In re M.B. Hayes, Inc., Bankruptcy No. 01-21054-8P1.

• Decision Date: 17 December 2003
• Docket Number: Bankruptcy No. 01-21054-8P1.,Adversary No. 02-203.
• Citation: 305 B.R. 361
• Parties: In re M.B. HAYES, INC., Debtor. M.B. Hayes, Inc., Plaintiff, v. Tak Chin Choi, et al., Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Florida

305 B.R. 361

In re M.B. HAYES, INC., Debtor M.B. Hayes, Inc., Plaintiff, v. Tak Chin Choi, et al., Defendants.

Bankruptcy No. 01-21054-8P1.

Adversary No. 02-203.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

December 17, 2003.

COPYRIGHT MATERIAL OMITTED

Richard C. Prosser, Stichter, Riedel, Blain & Prosser, Tampa, FL, for Debtor.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OF DECISION

ALEXANDER L. PASKAY, Bankruptcy Judge.

The matter under consideration in this Chapter 11 case are three claims asserted by M.B. Hayes, Inc. (Debtor), in three separate counts against Tak C. Choi, Yuet N. Choi, Chan C. Choy, and Wai Cheng Choy, all doing business as Albert's Asian Bistro, Inc. (Owner-Defendants). On March 8, 2002, the Debtor originally filed the instant action seeking to foreclose its construction lien and for breach of contract (Document No. 1). The Debtor later amended its complaint joining additional defendants ("Third Party Defendants") and asserting a third claim for declaratory relief to determine the extent, validity, and priority of liens against the contract proceeds and the Owner-Defendants' real property (Document No. 27).¹

The Owner-Defendants filed an answer and counterclaims seeking damages pursuant to Florida Statute 713 and declaratory relief as to the Third Party Defendants (Document No. 71). In addition, this Court allowed Keene Brothers, Inc. ("Keene Brothers") to intervene (Document No. 23). Keene Brothers, a subcontractor on the Project, filed a counterclaim and cross-claim against the Owner-Defendants asserting an interest in the contract proceeds and an equitable lien against the Owner-Defendants' real property (Document No. 24). This Court subsequently dismissed Albert's Asian Bistro, Inc. from the lawsuit.

This Court bifurcated the Debtor's claims and tried its claims to foreclose its construction lien and for breach of contract with the Owner-Defendants' counterclaims for relief pursuant to Section 713 Florida Statutes (Document No. 22).

This Court having considered the testimony of witnesses, the exhibits offered and admitted into evidence, the pleadings and stipulation offered by the parties, and the post-trial submissions by the parties, now finds and concludes as follows.

I.

On May 22, 2000, the Debtor entered into a stipulated sum contract with Wohup Development, Inc. to build a restaurant to be known as Albert's Asian Bistro (the Project)(Debtor's Exhibit No. 1). James H. Post signed the contract on behalf of the Debtor and Chan Choy signed the contract on behalf of the Owner-Defendants. The contract identified the architect as ROJO Architect. On August 1, 2000, the parties executed an addendum changing the owner's name from Wohup Development, Inc. to Tak C. Choi, Yuet N. Choi, Chan C. Choy, and Wai Cheng Choy, all doing business as Albert's Asian Bistro, Inc., previously defined as the Owner-Defendants.

The contract provided that the Debtor would commence work within ten days of the issuance of permits and substantially complete construction within 150 days. There were no penalties, however, for the Debtor's failure to complete the Project within this time.

The contract stipulated the sum of $707,965 for the work contemplated. The design and installation of an owner supplied Chinese arch and walkway was included in that price. The Debtor was entitled to periodic payments during the pendency of the construction subject to certain requirements. The Owner-Defendants were to make the final payment due on the contract no later than 30 days after the issuance of the final certificate, receipt of a certificate of occupancy, and receipt of all required lien waivers.

The contract provided a means by which the parties could vary its terms by the execution of mutually agreed upon change orders. A change order had to set forth in writing the change in work, adjustment in contract sum, if any, and adjustment in contract time, if any.

If the Debtor and Owner-Defendants could not agree on the terms of a change order, the architect could prepare a construction change directive with agreement by the Owner-Defendants. The construction change directive would direct the performance of the work but reserve for future determination the assessment of costs associated with the change. Under this procedure, the architect could later assess costs using one of three methods. Alternatively, the Debtor could keep an itemized accounting of the costs incurred in executing the change order — including labor, materials, equipment, insurance and other fees, and supervision — together with a reasonable allowance for overhead and profit. The architect determined all cost disputes for purposes of interim payments, subject to the rights of the parties to assert a formal claim.

To assert a formal claim, the parties had to do so in writing within 21 days of the occurrence of the event giving rise to the claim or the time that the claimant first recognized the condition giving rise to the claim, whichever occurred later. If the claim requested an increase in the contract price, the claimant had to initiate the claim before proceeding with the work, except in limited emergency situations. Claims for additional time had to include an estimate of the cost and probable effect of delay on the scheduled construction. In the case of continuing delay only one claim was required.

As is common in the construction business, the parties began to execute change orders almost immediately upon the Debtor's commencement of the Project. The vast majority of these change orders were at the Owner-Defendants' behest or for reasons beyond the control of the Debtor. As a consequence of these change orders, the estimated completion time for the Project was extended by a further 201 days, more than doubling the original time estimate.

In December 2000, the Debtor executed a change order recognizing some of these delays and assessing a delay charge of $4,155. The Debtor calculated the delay charge by multiplying $277 (the estimated daily cost of site supervision and overhead expenses) by 15 days. The Owner-Defendants refused to sign this change order. The architect was no longer associated with the Project, limiting the options available to the parties to settle the dispute for purposes of interim payments. Ultimately, the Debtor executed a substitute change order listing the additional days to be added to the completion time but omitting charges for those days (Debtor's Composite Exhibit No. 4). Although the Debtor verbally warned the Owner-Defendants that it would assess those charges at the end of the contract, it did not make a formal claim.

Thereafter, the Debtor excluded delay charges from its change orders and charged only for costs of materials and labor.² Consistent with its promise to later add delay charges, the Debtor twice more executed change orders detailing additional days but assessing no charges.³

Eventually, the Debtor completed the Project with the exception of the installation of the Chinese arch and walkway. The Debtor could not complete this part of the Project due to difficulties in obtaining permits and problems in delivery caused by the Owner-Defendants. By this time, the Debtor was under extraordinary financial pressures caused by an ambitious expansion of its business. The timely collection of its accounts receivables was critical to its financial health. Accordingly, on September 20, 2001, the Debtor submitted its seventh and final draw request to the owner seeking $132,393.36 (Owner-Defendants' Exhibit No. 1). This amount represented the remaining balance on the stipulated sum and most but not all of the change orders agreed to by the parties.⁴ It did not reflect a credit for the exclusion of the Chinese arch and walkway.

The Debtor also submitted an affidavit of payment of debts and claims (Debtor's Exhibit No. 3 and Owner-Defendants' Exhibit No. 1). In the affidavit, the Debtor certified that all subcontractors and materials and equipment suppliers had been paid except those listed in the affidavit. The Debtor excepted eleven sub-contractors or materials and equipment suppliers with aggregate claims exceeding $97,000 who had not been paid. The Debtor did not submit separate releases or waivers of liens from these unpaid subcontractors and suppliers as required by the contract. The Debtor's affidavit was also inaccurate as the Debtor did not include subcontractors and suppliers that it had failed to pay in connection with an earlier draw request for which payment had been received and certificates of payment issued (Owner-Defendants' Exhibit Nos. 5 and 6).

The Owner-Defendants refused to sign off on the Debtor's final draw request on the grounds that credit had not been given for the Debtor's failure to complete the Chinese arch and walkway. Otherwise, the Owner-Defendants did not dispute the amount sought. The Owner-Defendants did not make a formal claim for a reduction in the contract price.

The Debtor took no action to amend or supplement its application for payment. Instead, on October 26, 2001, the Debtor executed a change order reflecting a $21,000 credit for the Chinese arch and walkway and assessing delay charges in the amount of $56,508 resulting in a net increase of $35,508 (Debtor's Exhibit No. 5). On the same day, the Debtor executed another change order assessing a $2,000 charge for modifications to the air conditioning system (Debtor's Exhibit No. 6). The Owner-Defendants did not agree to these change orders and did not sign them.

On October 30, 2001, the Debtor sent the Owner-Defendants a letter of default (Owner-Defendants' Exhibit No. 3). The Debtor recorded a construction lien in the amount of $170,401.76 against the Owner-Defendants' real property on the same day (Debtor's Exhibit No. 2). The Debtor calculated the lien amount by adding the final draw request to the later assessed delay charges less a $14,000 credit for the uncompleted Chinese...