Shaw Constructors v. PCS Nitrogen Fertilizer LP

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 17, 2009
No. 08-30594 Charles R. Fulbruge III
Clerk
SHAW CONSTRUCTORS,
Plaintiff - Appellee Cross-Appellant
v.
PCS NITROGEN FERTILIZER LP,
Defendant - Appellant Cross-Appellee
Appeals from the United States District Court
for the Middle District of Louisiana
No. 3:99-CV-254
Before KING, GARWOOD, and DAVIS, Circuit Judges.
PER CURIAM:*
In a previous appeal in this case, we held that PCS Nitrogen Fertilizer,
L.P. was liable to Shaw Constructors under the Louisiana Private Works Act for
subcontract work performed in connection with a construction project. Shaw
Constructors v. ICF Kaiser Eng’rs, Inc., 395 F.3d 533 (5th Cir. 2004). We
rendered judgment only as to liability and remanded the case in order for the
magistrate judge to determine the amount of liability. After a six-day trial, the
magistrate judge entered a judgment in the amount of $1,455,060.47. PCS
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
Nitrogen Fertilizer appealed the judgment and Shaw Constructors filed a cross-
appeal asserting that the magistrate judge erred in calculating interest. For the
reasons stated below, we reverse and remand only on the issue raised in the
cross-appeal.
I. FACTUAL AND PROCEDURAL BACKGROUND
PCS Nitrogen Fertilizer, L.P. (“PCS”) entered into a contract with ICF
Kaiser Engineers, Inc. (“Kaiser”) for the construction of a nitric acid production
plant. Kaiser subcontracted the piping installation to Shaw Constructors, Inc.
(“Shaw”). For reasons which are contested in this appeal, Shaw’s work fell
significantly behind schedule. This delay resulted in Kaiser and Shaw entering
into a change order that converted their original lump-sum contract into a cost-
reimbursable contract. “Change Order No. 1” states, in relevant part:
As compensation for the remaining Subcontract Work,
commencing as of the start of business on August 3, 1998 through
Project completion, the Subcontractor will be reimbursed for
reasonable and necessary costs . . . .
Furthermore, a Not-to-Exceed (NTE) total amount of
$7,677,918.00 . . . has been established for compensation of costs
incurred during the performance of all of the work associated with
this Subcontract. It is mutually understood by the parties that the
NTE amount may have to be adjusted if reasonable and necessary
costs incurred during the performance of the work exceed the total
NTE amount. If Contractor observes Subcontractor invoicing for,
performing, or reporting work which falls outside of “reasonable and
necessary,” Contractor will endeavor to transmit this information to
the Subcontractor within 7 days of witnessing the non-conforming
work so that billing or field work corrections can be made.
The change order retained the unaltered provisions of the original subcontract
including the following prohibition against oral modifications: “No amendment,
variance or change in the provisions of this Subcontract shall be made except in
writing signed by the authorized representatives of the parties hereto.”
2
Thereafter, Kaiser fell behind on its payments to Shaw and eventually
terminated Shaw from the project prior to completion. Kaiser hired a different
company to complete Shaw’s scope of work. Shaw then filed a lien against PCS
and a lawsuit against both PCS and Kaiser seeking to collect its unpaid invoices.
As a result of this lawsuit, Kaiser and Shaw, but not PCS, entered into a
Compromise Agreement. In this agreement, Kaiser agreed to make 20 monthly
payments to Shaw of $291,012, which represented the full amount of Shaw’s
outstanding invoices plus two extra monthly payments for interest.
Kaiser filed bankruptcy after making only 13 monthly payments under the
Compromise Agreement. Rather than pursue its claim in Kaiser’s bankruptcy
proceeding, Shaw elected to recover the remaining balance of its invoices from
PCS by enforcing the statutory lien granted to it under the Louisiana Private
Works Act (“LPWA”). PCS defended by relying on a provision in the original
subcontract whereby Shaw waived its right to file liens against PCS’s property.
This dispute was the basis of the first appeal in this case. We concluded that,
under Louisiana law, Shaw could regard the subcontract as dissolved upon
Kaiser’s breach and PCS could not prevent Shaw from enforcing its LPWA lien.
Shaw Constructors, 395 F.3d at 536. We remanded the case solely for
determination of the amount that PCS owed Shaw under the LPWA. Id. at 555.
After a six-day bench trial, the magistrate judge concluded that: (1) the
reasonable and necessary costs of Shaw’s work totaled $11,631,045.20, which
was the full amount that it had invoiced Kaiser; (2) Shaw and Kaiser mutually
agreed to exceed the NTE amount stated in the change order; (3) under the
LPWA, Shaw was entitled to recover from PCS the remaining balance of the
price of the work performed pursuant to the subcontract and the change order;
(4) the balance owed for work under the subcontract and change order was
$5,238,217.90, but PCS received credit for the $3,783,157.43 in payments made
by Kaiser under the Compromise Agreement; (5) PCS was therefore liable to
3
Shaw for $1,455,060.47 plus prejudgment interest on that amount from
February 23, 1999, the date of judicial demand; and (6) Shaw did not breach its
duty to mitigate damages by failing to pursue its claim in Kaiser’s bankruptcy
proceeding. PCS filed a timely appeal of the judgment and Shaw filed a cross-
appeal regarding the calculation of interest.
II. DISCUSSION
This appeal involves both findings of fact, which we review for clear error,
and conclusions of law, which we review de novo. Triad Elec. & Controls, Inc.
v. Power Sys. Eng’g, Inc., 117 F.3d 180, 186 (5th Cir. 1997). “Where there are
two permissible views of the evidence, the factfinder’s choice between them
cannot be clearly erroneous.” Anderson v. Bessemer City, 470 U.S. 564, 574
(1985).
PCS raises the following issues regarding the magistrate judge’s findings
of fact and conclusions of law: (1) whether Kaiser and Shaw mutually agreed to
exceed the NTE amount; (2) whether all of Shaw’s costs were reasonable and
necessary; and (3) whether Shaw breached its duty to mitigate by failing to
pursue its claim in Kaiser’s bankruptcy proceeding. Additionally, both parties
challenge the magistrate judge’s calculation of interest.
A. Did Kaiser and Shaw mutually agree to exceed the NTE amount?
Although PCS continues to assert that the NTE amount could only have
been amended through a written agreement pursuant to the prohibition against
oral modifications in the original subcontract, the magistrate judge correctly
looked to the conduct of the parties to answer this question because, under
Louisiana law, “‘[w]ritten contracts for construction may be modified by oral
contracts and by the conduct of the parties, and this is true even when the
written contract contains the provision that an owner is liable only if the change
orders are in writing.’” L&A Contracting Co., Inc. v. Ram Indus. Coatings, Inc.,
4
762 So. 2d 1223, 1232 (La. Ct. App. 2000) (quoting Pelican Elec. Contractors v.
Neumeyer, 419 So. 2d 1, 5 (La. Ct. App. 1982)).
The magistrate judge concluded that Kaiser and Shaw had mutually
agreed to exceed the NTE amount because: (1) Kaiser never advised Shaw that
it could not exceed the NTE amount; (2) Kaiser never advised Shaw that it had
exceeded the NTE amount and should cease performance; (3) Kaiser never
advised Shaw that any of its work was not reasonable or necessary; (4) Kaiser
later agreed that Shaw was owed an amount in excess of the NTE amount; and
(5) Kaiser actually made payments to Shaw in excess of the NTE amount.
The fourth and fifth facts were derived from the Compromise Agreement
and the payments made under it. PCS argues that this reliance on the
Compromise Agreement violated Rule 408 of the Federal Rules of Evidence.
Rule 408 provides that the compromise of a claim “is not admissible on behalf of
any party, when offered to prove [the] . . . amount of a claim that was disputed.”
It does not, however, “require exclusion if the evidence is offered for purposes not
prohibited by subdivision (a).”
PCS’s argument fails because the purpose behind the magistrate judge’s
use of the Compromise Agreement was not to establish the amount of the claim.1
Rather, the Compromise Agreement was used to refute PCS’s defense that the
NTE amount limited its total potential liability to Shaw.2 The NTE amount
1
Shaw filed a Motion in Limine for Determination of the Proper Method of Measuring
Damages, arguing that the amount owed by PCS was Kaiser’s balance due under the
Compromise Agreement. The magistrate judge ruled that in order to determine the “price”
of its work under the LPWA, the court would look to the terms of the subcontract between
Shaw and Kaiser. Since the default judgment entered against Kaiser was not binding on PCS,
Shaw would have to show that its work was recoverable under the subcontract (i.e., it was
reasonable and necessary). Thus, the amount of the claim was determined based on the
reasonable and necessary expenses that Shaw proved at trial.
2
PCS argued that the NTE amount was a strict cap such that it had the practical effect
of converting the contract back into a lump sum contract based on Allan E. Amundson, Inc.
v. Hoppmeyer, 442 So. 2d 1254 (La. Ct. App. 1983). The fixed-price contract in Amundson
5
could be exceeded if it was “mutually understood by the parties that . . .
reasonable and necessary costs incurred during the performance of the work
exceed[ed] the total NTE amount.” Therefore, the material fact raised by PCS’s
defense was whether Kaiser and Shaw’s conduct evidenced their mutual
understanding that reasonable and necessary costs had exceeded the NTE
amount. In other words, the magistrate judge used the Compromise Agreement
as evidence of the fact that the parties had agreed to an upward adjustment of
the NTE amount, but not as evidence for the specific amount of that upward
adjustment.
The other facts relied on by the magistrate judge relate to Kaiser’s failure
to raise any objection to Shaw exceeding the NTE amount. PCS argues that
Kaiser’s passivity was insufficient to “waive” the NTE amount and that there
was no affirmative evidence that Kaiser ever intended to allow Shaw to exceed
the NTE amount. However, the language of the change order does not require
such an affirmative waiver from Kaiser. Rather, the change order suggests that
Kaiser should notify Shaw of any non-conforming work within seven days so that
it would not be charged for unreasonable or unnecessary work. It was within
reason for the magistrate judge to infer that Kaiser’s failure to object to any of
Shaw’s expenses was an implicit acknowledgment that the reasonable and
necessary costs had exceeded the NTE amount.
Therefore, we conclude that the magistrate judge’s finding of fact that
Kaiser and Shaw mutually agreed to exceed the NTE amount was not clearly
erroneous.
B. Were all of Shaw’s costs reasonable and necessary?
stated that if the cost-plus amount was less than the fixed price, then the final price would be
the cost-plus amount. Id. at 1255. But, if the cost-plus amount exceeded the fixed price, then
the final price would be the fixed price. Id. That is not the case here where the change order
does not contemplate Shaw bearing the risk of excess costs. If reasonable and necessary costs
exceeded the NTE amount, Shaw would be paid all of its costs.
6
The parties presented competing versions of what caused Shaw’s portion
of the project to run over its original deadline and budget. PCS contended that
the delays were caused by Shaw’s inefficiency and poor workmanship. Shaw
contended that the delays were caused by Kaiser’s voluminous revisions to the
project’s engineering plans. Both parties put on evidence and called witnesses
in support of their argument. The magistrate judge found Shaw’s version more
credible and explained in detail why Kaiser’s alterations were the cause of
Shaw’s delay.3
PCS’s argument that this finding of fact was erroneous relies heavily on
its expert witness, William Kelly, who testified that Kaiser’s alterations made
after the date of the change order were minor and would have only cost between
$184,000 and $336,000 to complete as a stand-alone project. The magistrate
judge, however, discredited this testimony because it was “not supported by the
undisputed facts that existed during and in the months immediately following
Shaw’s work at the PCS site.” In other words, this estimate was based on usual
and ordinary conditions, rather than the actual circumstances of Kaiser’s
previous engineering errors. We cannot say that the magistrate judge’s
discrediting of this testimony was clearly erroneous, particularly in light of the
testimony presented describing Kaiser’s engineering errors. See F ED. R. C IV. P.
52(a)(6) (“[T]he reviewing court must give due regard to the trial court’s
opportunity to judge the witnesses’ credibility.”).
PCS also claims that the magistrate judge erred by placing the initial
burden on it to establish that costs were unreasonable rather than on Shaw to
3
The magistrate judge concluded that “[e]ven after Change Order No. 1 . . . significant
changes and difficulty with the engineering design continued. Kaiser’s defective engineering
and engineering errors had a substantial impact on the completion and the cost of the project.
The time and cost to complete the project greatly increased.” The magistrate judge’s final
conclusion was that “a preponderance of the credible evidence established that the root cause
of the delay and cost overruns, including the substantial increase in the time and costs of
Shaw’s subcontract work, was Kaiser’s late, deficient and error-filled engineering design.”
7
prove that they were reasonable. This is not an accurate description of the
record. After Shaw carried its initial burden of proving that its costs were
reasonable and necessary, PCS countered with evidence that the costs were
unreasonable. The judge was persuaded by Shaw’s evidence and disbelieved
PCS.4
Therefore, we conclude that the magistrate judge’s finding of fact that all
of Shaw’s costs were reasonable and necessary is not clearly erroneous.
C. Did Shaw breach its duty to mitigate by failing to pursue its claim in
Kaiser’s bankruptcy proceeding?
PCS provides no direct authority holding that a party must pursue a claim
in bankruptcy before seeking recovery from a solvent party that is liable on the
same debt.5 It relies instead on the general principle of mitigation. See L A. C IV.
C ODE A NN. art. 2002 (“An obligee must make reasonable efforts to mitigate the
damage caused by the obligor’s failure to perform.”). Based on this, PCS argues
that Shaw had a duty to file a proof of claim in Kaiser’s bankruptcy proceeding
before seeking to recover from it under the LPWA.6
4
PCS notes that the magistrate judge concluded that “there is no contemporaneous
evidence that Shaw was ever back charged for any delay or defective work, that any analysis
or report was ever done during or after the project which showed that the delay or costs
overruns on the job were caused by Shaw, or that any of Shaw’s invoices included in the total
agreed to by Kaiser were not approved or were rejected because they were unreasonable,
unnecessary or excessive.” This is not the magistrate judge placing the burden on PCS. It is
an explanation of why he discredited PCS’s explanation of the delays. This quotation followed
the magistrate judge’s review of the evidence supporting Shaw’s theory of causation.
5
PCS cites Gifford Hill & Company, Inc. v. Harper, 262 So. 2d 842 (La. Ct. App. 1972)
for the proposition that the owner should receive an offset for any recovery the subcontractor
receives from the contractor’s bankruptcy estate. However, Gifford does not state that a
subcontractor is required to participate in the contractor’s bankruptcy. Rather, it holds that
if the subcontractor receives a distribution from the contractor’s estate, then that amount is
deducted from the claim against the owner.
6
We note that a creditor is not obligated or required to file a proof of claim. See
Simmons v. Savell (In re Simmons), 765 F.2d 547, 551 (5th Cir. 1985). Therefore, failing to
file a proof of claim alone is unlikely to breach the duty to mitigate.
8
The magistrate judge determined that there was no duty to mitigate under
the LPWA based on Jefferson Door Company, Inc. v. Forman Construction, Inc.,
836 So. 2d 552 (La. Ct. App. 2002). Jefferson Door involved a similar dispute
between an owner, a bankrupt contractor, and—in that case—a material
supplier rather than a subcontractor. Id. at 553. Rather than pursue the
bankrupt contractor, the supplier sought to enforce its materialman’s lien, which
was also derived from the LPWA, against the owner. Id. The owner argued that
the supplier owed it a duty to determine that the contractor was not credit-
worthy and to not supply it materials on credit. Id. The court rejected such a
duty. Id. at 554–55. However, that preemptive duty is not the same one that
PCS claims in this case. The duty here is an after-the-fact duty to mitigate by
first pursuing the bankrupt contractor for payment before pursuing the solvent
owner.
Assuming arguendo that the general rules of mitigation apply to claims
under the LPWA, Shaw’s conduct would not have breached that duty.
[C]ourts generally do not determine damages based upon the
making of these [mitigation] expenditures unless (1) they are small
in comparison to the possible losses, and (2) it is virtually certain
that the risks incurred will avoid at least a part of the loss.
Damages will not be decreased through showing that a substantial
expenditure would have minimized the total loss or that the
suggested expenditure may or may not have decreased damages.
Unverzagt v. Young Builders, Inc., 215 So. 2d 823, 825–26 (La. 1968). Pursuing
its claim in Kaiser’s bankruptcy would have required Shaw to expend monies on
legal fees and costs without a definite, certain amount to be gained. Shaw
asserts that it made the calculated business decision, based on the advice of its
counsel, that filing a proof of claim would increase the likelihood that it would
be sued by the Kaiser estate for recovery of the final payment made under the
9
Compromise Agreement as a preferential transfer, thereby potentially resulting
in a net loss.
Therefore, we conclude that the magistrate judge did not err in concluding
that Shaw did not breach its duty to mitigate damages. 7
D. Issues related to the calculation of interest
Both parties raise issues regarding the magistrate judge’s calculation of
interest. PCS argues that interest should have started on the date of the
judgment rather than the date of the judicial demand. See Lone Star Indus. v.
Am. Chem., Inc., 461 So. 2d 1063, 1069 (La. Ct. App. 1984) (“Interest on the
disputed, or unliquidated, portion of the contract price is due from the time the
amount became ascertainable, that is from the date of judgment.”). Shaw’s
cross-appeal argues that the magistrate judge miscalculated interest by
deducting all of the Compromise Agreement payments from principal as a lump
sum.
1. On what date should interest begin to accrue?
The LPWA provides for interest but does not specify the date from which
interest should be calculated. The magistrate judge followed Louisiana Civil
Code Article 2000, which states in relevant part: “When the object of the
performance is a sum of money, damages for delay in performance are measured
by the interest on that sum from the time it is due, at the rate agreed by the
parties or, in the absence of agreement, at the rate of legal interest as fixed by
7
PCS’s argument that the magistrate judge erred in excluding the testimony of Kaiser’s
CFO on Shaw’s theoretical distribution from Kaiser’s bankruptcy as expert testimony is moot
because there was no breach of the duty to mitigate.
10
Article 2924.” 8 The issue, therefore, was on which date did PCS’s liability under
the LPWA become due.
Citing Alexander v. Burroughs Corp., 359 So. 2d 607 (La. 1978), the
magistrate judge concluded that interest began to run on the date of judicial
demand. In Alexander, the state appellate court awarded the plaintiffs interest
from the date of the trial court judgment. Id. at 609. The Louisiana Supreme
Court reversed, concluding that contractual damages are due from the moment
of default and that a party may be in default “‘either by the commencement of
a suit [or] by a demand in writing.’” Id. at 613 (quoting L A. C IV. C ODE A NN. art.
1911). It found that “plaintiffs’ claim was ascertainable on the date of formal
demand for ‘cancellation’ of the purchase . . . and hence interest should run from
that date . . . .” Id. at 613–14 (emphasis added).
Lone Star Industries, the case relied on by PCS, concluded that the
“disputed, or unliquidated, portion of a contract price is not due until the amount
becomes ascertainable, that is from the date of the judgment.” 461 So. 2d at
1069 (citing Roques v. Alfonso, 399 So. 2d 1294 (La. Ct. App. 1981)). Roques cites
the same language in Alexander which was cited by the magistrate judge.
The Louisiana Supreme Court has since rejected the implication in
Alexander that interest runs from the date that a debt is ascertainable. See
Trans-Global Alloy, Ltd. v. First Nat’l Bank of Jefferson Parish, 583 So. 2d 443,
457 (La. 1991) (“While we agree that the damages in this case were not
ascertainable until reduced to judgment, we nevertheless find that interest
should run from the date of judicial demand. That finding is consistent with
longstanding Louisiana jurisprudence.”). The court determined that the rule
8
The legal interest rate is applicable in this case because the judgment is based on the
LPWA and not the Compromise Agreement. See Long Leaf Lumber, Inc. v. Svolos, 258 So. 2d
121, 124 (La. Ct. App. 1972) (holding that the contractual interest rate was not binding when
the owner was not a party to the agreement between the contractor and the subcontractor
containing the interest rate and instead applying the legal rate).
11
that requires damages to be ascertainable is derived from the common law view
of interest as punitive in nature.
According to that view, when damages are reasonably ascertainable,
the defendant can determine what his liability might be, and stop
the accrual of interest by paying the claim; when the damages are
uncertain, however, the defendant cannot determine the extent of
his liability prior to trial, and it would be unjust to penalize him for
failure to pay the damages before judgment.
Id. Conversely, under civil law and the modern understanding of interest, the
purpose of interest is to account for the lost time-value of money. Id. at 458.
Accordingly, the court awarded interest from the date of the judicial demand, not
the date of judgment. Id. at 459.
Therefore, we conclude that the magistrate judge did not err in concluding
that interest should run from the date of judicial demand rather than the date
of the judgment.
2. How should the Compromise Agreement payments be imputed?
The magistrate judge refused Shaw’s request to calculate interest as it
actually accrued because “Shaw failed to establish that the unpaid principal
amount of the price of its work includes this accrued interest.” However, Shaw
was not required to prove that it was entitled to accrued interest under the
LPWA because Louisiana law provides that “[a]n obligor of a debt that bears
interest may not, without the obligee’s consent, impute a payment to principal
when interest is due. A payment made on principal and interest must be
imputed first to interest.” L A. C IV. C ODE A NN. art. 1866; see also Ridenour v.
Wausau Ins. Co., 627 So. 2d 141, 142–43 (La. 1993) (applying Article 1866
because a payment made after the date of judicial demand must be applied to
interest before principal). Thus, the LPWA provides for interest and other
12
Louisiana law provides that interest should be calculated as it accrued.9
Therefore, we remand for entry of a judgment correctly calculating interest by
applying the Compromise Agreement payments first to accrued interest and
then to principal.
III. CONCLUSION
For the reasons stated above, the judgment of the district court is
AFFIRMED except as to the award of interest, as to which the judgment is
REVERSED. The case is REMANDED solely for the entry of a judgment with
interest calculated as herein provided. PCS shall bear the costs of this appeal.
9
PCS argues that it should not be liable for interest while Kaiser was making
payments under the Compromise Agreement because “extinguishment of the primary
contractual obligation extinguishes the statutory liability.” LA . REV . STAT . ANN . § 9:4802. The
flaw in this argument is that the Compromise Agreement never extinguished the primary
contractual obligation, only suspended it. The debt would not be extinguished until the final
payment was made, an event which never occurred.
13