/Atlas's obligation to pay the plaintiff and it is still possible that the owner will pay HRH/Atlas. Nevertheless, the other terms of the subcontract do not indicate that the parties intended to absolve HRH/Atlas of its obligation to pay the plaintiff for the work it performed nor does the subcontract provide that the plaintiff must bear the risk of the owners' insolvency . Moreover, the defendants have not provided evidence that they have been unable to obtain final payment from State Street or that it is not within their power to do so. (Emphasis added.)
The lack of contract provisions as stated in the emphasized language clearly distinguishes R& L Acoustics from the case at bar, as the contract under consideration does absolve the defendant of its obligation to pay the plaintiff if it is not paid, and it does provide that the plaintiff must bear the risk of the owner's insolvency. (" The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work" and " the Subcontractor agrees that payment by the owner to the Contractor for work performed by the Subcontractor shall be a condition precedent to any payment obligation of the Contractor to the Subcontractor.")
More generally, there is a need to avoid focusing on analysis without regard to what is being analyzed. Footnote 14 in Blakeslee Arpaia quoted the relevant language: " The subcontract in this case provided that [p]ayment of the approved portion of the Subcontractor's monthly estimate shall be conditioned upon receipt by the Contractor of his payment from the Owner." As cases have raised questions such as whether the quoted or similar language was ambiguous, whether the language was properly characterized as a condition or precondition for payment, whether the language was intended to transfer the risk of nonpayment to the subcontractor, whether the subcontractor was relying on the solvency of the general contractor, etc., the language used in contracts apparently has evolved (to address each such issue), resulting in the far more detailed and specific language used in the contract in this case. The court does not believe that there is any ambiguity as to the intent to condition any payment to the plaintiff upon the defendant being paid, and that the risk of non-payment clearly was being assumed by the plaintiff when it agreed to the contract involving this project.
Therefore, the court cannot conclude that the plaintiff has met its burden of establishing probable cause that it will prevail on the merits of its claim. The contract places the risk of nonpayment on the plaintiff, and the court has not been presented with a basis on which to conclude that the provision is not enforceable or should not be enforced.
Conclusion
As noted at the outset, although not always recognized by parties to a contract, probably the overwhelming majority of contracts providing for non-immediate payment entail some risk of nonpayment due to insolvency. It clearly is foreseeable in construction projects that an owner or the general contractor may become insolvent, creating risks for " downstream" subcontractors. Payment bonds can insure against the risk, but at an increase in cost (premiums for the bonds). The plaintiff has not provided the court with any clear authority that in Connecticut, it is impermissible for a general contractor to enter into a contract with a subcontractor, on a nongovernmental project, whereby the subcontractor is at risk of nonpayment should the owner fail to pay the contractor. In other words, there is no clear authority that the parties to such a contract--commercial parties--cannot allocate the risk in the fashion set forth in the contract between the plaintiff and the defendant. The court cannot torture the words actually used so as to mean that the provision only was intended to relate to timing of payment, especially, " [t]he Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work." Many of the cases cited by the plaintiff rely, at least in part, on the absence of provisions that are present in the contract before this court.
The form contract provision seems to encompass governmental projects to the extent it purports to make claims against any payment bond subject to the same conditions. The court has noted issues relating to the extent to which the provision might be enforceable in that context, but that likely would be dependent on the claimed basis for non-payment and in any event is beyond the scope of issues before the court at this time.
The plaintiff certainly has articulated a sympathetic predicament with respect to this litigation, but the Seaboard bankruptcy and associated litigation relating to, or resulting from, the conduct of Seaboard and Mr. DiMenna have led to a not-insignificant list of lenders, contractors, attorneys, guarantors and insurers, fighting over allocation and reallocation of (and blame for) the losses associated with the various projects involving Seaboard and Mr. DiMenna. It is clear that the defendant took advantage of its superior bargaining position in this contract; the plaintiff, however, seemingly made a conscious decision to sign a contract containing this risk-assumption provision which, in these unfortunate circumstances, has come into play. The provision appears to have addressed the range of concerns relating to notice, reliance, consent, etc., as have been identified in decisions declining to enforce such risk re-allocation. Risk allocation and re-allocation is far from unusual in commercial transactions; see, e.g., General Statutes § 42a-2-303; and the plaintiff has failed to identify a basis for this court to reject this seemingly unambiguous re-allocation of the risk of non-payment due to owner insolvency.
As noted above, the court concludes that the plaintiff has not carried his burden of proof, even to the modest standard of probable cause, relating to its ability to prevail on its contract claim. Under the contract, the court cannot conclude that there is a probability that it will prevail, given the provision whereby it assumed the risk of nonpayment by the owner, a risk that has come to fruition.
For all of these reasons, then, the court denies the application for a prejudgment remedy.