$2.3 million construction suit remanded to Union County

By PAUL THARP, Staff Writer

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Charlotte attorney James B. Gatehouse said he always hopes for an amicable result in litigation, especially in complicated construction matters.

That said, “I anticipate that this one will be tried,” Gatehouse said of Signature Development, LLC v. Sandler Commercial at Union, LLC (Lawyers Weekly No. 10-07-1057, 33 pp.).

Mecklenburg County-based Signature claims that Sandler – the property owner of Cureton Town Center on Providence Road, southeast of Charlotte – owes it a participation fee in excess of $2.3 million pursuant to an agreement the companies executed in 2005.

The Court of Appeals reversed a superior court judge’s dismissal of most of Signature’s claims and remanded the case to Union County.

“Overall, we are thrilled with the court’s decision,” Gatehouse said. “There is a lot of money at stake.”

Under the agreement, Signature “acted as Sandler’s agent in managing, developing, constructing, marketing and leasing the property,” according to the Court of Appeals’ opinion.

In exchange, Sandler agreed to pay Signature an initial development fee, a base development fee, a leasing fee, a sales fee and a participation fee.

Sandler failed to pay the participation fee, which Signature alleged was $2,338,806.

Signature placed a lien on the property, brought suit and obtained an order of attachment.

Sandler moved to dismiss Signature’s suit on the basis that Signature, “as the development project manager, was really acting like a general contractor and doing so without license,” Gatehouse said. “The trial court was persuaded erroneously that Signature was wearing the general contractor’s hat without having a license.”

But Charlotte attorney Gary J. Welch of Johnston, Allison & Hord – who represented Sandler – disagreed. 

“We believe that under these facts the Court of Appeals applied the control test erroneously,” Welch told Lawyers Weekly.

Name game

Because of the growing use of project managers nationwide, Charlotte lawyer John W. Bowers – who was hired by the N.C. chapter of the National Association of Industrial and Office Properties to write an amicus brief to the appeals court – called Signature the “biggest construction law opinion of the past year or two, maybe longer.”

That’s because the case boiled down to the difference between a project manager and a general contractor.

Gatehouse said courts have been grappling with how to define a project manager.

“There was not great clarity in terms of what appellate decisions said about the role of project managers and developers and whether they were serving as general contractors,” he explained.

In Signature, the Court of Appeals focused on “the degree of control exercised by a particular contractor over the entire project” in order to determine whether Signature was a general contractor.

It determined that Sandler, not Signature, was in control.

But Daniel Merlin, who also represented Sandler, said contractors always perform their services subject to the approval of the owner.               

Welch, of Johnston Allison, agreed with Merlin.

“Signature was clearly acting as a construction manager under North Carolina law,” he said. “Signature was responsible for superintending the entire construction aspect of the development.”

Welch said determining whether a party is a general contractor or project manager depends on the interpretation of the specific terms of the contract between the parties.

For that reason, the Signature decision is limited to its facts, he said.

However, Welch also noted the case may have far-reaching effects because it more fully explores the control test.

In the short term, Bowers told Lawyers Weekly, it would have been catastrophic if the Court of Appeals had affirmed the trial court’s ruling in Sandler’s favor.

“That would have meant that all these groups and individuals who don’t have licenses wouldn’t have to be paid for their work,” he said.

It also would have slowed down – if not brought to a halt – commercial real estate development in North Carolina, Bowers said.

 Conclusion

Ultimately, the Court of Appeals found that Signature had completed its duties per the agreement and Sandler did not.  

That failure, the court said, “was a direct result of the Sandler’s having inadequate financial resources to meet its obligations under the agreement, a condition which [Signature] certainly did not bring upon itself.”

Since 2007, L.M. Sandler & Sons – the parent company of Sandler – has become the subject of numerous state and federal actions involving unpaid bills for services and liens on its developments throughout the southeast.

The general contracting licensing statute, the Court of Appeals wrote, “should not be used as a shield to avoid a just obligation owed to an innocent party.”

Merlin said he and Welch would be meeting with Sandler to determine whether to petition the Supreme Court for discretionary review of the Court of Appeals’ decision.

OPINION BRIEF

Case name: Signature Development LLC v. Sandler Commercial at Union LLC

Court: N.C. Court of Appeals.

Judges: Judge Linda Stephens. Judges Linda M. McGee and Sanford L. Steelman Jr., concurring.

Date: Nov. 2, 2010

Plaintiff-appellant’s attorneys: James B. Gatehouse, David S. Melin and Daniel J. Finegan of Rayburn Cooper & Durham (Charlotte).

Defendant-appellee’s attorneys: Gary J. Welch and Daniel A. Merlin of Johnston, Allison & Hord (Charlotte).

Applicant-appellee’s attorneys: Gavin B. Parsons and D. Kyle Deak of Troutman Sanders (Raleigh).

Amicus curiae: John W. Bowers of Horack Talley Pharr & Lowndes (Charlotte).

Issues: 1. Did the trial court err by dismissing the plaintiff’s suit against a property owner because the plaintiff was not a licensed general contractor? 2. Did the trial court err in dismissing the plaintiff’s claim of lien? 3. Did the trial court err by dissolving the plaintiff’s order of attachment?

Holdings: 1. Yes. Since the plaintiff did not exercise the requisite control over a development project to be considered the general contractor, the trial court erred in dismissing the plaintiff’s complaint under Rule 12(b)(6) based on the plaintiff’s failure to obtain a general contractor’s license.

   2. No. The trial court did not err by dismissing the plaintiff’s claim of lien where the claim of lien was based on a percentage of profits, not upon debts owing for labor done or professional design or surveying services or material furnished, as required under G.S. § 44-8.

   3. Yes. The trial court erred by dissolving the plaintiff’s order of attachment because it did not make adequate findings under G.S. § 1-440.3 to justify doing so.

Noteworthy: Case involving $2.3 million participation fee remanded to Union County.

Opinion digest: See page 10.