Home > Uncategorized > Great Lessons for Real Estate Professionals From Unfortunate Local Construction News and Recent Case Law

Great Lessons for Real Estate Professionals From Unfortunate Local Construction News and Recent Case Law

Court cases and local headlines have a way of grabbing our attention – they also provide useful lessons.

I had a builder client come to me recently about concerns with their construction contract.
The owner that my builder was beginning a job for had a question about the indemnity provision in the contract (which I drafted).
Basically, the owner looked at the contract and asked: how does this indemnity clause protect me?
The short answer was, it doesn’t.
Contracts are all about “risk allocation” – how much risk is each side willing to bear?
Since my client had me draft the contract, naturally, I am going to be looking out to protect my client where I think its business most needs to be protected, in the event worst case scenario happens.
Lamar Construction’s Shutdown
I look at the unfortunate, and quite unexpected, news about the shutdown of Lamar Construction 
Many Affected.
Many relationships are affected by this shutdown, least of all the couple hundred employees.  By the way, great job by the Associated Builders and Contractors, Inc. for offering help to place the many displaced Lamar employees into new jobs.
The Landlord for Lamar Construction is filing to evict Lamar. This is not surprising. What is surprising to me is that they are doing so after Lamar getting behind over $45,000 in past rent.
Suppliers are affected. Those who have supplied materials to projects lead by Lamar and now have no ability to get their supplies back, or get paid what they are owed.
Subcontractors are affected. Those who also have purchased materials, provided labor and will not get paid.
Since Lamar filed bankruptcy, where are they left standing?
All creditors who don’t have a secured interest will stand in line and share pro-rata with all the other unsecured creditors.
Some options for suppliers or contractors might be to record a claim of lien on projects. However, this isn’t ideal for several reasons, one of which is that likely anyone else who wasn’t paid on a Lamar project will likely file a lien as well. There will be more “standing in line” with everyone else who is owed.
Further, they are likely all standing behind the first mortgage on the project, filed by Lamar’s (previous) lender.  Likely, the Bank will cover it’s losses first.
The legal battles have already begun, as the news articles have highlighted – from the landlord, to the bankruptcy action to a federal class action lawsuit.  Yes, this will be a messy ordeal.
How This Ties In to Indemnity Clauses
It doesn’t, directly. But it proves my point: Lawyers are here to protect our clients from worse case scenarios:  Like Lamar’s shutdown.
A recent Michigan Court of Appeals case decided in April of this year provides a good example of the place of indemnity clauses in development contracts.
The case is Sachse Const & Dev Co, LLC v AZD Assoc, Inc, No. 310026, 2014 WL 1351397 (Mich Ct App April 3, 2014)
Law of Indemnity: “Common-law” v.s. “Contractual”
Common law Indemnification…springs from equity: namely, that an innocent party should not be liable for the wrongful acts of another.5 Lakeside Oakland Dev, LC v. H & J Beef Co, 249 Mich.App 517, 531; 644 NW2d 765 (2002).
It is intended “only to make whole … a party held vicariously liable to another through no fault of his own.Peeples v. City of Detroit, 99 Mich.App 285, 292; 297 NW2d 839 (1980).  Sachse Const & Dev Co, LLC v AZD Assoc, Inc, No. 310026, 2014 WL 1351397 (Mich Ct App April 3, 2014)
to prevail on a claim for common-law indemnification, the party seeking indemnification must show that:
(1) it has been held liable for the acts of another; and

(2) it is free from fault in the underlying wrongful act that gave rise to the liability at issue

Sachse Const & Dev Co, LLC v AZD Assoc, Inc, No. 310026, 2014 WL 1351397 (Mich Ct App April 3, 2014)
Common-law indemnification is different than “contractual” Indemnification, which is an agreement to indemnify that springs from the parties contractual agreement. (essentially, the language that lawyers like me put in our clients’ contracts to protect them).  This language is typically much broader, and protects the client more fully.
In Sachse, the owner of a condominium project claimed there were many defects in the project. Contractor, likely did not have a contractual indemnity agreement, and so it sued the other parties to the project for common law indemnity.
The Court held that the owner of the project was only attempting to hold the contractor, Sachse, responsible for its own direct damages, and therefore the Court denied Sacshe’s claim for common law indemnity.
Lesson:
  • Lawyers protect our clients from worst case scenarios. This is particularly important in the real estate industry where multiple layers of contractual relationships exist.
  • Lamar Construction provides an example of worst case scenario and the multiple relationships that it affects.
  • One of the ways to protect yourself is to have a contractual indemnity provision – so that you aren’t left like Sachse, trying to unsuccessfully rely on common law indemnity.
Email: Jeshua@dwlawpc.com
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