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Subcontractor can’t get credit thanks to collateral source rule

 

A subcontractor that was held liable in tort for damages it had caused on a construction project was correctly denied a credit for payments that had been made to the general contractor by a different subcontractor because of the collateral source rule, a unanimous panel of the North Carolina Court of Appeals has ruled in a case of first impression.

In 2015, J. Scott Campbell Construction Company contracted to build a house in Haywood County. As part of the project, Campbell hired Ariel Mendoza to build a boulder retaining wall to support a vehicle turnaround area, but the wall collapsed twice during construction twice because its water drainage system failed and its foundation was compromised. Mendoza hired Caroline-A-Contracting to remove the rubble, stabilize the slope, and erect a new wall, but Campbell deemed CAC’s work unacceptable and booted it from the project. Campbell ultimately paid yet another contractor $106,000 to raze CAC’s work and rebuild the wall.

Both Campbell and Mendoza refused to pay CAC for the work that it had done, and CAC filed separate lawsuits against both. Campbell counterclaimed for negligence, pointing to the damages as a result of CAC’s work. While both cases were pending, CAC learned that Mendoza paid Campbell at least $90,000 related to damages caused by the defective wall.

As CAC’s case against Campbell moved to trial, CAC filed a motion for a credit in the event of an adverse verdict on Campbell’s counterclaim, arguing that Campbell wasn’t entitled to recover from CAC money damages that had already been paid by Mendoza. Campbell disagreed, arguing that the collateral source rule should exclude evidence of such payments because Mendoza was an independent party, it told the court. Haywood County Superior Court Judge Bradley B. Letts agreed and excluded evidence of the payments.

A jury awarded CAC $5,000 in quantum meruit for its work and awarded Campbell $41,678.09, plus interest, for CAC’s negligence. CAC appealed the denial of its motion for a credit. Writing for a unanimous panel in a March 16 opinion, Judge Lucy Inman affirmed the verdict.

“Mr. Mendoza’s payments to Campbell for his failure to fulfill his obligations were entirely independent of CAC’s negligence and do not relieve CAC from its own distinct liability to Campbell for damage caused at the site,” Inman wrote. “Mr. Mendoza’s payments to Campbell, thus, constitute payments made from a collateral source.”

Exception to “one injury, one recovery”

The collateral source rule provides that a tortfeasor should not be permitted to reduce his or her own liability for damages by the amount of compensation the injured party receives from an independent source, Inman explained. Punitive in nature, the rule is intended to prevent the tortfeasor from a windfall when a portion of a plaintiff’s damages have been paid by a collateral source.

While the North Carolina Supreme Court hasn’t “clearly enunciated” the factors that should be taken into account when determining whether a payment source is or isn’t collateral to a defendant, the defining characteristic of a collateral source is its independence from the tortfeasor. The application of the rule in the context of a construction dispute was a matter of first impression, Inman said.

CAC argued that any amount paid by Mendoza should be applied as a credit on the total recovery for the same injury or damage. But the collateral source rule operates as an exception to the general common law principle that there should be only one recovery for one injury, Inman said.

She referenced other state appellate courts that have applied the rule to claims for negligent construction resulting in injury to real property, citing decisions from California, South Carolina and Wyoming. Similar to North Carolina, the collateral source rule in these states hasn’t been codified in statute and is thus governed by common law.

‘Entirely independent’ from tortfeasor

To decide whether the collateral source rule applied, Inman considered Mendoza’s role in the residential construction project and his relationship to CAC. Mendoza hired CAC of his own accord, Campbell wasn’t a party to the contract between CAC and Mendoza, and Mendoza wasn’t CAC’s agent or employee.

As for the allegations in the lawsuit, Campbell’s counterclaim against CAC sought recovery on a theory of negligence, not breach of contract, and Campbell alleged that Mendoza entered into a contract with CAC without Campbell’s knowledge. Therefore, Mendoza’s payments to Campbell for his own failures were “entirely independent” of CAC’s negligence, Inman said.

“Because CAC was an independent subcontractor, Mr. Mendoza had no obligation beyond his own contractual duties to Campbell to rectify damages caused by CAC’s negligence,” she wrote.

CAC attempted to compare its situation to another construction contract case where the collateral source rule did not apply, but the court distinguished the facts, as Campbell did not sue Mendoza or allege that Mendoza was an agent of CAC.

“In addition … CAC’s work on the retaining wall in this case was entirely separate from Mr. Mendoza’s work, causing injury and delay distinct from Mr. Mendoza’s own deficient work and failure to perform under its agreement with Campbell,” Inman wrote.

Although CAC “bemoan[ed]” that Campbell would recovery doubly for the same injury, to the extent that Mendoza’s payments and the damages awarded overlap, “our prior decisions have established that in this situation, the injured party—Campbell, not the tortfeasor—CAC, should reap any such windfall,” she said. “Thus, we conclude the collateral source rule applies in this case and bars CAC from reducing its liability by the amount of compensation Campbell received from Mr. Mendoza.”

Allan R. Tarleton and Martin E. Moore of Van Winkle, Buck, Wall, Starnes & Davis in Asheville represented Campbell. Tarleton said the decision reminds lawyers that breach of contract isn’t the only path to recovery in construction cases.

“This was a negligence case in tort, and lawyers shouldn’t overlook that remedy,” Tarleton said.

John E. Spainhour of McAngus Goudelock & Courie in Asheville represented CAC. He did not respond to a request for comment on the opinion.

The 13-page decision is Caroline-A-Contracting, LLC v. J. Scott Campbell Construction Co. (Lawyers Weekly No. 011-019-21). The full text of the opinion is available online at nclawyersweekly.com.


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