Arete Ventures, Inc. v. Univ. of Ky.

• Decision Date: 24 July 2020
• Docket Number: NO. 2016-CA-001628-MR, NO. 2016-CA-001592-MR,NO. 2016-CA-001586-MR,2016-CA-001586-MR
• Citation: 619 S.W.3d 906
• Parties: ARETE VENTURES, INC., Appellant v. UNIVERSITY OF KENTUCKY, Appellee Auto-Owners Insurance Company, Appellant v. University of Kentucky, Appellee University of Kentucky, Cross-Appellant v. Auto-Owners Insurance Company and Arete Ventures, Inc., Cross-Appellees
• Court: Kentucky Court of Appeals

619 S.W.3d 906

ARETE VENTURES, INC., Appellant

v.UNIVERSITY OF KENTUCKY, Appellee

Auto-Owners Insurance Company, Appellant

v.University of Kentucky, Appellee

University of Kentucky, Cross-Appellant

v.Auto-Owners Insurance Company and Arete Ventures, Inc., Cross-Appellees

NO. 2016-CA-001586-MR

NO. 2016-CA-001592-MR

NO. 2016-CA-001628-MR

Court of Appeals of Kentucky.

JULY 24, 2020; 10:00 A.M.

Discretionary Review Denied April 20, 2021

BRIEFS FOR APPELLANT/CROSSAPPELLEE ARETE VENTURES, INC.: William C. Hurt, Jr., Luke Wingfield, Jacob Kenneth Michul, Lexington, Kentucky.

BRIEFS FOR APPELLANT/CROSSAPPELLEE AUTO-OWNERS INSURANCE COMPANY: Wendell L. Jones, John J. Bursch, Elizabeth A. Sprowl, Louisville, Kentucky.

BRIEFS FOR APPELLEE/CROSSAPPELLANT UNIVERSITY OF KENTUCKY: Lynn C. Stidham, William E. Thro, Richard Jacob Dieffenbach, Lexington, Kentucky.

BEFORE: CLAYTON, CHIEF JUDGE; ACREE AND TAYLOR, JUDGES.

OPINION

ACREE, JUDGE:

Two consolidated appeals and a cross-appeal were brought to this Court from a judgment of the Franklin Circuit Court entered after a trial without a jury. The judgment finds Arete Ventures, Inc. liable to the University of Kentucky for breaching Arete's and UK's contract to construct an equine isolation barn; the judgment also finds Auto-Owners Insurance Company liable to UK for breaching its performance bond incorporating Arete's construction contract and assuring Arete would perform according to the construction contract's terms. Arete and Auto-Owners present this Court with a variety of arguments that the judgment is unsound.

On cross-appeal, the University challenges the trial court's failure to award pre-judgment interest and its suspension of post-judgment interest for approximately ten months following the judgment.

After thorough review, and following oral argument, we affirm the trial court's judgment finding Arete and Auto-Owners liable to UK. However, we find that the trial court erred as a matter of law by failing to award pre-judgment interest and by suspending the accrual of post-judgment interest.

BACKGROUND

As part of its equine research program, UK needed a facility to quarantine diseased horses (the "Barn"). The design called for: (1) a poured, concrete foundation; (2) steel, reinforced floor slabs; (3) watertight walls made from concrete masonry units reinforced with rebar – vertically, and horizontally laid; (4) wood roof trusses; and (5) twelve horse stalls. After the site was selected and before construction commenced, UK prepared the building pad and retained a geotechnical firm to test the soil to assure proper compaction. Once the site was prepared, Arete began construction pursuant to the design and in accordance with a construction contract between Arete and UK dated September 24, 2007.

Under the contract, Arete was to receive $779,000 for the structure itself and an additional $40,607 for an alternative floor design, for a total contract price of $819,607. As required by the Kentucky Model Procurement Code, KRS ¹ 45A.005 et seq. , Arete obtained performance bonds from two sureties – Auto-Owners for $779,000 and CNA Surety Insurance Company for $40,607. The performance bonds specifically incorporated the construction contract and covered defective work and guaranteed construction in accordance with that incorporated contract and the design.

Construction began October 29, 2007, and Arete completed the Barn in 2008. The contract required Arete to reinforce the walls with vertical and horizontal rebar to prevent cracking. Although unknown during or at the completion of construction, it is now uncontroverted that Arete's subcontractor responsible for that rebar reinforcement failed to install the rebar in accordance with the construction contract or industry standards.

UK conducted a warranty walk-through in 2009 and noticed cracking in the walls. By the time UK discovered the damage, Arete was out of business. However, Arete acknowledged the cracks were its responsibility and attempted to repair them. The attempted repairs were unsuccessful. This prompted UK to investigate the cause of the cracking. Investigators hired by UK concluded the walls were defectively constructed. Defects included runs of rebar that were not lapped and tied together, missing grout that should have filled the cavities of certain blocks or cells, misaligned rebar, and other errors in construction that compromised the stability of the walls.

UK submitted a claim to Auto-Owners and, in accordance with the bond, demanded that Auto-Owners repair the defective walls. Auto-Owners refused, asserting that UK had the opportunity to inspect and prevent the construction defects, failed to take advantage of that opportunity, and paid Arete the full amount of the construction contract. Auto-Owners took the position that its bond was thereafter an indemnity bond, limiting its obligation to reimburse UK only after it paid for necessary remediation.

Pursuant to another provision of the bond, UK engaged another contractor for remediation work. UK claimed total remediation costs of $629,561.93. UK then submitted a second claim to Auto-Owners requesting reimbursement, but Auto-Owners never satisfied that claim.

PROCEDURAL HISTORY

Auto-Owners brought a declaratory judgment action against UK seeking a ruling that it had no liability under the bond, later amending its complaint to include claims for money damages against UK for alleged negligence, fraud, and breach of implied warranties. UK counterclaimed, asserting breach of the performance bond, as well as bad faith in refusing to take over the project despite admitting Arete's work was defective. Although Arete was no longer in business, it intervened in the case. Arete sought a declaratory judgment on its liability to UK, asserting a third-party complaint against the masonry subcontractor. UK cross-claimed against Arete for breach of contract, building code violations, and negligent construction and supervision.

The trial court held a twelve-day bench trial and, on November 12, 2015, entered thorough and comprehensive Findings of Fact, Conclusions of Law, and Judgment. Relevant to this appeal, the trial court's judgment stated as follows:

(1) "There was no evidence that UK was negligent in preparing the pad." (Judgment, Findings of Fact at ¶ 12).

(2) "The evidence showed that the design contained adequate details for installing the vertical rebar." (Id. at ¶ 27). "[T]here was uncontroverted evidence that the design was adequate." (Judgment, Conclusions of Law at ¶ 36).

(3) UK's expert "testified that the masonry subcontractor ... incorrectly installed the vertical reinforcement in the walls [and] that the block was also placed during the winter without the required cold weather protection." (Judgment, Findings of Fact at ¶ 30).

(4) "Arete ... acknowledged that the horizontal cracks were its responsibility." (Id. at ¶ 31).

(5) "The Court was persuaded by [expert] opinion that the failure to lap rebar and fully grout all of the cells resulted in discontinuous reinforcement, lack of sufficient strength to resist out-of-plane loads, and was a substantial factor in causing the horizontal wall cracks [because UK's expert] testified that properly installed vertical reinforcement would have prevented the horizontal cracks [and Auto-Owners’ expert] testified that he did not think that the horizontal cracking would have occurred if the [re]bars had been continuous." (Id. at ¶ 38).

(6) Auto-Owners’ expert "determined that the walls were not constructed according to [the] design or the masonry standards referenced in the KBC [Kentucky Building Code;] ... that the rebar was not placed as intended or protected from cold weather. He concluded that had the reinforcing been placed as described and intended with the masonry standard, among other things, the majority of the cracks would have been prevented." (Id. at ¶ 52).

(7) "UK has met its burden of proving each element [of its cause of action for breach of contract against Arete] by a preponderance of the evidence." (Judgment, Conclusions of Law at ¶ 1).

(8) As to the element of causation, the trial court said: "Consultants retained by Arete's surety, Auto-Owners ..., also determined that the horizontal cracks were serious defects and resulted from the lack of continuous vertical reinforcement." (Id. at ¶ 6).

(9) Regarding the bond claim, the trial court said: "UK must prove the existence of a bond and damages flowing from the breach.... UK has met its burden." (Id. at ¶ 10).

(10) "The evidence shows that [Auto-Owners] breached the Bond."

More specifically: "The evidence showed that (a) Arete defaulted; (b) UK terminated the [construction c]ontract; (c) UK exercised its option to demand that [Auto-Owners] remediate the defects; and (d) [Auto-Owners] refused." (Id. at ¶ 13).

(11) "The [construction c]ontract, which imposed specific obligations on the surety [Auto-Owners], was still incorporated in the Bond.... [Auto-Owners] thus agreed to be bound by the Contract although it did not sign it." (Id. at ¶ 14).

(12) Auto-Owners "took the position that it was not obligated to pay UK until it remediated the Barn [defects] itself. The evidence showed that UK submitted another bond claim ... seeking reimbursement of its remediation costs and [Auto-owners] rejected the claim. Therefore, [Auto-Owners] breached by refusing to neither [sic] remediating nor paying for remediation." (Id. at ¶ 16).

(13) The construction contract provided that "UK had the option to correct the work or repair damages and ‘the cost and expense incurred in such event shall be paid by or be recoverable from the General Contractor [Arete] or the surety [Auto-Owners].’ " (Id. at ¶ 21).

(14) "UK incurred total remediation costs of $629,561.93." (Id. at ¶ 23).

(15) "[I]t was reasonably foreseeable that if Arete failed to provide [contract and code compliant, and industry standard] reinforcement [of the Barn's walls], there would be damages flowing from it, including the cost of remedying the

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