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In re Red Rock Servs. Co., LLC

United States District Court, E.D. Pennsylvania

December 8, 2014

IN RE: RED ROCK SERVICES CO., LLC, Debtor.
v.
SUFFOLK CONSTRUCTION COMPANY, INC., Defendant-Appellant ROBERT H. HOLBER, Chapter 7 Trustee, of Red Rock Services Co., Inc., Plaintiff-Appellee,

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For ROBERT H. HOLBER, CHAPTER 7 TRUSTEE, OF RED ROCK SERVICES CO., INC., Plaintiff, Appellee: DAVID R. KING, LEAD ATTORNEY, HERRICK FEINSTEIN LLP, PRINCETON, NJ; HOWARD GERSHMAN, LEAD ATTORNEY, GERSHMAN LAW OFFICES PC, JENKINTOWN, PA.

For SUFFOLK CONSTRUCTION COMPANY, INC., Appellant, Defendant: JOHN W. DINICOLA, II, LEAD ATTORNEY, DINICOLA SELIGSON & UPTON LLP, BOSTON, MA; SCOTT AARON LEVIN, LEAD ATTORNEY, MCELROY DEUTSCH MULVANEY & CARPENTER LLP, MORRISTOWN, NJ.

FREDERICK BAKER, AUST, Trustee, Pro se, PHILADELPHIA, PA.

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MEMORANDUM

EDUARDO C. ROBRENO, J.

Table of Contents

I. INTRODUCTION

II. BACKGROUND

A. Facts

1. Silo Point Project

2. McCormack Project

B. Procedural History

III. STANDARDS OF REVIEW

IV. DISCUSSION

A. Bankruptcy Court's Authority To Issue Final Judgment

B. Silo Point Subcontract

1. Silo Point Subcontract Balance

a. Denial of General's Motion for Directed Verdict for Lack of

Evidence of Damages

b. Award to Subcontractor Based on Its Substantial Completion

of the Silo Point Subcontract

2. Change Order No. 3

a. The Bankruptcy Court's Holding of Equitable Estoppel

(1) Voluntary Conduct or Representation

(2) Reliance and Detriment

(3) Equitable Considerations

b. General's Additional Challenges to the Silo Point Award

(1) Waiver of Notice Defense

(2) Proof of Differing Site Condition

(3) Change Order No. 3 Damages Calculation

c. Award of Insurance Proceeds

C. McCormack Subcontract

1. James McKay Expert Testimony

a. Admissibility of Expert Testimony on Rebuttal

b. Daubert Challenge to Expert Testimony

(1) McKay's Expert Qualification

(2) Reliability of McKay's Testimony

2. Factual Finding Regarding Reasonable Cost of Completion

D. Attorneys' Fees

E. Additional Procedural Challenges

1. Limitation on Use of Exhibits During Cross-Examination

2. Grant of Motion for Protective Order

3. Additional Damages Conditioned on $50,000 Payment

V. CONCLUSION

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I. INTRODUCTION

This is a dispute between a general contractor and a subcontractor concerning the subcontractor's performance at two separate construction projects. Because during the course of the dispute--which has generated myriad factual and legal issues--the subcontractor filed for bankruptcy, the matter was tried before the Bankruptcy Court.

Before the Court is the general contractor's appeal from the final judgment of the Bankruptcy Court. For the reasons set forth below, the Court will affirm the Bankruptcy Court's decision in favor of the subcontractor.

II. BACKGROUND

A. Facts[1]

Prior to its bankruptcy filing in September 2007, Red Rock Services Co., LLC (" Red Rock" or " Subcontractor" ) was a demolitions subcontractor. Suffolk Construction Co., Inc. (" Suffolk" or " General" ) is a construction general contractor. In 2006, Red Rock entered into two subcontracts with Suffolk; these related to two separate projects for which Suffolk was the general contractor. Holber v. Suffolk Constr. Co. (In re Red Rock Servs. Co.), 480 B.R. 576, 585 (Bankr. E.D. Pa. 2012).

1. Silo Point Project

On July 24, 2006, Subcontractor and General entered into a subcontract (" Silo Point subcontract" ) under which Subcontractor would perform demolition work on a construction project located in Baltimore, Maryland (" Silo Point project" ). The project entailed converting an old grain silo into condominiums Id. Suffolk, as general contractor, was under contract with the site's owner, Silo Point II, LLC (" Silo Point" or " Owner" ).

On or about November 6, 2006, while Subcontractor was engaged in demolishing certain of the silo's vertical storage bins, one bin detached and fell to a floor below, damaging a portion of the building. Subcontractor stopped work to take stock of the damage and assess how it would proceed. It ultimately modified the demolition method it was using, resulting in significantly increased costs. Id. at 586. Subcontractor initially told General that it would submit a claim to its own insurance carrier to cover these additional costs. Id. However, on December 14, 2006, Subcontractor notified General of its intention to submit a change order related to the unforeseen condition (also called a differing site condition). Id. The Silo Point subcontract required notice of intent to submit a change order within ten business days of the event triggering the claim. Silo Point Subcontract, Ex. J-2, art. 8-12. Under the Silo Point general contract, Owner would be responsible for any increased costs due to a valid differing site condition claim. Gen. Conditions of Silo Point Contract, Ex. J-1, art. 4.3.4.

In re Red Rock,

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480 B.R. at 586. On April 16, 2007, Subcontractor submitted Change Order No. 2, which supplemented the first change order and related to additional work performed. Id. General did not acknowledge this submission. Id. In April 2007, the parties executed a Memorandum of Understanding, wherein Subcontractor agreed to accept new staffing requirements, completion dates, and delayed payment, and to retain a consultant to report on the differing site condition. Mem. Understanding, Ex. J-30, ¶ ¶ 4-11. General agreed to provide reasonable cooperation with Subcontractor's differing site condition claim and to make several advance payments on behalf of Subcontractor, which Subcontractor was obliged to make to its own subcontractors, vendors, and suppliers. Id. ¶ ¶ 6, 11.

On July 27, 2007, Subcontractor submitted Change Order No. 3, encompassing and superseding the previous two change orders and requesting a contract price increase. In re Red Rock, 480 B.R. at 587. Change Order No. 3 was supported by a report from Subcontractor's consultant Hill International, which concluded that the bin collapse had been caused by an unforeseeable differing site condition and calculated the resulting cost increases borne by Subcontractor. Id. General forwarded Change Order No. 3 on to Owner, who rejected it for its untimeliness and for other reasons. Id.

On September 6, 2007, General notified Subcontractor that it was in default under the subcontract. Id. When Subcontractor failed to remedy the default within the required time, General hired Terra Drilling to complete Subcontractor's work. Id. at 588. On September 13, 2007, Subcontractor filed for bankruptcy in the Eastern District of Pennsylvania.

On October 15, 2007, General responded to Owner's denial of Subcontractor's differing site condition claim (i.e., Change Order No. 3) by challenging Owner's decision and requesting a claims meeting on behalf of itself and Subcontractor. Id. at 587. On March 21, 2008, General sent Owner a Request for Equitable Adjustment (" REA" ), which asserted a number of claims and specifically included Subcontractor's differing site condition claim. Id. at 588. Owner rejected the REA and, on April 25, 2008, General filed a mechanic's lien against Owner, again including Subcontractor's differing site condition claim as support. Id. In February 2009, General and Owner settled the mechanic's lien action for $9,991,231, which represented a little under half of the total amount sought. Id.

2. McCormack Project

On August 30, 2006, Subcontractor and General entered into a subcontract (" McCormack subcontract" ) under which Subcontractor would perform demolition work on a construction project located in Boston, Massachusetts (" McCormack project" ). The project involved rehabilitating a federal office building. Id. at 588. During the project, Subcontractor fell behind schedule and failed to fulfill various contractual duties. Id. at 589. On April 9, 2007, General notified Subcontractor that it was in default; on April 11, 2007, General terminated the McCormack subcontract. General subsequently hired its affiliate Liberty Construction (" Liberty" ) to complete Subcontractor's work, although Liberty's lack of competence and General's failure to adequately supervise significantly increased costs. Id. at 609. In October 2007, after Liberty had completed a portion of the work, General hired NASDI Construction (" NASDI" ) to complete the remaining demolition work for a fixed fee. Id.

B. Procedural History

As noted, Subcontractor filed for bankruptcy on September 13, 2007. On March

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18, 2008, General a filed a proof of claim, alleging it was owed substantial damages arising from alleged breach of the two subcontracts discussed above. Proof of Claim, Ex. J-57. On May 18, 2009, Subcontractor then initiated an adversary proceeding against General, alleging it was owed money by General for work performed in the two subcontracts. In Re Red Rock, 480 B.R. at 583.[2]

The Bankruptcy Court held an eight-day bench trial ending on May 17, 2011. Id. at 584. On August 30, 2012, the Bankruptcy Court issued an opinion (1) awarding damages to Subcontractor for General's breach of the Silo Point subcontract, (2) awarding damages to General for Subcontractor's breach of the McCormack subcontract, and (3) allowing General to offset its award against Subcontractor's, which resulted in a net recovery to Subcontractor. Id. at 617. The Bankruptcy Court deferred final judgment to resolve attorneys' fees and costs. Id.

On January 2, 2013, the Bankruptcy Court resolved the attorneys' fees and costs issue, granting a net award to Subcontractor in the amount of $799,006.95 (including $304,707.63 net damages and $494,299.32 net attorneys' fees and costs) and entering final judgment.[3] Holber v. Suffolk Constr. Co. (In re Red Rock Servs. Co. II), 484 B.R. 67, 71 (Bankr. E.D. Pa. 2013). On March 15, 2013, the Bankruptcy Court ruled on Subcontractor's Motion to Amend the Order and General's related cross-motion. Holber v. Suffolk Constr. Co. (In re Red Rock Servs. Co. III), Adv. No. 09-2112, 2013 WL 1100946 (Bankr. E.D. Pa. Mar. 15, 2013). The Bankruptcy Court granted Subcontractor's motion to increase its award on the Silo Point subcontract by $135,452.00 on the basis of an inadvertent calculation error. Id. at *2. The Bankruptcy Court denied General's motion to subtract overhead and profit from Subcontractor's Silo Point subcontract recovery because General failed to raise the issue prior to judgment and, in the alternative, on the merits. Id. at *2-3.

General timely appealed the Bankruptcy Court's final judgment in the amount of $934,458.95 (including the initial net award of $799,006.95 plus the $135,452.00 adjustment) in favor of Subcontractor. The parties have fully briefed the issues presented; as such, this appeal is ripe for review by the Court.

III. STANDARDS OF REVIEW[4]

This is an appeal from an adversary proceeding. Therefore, the Court applies a clearly erroneous standard to the Bankruptcy Court's findings of fact[5] and reviews de novo any conclusions of law. In re Jersey City Med. Ctr., 817 F.2d 1055, 1059 (3d Cir. 1987). Mixed questions of law and fact are bifurcated in order to

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apply the appropriate standard to each. Ram Constr. Co. v. Am. States Ins. Co., 749 F.2d 1049, 1053 (3d Cir. 1984). Decisions of the Bankruptcy Court made within its discretion are to be reviewed by this Court for abuse of that discretion. Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 228 (3d Cir. 2006). " [A]n abuse of discretion exists where the district court's decision rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact." NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108, 118 (3d Cir. 2004) (quoting In re SGL Carbon Corp., 200 F.3d 154, 159 (3d Cir. 1999)).

IV. DISCUSSION

A. Bankruptcy Court's Authority To Issue Final Judgment

General argues as a threshold matter that the Bankruptcy Court lacked constitutional authority to issue a final judgment under Stern v. Marshall, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See General's Br. 49-50. Specifically, it asserts that both parties' claims under state law relate to private rights, which means they do not fall under the Supreme Court's public rights exception and thus they may not be adjudicated by a non-Article III court. Id. General concludes that the Bankruptcy Court's opinion must instead be considered as proposed findings of fact and conclusions of law, id. at 50, which requires this Court to perform its review de novo. See Exec. Benefits Ins. Agency [" EBIA" ] v. Arkison, 134 S.Ct. 2165, 2168, 189 L.Ed.2d 83 (2014) (holding that when, under Stern, " the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court" ); Letter to Court from General's Counsel 2, ECF No. 22 (requesting this Court to conduct a de novo review).

Under federal law, bankruptcy courts may hear and enter final judgments in " all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1). " Core proceedings," as defined by the statute, include " allowance or disallowance of claims against the estate or exemptions from property of the estate," § 157(b)(2)(B), as well as " counterclaims by the estate against persons filing claims against the estate," § 157(b)(2)(C). Bankruptcy courts may also submit proposed findings of fact and conclusions of law on a " proceeding that is not a core proceeding but that is otherwise related to a case under title 11." § 157(c)(1). Alternatively, bankruptcy courts may enter final judgment on non-core proceedings, with the consent of all the parties. § 157(c)(2).

Constitutional limitations, however, narrow a bankruptcy court's statutory authority to issue final judgments in core proceedings. See Stern, 131 S.Ct. at 2620 (holding that " [t]he Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim" ). Separation-of-powers concerns and the lack of Article III tenure protections preclude bankruptcy judges from exercising the judicial power of the United States. Id. at 2608-09. However, Congress may assign to non-Article III courts the power to hear a limited class of cases involving the adjudication of " public rights." See id. at 2610 (discussing the plurality opinion in N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)).

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This exception encompasses cases that " flow from a federal statutory scheme," such as the one created by title 11 in the area of bankruptcy. Id. at 2614.

Bankruptcy courts therefore have clear constitutional authority to resolve claims based on federal bankruptcy law under title 11. See In re Lazy Days' RV Ctr. Inc., 724 F.3d 418, 423 (3d Cir. 2013) (holding that the bankruptcy court had subject matter jurisdiction to determine whether " an anti-assignment clause survived the Settlement Agreement it had confirmed as part of a Chapter 11 bankruptcy" --a claim based on federal bankruptcy law). Bankruptcy courts may also adjudicate claims deriving from non-bankruptcy law and state law, but only if the " action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern, 131 S.Ct. at 2618. In other words, only if the claim " flows from" the federal bankruptcy scheme--by being resolvable as part of the bankruptcy process--will it fall under the public rights exception. This was the Supreme Court's recent holding in Stern.

In Stern, which arose in the context of an inheritance dispute, the creditor filed a proof of claim against the bankruptcy estate requesting damages relating to defamation. Id. at 2601. The debtor's alleged defamatory statements asserted that the creditor had " engaged in fraud to gain control of his father's assets." Id. The debtor responded by filing a counterclaim " for tortious interference with the gift she expected" from the creditor's father, who was also the debtor's deceased husband. Id. The bankruptcy court found that the two claims had some " overlap," in that both required it to determine " whether [the creditor] had in fact tortiously taken control of his father's estate." Id. at 2617. However, given that this determination was only one element of the counterclaim, " there was never any reason to believe that the process of adjudicating [the creditor's] proof of claim would necessarily resolve [the debtor's] counterclaim." Id.

Several courts applying Stern have affirmed bankruptcy courts' authority over claims resolved through the claims allowance process. In In re New Century TRS Holdings, Inc. the Third Circuit found, in a non-precedential opinion, that the bankruptcy court had constitutional authority to address a fraud claim related to a bankruptcy proceeding. Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), 544 F.App'x 70, 73 (3d Cir. 2013). Because the claim in that case alleged that the debtors " fraudulently induced [the creditor] to enter into a settlement agreement concerning indisputably core proceedings" of the bankruptcy, it was " irreversibly intertwined" with the claims allowance process and thus within the court's authority. Id. Similarly, in Kurz v. EMAK Worldwide, Inc., the district court held that a state law claim by a creditor who had also filed a proof of claim was within the authority of the bankruptcy court where " the state action and proof of claim arise out of the same facts and contain the same legal question." 464 B.R. 635, 645 n.6 (D. Del. 2011); see also id. (" [T]he proof of claim is identical to the state action; therefore, it must be adjudicated in order for the bankruptcy court to resolve the proof of claim." ).

Courts in other circuits have analyzed this question similarly. In In re Bernard L. Madoff Investment Securities LLC, the Second Circuit found that, because the defendants to a fraudulent transfer claim had themselves filed a proof of claim, the bankruptcy court could resolve the former claim as well: " In order to rule on that [proof of] claim, the Bankruptcy Court was required to first resolve ...


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