Forrest Constr. Co. v. Laughlin

• Decision Date: 09 December 2009
• Docket Number: No. M2008–01566–COA–R3–CV.,M2008–01566–COA–R3–CV.
• Citation: 337 S.W.3d 211
• Parties: FORREST CONSTRUCTION COMPANY, LLCv.James L. LAUGHLIN, II, et al.v.Thomas B. Naive.
• Court: Tennessee Court of Appeals

337 S.W.3d 211

FORREST CONSTRUCTION COMPANY, LLC

v.James L. LAUGHLIN, II, et al.

v.Thomas B. Naive.

No. M2008–01566–COA–R3–CV.

Court of Appeals of Tennessee, Middle Section, at Nashville.

Aug. 7, 2009 Session.Dec. 9, 2009.Permission to Appeal Denied by

Supreme Court June 18, 2010.

Published Pursuant to Tenn. R. S. Ct. 4(D).

Christopher S. Dunn, Alyssa M. Leffall and William B. Herbert, Nashville, Tennessee, for the appellants, Forrest Construction Company, LLC, and Thomas B. Naive.Donald Capparella, Nashville, Tennessee, for the appellees, James L. Laughlin, II, and Debbie Laughlin.

OPINION

FRANK G. CLEMENT, JR., J., delivered the opinion of the court, in which ANDY D. BENNETT and RICHARD H. DINKINS, JJ., joined.FRANK G. CLEMENT, JR., J.

This action involves a variety of claims arising from the construction of a residence in Williamson County. A homeowner, James Laughlin, entered into a cost plus contract with Forrest Construction Company, LLC to construct a home for him and his wife. Prior to the home being completed, Forrest Construction stopped work, filed a lien on the residence, and thereafter filed a breach of contract action against Mr. Laughlin and an action to recover damages based on the doctrine of quantum meruit against Mrs. Laughlin. Forrest Construction claimed that Mr. Laughlin was in breach of the contract for failure to pay according to the contract. Mr. and Mrs. Laughlin filed a counter-claim for negligent construction, gross negligence, negligence per se, breach of contract, and violations of the Tennessee Consumer Protection Act. The trial court found that Mr. Laughlin had materially breached the contract by failing to pay according to the terms of the contract, and awarded damages to Forrest Construction. Conversely, the trial court found for the Laughlins on their claim of negligent construction and awarded damages against Forrest Construction. Both parties appeal. Forrest Construction contends that the trial court erred in holding it liable for alleged defects because Mr. Laughlin committed the first material breach and failed to give Forrest Construction notice and the opportunity to cure the alleged defects. Mr. Laughlin contends the trial court erred in finding that he committed the first material breach. The Laughlins also contend the trial court erred in reducing the cost of the repairs to their residence and in failing to pierce the corporate veil. We find that Forrest Construction was the first to materially breach the contract by submitting requests for draws that were not properly supported by records of its costs and expenses as required by the contract, including submitting draws which erroneously included charges for work done on its other projects, and by failing to complete construction of the home. We, therefore, reverse the trial court's determination that Mr. Laughlin committed the first material breach and hold that Forrest Construction was the first to materially breach the contract. We affirm the trial court's determination that the Laughlins were excused from the duty to give notice of the alleged defects and an opportunity to cure; thus, the Laughlins are entitled to recover damages due to the negligent construction by Forrest. As for the trial court's substantial reduction of the damages requested by the Laughlins for the cost to repair the yet unrepaired defects to their home, we are unable to determine whether the trial court considered or overlooked $55,000 of the estimated cost to repair the defects; therefore, we remand this issue to afford the trial court the opportunity to either restate its previous ruling or to increase the award of damages, if it so determines, based on the evidence presently in the record. As for the issue of piercing the corporate veil, we remand that issue for further proceedings.

This action arises from the construction of a residence in Williamson County for James and Debbie Laughlin. Forrest Construction Company, LLC entered into a construction contract with James Laughlin on July 11, 2003 for the construction of the Laughlins' new home.¹ For reasons unexplained by the record, Debbie Laughlin did not sign the contract; only James Laughlin and Thomas Naive, the sole owner and member of Forrest Construction, signed the contract.² Thus, James Laughlin and Forrest Construction are the only parties to the contract. However, Mrs. Laughlin is a defendant in this action as Forrest Construction filed a quantum meruit claim against her, and she joined her husband in filing a counter-claim against Forrest Construction for negligent construction, gross negligence, negligence per se, and violations of the Tennessee Consumer Protection Act.

The contract, which was a “cost plus” contract, provided that Forrest Construction would recover its actual net costs, plus 7% for “the contractor's overhead,” plus an 8% profit, which was based on the “actual net costs of all direct materials, labor, services, and fees, that go into the entire project.” The contract provided that Forrest Construction was to be paid pursuant to the cost plus formula on a weekly basis; it was to submit weekly requests for draws based on the cost of the work in the previous week plus overhead and profit. The contract also provided that each draw would be submitted with “full back-up support for all amounts requested” and that Forrest Construction “shall have full responsibility and obligation to keep full and accurate records of all costs and expenses to satisfy tax laws and Owner.”

In order for the Laughlins to secure the construction loan needed to finance the project, Forrest Construction submitted an initial cost estimate to the Laughlins and their lender, Fifth Third Bank. The estimated cost of construction was $556,944.89. Based upon this estimate, the Laughlins secured two loans, a construction loan for $506,000 and an additional line of credit of $50,000 that was to be held in reserve. At the inception of the project, the Laughlins also made a “deposit” of $25,000 which Forrest Construction was to use only for the payment of work done in the absence of the Laughlins' ability to make the required draw payments.

Construction on the home began in mid-July of 2003. During the construction, the Laughlins made the decision to finish rooms in the home that were initially to be left “unfinished” and Forrest agreed to do the additional work. Despite the requirement that such changes be made by written change orders signed by both parties, no change orders were prepared or signed.

As construction progressed over the next few months, Forrest Construction submitted requests for draws directly to the Bank and the bank paid the draws in the amounts requested. In May 2004, Mr. Naive and Mr. Laughlin discussed the fact that the primary construction loan had been fully expended and that additional funds were needed to complete construction. Mr. Laughlin approved the use of the $50,000 from the second mortgage, which had been held in reserve, and he secured an additional $25,000 to cover additional construction costs.

When Forrest Construction submitted a draw request for its June work on July 6, 2004, there were not enough funds to cover the entire draw request; therefore, $12,000 remained unpaid. Despite the lack of funds, Forrest continued construction. Mr. Naive stated that work continued due to assurances from Mr. Laughlin and the Bank that funds would be forthcoming. Subsequently, Mr. Naive claimed that he personally incurred $87,101 in out-of-pocket expenses to cover the cost of work the Laughlins had not paid for.

In the interim, in an effort to secure additional funds, Mr. Laughlin requested a final cost estimate to complete construction on the home. On August 20, 2004, Mr. Naive submitted an estimate that it would cost an additional $50,584 to complete construction. With the unpaid balance of $87,101 in out-of-pocket expenses claimed by Mr. Naive, this resulted in a balance of $137,000.

Before agreeing to provide any additional funds for the project, Mr. Laughlin requested that Mr. Naive provide records of Forrest's expenses up to that point. On September 3, 2004, Mr. Naive provided Mr. Laughlin with a box of papers approximately two feet high. Mr. Laughlin described the contents of the box as miscellaneous invoices and check stubs that had no organization and which he found wholly unsatisfactory. Mr. Laughlin then requested a meeting for September 10, 2004.³ On the morning of September 10, Mr. Laughlin filled out the required paperwork to secure an additional $145,000 from the Bank and that afternoon he met with Mr. Naive at a Chili's restaurant.

What occurred during the meeting at Chili's is disputed; in any event, it did not result in an amicable resolution. Mr. Laughlin claims that he expressed his concern with the lack of documentation to support the draw requests submitted by Forrest Construction, and due to this, he proposed new terms to settle their differences and complete construction of the residence. Mr. Laughlin states that he proposed paying $50,000 to complete the project, which would be paid directly to the workers. Of the $87,000 that Mr. Naive or Forrest Construction claimed to have incurred, Mr. Laughlin offered to pay $70,000 for the actual costs, excluding any profit, which would be made in installment payments. Though he admitted that Mr. Naive was initially upset over his proposal, Mr. Laughlin stated that Mr. Naive accepted the proposal. Mr. Naive, however, claims that Mr. Laughlin stated he would not pay the amount due under the contract, and while it may have appeared that he agreed to Mr. Laughlin's proposal, he made that statement in order to retrieve the box of documents that were still in Mr. Laughlin's possession. The meeting at Chili's then concluded.

Immediately after leaving Chili's, Mr. Naive drove to his attorney's office. Three days later, on September 13, 2004, Forrest Construction filed a Mechanic's and...