Chinese Drywall Excluded from Insurance Coverage

If you have a possible Chinese Drywall claim against you insurance carrier, and you have a pollution exclusion provision in your policy, you don't want to litigation in the Norfolk Division of the United States District Court for the Eastern District of Virginia. In a recent decision, Judge Smith ruled in Dragas Management Corp. v. Hanover Insurance Co., No. 2:10cv547, Aug. 8, 2011, that Dragas' pollution exclusion was unambiguous and so barred coverage. Judge Smith found that the focus should be on the sulfur gases that came from the drywall and caused the damages, and that since they were pollutants, they therefore came within the exclusion. So she granted judgment for the insurance carriers. This probably isn't good news for anyone. Without insurance coverage, this leaves monetary responsibility with developers, contractors, and suppliers, who may not be able to sustain those losses. This in turn could leave injured parties without a remedy. We'll have to see how it continues to shake out.

Corporate Protection: Henrico Court pierces the veil of contractor

Corporations are often principally set up to shield individuals from liability. Court generally accept the corporate veil absent proof of "sham" corporations. As a result, the assets of individual officers, directors, shareholders or employees of corporations remains personally protected, absent proof of activity outside of the scope of their authority, intentional negligence, or other limited theories. But when corporations do not have sufficient assets to cover losses, such exceptions may get litigated to establish a recovery pot, and similar facts gave rise to the recently decided case in Henrico Circuit Court by Judge Hicks in Ace Electric Co., Inc. v. Advance Technologies, Inc., et al., Civil Case No. CL09-971, 14 Cir. CL09971 (2011) (April 29, 2011).

In the Spring of 2007, Trent Construction Company subcontracted with Ace Electric Company for boiler work on a project at the University of Richmond. Ace sub-subcontracted work to Advance Technologies, Inc. by written purchase order. Ace later terminated Advance, which had ceased operations. Ace brought suit against Advance and received a default judgment against Advance. After being unable to collect the judgment amount, Ace brought suit against Ace's sole shareholder, officer and director, Erik Butler, his wife, and ADVTEC, Inc., a later created company claimed to have been fraudulently created to avoid Advance's debts.

The Court noted that piercing a "corporate veil is an extraordinary remedy that is infrequently granted." But the court found the evidence sufficient in that case to do so against Mr. Butler because it found that he had failed to uphold corporate formalities, such as conducting annual meetings and maintaining corporate records, and because the company was "grossly undercapitalized" at the time it entered into the contract with Ace.  While the court found the facts relating to Mrs. Butler and ADVTEC suspicious, it held Ace had not met the required burden to get to them.

The key lesson learned from this case is the importance of maintaining corporate formalities. They may seem like impositions, but failing to maintain those formalities can have drastic implications, including this type of corporate piercing, and as a result the advantages of corporate protection are lost. It certainly was an important, and expensive, lesson learned to Mr. Butler in this case.

CAS Board is Eliminating Overseas Exemption

For those doing overseas work, the Office of Federal Procurement Policy's Cost Accounting Standards (CAS) Board has finalized a proposed rule that eliminates the CAS exemption for contracts executed and performed outside of the US.  The Board says it concluded that eliminating the exemption would not create any hardships and that the Board, among other things, did not believe the exemption had any accounting basis. The final rule takes effect Oct. 11 (76 Fed. Reg. 49,365, 8/10/11), and is available at: http://www.gpo.gov/fdsys/pkg/FR-2011-08-09/pdf/2011-20138.pdf.

Mediation vs. Arbitration: What's the difference anyway?

Many construction contracts have mandatory mediation and arbitration provisions. So what's the difference? The key difference is purpose. Mediation involved a third-party facilitator, who tries facilitate a resolution between the parties. Most mediators use one of two styles; facilitative or evaluative. With facilitative style the mediator does not express opinion on the merits of the dispute, but with evaluative style opinion is given. While parties often want an evaluation, often mediators are loath to do so because they feel it hinders compromise by "picking a side." So, typically mediators will resort to evaluation as a last resort when it's apparent the parties would otherwise impasse. But many mediators use variations on both styles, or combinations of them. For example, a mediator might be evaluative, but keep the evaluation confidential so that it does not taint the other side's views. In contrast, arbitration is intended to be a decision making process, whereby the arbitrator finds for one side or the other, without concern for possible settlement. I'll discuss these and other alternative dispute resolution processes in follow on blogs.