KM Upstream, LLC v. Elkhorn Construction, Inc.

Citations: 2012 WY 79; 278 P.3d 711; 2012 WL 2018238Docket: S-11-0185, S-11-0207, S-11-0186, S-11-0208

Court: Wyoming Supreme Court; June 6, 2012; Wyoming; State Supreme Court

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KM Upstream, LLC (KM), the owner of an amine plant, appealed the district court's summary judgment in favor of Elkhorn Construction, Inc. (Elkhorn), a subcontractor, on Elkhorn's mechanic's lien claim. KM argued that the summary judgment was improper due to genuine issues of material fact and claimed the district court lacked jurisdiction because of an automatic stay linked to the bankruptcy of Newpoint Gas, LP (Newpoint). KM further contended that Newpoint was an indispensable party, which precluded the district court from proceeding without its involvement.

In cross-appeal, Elkhorn argued the district court should have considered its oil and gas lien claim alongside the mechanic's lien, which would have allowed for the recovery of attorney's fees and costs. The case involved four docketed entries due to a W.R.C.P. 54(b) certification issue. The Supreme Court of Wyoming affirmed in part, reversed in part, and remanded for further proceedings.

Key issues included whether the bankruptcy stay affected the district court's jurisdiction, the absence of indispensable parties (Newpoint and HFG Engineering US, Inc.), the existence of genuine material facts, and whether the awarded judgment exceeded the contract price. Additionally, the court examined whether Elkhorn's Lien Statement properly claimed both a mechanic's lien and an oil and gas lien, and whether the district court erred in its findings regarding damages, pre-judgment interest, and the validity of part of Elkhorn's claim. The case stemmed from a contract between KM and Newpoint for constructing the amine plant with a final agreed price of $15,695,855.30.

Newpoint, Inc. subcontracted Elkhorn for foundation work and interconnecting "skids," establishing a Time and Material Contract with a fixed target price of $5,700,000, which could only be increased in writing. Despite this, Newpoint approved Elkhorn's invoices totaling $9,910,086.96 without any formal price increase or change orders. On March 6, 2009, Elkhorn filed a Lien Statement claiming a lien for $4,880,588.83 against a leasehold interest and improvements tied to the West Frenchie Draw Amine Gas Treating Plant, detailing materials and labor provided from March 18, 2008, to January 16, 2009. Elkhorn’s claim included interest, late charges, attorney's fees, and costs, supported by 1,260 pages of invoices. On March 23, 2009, Elkhorn initiated a complaint against KM, asserting three causes of action: foreclosure of a mechanic's lien, foreclosure of an oil and gas lien, and unjust enrichment/quantum meruit. KM subsequently moved to join Newpoint, Inc. as a necessary party, leading to a stipulation that resulted in Newpoint being added as a defendant in a Second Amended Complaint, which redefined the defendant to include Newpoint Gas, LP, also known as Newpoint Gas Services, Inc.

KM filed an answer to the Second Amended Complaint, denying Elkhorn's entitlement to recover under its claims and asserting multiple affirmative defenses. Newpoint, Inc. also responded, denying that Elkhorn had provided unpaid material or labor, and counterclaimed that Elkhorn breached their contract by seeking compensation above the target price without prior notice. Newpoint sought a declaration that no further payments were due to Elkhorn. Newpoint later amended its counterclaim to request a declaratory judgment regarding amounts owed to Elkhorn and added a cross-claim against KM with seven claims, including misrepresentation and breach of contract.

KM answered the cross-claim and filed its own against Newpoint, alleging multiple breaches related to contract management and lien responsibilities. KM sought a declaration regarding Newpoint's obligations to defend and indemnify it against Elkhorn's claims. Following these exchanges, Elkhorn amended its complaint to include a breach of contract claim against Newpoint for $4,880,588.83 in unpaid amounts. Newpoint responded by amending its cross-claim against KM to include allegations of negligent contractor retention.

Subsequently, KM moved to join HFG as a defendant, arguing that all claims should be resolved in one case due to Wyoming's lien statutes and the joint venture between HFG and Newpoint. Elkhorn opposed the motion, citing the case's age, lack of prior discovery regarding HFG, the introduction of a new legal theory, and the existence of an arbitration clause between KM and HFG that would require arbitration of related issues.

On March 28, 2011, Elkhorn filed a motion for summary judgment, followed by a similar motion from KM on April 4, 2011. Both motions included extensive supporting documents. On May 3, 2011, KM sought partial summary judgment against Newpoint, Inc. regarding four causes of action in its cross-claim. Before the motions were heard, KM informed the district court that Newpoint, LP had filed for bankruptcy in Oklahoma and requested guidance on the applicability of the automatic stay. KM later amended this notice to clarify that Newpoint Gas, LP, also known as Newpoint Gas Services, Inc., had filed for bankruptcy.

Elkhorn opposed the application of the automatic stay, asserting that its contract was with Newpoint, Inc., which was not in bankruptcy. Elkhorn argued that the bankruptcy stay does not apply to solvent affiliates of the bankrupt entity or to co-defendants of the bankrupt party. The district court heard the pending motions concerning the bankruptcy stay and the summary judgment motions on June 17, 2011. The court granted Elkhorn’s motion for summary judgment for foreclosure on the mechanic's lien but stayed further proceedings related to Newpoint, Inc. and Newpoint, LP.

Subsequently, on July 1, 2011, an order was issued to stay the case and grant Elkhorn's motion for summary judgment on the mechanic's lien foreclosure. The document discusses whether the automatic stay in Newpoint, LP's bankruptcy deprived the district court of jurisdiction to render summary judgment. It concludes that the automatic stay does not prevent proceedings against solvent co-defendants, like KM, of an insolvent debtor, Newpoint, LP, as supported by relevant case law and legal literature.

The district court stayed proceedings related to any claims against Newpoint, allowing only the summary judgment on Elkhorn's in rem mechanic's lien foreclosure to move forward. The lien foreclosure involved property owned by KM, not Newpoint, meaning the automatic stay associated with Newpoint's bankruptcy did not apply. Under 11 U.S.C. § 362, the automatic stay only protects claims against the debtor, the debtor's property, and the estate, and does not extend to actions against unrelated property or co-debtors. The stay does not impede actions against nonbankrupt parties unless it interferes with the bankruptcy proceedings. The court's jurisdiction to issue summary judgment was not impacted by the bankruptcy stay. The issue of whether the district court erred in granting summary judgment without Newpoint, deemed an indispensable party, is subject to an abuse of discretion standard. Under W.R.C.P. 19, a party must be joined if their absence prevents complete relief or impedes their ability to protect their interest. If a necessary party cannot be joined, the court must decide if the case should proceed or be dismissed, considering equity and good conscience.

A judgment rendered in a person's absence raises considerations about potential prejudice to that person or existing parties, the ability to mitigate such prejudice through protective provisions or shaping of relief, the adequacy of the judgment, and the availability of remedies for the plaintiff if the action is dismissed due to a nonjoinder. The lien statutes establish that a contractor, like Newpoint, must defend actions brought by subcontractors such as Elkhorn and can be made a party in lien foreclosure actions against property owners like KM. Should a lien be enforced, the owner may withhold payments to the contractor or recover amounts previously paid if the contractor is found liable.

The case under consideration involves the district court's decision regarding the joinder of Newpoint, Inc., which was stipulated by KM and Elkhorn but complicated by Newpoint's subsequent bankruptcy filing. The central issue is whether the district court abused its discretion by not staying or dismissing the case due to Newpoint's non-participation. The court's actions of granting Elkhorn's summary judgment against KM on the lien foreclosure and staying proceedings affecting Newpoint's rights align with the intent of the bankruptcy stay and lien statutes. The purpose of these statutes is to secure claims of certain creditors and prevent unjust enrichment from unpaid labor and materials. The court rules regarding indispensable parties emphasize that a case should proceed among existing parties if it can be resolved without the absent party, as is the case here with Elkhorn's ability to foreclose the lien without Newpoint's presence.

Wyo. Stat. Ann. 29-2-101 grants property owners the right to ensure that contractors are included in lien actions, but this right is contingent upon the feasibility of joining the contractor. Joinder is guided by W.R.C.P. 19(a), which permits exceptions if it could hinder the action, such as issues with service of process or jurisdiction. The determination of whether a party is indispensable is discretionary and based on the specific facts of the case. An indispensable party is defined as one whose interests are so intertwined with the case that a final judgment cannot be made without affecting those interests. Their absence must significantly impair the ability to resolve the matter. Conversely, individuals without a direct interest in the controversy are not considered indispensable parties. 

In the context of mechanic's lien foreclosure, this statutory process allows subcontractors to claim compensation for labor and materials provided, aiming to prevent unjust enrichment and ensure restitution. The necessity for a subcontractor to establish a lien is typically rooted in the contractor's failure to pay. If property owners could evade payment by citing a contractor's bankruptcy, it would undermine the statutory lien process, highlighting the legislative intent that labor and material providers should be compensated when possible.

KM argues that Newpoint is an indispensable party entitled to "absolute indemnity," referencing the case A.H. Robins Co. v. Piccinin. In contrast, Elkhorn contends that the indemnity question is unclear and needs resolution in bankruptcy court, a stance the court supports. The court finds that the contingent nature of indemnity claims does not warrant staying state lien foreclosure proceedings. It emphasizes that allowing the state court action to proceed will not impact the indemnity claims against the bankrupt entity, as the state court will only address liability and damages, leaving indemnification issues to the bankruptcy court. 

Two years into the lawsuit, KM sought to join HFG Engineering US, Inc. as a defendant, claiming it was a joint venturer with Newpoint and thus indispensable. Elkhorn opposed this, citing untimeliness, the lack of joint venture status, and a mandatory arbitration clause in the contract with KM. The court concludes that resolving Elkhorn's statutory lien claim does not necessitate determining the joint venture status of Newpoint and HFG, as these matters are appropriately left for the bankruptcy court. 

Regarding the summary judgment issue, the court applies a plenary review standard, stating that summary judgment is warranted when no genuine material facts are in dispute, and the moving party is entitled to judgment as a matter of law. The court will view the record favorably toward the opposing party and review legal questions de novo, without deferring to the district court's decisions.

A genuine issue of material fact arises when a disputed fact, if proven, could establish or negate a critical element of a legal claim or defense. The party seeking summary judgment must initially demonstrate a prima facie case. If successful, the opposing party must then provide specific, admissible evidence to show that genuine issues of material fact exist, rather than relying solely on allegations, conclusions, or speculation. In the context of the Newpoint-Elkhorn contract, the agreed target price was $5,700,000, yet Newpoint approved invoices amounting to $9,910,086.96 and paid $4,829,498.13. Elkhorn later filed a lien statement with unpaid invoices totaling $4,880,588.83. At a hearing on summary judgment motions, Elkhorn acknowledged genuine issues regarding invoices totaling $181,369.00, resulting in a balance of $4,699,219.83 awarded for Elkhorn's foreclosure claim. Elkhorn's summary judgment motion included nine attachments, including deposition excerpts from Zane Rhodes, president of Newpoint, who confirmed that the approval of invoices indicated acceptance for payment and that the billing format met contractual requirements. Rhodes testified that some invoices were approved in the field and others at Newpoint's offices, affirming the amounts were due and that Elkhorn's invoices were utilized to enhance Kinder Morgan's property.

Elkhorn's summary judgment motion includes a deposition of Cole Deister, detailing construction problems that led to additional work and costs for Elkhorn. Attached exhibits encompass the Time and Material Contract with Newpoint, bid documents, email correspondence regarding construction issues, invoices, and contracts related to KM/HFG and KM/Newpoint. Elkhorn attributes the construction problems to HFG's failures, particularly the late delivery of engineering drawings.

KM filed its own summary judgment motion and raised three key issues: Elkhorn's entitlement to claimed amounts, responsibility for cost overruns, and the reasonableness of Elkhorn's lien claim. KM’s project management head stated that the contract price was never increased in writing, and KM only approved two change orders for minor price increases. KM contends Elkhorn did not secure a formal increase in contract price, thus is not entitled to additional amounts.

In response, Elkhorn cites Wyoming case law to support its position, arguing that HFG's failure to deliver timely engineering drawings made it impossible to establish a new target price under their contract. Elkhorn references legal principles that discharge performance obligations due to unforeseeable events and notes that contract price modifications occurred through Newpoint's approval of Elkhorn's invoices. Elkhorn also argues that a habitual disregard for written change orders may indicate a waiver of that requirement, citing relevant case precedents.

Elkhorn's modified contract pricing method, which involved periodic approval of invoices rather than a single amendment, remains valid and does not affect Elkhorn's right to payment. There is no genuine issue of material fact regarding this point. KM contends that a dispute exists regarding responsibility for cost overruns, suggesting that Elkhorn should not benefit from expenses it allegedly caused. Elkhorn supports its position with attachments to its Lien Statement and summary judgment motion. In contrast, KM cites Newpoint's emails questioning Elkhorn's performance, including claims of contract breaches related to project management and documentation failures.

Additionally, KM raises concerns about the reasonableness of Elkhorn's claimed lien amount. The measure of compensation for a mechanic's lien should reflect the value of materials and services provided rather than the enhanced property value. In cases without a direct contract between the owner and subcontractor, the reasonable value of labor and materials is the standard for lien compensation. Both the cost of goods and the contract price are relevant to determining reasonable value.

Ultimately, Elkhorn established a prima facie case for its summary judgment motion, supported by various forms of evidence, including approved invoices. KM failed to provide specific facts demonstrating genuine issues of material fact in response. KM misunderstood its burden in opposing Elkhorn's motion.

Elkhorn's responsibility for cost overruns is not substantiated by evidence, as speculation is insufficient. KM's argument that Elkhorn and Newpoint did not formally amend the contract's "target price" lacks merit, since they had an agreed process for determining contract prices through invoice approvals. Elkhorn provided documentation and testimony showing that the work was approved, which supported the district court's conclusion that no genuine material fact issues existed. 

Regarding the mechanic's lien, Wyo. Stat. Ann. 29-2-101(b) requires that work or materials for a lien must be based on a contract. KM claims Elkhorn's lien is invalid because it exceeds the original contract price. However, the court rejected KM's argument, noting that no case law supports the interpretation that the statutory language caps lien amounts at the contract price. The court emphasized that the contract requirement likely serves to inform the property owner of potential lien claims, not to limit them.

Elkhorn's Lien Statement claimed amounts for labor and materials, referencing both general lien provisions and oil and gas liens under Wyoming law. KM contends that this means Elkhorn did not assert a mechanic's lien under the appropriate statute. However, the document indicates that Elkhorn is seeking to establish both types of liens.

Elkhorn argues that the use of "and" in the Lien Statement indicates an intention to assert both a mechanic's lien and an oil and gas lien. It contends that Wyo. Stat. Ann. 29-1-301(b) does not mandate referencing the specific statutory basis for the lien. Elkhorn provided KM with notice of its intent to file a lien, complying with mechanic's lien statutes, although not with oil and gas lien statutes. KM acknowledged the filing of both liens in its pleadings. The court emphasizes that statutory liens, being an exception to common law, must be strictly interpreted, necessitating full compliance with the statutes. However, it recognizes that liens can still be valid despite minor inaccuracies that do not prejudice the interested parties. KM's assertion that Elkhorn did not file a mechanic's lien due to a lack of reference to Wyo. Stat. Ann. 29-2-101 is inconsistent with KM's earlier arguments in court. The court concludes that the Lien Statement effectively communicated the intent to file both liens and that KM was not misled or harmed by any omissions. It affirms that strict compliance with lien statutes should not invalidate a lien over trivial discrepancies that do not affect the parties' rights. Additionally, the district court's decision to award Elkhorn prejudgment interest at a statutory rate of seven percent per annum is noted.

The determination of prejudgment interest hinges on two legal standards: the entitlement to award interest is reviewed de novo, while the decision to award interest is reviewed for abuse of discretion. The core issue is whether the claims supporting the Lien Statement meet the criteria for awarding prejudgment interest, which is applicable under the doctrine of unjust enrichment, particularly in foreclosure contexts to compensate for the lost use of money. Prejudgment interest can be awarded if two conditions are satisfied: the claim must be liquidated and the debtor must have notice of the amount due before interest accrues. The standard rate for prejudgment interest, absent a contractual agreement stating otherwise, is seven percent per annum as per Wyo. Stat. Ann. 40-14-106(e).

In this case, KM argues that Elkhorn’s claim was not liquidated; however, the district court disagreed, determining the claim was readily computable and that KM received notice of the claimed amount upon the filing of the Lien Statement on March 5, 2009. The Lien Statement included extensive documentation (1,260 pages of invoices) detailing the labor and materials provided, along with confirmation that the amounts were due. Furthermore, the court noted that mere disagreements about the amount owed do not prevent the awarding of prejudgment interest, provided the claim is a sum certain and the debtor is notified. The district court's finding to subtract $181,369 from Elkhorn's claim due to its concession of invalidity is also under scrutiny.

Elkhorn raised issues in its cross-appeal regarding material facts during the summary judgment motion hearing. Elkhorn's counsel highlighted that the only substantive fact raised by the opposing party was related to an expert report challenging the validity of completion bonuses and rate differentials in a purchase order. Elkhorn contended that completion bonuses were documented via email and that rate differentials for night shifts were justified, referencing specific claims about the construction work performed by Working Horse Log Homes. Elkhorn asserted that these factual disputes could be resolved in a brief trial. Consequently, Elkhorn requested partial summary judgment in its favor for a lien claim of $4,880,588, deducting $181,369 for the disputed items, resulting in a net claim of $4,699,219. The district court acknowledged the deduction in its order but did not explicitly state that the $181,369 was not owed, indicating it would be subject to further trial proceedings. The court also implied that the resolution of Elkhorn's mechanic's lien made it unnecessary to address Elkhorn's other claims related to oil and gas liens. The matter is to be remanded for trial regarding the disputed amount.

Elkhorn's cross-appeal argues that the district court's language effectively rendered its oil and gas lien issue moot. However, a comprehensive review of the district court's order indicates that it did not intend to moot the oil and gas lien claim. The court had previously stayed issues related to the contractor, Newpoint, yet indicated that "the rest of the agenda" was not moot and suggested a future court appearance to resolve outstanding matters not affected by Newpoint's bankruptcy. 

The distinction between oil and gas liens and mechanic's liens is significant; oil and gas liens pertain to production and its proceeds under specific statutory conditions, as outlined in Wyo. Stat. Ann. 29-3-105, and a decision on a mechanic's lien does not inherently moot an oil and gas lien claim. Furthermore, successful oil and gas lien claimants can recover attorney's fees under Wyo. Stat. Ann. 29-3-103(a)(vi). 

The case must be remanded for the district court to assess the validity and amount of Elkhorn's oil and gas lien claim, determining whether the record is adequate for a summary judgment or if a bench trial is necessary. The district court maintained jurisdiction to enter a summary judgment favoring Elkhorn in the in rem lien foreclosure action despite Newpoint's bankruptcy, as the proceeding did not require the presence of Newpoint or HFG. Elkhorn established a prima facie case for summary judgment, while KM's response failed to demonstrate genuine material issues. Elkhorn's lien statement included both a mechanic's and an oil and gas lien claim, and the award of prejudgment interest was appropriate due to the determinable nature of Elkhorn's claim. The district court did not rule $181,369 of Elkhorn's lien claim invalid but rather disputed, necessitating remand for resolution. The resolution of the mechanic's lien in favor of Elkhorn does not moot the validity and amount of the oil and gas lien claim.

Affirmed in part and reversed in part, the case is remanded to the district court for further proceedings. Newpoint Gas Services, Inc. and Newpoint Gas, LP, either affiliated or successor entities, introduce uncertainty regarding the appropriate party in the case. References to lien statutes will utilize the 2007 version due to amendments since the proceedings commenced. The document outlines various claims and counterclaims to contextualize the stay order and summary judgment. The appropriate standard of review remains unresolved. The ability of an owner to require lien waivers from subcontractors and payment and performance bonds from contractors is upheld, supported by Wyoming case law. Mechanic's lien rights apply to contractors, subcontractors, materialmen, and laborers involved in the improvement of real property. The text discusses prejudgment interest in conversion cases and clarifies that a case is moot when a determination would not affect the existing controversy.