Tag Archives: negligence

Minnesota Federal District Court clears up confusion regarding accountant malpractice claims in North American Specialty Insurance Company v. WIPfli, LLC, et al.

5 Aug

On July 26, 2013, the Federal District Court for the District of Minnesota issued an order reconciling almost 40 years of ambiguous rulings concerning the claims available to a third party non-client seeking to sue an accountant. The case is North American Specialty Insurance Company v. WIPfli, LLC, et al. A copy of the Order, which denied WIPfli, LLC’s (“WIPfli”) motion to dismiss the complaint for failure to state claims against it, can be read here.

The case involved North American Specialty Insurance Company (“NAS”), which provided statutory performance and payment bonds on projects performed by general contractor Crowley Company, Inc. (“Crowley”). The purpose of these bonds is to guaranty for the project owner or developer that, in the event Crowley were to fail to perform its obligations under its contract, which might involve failure to complete the work (performance bonds) or failure to make full payment to all of its subcontractors and suppliers (payment bonds), NAS would act as “surety”, and would pay to ensure those obligations were met.

According to the Court’s Order, NAS alleged that WIPfli performed accounting and auditing services for Crowley. Thus, NAS was not WIPfli’s client. However, WIPfli prepared two “Independent Auditor’s Reports” regarding Crowley’s financial statements and condition, on which NAS claims it relied in providing $8 million in bonds on Crowley’s projects. Ultimately, according to NAS, Crowley began defaulting on its obligations to several parties because it was in poorer financial condition than Crowley’s financial statements suggested, and NAS alleges it ultimately was obligated to pay on approximately $2 million in claims.

NAS apparently alleged several items contained in WIPfli’s reports were inaccurate and were not based on generally accepted accounting standards despite a statement within the reports that WIPfli had done so. Importantly, NAS also alleged that WIPfli was aware that NAS would rely on the WIPfli reports. Therefore, in addition to suing Crowley to recover the amounts it claims it had to pay because it relied on the contractor’s misleading financial statements, NAS sued WIPfli alleging it failed to catch certain manipulated and inaccurate figures in those financial statements when preparing its “Independent Auditor’s Reports.”

WIPfli argued that NAS’s complaint should be dismissed because: 1) Minnesota does not recognize a claim for negligence against accountants by parties who were not clients of that accountant; and 2) failed to state with the required specificity a claim for negligent misrepresentation. The Court analyzed whether Minnesota law recognizes a claim for negligence (otherwise known as malpractice when referring to a professional such as a doctor or accountant) by a party in NAS’s position against an accountant providing services for another party (in this case, Crowley). Although noting that several cases issued by Minnesota’s appellate courts have allowed claims to proceed against accountants on claims that were referred to as based on “negligence”, this Court observed that a close reading of those cases demonstrates that Minnesota Courts had never held “negligence” was the appropriate cause of action. Rather, the claims at issue were permitted to proceed because they satisfied the standard for negligent misrepresentation.

The Court suspected the apparently confusing holdings in prior cases was due to the similarity between claims for negligence and claims for negligent misrepresentation. Ordinary negligence requires, among other things, that a defendant, who owes a duty to the plaintiff, breaches that duty (generally by failing to exercise the appropriate degree of care or competence). Negligent misrepresentation contains several additional elements, including the nature of the defendant’s role in the applicable transaction, but also includes a failure “to exercise reasonable care or competence in obtaining the information or communicating . . . information” to the plaintiff. A failure to exercise reasonable care is required under both claims, but the Court determined that a party in NAS’s position has been recognized as having a cause of action against another party’s accountant for negligent misrepresentation; not for negligence/malpractice.

The Court went on to determine that NAS had sufficiently pled facts necessary to continue with its negligent misrepresentation claim against the accounting firm. More importantly, however, based on its incisive analysis, the Court dismissed NAS’s claim for negligence against WIPfli after concluding that Minnesota courts had never intended to recognize such a claim despite certain cases that may at first have suggested otherwise.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Contracting Diseases: Mishaps in contract drafting, limitation of liability edition

1 Aug

One of the problems I regularly encounter with new clients is that they have come to me too late to do the most good. This frequently happens in the area of drafting contracts relating to their business or project. Many people say they want a “simple” contract, or they think they know what they’re signing, or that they trust the other party to the deal, so they don’t need to overthink what they’re doing. A recent decision by a Federal Court in Indiana demonstrates how costly this kind of “penny-wise” thinking can be.

SAMS Hotel Group, LLC set out to build a new hotel. Unfortunately, the architecture firm the company retained to provide the design work for the project apparently did not employ or even consult with a registered professional structural engineer for the project. The county building officials later found structural design defects, which resulted in the condemnation of the structure and its ultimate demolition before the hotel ever opened its doors to the public.

SAMS sued its architect, Environs, Inc. The trial court held that Environs breached the applicable standard of care by failing to involve a structural engineer and for failing to timely inspect the project during construction. SAMS proved damages in the amount of $4.2 million.

Now the story turns truly tragic for the developer. Environs incorporated a clause in its contract with SAMS that sought to limit its liability:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs/Architects/Planners, Inc. total liability to [SAMS] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.

SAMS, as the “Owner” under the applicable contract, paid Environs a lump sum fee of $70,000. The court enforced this limitation of liability provision and held that SAMS could recover only $70,000 of its $4.2 million loss, even though the source of Environs’ liability arose out of negligence rather than a breach of the parties’ contract. The United States Court of Appeals for the Seventh Circuit affirmed the trial court’s ruling. It noted, under Indiana law, that sophisticated parties aren’t entitled to protection from even the apparently unfair terms of the contracts they sign:

[T]he general rule of freedom of contract includes the freedom to make a bad bargain.

Parties are free to enter into any kind of contract they like, but just know that if you assume you are sophisticated enough not to need a lawyer’s assistance with your contract, the court just might agree with you and hold you to what you signed.

The complete order of the Federal District Court for the Southern District of Indiana can be read here.

The complete opinion of the Seventh Circuit Court of Appeals can be read here.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Minnesota Construction Warranty Claims: New Procedures for 2011

18 Jan

You may be familiar with (or at least aware of) the warranties provided to homeowners under Chapter 327A of Minnesota Statues.  These warranties include a one-year warranty on all workmanship and materials, a two-year warranty on plumbing, electrical or other mechanical systems, and a ten-year warranty against major construction defects.  These warranties apply to new or newly remodeled residential property (which can include single-family homes or community associations, such as condominiums or townhouses), and are binding against the builder (of a new home) or contractor (in the case of a remodeling project).  Throughout the rest of this article, I will refer to both as a “contractor”, though homeowners should appreciate there can be a difference.

For years, Chapter 327A has contained certain procedures that owners must follow to preserve a claim for a breach of one or more of these warranties.  Effective January 1, 2011, these procedures now have been revised, and new procedures have been added.  You can read the complete text of the new statute here.  The legislature’s goal in making these changes is to try to reduce the number of lawsuits that are necessary to resolve these warranty disputes, but as with any new process there will always be traps for the unwary and navigating the new procedures is bound to catch more than a few homeowners off guard.

The process still provides that written notice of an alleged defect must be provided to the contractor within six months of the discovery of the defect, with the new exception being where the owner can demonstrate the contractor had actual notice of the claimed defect. Of course, it’s best to provide timely written notice if you wish to rely on this statutory warranty.  Many owners falter by failing to provide this notice within six months of discovering the defect.

After this notice has been provided, the contractor has always been required to inspect the alleged defect within 30 days and propose a repair.  The new amendment now requires the owner to allow the contractor to conduct “invasive” testing to determine the extent of any damage or the proper type of repair, however.  Invasive testing may involve making test cuts in stucco or interior drywall and/or using a probe to test the moisture content of the wood framing members of the home, though the statute does not specify.  It is of course fair to permit the contractor a reasonable opportunity to understand fully the defect (if any) involved, and the contractor is required to place the property back into “pre-inspection condition” following any invasive procedures, but it is unclear how this restoration process will be measured or enforced in practice.

In the event the contractor inspects the property and the owner and contractor cannot agree on the proposed repair (and owners should carefully evaluate proposed repairs, preferably with the assistance of a trusted contractor, engineer or attorney), the homeowner must (yes, must) follow through with the new “home warranty dispute resolution process”.  The new dispute resolution process requires the selection of a “qualified neutral” from a list maintained by the Minnesota Department of Labor and Industry, which will charge aspiring neutrals a $200 fee to be listed.  There are rather short timeframes applicable to the steps for selecting a neutral, so homeowners should consult with an experienced member of the construction industry and/or their own construction attorney before submitting their claim to the commissioner of the Minnesota Department of Labor and Industry.  Otherwise they will find themselves with little time to make a decision about the neutrals from which they must choose to evaluate their case.

After a neutral has been selected, the parties must meet together with the neutral and each will submit its own reasons why its proposed repair is proper.  There is a fee of $25 per party for participation in the process, in addition to the hourly fees of the neutral third-party the parties select.  It also is possible the parties will use attorneys to represent them through this process, and contractors with insurance coverage almost certainly will have attorneys present to represent them, though homeowners presumably will not be required to do so.  According to the amendment, at the end of this process the neutral third party does not issue a binding decision (it simply is an evaluation). Moreover, this evaluation may not be used as evidence in any later litigation if the “unreasonable” party does not care to acknowledge that it is being unreasonable. The process does, however, provide the parties with perhaps some further understanding of the potential damages at stake and chances of a favorable (or unfavorable) result.

Barring certain exceptions, the parties must complete this process before litigation can be commenced.  However, there are four situations which owners may commence litigation earlier if the contractor is not engaging in the process in good faith:

1) The homeowner may sue the contractor immediately if:

a) the contractor fails to conduct an inspection within 30 days after the owner has provided written notice of the defect;

b) the contractor performs the inspection but fails to provide a written proposal to make a repair of the alleged defective condition within 15 days after the inspection is complete;

c) the contractor provides a proposed repair, to which the owner agrees, but the contractor does not perform the repair.

2) The homeowner may also sue the contractor following the expiration of 60 days from the owner’s receipt of the contractor’s repair proposal, whether or not the dispute resolution process is complete.

In the event the evaluation process is not successful in bringing the owner and contractor to a resolution, the new amendment also alters certain timing considerations applicable to a construction defect lawsuit. This is because there are numerous claims (or theories of recovery) applicable to construction defect cases. These can include not just a claim that the contractor breached one or more of the statutory warranties under Chapter 327A, but also that the contractor breached an applicable contract, or that the contractor was negligent. There are also other warranties that may apply, including warranties applicable to common interest communities (condominiums and townhouses) as well as warranties covering the sale of goods (such as windows, doors, shingles, etc.). Each of these claims has not only its own standards, but each also has an applicable limitations period (the period within which you must sue or your claim is barred) which may be different from the next. The amendments to 327A now provide that, for as long as an owner is following this statutory procedure, or for 180 days, whichever is longer, all of those claims will be “tolled” (meaning their expiration will be delayed). This is a useful provision for ensuring a homeowner does not lose the right to commence litigation as a result of participating in this mandatory dispute resolution process.

The new provisions of Chapter 327A certainly have created more opportunities for construction defect cases to reach resolution outside of court, in theory.  However, there is little likelihood that a contractor who was being unreasonable under the prior procedures failed to realize it was being unreasonable, and there is little consequence to a contractor that fails to reach a reasonable resolution even under this new scheme.  Therefore, until we have seen this process utilized a few times, we do not know whether it will provide aggrieved homeowners with a legitimate alternative to litigation, or just another hurdle to clear to obtain a recovery under Chapter 327A.  In the meantime, if you have any questions about whether this process applies to you and how to comply with its provisions, contact Matt Drewes or one of the other construction litigation attorneys at Thomsen Nybeck.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!finance.com and Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Matt Drewes Quoted in Articles About Construction Defects Appearing at HOAleader.com

13 Mar

Matt Drewes recently contributed quotes for the following articles published at www.hoaleader.com, a national web-based publication focused on homeowners association and condominium board members and association management professionals: 

 

Matt Drewes is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

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