January 2021

Audits are critical to the surety industry.  An audit is the touchstone for the decision to extend surety credit, and when auditors fail, it usually leads to the losses for the Surety. In recent years, pursuing salvage for misstatements made in a clean audit opinion has become more common. Some of the classic indicators of a potential claim include a good, stable account that falls off a cliff in less than a year and runs out of cash. Because many auditing firms have significant insurance, as well as other assets, pursuing recovery is often worth the risk and expense.

As you can imagine, however, these auditing firms (and their carriers) do not go quietly into the night. Rather, there are usually spirited fights throughout the case. Recently, a federal court in Pennsylvania was confronted with some of the common arguments we see: (1) lack of specificity on alleging exact problems with the audit; (2) lack of standing for a surety to pursue the auditor; and (3) damages are not fully liquidated. It is always a good feeling when a Court gets the right answer, and that was the case with this judge in looking at an early motion to dismiss by an auditing firm. The Court rejected three classic arguments:

• You have to show a math error. The basis of a negligent misrepresentation claim against an auditor is usually (1) the clean audit opinion failed to comply with generally accepted accounting principles (GAAP); and (2) the auditor failed to conduct the audit in accordance with generally accepted auditing standards (GAAS). An example of the latter is an auditor failing to exercise the requisite amount of professional skepticism, which can be the case when it becomes a consultant for the audit target. Thus, it is not necessary for a surety to reconstruct the audit at the outset of a suit and demonstrate that revenue should have been $17 instead of $21, etc. The Court agreed.
• I don't know who you are. Auditors often argue that they did not know that a surety would rely on the audit in issuing surety credit. Most underwriters laugh at this notion given that surety credit is usually the only reason an audit is required at all. In examining Pennsylvania's specific law for a negligent misrepresentation claim, the Court also rejected this idea, finding that it was foreseeable that a surety would receive the audit and rely on its contents. This is a more liberal standard than we see in places like Texas (and most of the rest of the country), which has a middle ground standard of known party for a known purpose. Regardless, the idea that the auditor needs to know the surety by name or hand deliver the audit to the underwriter is not a requirement anywhere.
• The damages are up in the air. There is a pretty short window to bring this type of claim. Moreover, there can be a fight with the auditor on when the clock starts running. The auditor usually will argue that it starts at the time the audit is prepared. This is the wrong answer, but it does demonstrate that a surety needs to act quickly to pursue this salvage. That typically means that all losses of a surety have not yet been realized. Indeed, in many cases the surety is just starting to see the effects of the cratering of the principal. As a result, the auditor argues that because the damages have not been fully liquidated, a critical element of the claim is missing. The Court in Pennsylvania rejected this argument as well, holding that this level of specificity is not necessary in order to bring a claim in the first place. This is important given that it would be expected that a damage number would fluctuate greatly as projects are finished and vendors are paid, not to mention other salvage that might be applied to the bottom line.

For reference, the case out of Pennsylvania is Platte River Insurance Company vs. Joseph P Melvin, Cause No. 20–3380. Feel free to let me know if you would like a copy and I would be happy to send it on. Happy New Year to all as well, and here’s to heading to a brighter 2021!

Author - Brandon Bains
Langley L.L.P., Attorneys & Counselors
P. O. Box 94075, Southlake, TX 76092 214.722.7160
Licensed in Texas, Florida, and Arkansas

Texas • Florida • Oklahoma • Arkansas

Litigation strategies for pursuing affirmative claims with a group of professionals that can provide input on construction, accounting, and legal considerations.

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In 2020 the Court unanimously said that an order denying a creditor relief from the automatic stay on debt collection efforts was final and immediately appealable

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We think nothing would brighten your day like an email on insurance and CGL coverage. Certainly, for me, it is all I need to get through the dark days. While we are often required to disabuse owners and obligees that surety bonds are blanket insurance policies, it does raise the issue of remembering that there are certain insurance products that can help mitigate exposure on a project gone wrong. Most notably, a CGL policy can provide a source of recovery in cases of construction defects and resulting damage. A classic example is a poorly built roof that allows water intrusion, which subsequently damages interior finishes, etc. In such a case, there are good arguments for the carrier covering not only the resulting damage, but in the right case, the defective workmanship to begin with.

A recent case from the Michigan Supreme Court (Skanska v. MAP Mechanical, 2020 WL 3527909) highlights this point. There are three main takeaways from the case:

Defective workmanship absolutely constitutes an accident that gives rise to an initial grant of coverage under a CGL policy. The Court noted that it did not matter that the workmanship was in the control of the party performing the work, as the fact that something was built improperly is almost by definition an accidental occurrence.
As defective workmanship can constitute an accident, this necessarily would then be covered by the CGL policy to the extent that the workmanship was done by a subcontractor of the insured (recognizing the exception to the “your work” exclusion in most CGL policies).

Importantly for sureties, the Court rejected an argument that the CGL policy should not be in play because there was a performance bond on the job. The Court found that even if there is possibility of overlap with the performance bond, that does not take away from the initial grant of coverage provided by the CGL policy itself.
The Michigan Supreme Court is the latest Court to tackle these issues and is coming in line with the more modern approach for what a CGL policy covers. Indeed, states around the Country – including Texas – have found similarly. In that vein, Texas has specifically found that not only can a CGL policy cover defective workmanship, but the carrier may also be required to cover the costs to "rip and tear" good work in order to remedy the bad work. That can be a big number on a project with significant defective work.

Thus, the most immediate practice point for a project with significant defective work is to ensure that an early and effective demand is sent to the insurance carrier to properly trigger the duties to defend and indemnify. While the duty to defend is a lower bar to trigger, we have still seen plenty of instances where it is not done correctly by the principal. Generally speaking, this duty is triggered by the eight corners rule – the four corners of the insurance policy and the four corners of the complaint/lawsuit/claim that gives rise to coverage. When triggered, the carrier will then bear the costs of defense.  Although it may be difficult to have the carrier bear the Surety’s own fees as well, defense counsel can take the laboring oar on substantive, overlapping defenses. The duty to indemnify is typically a longer fight, particularly when dealing with some of the issues identified above in terms of bearing costs for defective work, rip and tear, etc. Yet, carriers can be persuaded to cover these costs once they understand better the state of the law and the limits of performance bond coverage.

The attorneys at Langley LLP are committed to working smarter.  For us, this means a heavy focus on communication, understanding your business, understanding your goals, thinking outside the box for creative solutions to complex problems, and fostering relationships with obligees and repeat players so that gains made in one case are to the mutual benefit of clients down the road when those same individuals come back to the forefront.

Brandon Bains is an experienced trial lawyer who focuses on understanding the client’s business. He then seeks the earliest positive resolution of issues by using early comprehensive evaluation.

Keith Langley discusses Arbitration and Surety

When evaluating bankruptcy, a surety profession should keep 3 things in mind: Get your professional involved early; Understand the process; Evaluate proof of claim.

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In Texas, the party seeking to enforce liquidated damages has the burden of showing that (1) “the harm caused by the breach is incapable or difficult of estimation” and (2) “the amount of liquidated damages called for is a reasonable forecast of just compensation”.

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Bankruptcy courts are facing unique challenges given the intersection of COVID-19 and the accompanying economic downturn. Creditors therefore need to also be sensitive to protecting their rights if it is expected that bankruptcy filings will tick upwards over the next 60 days.

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Coronavirus is officially a pandemic — which, in the realm of infectious diseases, is the worst case scenario.

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The automatic stay is perhaps the most fundamental protection for a debtor in bankruptcy.

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Legal Fees and Arbitration in Texas

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Can the Texas Performance Bond Surety Be Liable After Substantial Completion?

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Texas Supreme Court Creates New Path for Defendants to Recover Attorneys’ Fees in Texas – Has Fee-Shifting Swallowed the American Rule?

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eDiscovery: 5 Keys to Success

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Post-Appraisal Summary Judgment Affirmed – and Gutted

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There are many bankruptcies where a debtor is looking to reorganize and needs continued surety support during the pendency of the bankruptcy. This leads to an opportunity early on to receive accommodations and make deals.

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With summer upon us, many will venture out on the great American road trip to experience the unique features our country has to offer (most, I assume, will travel to see Cowboys Stadium, home of America's team).  Like the variety offered by our country's travel destinations, we too see this in application of legal concepts from state to state.

The attached newsletter addresses two important areas of the law – reliability of expert opinions and the economic loss rule – and how the results can be widely different depending on the jurisdiction. We offer sample illustrations from the great states of Texas and Florida (where the Firm actively practices – in addition to Oklahoma and Arkansas). On the expert front, Florida has now finally adopted the federal Daubert standard.  Excluding expert testimony is a marvelous tool in litigation, particularly in the construction context where damage calculations and theories of liability are often ad hoc and off the cuff.  In terms of the economic loss rule, while Texas remains in the majority that holds that a design professional cannot be sued in tort by parties that do not have a contractual relationship with it, this is not case in Florida.  Rather, Florida does allow tort recovery if the specific facts show “control” by the design professional.

Happy summer to all, and I will personally buy a Dallas Cowboys T-shirt for whoever submits the best vacation photo.

Download June 2019 Newsletter Here »

Contractual Language Defeats $100,000,000 Fraud Verdict as a Matter of Law

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Construction and surety law is a broad field that covers a vast number of topics and issues.  Given this size, there is a constant stream of judicial decisions that could affect your next legal dispute.  The attached newsletter highlights three such decisions:

US Specialty Insurance Co. v. Strategic Planning Associates, LLC out of the US District Court for the Eastern District of Louisiana.  In an indemnity lawsuit, there is no bad faith counterclaim under Louisiana law.

Jody James Farms, JV v. The Altman Group, Inc. out of the Texas Supreme Court.  The Court, and not the arbiter, decides whether there will be arbitration between a signatory and non-signatory to an arbitration agreement.

Dudley Constr. Ltd. v. Act Pipe and Supply, Inc. out of the Texas Supreme Court.  Attorneys’ fees are not recoverable in a Texas Trust Fund Act claim.
Should you be faced with one of these issues, or any other legal dispute, it is important to consult experienced counsel to explore your options and protect your rights. 

We are ready to help you in any endeavor.

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We’ve all seen the classic Texas insurance policy lawsuits.  The ones that allege a plethora of contractual and extracontractual claims and seemingly pop up out of nowhere.  In reality, these suits are not about justice.  They are about lining the pockets of plaintiffs’ counsel.  Our firm has a wealth of experience in fighting – and beating – these lawsuits.  Our approach is simple: (1) invoke appraisal; (2) pay the award; and (3) move for summary judgment—which should be granted.  This approach is well grounded in a long line of Federal District Court, Texas Court of Appeals, and 5th Circuit Court of Appeals authority—but so far, the Texas Supreme Court hasn’t weighed in.  This will soon change.  The Court is set to hear oral argument in two post appraisal summary judgment cases.  The attached newsletter provides an update on this crucial area of the law for Texas insurers.  Be on the lookout for additional updates from us after the Court hears oral argument, and after a decision is rendered. 

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eDiscovery Update: Phones, Emails, Hash Values and Saving Costs by Self-Authenticating ESI

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Have you considered and Appraisal Expert for Building the Difference-in-Value Defense? Defendants would be wise to build a “difference-in-value” defense, bolstered by an appraisal expert

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Uncovering the pipeline. Revisiting Mustang Pipeline.

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Hurricane Harvey or Irma Insurance Dispute? How About Appraisal – The Top 10 Items to Consider When Invoking Appraisal

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The Best Laid Plans of Mice and Men Often Go Awry

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The Miccosukee Million - where allegations are suspect, evidence for the other side is tenuous, and opposing counsel is unreasonable and likely is giving bad advice.

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The Increased Prevalence Of Sinkhole Claims In Florida

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The first Cuban-American to lead Florida’s judicial branch.

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The South Florida construction scene is sizzling with rapid growth in commercial, residential and industrial sectors.

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Defining “to perform its work in a good and workmanlike manner”

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