3D Enterprises v. Metro. Sewer Dist.

• Court: Supreme Court of Kentucky
• Writing for the Court: Johnstone
• Citation: 3D Enterprises v. Metro. Sewer Dist., 174 S.W.3d 440 (Ky. 2005)
• Decision Date: 25 August 2005
• Docket Number: No. 2003-SC-0249-DG.,2003-SC-0249-DG.
• Parties: 3D ENTERPRISES CONTRACTING CORPORATION, Appellant, v. LOUISVILLE AND JEFFERSON COUNTY METROPOLITAN SEWER DISTRICT, Appellee.

174 S.W.3d 440

3D ENTERPRISES CONTRACTING CORPORATION, Appellant, v. LOUISVILLE AND JEFFERSON COUNTY METROPOLITAN SEWER DISTRICT, Appellee.

No. 2003-SC-0249-DG.

Supreme Court of Kentucky.

August 25, 2005.

Rehearing Denied November 23, 2005.

COPYRIGHT MATERIAL OMITTED

Michael J. O'Connell, Thomas E. Roma, Jr., Sarah J. Martin, Parker & O'Connell, PLLC, Louisville, KY, Counsel for Appellant.

Laurence J. Zielke, John H. Dwyer, Jr., Pedley, Zielke & Gordinier, PLLC, Louisville, KY, Counsel for Appellee.

Opinion of the Court by Justice JOHNSTONE.

This appeal arises from a judgment of the Jefferson Circuit Court granting summary judgment in favor of Appellant, 3D Enterprises Contracting Corporation; for claims arising from a construction project for Appellee, Louisville and Jefferson County Metropolitan Sewer District. The Court of Appeals reversed and remanded ordering the circuit court to enter summary judgment in favor of the Appellee. This Court granted discretionary review. For the reasons set forth herein, we reverse the judgment of the Court of Appeals and reinstate summary judgment in favor of the Appellant.

Factual & Procedural Background

At the center of this matter is the construction of two bioroughing towers. These towers were designed to contain eleven layers of plastic bioroughing media, a material employed in the wastewater treatment process. In June of 1992, Louisville and Jefferson County Metropolitan Sewer District ("MSD") contracted with 3D Enterprises Contracting Corporation ("3D") to build the two bioroughing towers and an associated pumping station at MSD's main wastewater treatment plant in Louisville. Pursuant to the contract, 3D was to build these towers according to the plans and specifications prepared by Camp, Dresser, & McKee, Inc. ("CDM"), the consulting engineers on the project.

American Surfpac Corporation ("Surfpac") was chosen as the media supplier. Pursuant to the contract between 3D and MSD, 3D provided a general one-year warranty on the project. In addition, and also pursuant to the contract, 3D procured from Surfpac a manufacturer's warranty that extended four years beyond the one-year general warranty.

In May of 1994, CDM advised 3D that Surfpac was experiencing financial difficulties, and in fact was in the process of selling some of its assets. The parties consequently became concerned about Surfpac's ability to pay its own suppliers and its ability to honor the extended warranty on the media. At this time, 3D had paid Surfpac all sums due except $184,214.28 of its purchase order price for the media. 3D withheld this amount because of its concerns about the value of Surfpac's extended warranty.

When Surfpac did not receive payment, it filed a mechanic's lien against the funds due to 3D from MSD pursuant to KRS 376.210 et seq. 3D filed a protest. Also, in response to Surfpac's lien action, 3D filed a counterclaim against Surfpac, arguing that Surfpac would not be able to honor the extended warranty for the bioroughing media. 3D also filed a cross-claim against MSD and sought a declaration releasing itself from any obligation under the contract for the extended warranty. MSD did not file a counterclaim to 3D's cross-claim, but did withhold the lien amount from 3D.

On December 23, 1995, one of the bioroughing towers collapsed, destroying most of the media in that tower. MSD immediately began to investigate the collapse. As part of this investigation, it undertook discovery of Surfpac regarding its ability to honor its media warranty. By this time, Surfpac's financial picture was bleak: shortly after the collapse, Surfpac's attorneys admitted the company's insolvency.

In August of 1996, MSD filed suit against 3D and CDM to recover damages arising from the collapse. 3D filed a counterclaim seeking recovery of unpaid contract balances, including the $184,214.28 withheld as a result of the Surfpac lien. Meanwhile, because any recovery from Surfpac seemed unlikely, MSD entered into its own negotiations with the media supplier. Those negotiations culminated in a settlement agreement by which Surfpac surrendered all claims to any remaining contract funds, and MSD released Surfpac from any warranty claims.

Surfpac's lien litigation was still pending at this time; it had been continued indefinitely following the tower's collapse. However, in July of 1997, the action was dismissed without prejudice for Surfpac's failure to prosecute. Purportedly in accordance with KRS 376.250(4), MSD continued to retain the $184,214.28 lien amount, pending court order or judgment. No court order was ever issued regarding the lien funds.

In light of the suit filed by MSD against 3D and CDM for damages resulting from the collapse, mediation was commenced. A settlement agreement was finally reached in April of 1999. As part of the agreement, 3D paid MSD an agreed sum for settlement of the breach of contract, breach of warranty, and negligence claims asserted by MSD in connection with the collapse. In exchange, MSD released any and all claims against 3D arising from the construction of the towers. The agreement did provide that 3D would retain its counterclaim against MSD for recovery of its contract balances. As a result, MSD's claims against 3D were dismissed with prejudice and 3D's counterclaim was dismissed without prejudice.

After the MSD action was dismissed, 3D began seeking recovery of its contract balances to no avail. An action was commenced in Jefferson Circuit Court; it is this action that is the basis of the present appeal. In its complaint, 3D sought to collect the balance it alleges MSD owed on the contract, including the $184,214.28 amount originally liened by Surfpac, which MSD continued to retain. A motion for partial summary judgment was filed by 3D as to the lien amount, asserting that it was entitled to payment of the $184,214.28 pursuant to KRS 376.210 et seq. MSD filed a cross-motion for summary judgment with respect to the same funds, arguing that it was entitled to retain the funds because 3D had breached its contract by failing to deliver a warranty with value. The trial court entered summary judgment in favor of 3D as to the liened funds, concluding that MSD was obliged to pay the $184,214.28 to 3D because the lien had been released. KRS 376.210(3) provides that liens shall only attach to "any unpaid balance due the contractor for the improvement." According to the circuit court's reasoning, the lien represented monies otherwise due 3D; thus, when the lien was released, MSD should have complied with the statute and paid the $184,214.28 in liened funds directly to 3D. MSD appealed. 3D cross-appealed that portion of the trial court's judgment denying prejudgment interest.

The Court of Appeals reversed the trial court's summary judgment, determining that the trial court had erred in reviewing the claims solely pursuant to the lien statutes, without addressing MSD's cross-motion contract claims. The Court of Appeals focused on the following facts: 3D had withheld $184,214.28 from Surfpac, based on 3D's belief that Surfpac would be unable to honor its warranty. Although the lien was released, 3D was no longer entitled to these funds because it had breached its contract with MSD by delivering a worthless warranty on the media. The $184,214.28 represented the value of the warranty, and therefore MSD was permitted to withhold this payment from 3D as a result of its breach.

This Court granted discretionary review. Both parties make several arguments on appeal. 3D's primary assertion is that the lien statutes apply to this matter; that is, the failure of Surfpac to perfect the lien required MSD to release the funds to 3D. MSD argues that the lien action is of no consequence to the present matter, as it is nonetheless entitled to withhold the disputed funds because 3D failed to deliver a warranty on Surfpac's media per the original contract. 3D counters that the settlement agreement between itself and MSD prevents MSD from claiming the funds due to breach of contract, as such claims were specifically waived. MSD argues that the settlement agreement did not waive the type of claim that is being pursued herein.

Standard of Review

In ruling on a motion for summary judgment, the trial court must examine the record to determine if any real or genuine issue of material fact exists. City of Florence v. Chipman, 38 S.W.3d 387, 390 (Ky.2001). Summary judgment is proper when, as a matter of law, it appears that it would be impossible for the non-moving party to produce evidence at trial warranting a judgment in his favor. Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 483 (Ky.1991); CR 56.03. Because summary judgments involve no fact finding, this Court will review the circuit court's decision de novo. Blevins v. Moran, 12 S.W.3d 698, 700 (Ky.App.2000).

The Lien Claim

3D's primary argument is that it is entitled to the lien amount — $184,214.28 — because Surfpac failed to timely perfect the lien, rendering it void. 3D makes two alternative arguments regarding why the lien has been released: (1) because the settlement agreement between Surfpac and MSD operated to release any lien claim, or (2) because the lien action was dismissed for failure to prosecute. The trial court below considered all three of these arguments and concluded that each operated to release the lien.

Kentucky's Public Improvement Lien Statutes

KRS 376.210 et seq. govern liens for labor, materials, or supplies furnished on public improvements. After a lien is filed, the public authority may withhold the lien amount. KRS 376.250(1). The contractor may file a written protest within thirty days; once the protest is filed, the public authority continues to withhold the funds, paying them to neither the contractor nor the lien claimant until the matter is resolved. KRS 376.250(3). Thereafter, the lien claimant may file suit. If suit is filed, the funds are released upon court order or...