Groff Murphy

NEWS

Groff Murphy succeeds in piercing the corporate veil

Groff Murphy wins unanimous decision of the Washington Supreme Court in land use case ensuring level playing field for its client.

Groff Murphy scores victory in government contract dispute

Groff Murphy obtains a $60 million judgment for a Federal government contractor client

Groff Murphy Helps Obtain Victory For Contractors In Supreme Court Lien Case

WSDOT defeats $177 million construction project bid protest

King County Superior Court order enforces a subcontract “pay if paid” clause

New precedent set in Washington for bad faith claims handling

NEWSLETTERS

Newsletter, April 2014 Issue: 8

Newsletter, June 2013 Issue: 7

Newsletter, March 2013 Issue: 6

Newsletter, September 2012 Issue: 5

Newsletter, October 2011 Issue: 4

Newsletter, September 2011 Issue: 3

Newsletter, March 2010 Issue: 2

Newsletter, July 2009 Issue: 1

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Groff Murphy succeeds in piercing the corporate veil

When chasing a financially weak corporate entity, piercing the corporate veil is a goal often pursued but rarely achieved. On March 31, 2014, however, Groff Murphy scored a victory for its client Northwest Cascade when Division One of the Court of Appeals pierced the corporate veil of a debtor corporation. The Court held that the corporate shareholders were personally liable for the obligation due Northwest Cascade where they regularly diverted funds from the corporation for their personal use, used corporate assets without compensation, and stripped the corporation of its real estate assets after Northwest Cascade had filed suit. The Court of Appeals rejected the shareholders’ argument that these acts were simply poor accounting. The decision provides some clarity to Washington law by rejecting the argument that a creditor must prove that the shareholder intended to fraud the corporate creditors, instead interpreting Washington law to simply require manipulation of the corporation in a way that harms the creditor.

Northwest Cascade was represented at trial and on appeal by Michael J. Murphy.

Groff Murphy wins unanimous decision of the Washington Supreme Court in land use case ensuring level playing field for its client

A level playing field is critical for everyone engaged in business. Although market conditions normally play a key role in leveling the playing field, government can dramatically alter the playing field when it makes regulatory and land use decisions. Michael Murphy and William Crittenden successfully represented Ellensburg Cement Products, Inc., in overturning a decision of Kittitas County that would have allowed a competitor to engage in rock crushing on agriculturally-zoned lands – an activity that historically had not been allowed under the County land use code. Even though “rock crushing” was expressly designated a permitted or conditional use in other specific zones, the County issued a decision allowing rock crushing on agriculturally-zoned property on the theory that rock crushing was permitted as “processing of products produced on the premises,” a use classification only allowed in agricultural zones. On February 6, 2014, a unanimous Washington Supreme Court agreed with Ellensburg Cement Products, Inc., that “processing of products produced on the premises” was an agricultural use that did not include rock crushing.

The decision is also noteworthy for its handling of the issue of how much deference is due the government in its decision making. The County and the permit applicant argued that the court was required to defer to the County’s interpretation of its own zoning code. The Supreme Court disagreed, noting that the County’s decision to allow rock crushing in the current case was not a consistent policy and, therefore, the decision was not entitled to any deference from the courts. The Supreme Court decision not only ensures a level playing field in this particular case, but it is also a victory for fairness, predictability and consistency in local permitting decisions, significantly limiting the ability of local governments to make unsupported ad hoc decisions.

The Court also agreed with Ellensburg Cement Products, Inc., that the county’s administrative appeal procedure violated state law. The county’s procedure for appealing the permit decision under the State Environmental Policy Act, Chap. 43.21C RCW (“SEPA”) effectively prevented interested parties from presenting evidence or even addressing the permitting board regarding the SEPA decision by making the appeal a “closed record appeal.” The Supreme Court ruled that the County’s SEPA appeal procedure violated provisions of the 1995 land use regulatory reform statutes that were intended to standardize local government permit processes. Under those state statutes the County could not provide a “closed record appeal” unless the County first provided an “open record hearing” at which interested parties could present testimony and evidence.

Ellensburg Cement Products, Inc. v. Kittitas County, 179 Wn.2d 737, 317 P.3d 1037 (2014)

If you have any questions about the Ellensburg Cement Products decision or other land use matters please call Michael Murphy at 206-628-9500 or William Crittenden at 206-361-5972.

Groff Murphy scores victory in government contract dispute

Groff Murphy succeeded in defending a client on a government project facing an inflated, total cost delay claim submitted by a subcontractor in arbitration. The subcontractor claimed its productivity was impacted by the prime contractor’s directives and decisions on the Federal environmental remediation project at issue. Groff Murphy established that the subcontractor failed to prove a loss of productivity , failed to prove liability on behalf of the prime contractor, and succeeded in defeating the over $2.5 million in impact damages claimed.

If you have any questions about this decision or other government contract disputes, please call Marisa Bavand at (206) 628-9500.

Groff Murphy obtains a $60 million judgment for a Federal government contractor client

On September 5, 2012, Groff Murphy was successful in obtaining a judgment in excess of $60 million for its Federal government contractor client in a U S District Court lawsuit against a foreign procurement agent with offices in Seattle and Singapore. The client was the BOS contractor for the US Navy on the Indian Ocean island of Diego Garcia, and Groff Murphy successfully established that the defendants had engaged in various forms of procurement fraud, conspiracy, RICO violations and breach of contract.

Groff Murphy Helps Obtain Victory For Contractors In Supreme Court Lien Case

Good news for mechanic’s lien claimants - on September 15, 2011, the Washington State Supreme Court unanimously overturned the Court of Appeals decision in Williams v. Athletic Field, Inc. In Williams, the Court of Appeals had invalidated a lien filed by a lien service on behalf of the contractor. The contractor’s lien service had used the exact sample lien form set forth in the statute, which the law says shall be sufficient to state a valid claim of lien. But the Court of Appeals held that the lien was not properly “acknowledged,” and was therefore invalid. In doing so, the Court of Appeals failed to “liberally construe” the lien statute to protect the claimant, as it is specifically required to do by the statute.

The Court of Appeals decision in Williams posed a significant trap for lien claimants. Numerous pending liens, representing untold millions of dollars in work were at risk of being declared invalid. Moreover, future lien claimants also ran the risk of having their liens declared invalid even though they relied in good faith on the sample lien form.

Because of our experience with this issue and the importance of this case to our clients and the industry, Groff Murphy was an active participant in the effort to have Williams overturned. Mike Grace filed an amicus curiae brief in the case on behalf of the AGC of Washington, and Mike Grace argued the AGC’s position to the Supreme Court.

In a 9-0 decision, the Supreme Court agreed with lien claimants and the AGC, holding that a properly filed lien based on the sample form is indeed sufficient to state a valid lien. Moreover, the Court also said that the mechanics lien statute is to be “liberally construed” by the courts in order to provide payment security for claimants.

From our perspective, although the Williams decision is important because it confirms that lien claimants can rely on the sample form in the statute, perhaps the broader significance of the decision is the Court’s clarification of the liberal construction standard in RCW 60.04.900. There are a variety of issues and defenses raised in lien disputes to which the liberal construction standard will apply, to the benefit favor of lien claimants.

If you have any questions regarding the Williams decision or any other aspect of lien law, please call Mike Grace or Marisa Bavand at 206-628-9500.

WSDOT defeats $177 million construction project bid protest

Groff Murphy successfully defeated a bid protest on a $177 million construction project for Washington State Department of Transportation on behalf of its general contractor client. The disgruntled bidder sought to enjoin the award of the contract to the low bidder based upon the low bidder’s use of the term “mechanical” in its subcontractor listing. The Thurston County Superior Court denied the requested injunction and allowed the contract to be awarded to our client.

King County Superior Court order enforces a subcontract “pay if paid” clause

Groff Murphy obtained an order enforcing a subcontract “pay if paid” clause in King County Superior Court. The subcontractor sued our general contractor client for payment. Groff Murphy argued that the subcontractor was not entitled to payment because the general contractor had not been paid by the project Owner and the subcontract included a “pay if paid” provision. The Superior Court agreed, enforced the “pay if paid provision,” and dismissed the claims against our client.

New precedent set in Washington for bad faith claims handling

Groff Murphy established new precedent expanding the scope of an insurer’s liability for bad faith claims handling in Washington. In denying the insurers’ motion to dismiss, the Western District of Washington held that an insurance claims representative may be held individually liable for bad faith claims handling. In addition, the Court granted our client’s motion for summary judgment on its bad faith claims based on the insurer’s failure to honor the “made whole” rule during settlement negotiations

Regulatory non-compliance cannot support FCA liability against government contractors absent harm to the government.

The False Claims Act (FCA) continues to be a hot bed of legal decisions and a minefield for any contractor performing work in the Federal government arena. In 2013, FCA claims initiated by qui tam plaintiffs soared to 752 - 100 more than the record set the previous fiscal year. The Federal government also recovered in excess of $3 billion in FCA judgments and settlements in 2013. As these numbers climb, the Department of Justice and whistleblower counsel dedicate more resources, time and effort to FCA cases. Given these factors, contractors performing work in the Federal government arena need to keep abreast of new FCA developments.

Recent case law continues to shape application of the Federal False Claims Act. In United States ex rel. Rostholder v. Omnnicare, Inc., a February 2014 decision, the Fourth Circuit resisted attempts to "sanction use of the False Claims Act as a sweeping mechanism to promote regulatory compliance." Instead, the court made clear that unless compliance with the regulation is a prerequisite to payment by the government, there is no FCA violation. More and more, the industry has witnessed qui tam plaintiff and government attempts to expand the FCA to all manners of statutory violations and breaches to contract terms. Rostholder reinforces the notion that to rise to the level of a FCA violation, the action at issue must be a prerequisite to payment by the government. This further supports the 2001 Supreme Court decision in Allison Engine v. United States ex rel. Sanders, 553 U.S. 662 (2008) that the FCA is not an "all-purpose antifraud statute."

The FCA requires a plaintiff to plead four elements: (1) a false statement or fraudulent course of conduct; (2) made with the requisite "scienter" or knowledge, (3) that was material, and (4) that caused the government to pay out money or forfeit moneys due. 31 U.S.C. § 3729(a). Recently, qui tam plaintiffs and the government have attempted to assert per se regulatory violations as a basis to support FCA liability against government contractors absent any showing of harm to the government fisc.

Rostholder involved allegations that Omnicare, a pharmaceutical drug provider, fraudulently repackaged contaminated drugs that were not eligible for reimbursement by Medicare and Medicaid. Under applicable FDA safety regulations, penicillin and non-penicillin drugs are required to be packaged separately, which Omnicare's drugs were not. According to the qui tam plaintiff, Omnicare violated the FDA packing regulations, and therefore violated the FCA in seeking reimbursement for the drugs.

The Fourth Circuit disagreed. Although the relator sufficiently pled Omnicare's regulatory violations of the FDA, compliance with the safety regulations was not a prerequisite to payment under applicable Medicare and Medicaid regulations. Accordingly, Omnicare did not "falsely" state compliance with the payment-contingent regulations, despite its violation of FDA packaging rules. Medicare and Medicaid do not expressly prohibit reimbursement for drugs that are packaged in violation of FDA safety regulations, and do not require compliance with FDA safety regulations as a precondition to reimbursement. Omnicare's violations simply were not material to the government's ultimate reimbursement to support FCA liability.

The Omnicare holding emphasizes that the FCA should not be the appropriate enforcement mechanism for regulatory compliance, which should be done at the agency-level. A per se statutory violation cannot support a FCA claim absent financial harm to the government. Doing so would permit recovery against contractors as a result of any statutory violation in a claim for goods or services, without any showing of materiality. In deciding this case, the Fourth Circuit joined the growing number of courts that have refused to further expand the reach of the FCA to all manner of regulatory violations.

 

THINK YOU LIMITED YOUR LIABILITY? THINK AGAIN…

In the State of Washington, contractors historically have relied on the legal precedent that the "contract is king" for allocating and limiting risk on a project to purely economic damages. The Washington Supreme Court has changed the rules of the game.

In late 2013, the Washington Supreme Court issued a sharply-divided opinion in Donatelli v. D.R. Strong Consulting Engineers, Inc., limiting the ability of a contractor or design professional in a construction-related professional negligence action to rely on the existence of a written contract to limit liability.

The facts of Donatelli are those of a standard "project gone bad." A developer retained an engineering firm to provide engineering services for a set fee. The contract between the parties expressly limited the engineer's liability to the amount of the fee. A common form of limitation in the construction industry. When the project experienced overruns and delays, the developer sued the engineer for breach of contract (under which the liability limitation applied) and in tort - specifically negligence and negligent misrepresentation (under which there is no liability limitation). The engineer moved to dismiss the negligence based claims as barred by Washington's "economic loss rule" - which generally limits contracting parties to their contractual remedies - to enforce its contractual limitation of liability.

Despite the existence of a written contract, the Supreme Court declared that it could not tell what was actually agreed to by the parties, and that additional duties may have been assumed that are not reflected in the contract. The Court further identified a pre-contractual duty not to mislead a party, and held that the engineer's pre-contract statements regarding project budget and duration (the crux of most construction disputes) may give rise to a negligent misrepresentation claim.

In light of this shift in Washington law, there are a couple of steps that a contractor/design professional should take to try to stack the cards in its favor:

  • Use a merger or integration clause. In Donatelli, the Court noted how "conspicuously absent" from the parties' written contract was any type of merger or integration clause providing that the written contract supersedes any prior agreements between the parties. According to the court, "[s]uch a clause would tend to diminish the likelihood of the [the Developer] establishing the existence of an oral contract." Be sure to include an integration clause in your contracts.

  • Be aware of extra-contractual work. Take care to clearly define the scope of work in your contracts, and memorialize all additions/deletions to your scope in writing. In Donatelli, the Court noted that the contract at issue did not reflect the full scope of the engineer's work - particularly the extent of its managerial duties. The Court suggested that the engineer's performance of additional work not contemplated in the contract raised additional liability outside of the contract liability limitation. Be sure that your written contracts incorporate all additional work scope you perform, and that the base contract terms - including the limitation of liability terms - apply to all additional scope.
IS YOUR SUBCONTRACT FLOW-DOWN CLAUSE AS BROAD AS WASHINGTON LAW ALLOWS?

In our last newsletter, we discussed the recent Washington Supreme Court case of Washington State Major League Baseball Stadium Public Facilities District v. Huber, Hunt & Nichols-Kiewit Construction Company, --- P.3d ----, 2013 WL 363453, and how the Supreme Court held that a public owner could insert provisions in a public works contract that effectively force a contractor to waive the protections of the six year construction statute of repose.

Another notable aspect of the case is the Court's enforcement of broad flow-down provisions in subcontracts. In particular, the Court considered whether Hunt Kiewit's third party claims survived the subcontractors' assertion of the statute of limitations and statute of repose. The subcontracts incorporated by reference the prime contract documents and provided that the subcontractors assumed toward Hunt Kiewit all obligations and responsibilities that Hunt Kiewit assumed toward the Owner, "insofar as applicable, generally or specifically, to Subcontractor's Work." Perhaps most notable, however, is that the subcontracts also stated that the subcontractors agreed to "make good" any defect occurring "prior to the Contractor's release from responsibility to the Owner therefor."

The Court held that the flow-down provisions in the subcontracts clearly subjected the subcontractors to liability to the extent Hunt Kiewit is liable to PFD because of the subcontractors' defective workmanship. While the flow-down provisions could not be interpreted so broadly as to bind the subcontracts to all obligations of the general contractor to the owner, they did incorporate all provisions in the prime contract that could be applied to the subcontractors' work, including the procedural limitations and accrual provisions. As the time-of-accrual provision in the prime contract did not bar the Owner's claim against Hunt Kiewit, neither could it bar Hunt Kiewit's claims against the subcontractors. Similarly, the subcontractors could not assert a statute of limitations defense to Hunt Kiewit's claims when there was no statute of limitations bar to the Owner's claims. The subcontract language that the subcontractors would "make good" any defects occurring prior to Hunt Kiewit's release from liability was further evidence that the parties intended the procedural provisions in the prime contract to control any third party claims.

In our opinion, general contractors should review the flow-down clauses in their subcontracts and make sure the clause is consistent with the Court's decision, including language that requires the subcontractor to "make good" any defect occurring "prior to the Contractor's release from responsibility to the Owner therefor."

 

RECENT COLORADO CASE SUPPORTS EMPLOYERS' CONTINUED TESTING OF MARIJUANA USE BY EMPLOYEES UNDER FEDERAL LAW.

A recent Colorado Court of Appeals case of Coats v. Dish Network, LLC (April 25, 2013) addresses Colorado's treatment of employee termination on the basis of unlawful marijuana use under federal law, and may be informative on how a Washington Court will address the issue.

Plaintiff Brandon Coats filed a complaint against his former employer Dish Network after Dish Network terminated Coats' employment for testing positive for marijuana in violation of the Company's drug policy. Coats alleged that he only used medical marijuana within the limits of his license, never used marijuana on work premises, and was never under the influence of marijuana while at work.

The Court dismissed Coats' wrongful termination case, reasoning that because medical marijuana is subject to both state and federal law, Coats' medical marijuana use must comport with both state and federal law to be considered lawful. Coats acknowledged that his medical marijuana use is illegal under federal law, but argued his use was nonetheless a "lawful activity" under Colorado law because the statutory term "lawful" refers only to state, not federal law. The Colorado Court disagreed.

The Court in Coats went on to acknowledge the legislative purpose of the Colorado statute: "to keep an employer's proverbial nose out of an employee's off-site, off-hours business. Regardless, the Court found "no legislative intent to extend employment protection to those engaged in activities that violate federal law." Accordingly, Coats' termination, premised on his illegal drug use found by the Company's drug testing, was upheld.

 

THE IMPORTANCE OF A WELL CRAFTED AND EXECUTED RECORDS RETENTION POLICY

Records retention issues may not be on the hot plate managing day-to-day business, but a recent case, Micron v. Rambus, highlights the importance of balancing a defensible records retention protocol with managing document archival and/or destruction. While most businesses keep a keen eye on containing legal costs, Rambus reminds us that improper or poorly executed records retention polices can have an adverse effect.

Rambus viewed its records retention policy as a vehicle for containing legal costs inherent in employing aggressive business strategies. Unfortunately for Rambus, the Federal Circuit Courtfound those policies to reflect an attempt to destroy evidence unfavorable to litigation and preserve other, more favorable evidence. This resulted in severe sanctions against Rambus, including loss of the right to enforce its patents.

Rambus serves to highlight the need for responsible stewardship of business information and documentation. Practice tips to consider for your retention policy include: 1) know your business sufficiently to anticipate litigation and consider the timing of a document retention policy; 2) craft the policy to be content-neutral and routinely audited; 3) train personnel on the document retention policy and include procedures for implementation, from top management down, 4) create a policy identifying custodians, types of servers, backup tapes, mobile devices, etc., and 5) identify the balance between not keeping everything and keeping enough. A retention policy that is well crafted and well executed assures Courts that company information is well managed and deters potential costly discovery battle and sanctions.

Back to Brazier – Recent Washington Supreme Court Decision Holds Public Agencies May Contract Around the Statute of Repose for Construction Claims

On January 31, 2013, the Washington Supreme Court issued an opinion in the case of Washington State MLB PFD v. Huber Hunt & Nichols-Kiewit Construction Company. This is the first of two updates regarding the impact of the case. This update addresses the Supreme Court's treatment of the construction Statute of Repose. A second update will address the Supreme Court's treatment of subcontract flow-down clauses in Washington.

In Washington, contractors are protected from "stale" or untimely claims on construction projects by a series of interrelated statutes. First, the Statute of Repose for construction claims provides that all claims that have not "accrued" within six years of substantial completion are time barred. Second, statutes of limitation require that after a claim or breach of a construction contract has "accrued," it must be filed within six years.

These general rules are not set in stone for claims on public construction projects. In particular, a claim that is brought "in the name of or for benefit of the state" is exempt from statutes of limitations. See RCW 4.16.160. In 1984, the Supreme Court held that the Statute of Repose did not apply to claims brought by the state, effectively eliminating any time bar for claims by public owners against contractors. Bellevue School District v. No. 405 v. Brazier Construction Co., 103 Wn. 2d 111, 691 P.2d 178 (1984). The legislature quickly responded to the Brazier decision, and amended the Statute of Repose to state that it specifically and unequivocally applies to claims brought by the state. As a result, since 1986, contractors have assumed that even though statutes of limitations do not apply to claims brought by public agencies, the Statute of Repose does.

One would think that the legislature's amendment would have put this issue to rest. However, a recent decision by the Washington Supreme Court completely undermines the legislature's decision to make the Statute of Repose applicable to claims brought by public agencies. In Washington State MLB PFD v. Huber Hunt & Nichols-Kiewit Construction Company, 2013 WL 363453 (Wash. 2013), the Supreme Court held that state and public agencies may effectively contract around the Statute of Repose by specifying in the contract when a claim "accrues," effectively reinstating the holding of the Brazier case from 1984. Under the Court's logic, the state's claim accrues, by contract, within six years, eliminating the protections of the Statute of Repose. Because the state is not subject to statutes of limitation, a contractor's potential liability extends indefinitely.

Ironically, when used in a contract for a private construction project (i.e., a project that is subject to statutes of limitations), accrual provisions protect contractors by eliminating use of "the discovery rule" for latent defect claims. For example, an owner can assert that its claim for latent defects did not accrue until the owner discovered the damage. But, if an accrual clause is used, the claim is deemed to accrue upon substantial completion, the statute of limitations begins to run at that time and the owner is prevented from using the discovery rule to extend the statute of limitations.

The Supreme Court's recent decision is troubling to contractors in many respects. First, the Court did not even mention or discuss the potential impact of stripping a contractor of the protections of the Statute of Repose. Is it good policy to subject contractors (and their insurers) to potentially unending liability on public construction projects? Second, state and public agencies now have a green light to include accrual provisions in their construction contracts. Given that the terms of most public construction contracts are offered and awarded on a "take it or leave it" basis, under the Court's logic, contractors will have no choice but to agree to waive the protection of the Statute of Repose or forego the contract.

So what should a public works contractor do? Going forward, public works contractors must carefully review any public construction contract they are considering to determine if the contract contains any provision that determines when claims accrue. If the contract contains accrual language, contractors must assume that they are effectively waiving the protection of the Statute of Repose, and proceed accordingly. If there is any opportunity to negotiate or strike the accrual provision the contractor should do so.

On a broader scale, contractors should support industry efforts to legislatively correct the problem. Groff Murphy is presently working with the AGC of Washington to propose a legislative correction that would once again provide public works contractors with the protection of the Statute of Repose.

In the interim, should you have any questions about this issue, please contact Mike Grace at 206-628-9500.

Court of Appeals Decision Serves To Remind Contractors That Washington's Stop Notice Statute is an Effective Tool for Getting Paid

While often overlooked, the stop notice provision in Washington's Mechanic's Lien statute is an important weapon in a contractor's arsenal to get paid for work performed. The stop notice statute's provisions were confirmed again in the Washington State Court of Appeals case of Pacific Continental Bank v. Soundview 90, LLC, No. 65929-4-1 (Wash. App. Div. 1, Mar. 26, 2012). The Court's decision further clarified and strengthened a lender's obligations upon receipt of a stop notice.

Stop Notice Statute. Under Washington's stop notice statute (RCW 60.04.221), when a lien claimant gives notice to a lender providing construction financing, the lender must withhold the claimed amount from future distributions. The important provisions of the statute are as follows:

  • Once notice is given, the lender "shall withhold from the next and subsequent draws the amount claimed to be due as stated in the notice." RCW 60.04.221(5). In the alternative, the lender may obtain a payment bond from the borrower to cover the amount stated in the stop notice. Id.
  • The withheld funds cannot be distributed "except by written agreement of the potential lien claimant, owner, and primary contractor." RCW 60.04.221(6).
  • If the lender fails to comply with the statute, the lender's deed of trust (or other encumbrance securing the lender) is "subordinated to the lien of the potential lien claimant to the extent of the interim or construction financing wrongfully disbursed." RCW 60.04.221(7).
Lender Must Withhold Funds From Upcoming Progress Payments. Under the stop notice statute, the lender must hold back enough funds from upcoming progress payments to cover the amount claimed in the notice. The lender cannot disburse the withheld funds until: (1) the lender receives notice that the dispute was resolved, or (2) the borrower obtains a bond in favor of the contractor for the amount of the lien. Alternatively, the lender can declare the borrower in default and foreclose the loan. In Pacific Continental Bank, the lender reserved funds for a subcontractor, but continued to make scheduled payments to the borrower. The lender should have instead withheld funds from the borrower until it collected $385,465.48 to satisfy the lien amount (or it received notice that the dispute was resolved or a bond from the borrower). Instead, the lender treated the reserve "as a mere obligation under the line of credit that was cancelled along with the line of credit," so the lender did not properly withhold funds as required by the statute.

Contractor's Lien Takes Priority If Funds Not Withheld. Pacific Continental Bank also further enforces the rule that when a lender fails to withhold funds under the stop notice statute, the lender's entire deed of trust (or other encumbrance) is subordinated to the contractor's lien. The court rejected the lender's argument that only a portion of the lender's interest should be subordinated. It found that the plain language of RCW 60.04.221(7) does not support an argument that the lender's priority should be subordinated only to a portion equal to the amount the lender wrongfully disbursed.

Washington's lien laws can be a challenge to navigate. Groff Murphy offers complimentary in-house training to assist contractors in protecting their lien, bond and retainage rights.

If you have any questions regarding this article, please call Marisa Bavand or Mike Grace at 206-628-9500.

Dave Groff named "Lawyer of the Year" by Best Lawyers

Best Lawyers

Best Lawyers, the oldest and most respected peer-review publication in the legal profession, has named David C. Groff as the inaugural “Seattle Best Lawyers Construction Law Lawyer of the Year” for 2012.

After more than a quarter of a century in publication, Best Lawyers is, for the first time, designating “Lawyers of the Year” in high-profile legal specialties in large legal communities. Only a single lawyer in each specialty in each community is being honored as the “Lawyer of the Year.”

Best Lawyers compiles its lists of outstanding attorneys by conducting exhaustive peer-review surveys in which thousands of leading lawyers confidentially evaluate their professional peers. The current, 18th edition of The Best Lawyers in America (2012) is based on more than 3.9 million detailed evaluations of lawyers by other lawyers.

The lawyers being honored as “Lawyers of the Year” have received particularly high ratings in our surveys by earning a high level of respect among their peers for their abilities, professionalism, and integrity.

Steven Naifeh, President of Best Lawyers, says, “We continue to believe – as we have believed for more than 25 years – that recognition by one’s peers is the most meaningful form of praise in the legal profession. We would like to congratulate David C. Groff on being selected as the ‘Seattle Best Lawyers Construction Law Lawyer of the Year’ for 2012.”

If you have any questions regarding this article, please call Marisa Bavand at 206-628-9500.

Groff Murphy Helps Obtain Victory For Contractors In Supreme Court Lien Case

Good news for mechanic's lien claimants - on September 15, 2011, the Washington State Supreme Court unanimously overturned the Court of Appeals decision in Williams v. Athletic Field, Inc. In Williams, Division II of the Court of Appeals had invalidated a lien filed by a lien service on behalf of the contractor. The contractor's lien service had used the exact sample lien form set forth in the statute, which the law says shall be sufficient to state a valid claim of lien. But the Court of Appeals held that the lien was not properly "acknowledged," and was therefore invalid. In doing so, the Court of Appeals failed to "liberally construe" the lien statute to protect the claimant, as it is specifically required to do by the statute.

The Court of Appeals decision in Williams posed a significant trap for lien claimants. Numerous pending liens, representing untold millions of dollars in work were at risk of being declared invalid. Moreover, future lien claimants also ran the risk of having their liens declared invalid even though they relied in good faith on the sample lien form.

Because of our experience with this issue and the importance of this case to our clients and the industry, Groff Murphy was an active participant in the effort to have Williams overturned. Mike Grace filed an amicus curiae brief in the case on behalf of the AGC of Washington, and Mike Grace argued the AGC's position to the Supreme Court.

In a 9-0 decision, the Supreme Court agreed with lien claimants and the AGC, holding that a properly filed lien based on the sample form is indeed sufficient to state a valid lien. Moreover, the Court also said that the mechanics lien statute is to be "liberally construed" by the courts in order to provide payment security for claimants.

From our perspective, although the Williams decision is important because it confirms that lien claimants can rely on the sample form in the statute, perhaps the broader significance of the decision is the Court's clarification of the liberal construction standard in RCW 60.04.900. There are a variety of issues and defenses raised in lien disputes to which the liberal construction standard will apply, to the benefit favor of lien claimants.

If you have any questions regarding the Williams decision or any other aspect of lien law, please call Mike Grace or Marisa Bavand at 206-628-9500.

Does Washington Law Allow a Contractor to File a Lien for Changes?

It is a common scenario on construction projects - the contractor seeks additional money or time for work that it believes constitutes a change, but the owner disagrees, and refuses to issue a formal change or pay for the work. Indeed, often the fact of the change is undisputed, but the cost is. When this occurs on a private project, is the contractor allowed to record a lien that includes the cost of the disputed change? The answer has historically and reliably been "yes."

To the surprise of many in the construction industry, this is now an open question because of a case pending in the Washington State Court of Appeals, Keenan Hopkins Suder & Stowell v. J.E. Dunn Northwest, Inc. This case involves construction of a condominium project in the Belltown neighborhood of Seattle. The contractor filed a $6.7 million lien that included amounts for disputed changes. The owner took the position that because the lien included amounts in dispute, the amount of the lien was excessive and filed a motion for summary judgment to reduce the lien to eliminate the amounts for disputed changes.

The owner contended that the contractor's right to lien is limited to the "contract price," which is the "amount agreed upon" by the parties to the contract, and that "for amounts in excess of the contract price the contractor is afforded no security interest in the property, and must file suit for breach of contract - like any other unsecured plaintiff in Washington pursuing its breach of contract claims."

King County Superior Court Judge Gregory Canova agreed with the owner and ordered the lien reduced to eliminate the amount of the disputed changes. The court's ruling was based upon language in the Lien Statute:

"Any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials, or equipment furnished at the instance of the owner, or the agent or construction agent of the owner.

"Contract price" means the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefore. RCW 60.04.011(2)

Based upon a narrow reading of this language, the court reasoned that because the disputed change order work was not "agreed upon," it was not, by definition, included in the "contract price." The court completely ignored the fact that the contract contemplates the potential for disputes that will ultimately be resolved and the lien can then be amended to reflect the final agreed contract price. That is exactly what standard practice in the State of Washington has been, and fairly provides the contractor with security for the final contract price.

We did not handle this case, but in our opinion, the trial court's decision is wrong and should be reversed by the Court of Appeals. We believe the judge failed to appreciate that the change and dispute processes are integral and necessary to construction projects, and must be given effect in interpreting the lien statute. Indeed, all standard form contracts contemplate changes and potential disputes and provide mechanisms for resolving disputes to arrive at a final contract price. The breach of contract action and the lien foreclosure action often proceed in one suit with the final contract price and lien amount being determined in tandem.

In addition to ignoring standard practice and the intent of the lien statute, the judge only relied on part of the definition of "contract price" in the lien statute, and ignored the language "... or if no amount is agreed upon, then the customary and reasonable charge therefore." Only by giving effect to that language is the intent of the lien statute carried out - namely to give the contractor a security interest in the property in order to protect its right to be paid for the amount it is entitled to under the contract, whether called for by the original contract or by change.

Groff Murphy plans to file an amicus (friend of the Court) brief at the Court of Appeals to support the effort to overturn this decision. Stay tuned to see how the Court of Appeals rules on this important case for the industry.


Is a Performance Bond Claimant Required to Notify the Surety of its Principal's Default?

Another case that we take a look at in this issue of the newsletter concerns the notice required to be given to sureties when a contractor or subcontractor defaults, and its implications on Washington law. In a case from the "other" Washington, Hunt v. National Wrecking, 587 F.3d 1119 (D.C.C. 2009), the court found that the AIA 311 performance bond requires notice of a subcontractor's default as a condition of a surety's liability. In that case, the general contractor on a hotel project sued its excavation subcontractor, as well as the subcontractor's performance bond sureties. The general contractor alleged that the subcontractor had defaulted by failing to timely complete its work.

The sureties claimed that the general contractor delayed in notifying the sureties while incurring additional expenses for expediting the work. The sureties argued that this failure to give timely notice deprived them of their right to remedy the subcontractor's alleged default under the bond. The court agreed and granted the sureties' motion for summary judgment.

The court held that the AIA 311 bond form required timely notice of default to the surety, relying in part on the language in the bond which gives the surety the right to remedy the default. The court found that this right to remedy would not make sense without an understanding that the bond also required notice of default to the surety. The court also stated when notice is a condition of liability under the bond, proof of prejudice is not required.

The Hunt Court's decision is of interest because it is at odds with a relatively recent - and somewhat controversial - Washington Supreme Court holding that the AIA 311 bond did not require notice as a condition of recovery. In Colorado Structures, Inc. v. Insurance Co. of the West, 167 P.3d 1125 (Wn. 2007), the Washington Supreme Court relied on paragraph B of the AIA 311 bond, finding that it placed "one - and only one - express condition" on the surety's liability: the subcontractor's failure to fully and faithfully perform the contract. The Court interpreted paragraph C to apply only when the general contractor formally declares a default. Under this interpretation, notice of default was an option that led to additional remedies, such as the surety's right to remedy, and not a condition precedent to recovery against the surety.

So what is the lesson learned? If your subcontractor is bonded, carefully review the requirements in the bond to make sure you timely and properly comply with notice requirements. Although the Colorado Structures decision seems to indicate that Washington courts will give some latitude to claimants, this is a dangerous assumption to make. Courts from other jurisdictions seem to treat the Colorado Structures decision as somewhat of an aberration. Bond claimants are therefore wise not to rely upon the latitude in giving notice accorded to the claimant in Colorado Structures. Rather, the more prudent course of action when making a surety claim is to give notice early and often, and to strictly comply with the notice requirements in the bond form. Even though Colorado Structures is the law in Washington State, the safer approach for claimants is to follow the strict notice rules set forth in the Hunt v. National Wrecking case.

We would be glad to discuss any of these issues with you in further detail. Please feel free to contact Dave Groff, Mike Grace or Marisa Bavand at (206) 628-9500.

Welcome to the inaugural issue of the Groff Murphy newsletter

In this and future issues, we look to keep our clients and colleagues updated on news and events that are of current interest to the construction industry. In this first issue, we address a topic that has become increasingly relevant in these challenging economic times - false claims. The Federal Government recently passed legislation expanding the reach of the Federal False Claims Act. The Washington State Legislature considered, but did not pass, legislation that would have enacted a Washington False Claims Act.

Expansion of the Federal False Claims Act

The Federal False Claims Act ("FCA") dates back to the Civil War. It imposes both civil and criminal liability for "knowingly presenting or causing to be presented to an officer or employee of the United States Government a false or fraudulent claim for payment or approval." Case law has expanded the scope of the FCA to also include the use of information in a claim on federally funded projects with "deliberate ignorance" or "reckless disregard" of the truth or falsity of information.

On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act ("FERA"), which further expands the reach of the FCA and provides the Federal Government with more tools and resources to investigate and prosecute financial frauds. Pursuant to FERA, a contractor will face liability under the FCA if it submits false information that is "material," i.e., capable of influencing the government in making a payment. The Government is no longer required to establish a contractor's intent to submit a false claim.

FERA also clarifies a split among the Federal Circuit Courts related to the "presentment" requirement of the FCA. It is no longer a requirement that the contractor present false information to the Federal Government to be liable under the FCA, but must only submit false information on a project that is at least partially funded by Federal dollars. In addition, FERA increases FCA enforcement and oversight by establishing the Government's authority to make Civil Investigative Demands ("CIDs") during the course of an investigation. CIDs provide the Government with significant investigative tools to obtain access to documents, witnesses and other resources in the course of conducting an FCA investigation. Coupling this with the over $200 million in stimulus money earmarked for the hiring of Inspector Generals to oversee the spending of Federal funds and prosecute financial frauds, we expect to see a significant increase in FCA investigations.

The Washington False Claims Act - Gone For Now - But For How Long?

This spring, the Washington State Legislature concluded the 2009 legislative session. The session was unusually productive with respect to construction related legislation. There was a wide variety of legislation related to the construction industry, from bills that authorized funding for significant public works projects, to bills that affect contract rights on public projects.

Perhaps the most notable piece of legislation was a bill introduced by Senator Kline that didn't pass. SB 5144 was entitled the "Washington False Claims Act," and would have introduced a significant new dynamic into the owner-contractor relationship on public projects.

In a general respect, the bill was modeled after the Federal False Claims Act. As originally introduced, the bill defined a false claim as "any claim that contains or is based upon a materially incorrect fact, statement, representation, or record." However, the term "claim" was defined more broadly than the term is used in construction contracts, to include any "request or demand, whether under a contract or otherwise, for money or property which is made to a government employee or official, contractor, grantee, or other recipient if a governmental entity provides any portion of the money or property which is requested or demanded[.]" As is evident from the proposed language, a false claim could have been a request for a change order, as well as a contract claim or request for equitable adjustment.

A person that violated the act by would be liable for a civil penalty ranging from $5,000 - $10,000. In a subsequently proposed amended version of the bill, a person that violated the act could have been liable for uncapped treble damages, plus attorney's fees and costs.

The bill was supported by the Washington State Trial Lawyers Association. As one might surmise from WSTLA's support, the bill also provided Qui Tam provisions and incentives for third party enforcement (i.e., whistleblowers). Depending on how the false claim was prosecuted - in particular, whether the government chose to take control of an action after initiation by the whistleblower - the whistleblower could stand to recover between 15-30% of the amount recovered for the false claim.

Ultimately, the bill didn't pass. However, our take is that the Washington False Claims Act - whether in this form or modified - will be back. False claims are a hot topic these days, given the economic climate and the numerous high profile examples of fraud and corruption in the news over the past year.

So how can a False Claims Act be a bad thing? As drafted, the language in the bill was quite broad. There was no requirement of intent to defraud or to make a false claim. Liability could have been imposed for mistaken information that was included in a "request for money." If the Act were passed as drafted, the breadth of its language, combined with the tight timelines imposed by Mike M. Johnson, would have provided another tool for owners to defeat and discourage legitimate contractor claims. A contractor would not only face the waiver penalty imposed by Mike M. Johnson, but also potential monetary penalties as well. In our opinion, this simply shifts the balance too far in favor of owners.

Other Selected Legislation That Passed>

Despite the failure of the False Claims Act, the State Legislature did pass numerous other bills related to construction and public works, including the following:

HB 1195 - Payment of Undisputed Claims on Public Projects: This new law is a first short step towards addressing some of the inequity that results when public owners refuse to issue change orders for changed work. The law requires the State or municipality to issue a change order for the full dollar amount of any undisputed portion of additional work within 30 days of satisfactory completion of the additional work. If the owner fails to issue the change order within 30 days, the owner is liable for 12% annual interest on the amount due for the undisputed work. The law goes into effect on July 26, 2009.

SSB 5613 - Stop Work Orders for Failure to Secure Industrial Insurance: This new law authorizes the Director of Labor & Industries to issue a stop-work order against a general or specialty contractor or a general or specialty electrical contractor that has failed to secure payment of industrial insurance. The stop-work order may be served on a worksite by posting a copy in a conspicuous location, and is effective as to the employer's operations on that worksite. Upon issuance, business operations of the employer must cease immediately upon service. An employer who violates a stop-work order is subject to a $1,000 penalty for each day not in compliance. The law goes into effect on July 26, 2009.

Transportation Bills - The legislature passed multiple bills that authorized or provided funding for public transportation projects, including the following:

  • Economic Stimulus Transportation Funding - This new law authorizes the WSDOT to spend up to $341.4 million in Federal Funding, and updated the State transportation budget to account for these funds.
  • SR 520 Corridor - This bill authorizes tolls on the 520 floating bridge, replacement of the bridge, and other related projects on the SR 520 corridor.
  • Alaskan Way Viaduct Replacement Project - This bill requires the Alaskan Way Viaduct Tunnel to be located under 1st Avenue in Seattle. The bill also caps the amount of State funding for the tunnel at $2.4 billion, requires $400 million in toll revenues, and expedites the environmental review and design process.