SO ORDERED. SIGNED this 29 day of April, 2011. ________________________________________ ROBERT E. NUGENT UNITED STATES CHIEF BANKRUPTCY JUDGE ____________________________________________________________ OPINION DESIGNATED FOR ON - LINE PUBLICATION BUT NOT PRINT PUBLICATION IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS IN RE: ) ) CENTRAL STATES MECHANICAL, INC. ) Case No. 09-12542 ) Chapter 11 Debtor. ) ________________________________________________) ) CENTRAL STATES MECHANICAL, INC., ) ) Plaintiff, ) vs. ) Adversary No. 09-5155 ) AGRA INDUSTRIES, INC., ) ) Defendant. ) ________________________________________________) MEMORANDUM OPINION 1 Case 09-05155 Doc# 105 Filed 04/29/11 Page 1 of 128 TABLE OF CONTENTS I. BACKGROUND FACTS ........................................ 6 A. Bankruptcy of Debtor - Status of Chapter 11 plan ................. . 6 B. The Parties and Significant Players in the case .................... . 7 1. Central States Mechanical, Inc. ........................... 7 2. Sega, Inc. ........................................ 7 3. Agra Industries ........................................ 7 4. Delta-T Corporation ................................... 8 5. Great Plains Renewable Energy .......................... 8 6. Plymouth Energy, LLC ................................. 9 7. Wanzek Construction ................................... 9 C. The Subcontracts Generally .................................... 9 1. Superior Project ............ .......................... 10 2. Plymouth Project ..................................... 11 II. SUMMARY OF CLAIMS ....................................... 13 A. Central’s Breach of Contract Claims-Superior Project .............. 13 1. Failure to Pay Contract Balance ......................... 13 2. Failure to Pay for Extra Time and Expense Resulting from Delay and Breach of Duty to Schedule and Supply ...... 14 3. Water Treatment Facility Work .......................... 14 4. Disputed Change Orders ............................... 14 5. Attorneys Fees ....................................... 15 B. Agra’s Defenses and Counterclaims-Superior Project .............. 15 1. Failure to Satisfy Subcontract Conditions .................. 15 2. Failure to Complete Subcontract Scope of Work ............ 15 3. Setoff ....................................... 15 C. Central’s Breach of Contract Claims-Plymouth Project ............. 15 2 Case 09-05155 Doc# 105 Filed 04/29/11 Page 2 of 128 1. Contract Breaches and Failure to Pay Delay Claims .......... 15 2. Wrongful Termination of Agreement ..................... 16 3. Breach of Implied Covenant of Good Faith and Fair Dealing ... 16 4. Quantum Meruit ............ .......................... 16 D. Agra’s Defenses and Counterclaims-Plymouth Project .............. 16 1. Abandonment of Job .................................. 16 2. Cost to Cover Central’s Scope of Work ................... 17 3. Failure to File Timely Delay Notices and Follow Change Order Process ....................................... 17 III. THE CONTRACTS ....................................... 17 A. Superior Subcontract ....................................... 17 1. Generally ....................................... 17 2. Elements of the Contract ............................... 18 3. Cost of the Work and Substantial Completion .............. 20 4. Change Order Provisions ............................... 21 5. Delay and Acceleration Provisions ....................... 23 6. Scheduling Provisions ................................. 26 7. Claims Provisions .................................... 27 B. Plymouth Subcontract ....... ................................ 29 1. Generally ....................................... 29 2. Elements of the Contract ............................... 29 3. Subcontract Sum and Substantial Completion Date .......... 32 4. Agra’s Duties and Obligations Toward Central ............. 32 5. Payment Applications and Progress Payments .............. 33 6. Suspension of the Work ................................ 36 7. Termination of the Subcontract .......................... 37 8. Agra’s “Cover” of Central’s Scope of Work ................ 37 9. Delay Notices and Claims .............................. 38 3 Case 09-05155 Doc# 105 Filed 04/29/11 Page 3 of 128 10. Change Orders ....................................... 39 IV. SUPERIOR PROJECT – FINDINGS AND CONCLUSIONS OF LAW ..... 41 A. The Timeline ....................................... 41 1. Delays and Central Delay Claims ........................ 42 2. Change Orders ....................................... 45 3. Manpower Issues and Acceleration ....................... 47 4. Closing out the Superior Contract ........................ 48 B. Water Treatment Plant ....... ................................ 51 C. Findings Concerning Damages at Superior ....................... 54 D. Superior Analysis and Conclusions of Law ....................... 57 1. Remaining Unpaid GMP for Cost of the Work .............. 61 2. Superior Delay and Impact Claims ....................... 63 a. Did Central comply with the delay claim and change order process set out in the contract? ......... 63 b. Non-EED Claims: Additional Costs of Acceleration and Extended Duration .......................... 69 c. Acceleration Labor Costs ......................... 70 d. Extended Duration Overhead Costs ................. 71 e. Water Treatment Piping Costs ..................... 71 f. Out-of-Sequence Costs .......................... 72 g. Did Agra breach the change order provisions and, if it did, does that breach excuse Central’s compliance with them? .................................... 73 h. Does Central’s noncompliance with the claims and change order process disqualify it from being compensated on its impact claim? .... .............. 77 3. Water Treatment Claim ................................ 80 4 Case 09-05155 Doc# 105 Filed 04/29/11 Page 4 of 128 V. PLYMOUTH PROJECT – FINDINGS AND CONCLUSIONS OF LAW ... 85 A. Performance of the Plymouth Project ........................... 85 1. Delays ....................................... 85 2. Change Orders ....................................... 89 3. Manning the Plymouth Project .......................... 90 4. Central’s Payment Application No. 10 .................... 93 5. The “Walk-Off” ...................................... 99 6. Termination and Cover ............................... 102 7. Damages at Plymouth ................................ 103 B. Plymouth Analysis and Conclusions of Law ..................... 106 1. Central’s Payment Application No. 10 ................... 106 2. Central’s Walk-off and Suspension ...................... 116 3. Agra’s Damages ..................................... 120 4. Agra’s Breaches and Central’s Claims ................... 121 a. Demobilization ................................ 121 b. Pay App 10 . .................................. 122 c. Unreimbursed Sales Tax ........................ 122 d. Value of the Contract ........................... 122 e. Delay Claim/Extended Duration .................. 123 VI. SUMMARY ...................................... 125 A. Superior Project ....... ............................... 125 B. Plymouth Project ...................................... 126 C. Setoff ...................................... 126 D. Attorney’s Fees ...................................... 127 E. Post-Trial Motions ...................................... 128 F. Judgment ...................................... 128 5 Case 09-05155 Doc# 105 Filed 04/29/11 Page 5 of 128 This adversary proceeding is a construction contract dispute between Central States Mechanical, Inc. (“Central”), the mechanical/piping subcontractor, and Agra Industries (“Agra”), the design/builder and contractor, related to two separate ethanol plants built in Merrill, Iowa and Superior, Iowa. The Court conducted a two week trial on the parties’ claims in November 2010 and thereafter the parties submitted proposed findings of fact and conclusions of law.1 After careful review of the record and the parties’ submissions, the Court is now ready to rule.2 The following opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.3 I. BACKGROUND FACTS A. Bankruptcy of Debtor - Status of Chapter 11 plan Central filed its chapter 11 petition in this Court on August 7, 2009. By the time of its filing, Central had ceased doing business and, once in chapter 11, proceeded to liquidate its tangible assets. Pursuant to the chapter 11 plan confirmed on April 27, 2010, what remained of Central’s assets was conveyed at confirmation to a liquidating trust (Trust). Robert L. (Bobby) Myers, formerly secretary/treasurer of Central, is the liquidating trustee of the Trust and is hereby substituted as party plaintiff in this adversary proceeding in his trust capacity only. The principal remaining asset to be administered is Central’s claim for damages against Agra for breach of construction contract. 1 Central appeared at trial by its counsel Mikel Stout, Wyatt Hoch, and Francis Baalmann. Agra appeared at trial by its counsel Kevin Wolf, Sara Ackermann, and Thomas Lasater. 2 At the close of Central’s evidence, Agra orally moved for judgment. The Court deferred ruling on the motion pending the close of the evidence. The motion is DENIED. 3 The Court has subject matter jurisdiction over this core proceeding and the parties consent to trial and entry of a final order by this Court. 6 Case 09-05155 Doc# 105 Filed 04/29/11 Page 6 of 128 Central filed this adversary proceeding to prosecute those claims. Agra answered, denying Central’s claims and alleging its own counterclaims for breach of contract, and asserts that Central’s contractual failings caused Agra damages well in excess of Central’s claims against Agra. B. The Parties and Significant Players in the Case 1. Central States Mechanical, Inc. (“Central”) Central was the mechanical/piping subcontractor on two ethanol plant projects with Agra Industries – one in Superior, Iowa and one in Merrill, Iowa. It was responsible for fabricating and installing the piping, and for installation of certain equipment, instrumentation, vessels, and valves ordered and supplied by third parties. Central’s home office is located in Ulysses, Kansas. Robert E. (Bob) Myers, is the president of Central. His son, Robert L. (Bobby) Myers, is the secretary/treasurer and was the Central principal primarily involved in these two subcontracts. Heather Clutter is Central’s bookkeeper and was involved in corresponding with Agra, and submitting change orders and pay applications on behalf of Central. John Hill was Central’s site superintendent on the Superior project. Dennis Ahlberg was Central’s site superintendent at the Plymouth project. 2. Sega, Inc. (“Sega”) Central retained the services of Sega a Kansas City industrial engineering firm for design of the piping aspects of the ethanol plants, based upon Delta-T’s process design. Sega’s Brad Carver worked on the piping design on these two ethanol plant projects. Steve Wopata was Sega’s project manager. 3. Agra Industries (“Agra”) Agra is a general construction contractor headquartered in Merrill, Wisconsin. Agra was the 7 Case 09-05155 Doc# 105 Filed 04/29/11 Page 7 of 128 design/builder for the two ethanol plants in Iowa. Agra is headquartered in Merrill, Wisconsin and has built a number of biofuel and ethanol plants, feed mills, seed processing facilities and grain handling facilities. Pat Hinner is the president of Agra. David Marcott is the vice president of administration for Agra. Marcott was responsible for administration of the subcontracts, including the payment application process and the change order process. Marcott testified at trial. Bob Shank is the project director for Agra. Shank testified at trial, primarily regarding the Superior Project at Superior, Iowa. Russ Wende was Agra’s director of procurement. The Court received into evidence Wende’s deposition testimony. Erick Soder was the former site superintendent for Agra on the Plymouth Project. Soder reported to the project manager. Soder testified via video deposition. Terry Chipman, and later Dave Burgess, were the project managers on the Superior plant. Burgess was the project manager on the Plymouth project. Burgess reported to Bob Shank. Burgess testified at trial, primarily on the Plymouth project. 4. Delta-T Corporation (“Delta-T”) Agra retained Delta-T as its engineering consultant to design the process for the ethanol plants. It was also responsible for procuring and delivering process equipment, vessels, valves, and other components for installation by Central. 5. Green Plains Renewable Energy (“GPRE”) GPRE was the owner of the Superior, Iowa ethanol plant and contracted with Agra for the design/build of the ethanol plant. Scott Flynn, P.E. (“Flynn”) was employed by Engineering and Construction Services (“ECS”) and acted as the owner’s representative on the Superior project, overseeing construction and progress on the Superior plant and reporting to GPRE. 8 Case 09-05155 Doc# 105 Filed 04/29/11 Page 8 of 128 6. Plymouth Energy, LLC (“Plymouth Energy”) Plymouth Energy was the owner of the ethanol plant to be built in Merrill, Iowa and contracted with Agra for its construction. 7. Wanzek Construction (“Wanzek”) Wanzek was the piping contractor who replaced Central at the Merrill, Iowa project and completed Central’s scope of work. Wanzek’s project superintendent, Craig Pumper, testified regarding Wanzek’s work on the project. C. The Subcontracts Generally Prior to its bankruptcy, Central had been a mechanical subcontractor in its own right since 1993 and had been continuously involved in various subcontracting activities until its departure from the two jobs that form the basis of the disputes discussed in this opinion. Central did task-specific mechanical work in meat plants, ethanol plants, and oil and gas ventures. Mechanical contract work involves running piping and setting valves, fittings, controls, and other equipment that handles air and liquids. As Central grew, it performed ethanol-related mechanical services for ICM, a company based in Colwich, Kansas that designs and builds ethanol plants. Bobby Myers worked on various projects for ICM and it was there that he became acquainted with Bob Shank, who at the time was ICM’s director of field operations. After Shank left ICM and moved to Agra to become a project director, he contacted Central through Bobby Myers and invited bids on two 50 million gallon per year ethanol plants, one at Superior, Iowa and the other at Merrill, Iowa. The ethanol plants were nearly identical in technology and design. Delta-T provided the process design on both. Central bid to act as the lead 9 Case 09-05155 Doc# 105 Filed 04/29/11 Page 9 of 128 mechanical subcontractor on both projects.4 Agra awarded the mechanical/piping subcontracts to Central. 1. Superior Project On December 15, 2006, Agra and Central entered into a Standard Form of Agreement Between Contractor and Subcontractor (AIA Document A401-1997) for Central to perform the piping subcontract work on the Superior Project at Superior, Iowa (the “Superior Subcontract”).5 The Superior Subcontract incorporated the Terms and Conditions of the Prime Contract (AIA Document A141) between Agra and the owner (GPRE), which was attached to the Superior Subcontract.6 The Superior Subcontract obligated Central to provide the pipe-routing design to implement Delta-T’s ethanol-process design, to provide and install materials for the piping system, and to set some vessels and most equipment provided by others. The Superior Subcontract obligated Agra to pay Central the “Cost of the Work” plus a fee of 12%, up to a guaranteed maximum price (“GMP”) of $11,898,368.00. The GMP included a $250,000 contingency allowance for use by Central, with any unused amount of contingency reverting back to Agra upon completion of the work. The Superior Subcontract originally provided for a substantial completion date of November 18, 2007. 4 Ex. 5 (Superior), Ex. 157 (Plymouth). 5 Ex. 3. 6 Ex. 4. Although AIA Document A201 (General Conditions of the Contract for Construction) is also referenced in the subcontract A401 (See Ex. 3, § 1.2), neither party argued that it applied in the Superior Project; instead, AIA Document A141 contained the applicable Terms and Conditions, to the extent not inconsistent with the provisions of the subcontract AIA Document A401. 10 Case 09-05155 Doc# 105 Filed 04/29/11 Page 10 of 128