the City of Wolfe City, Texas v. American Safety Casualty Insurance Company ( 2018 )

ACCEPTED
06-17-00075-CV
SIXTH COURT OF APPEALS
TEXARKANA, TEXAS
1/4/2018 3:36 PM
DEBBIE AUTREY
CLERK
No. 06-17-00075-CV
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FILED IN
In the Sixth Court of Appeals
6th COURT OF APPEALS
TEXARKANA, TEXAS
at Texarkana, Texas 1/5/2018 1:30:00 PM
DEBBIE AUTREY
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Clerk
The City of Wolfe City, Texas, Appellant,
v.
American Safety Casualty Insurance Company, Appellee.
Amended Reply Brief of Appellant
the City of Wolfe City, Texas
__________________________________________________________________
Daniel W. Ray
Texas Bar No. 24046685
SCOTT, RAY & SULLIVAN,
PLLC
2608 Stonewall Street
Post Office Box 1353
Greenville, Texas 75403-1353
Tel. (903) 454-0044
Fax (903) 454-1514
Daniel@scottraylaw.com
ATTORNEY FOR APPELLANT,
THE CITY OF WOLFE CITY,
TEXAS
TABLE OF CONTENTS
Table of Contents ............................................................................ 2
Index of Authorities ........................................................................ 4
Arguments ....................................................................................... 5
1. The City does not have the burden to prove ASCIC’s defense of
“Design Defect” under the no-evidence MSJ standard. ............. 5
A. The correct no-evidence MSJ standard. ................................. 5
B. The City carried its burden under the correct standard. ...... 6
C. ASCIC attempts to modify the no-evidence MSJ standard. .. 7
2. ASCIC failed to prove the design-defect defense in its traditional
MSJ. ............................................................................................. 9
A. The standard of proof for a design-defect defense. .............. 10
B. ASCIC’s evidence of a design-defect falls short of the
standard..................................................................................... 10
3. The terms of the bond, and the contract it secures, controls
ASCIC’s liability. ...................................................................... 11
A. The AMR system was not an acceptable punch list item. .. 11
B. ASCIC was responsible as a surety for punch list items. .... 12
C. Change Order No. 2 was not a confirmation of substantial
completion. ................................................................................ 13
4. The City could not have objected to the certificate of substantial
completion within the contractual time-frame because Hayter
acted fraudulently or in bad faith. ........................................... 14
5. The Trial Court contemplated that additional evidence would be
discovered after the hearing on ASCIC’s motions for summary
judgment. .................................................................................. 16
Appellant’s Amended Reply Brief Page 2
Conclusion ..................................................................................... 17
Certificate of Compliance.............................................................. 19
Certificate of Service ..................................................................... 19
Appellant’s Amended Reply Brief Page 3
INDEX OF AUTHORITIES
CASES
Barraza v. Eureka Co., 25 S.W.3d 225 (Tex. App.—El Paso 2000, pet.
denied) ......................................................................................... 9
Bayshore Constructors, Inc. v. S. Montgomery County Mun. Util.
Dist.543 S.W.2d 898, 901 02 (Tex. Civ. App.—Beaumont 1976),
writ ref'd n.r.e. (Mar. 30, 1977) ................................................. 12
Blackard v. Fairview Farms Land Co., Ltd., 346 S.W.3d 861 (Tex.
App.—Dallas 2011, no pet.)......................................................... 5
City of Hous. v. Clear Creek Basin Auth., 589 S.W.2d 671 (Tex.1979)
..................................................................................................... 9
Foreman v. Whitty, 392 S.W.3d 265 (Tex. App.—San Antonio 2012,
no pet.) ........................................................................................ 9
Maguire Oil Co. v. City of Hous., 69 S.W.3d 350 (Tex. App.—
Texarkana 2002, pet. denied) .................................................... 6
Montgomery v. Kennedy, 669 S.W.2d 309 (Tex. 1984) .................. 9
RULES
Tex. R. Civ. P. 166a(i) ..................................................................... 5
OTHER AUTHORITIES
4A Bruner & O'Connor Construction Law § 12:46. .................. 8, 10
Appellant’s Amended Reply Brief Page 4
Arguments
To be as brief as possible, the City incorporates in this reply all the
arguments put forth in the City’s Brief. The City further shows this Court
the following:
1. The City does not have the burden to prove ASCIC’s defense of
“Design-Defect” under the no-evidence MSJ standard.
In its effort to skirt liability on the performance bond, the recurring
theme of American Safety Casualty Insurance Company’s (“ASCIC” or
“Appellee”) brief is to suggest that McKinney & McMillen (“M&M”), the
general contractor, is not liable because of an alleged “Design-Defect” in
the fixed-based automatic meter-reading collection system (“AMR
system”). In doing so, ASCIC improperly shifts to the City the burden to
prove ASCIC’s defense of a design defect.
A. The correct no-evidence MSJ standard.
The no-evidence MSJ standard states that a “court must grant the
motion unless the respondent produces summary judgment evidence
raising a genuine issue of material fact.” Tex. R. Civ. P. 166a(i). Courts
have interpreted this standard to require the nonmovant to produce only
more than a ‘scintilla of evidence,” and the evidence must be read “in a
light most favorable to the nonmovant”—here the City. See Blackard v.
Appellant’s Amended Reply Brief Page 5
Fairview Farms Land Co., Ltd., 346 S.W.3d 861, 868 (Tex. App.—Dallas
2011, no pet.). “More than a scintilla of evidence exists when the evidence
would enable reasonable and fair-minded people to reach different
conclusions.” Id. Further, the nonmovant is only required to present
evidence on the elements on the elements the movant challenges. See
Maguire Oil Co. v. City of Hous., 69 S.W.3d 350, 357 (Tex. App.—
Texarkana 2002, pet. denied). The only element ASCIC challenged in its
no-evidence motion is whether M&M defaulted. (1CR327) (“an essential
element of the City’s bond claim is that the City must show that the
contractor, M&M, failed to fulfill its duty of performance under the
construction contract”).
B. The City carried its burden under the correct standard.
To survive the no-evidence MSJ, the City needed to provide only
“more than a scintilla of evidence” that M&M defaulted on the
Construction contract. The City met this requirement when it provided
evidence of M&M’s responsibilities under the Contract and M&M’s
failure to comply with those terms. (1CR668.) M&M failed to comply with
the terms of the Contract when it did not deliver a fully functional system
(1) as admitted by George McKinney, a representative of M&M, in his
Appellant’s Amended Reply Brief Page 6
deposition (1CR697, 706); (2) as admitted to by M&M when it admitted
it stopped work before this lawsuit was filed (1CR710-6); and (3) as
admitted to by M&M in its response to Wolfe City’s Demand for Contract
Performance when it refused to continue working on the project.
(1CR724.) This put M&M in default of the construction contract, which
makes ASCIC liable under the performance bond. Because there is more
than a scintilla of evidence that M&M was in default, the no-evidence
MSJ was erroneous. (See Appellant’s Br. at 27-30.)
C. ASCIC attempts to modify the no-evidence MSJ standard.
Because the City provided sufficient evidence to surpass the “more
than a scintilla” threshold when the evidence is viewed in a “light most
favorable to the nonmovant,” ASCIC attempts to shift to the City the
burden to prove that the City’s problems were NOT due to a design-
defect. Thus, ASCIC attempts to modify the no-evidence MSJ standard.
ASCIC asserts: “M&M’s responsibility is solely for construction or
installation defects. If the City’s problems arose from a design defect in
Zenner’s or Datamatic’s components, then M&M did not default on the
construction contract.” (Appellee Br. at 16.) Further, “M&M could not
have defaulted on the construction contract if the City’s problems
Appellant’s Amended Reply Brief Page 7
resulted from a design defect rather than a construction or installation
defect.” (Id. at 22.)
After shifting the burden of proof for a no-evidence MSJ, ASCIC
then claims that the City falls short: “[t]hus, for the City to raise a
genuine fact issue on ASCIC’s ‘no evidence’ motion, it had to offer some
evidence that the City’s failure to receive a fully functional system
resulted from M&M’s default, and not from a defect in the Datamatic
components that Hayter specified for the system.” (Id. at 25) (emphasis
added.)
Existence of a design defect is a defense, which is ASCIC’s burden
to prove. “[A] surety is entitled to the protection of the principal's
‘contract defenses.’ One such defense is the owner's control over
preparation and issuance of detailed design documents with design
inadequacies.” 4A Bruner & O'Connor Construction Law § 12:46. In
short, existence of a design defect is a contract defense belonging to
M&M. ASCIC can urge that defense, but also has the burden of proof on
the defense.
Because ASCIC carries the burden of proof for this defense, it
cannot shift this burden to the City in a no-evidence MSJ. It is not proper
Appellant’s Amended Reply Brief Page 8
in a no-evidence MSJ to raise a legal issue on which the movant has the
burden of proof. A movant cannot file a no-evidence motion for summary
judgment on a claim or defense on which he has the burden of proof at
trial. Foreman v. Whitty, 392 S.W.3d 265, 279 (Tex. App.—San Antonio
2012, no pet.); See also, e.g., Barraza v. Eureka Co., 25 S.W.3d 225, 231
(Tex. App.—El Paso 2000, pet. denied) (party may not urge no-evidence
summary judgment on claims or defenses on which it has burden of
proof).
In sum, the City met the actual no-evidence threshold and was not
required to meet the threshold of providing evidence to disprove ASCIC’s
design-defect defense.
2. ASCIC failed to prove the design-defect defense in its traditional
MSJ.
The burden that ASCIC attempts to require of the City in the no-
evidence MSJ is a burden ASCIC itself does not meet in its traditional
MSJ. “Defendants moving for summary judgment must expressly present
and conclusively prove all essential elements of their defense as a matter
of law; there can be no genuine issues of material fact.” Montgomery v.
Kennedy, 669 S.W.2d 309, 310-11 (Tex. 1984) (citing City of Houston v.
Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex.1979)).
Appellant’s Amended Reply Brief Page 9
A. The standard of proof for a design-defect defense.
Bruner & O’Connor’s treatise on Construction Law sets forth the
standard ASCIC must prove for its design-defect defense:
“[W]here the owner issues detailed design documents found to be
defective, fails to disclose critical information to the contractor, or
maintains control over the contractor's construction methods, the
contractor's nonperformance will be excused.”
4A Bruner & O'Connor Construction Law § 12:46 (emphasis added).
ASCIC cites the same treatise in putting forth its design-defect defense.
(Appellee Br. at 23.) For ASCIC to claim the design-defect defense, it had
the burden to prove that detailed design documents provided by the City
or its agent are defective and, thus, are the cause of the nonfunctioning
AMR system.
B. ASCIC’s evidence of a design-defect falls short of the
standard.
ASCIC’s evidence of an alleged design defect amounts to the City
selecting the type of water meter and requiring it to be supplied by an
experienced qualified vendor—none of which comprise “detailed design
documents that have been found to be defective.” ASCIC offered evidence
that the Engineer specified the type of meters for the project. (1CR328.)
The contractor could use one of five brands of water meters: Master
Meter, Itron, Neptune, Badger, or Infinity. (Appellee Br. at 3, citing
Appellant’s Amended Reply Brief Page 10
1CR135.) ASCIC further points to evidence that the engineer required
the AMR system to be “supplied by an experienced, qualified, vendor.”
(Id.) That is where the evidence stops. ASCIC did not present any
evidence of “detailed design documents that were found to be defective.”
Because ASCIC did not conclusively its design-defect defense, it was
error to grant ASCIC’s traditional MSJ.
3. The terms of the bond, and the contract it secures, controls ASCIC’s
liability.
ASCIC attempts to convince this Court that freedom of contract
does not exist and it is entitled to rely on a certificate of substantial
completion, regardless of how it was obtained and regardless of the terms
of the contract.
A. The AMR system was not an acceptable punch list item.
ASCIC’s erroneously argues that the AMR System was a punch list
item. However, the Contract explicitly states that the punch list must not
contain any major deficiencies. CR 411-12, 585. In this case, the entire
purpose of the AMR System was so that the City could read the meters
remotely, but this could not occur because the AMR System was not
functional, as indicated on the punch list. See CR 412-13. Because the
AMR System could not fulfil its intended purpose and was a major
Appellant’s Amended Reply Brief Page 11
component of the overall project, it follows that the indication of the AMR
System on the punch list as a deficiency was contrary to the explicit terms
of the Contract and therefore not an actual punch list item pursuant to
the terms of the Contract. Nevertheless, pursuant to the Contract, ASCIC
was responsible for deficient items which were not corrected within 30
days after being noted on the punch list.
B. ASCIC was responsible as a surety for punch list items.
A surety can be responsible for punch list items. Indeed, in
Bayshore Constructors, the contract specified that “[t]he Contractor shall
remedy any defects in the work and pay for any damage to other work
resulting therefrom, which shall appear within a period of one (1) year
from the date of final acceptance of the work unless a longer period is
specified.” Bayshore Constructors, Inc. v. S. Montgomery County Mun.
Util. Dist., 543 S.W.2d 898, 902 (Tex. Civ. App.—Beaumont 1976, writ
ref'd n.r.e.). The Court interpreted the contract, and the bond, to include
the one year warranty period. Id.
In this case, the Contract specified that all punch list items shall be
remedied within 30 days from the date of the certificate of substantial
completion. CR 418-19. Even though completion of the punch list items
Appellant’s Amended Reply Brief Page 12
did not occur, ASCIC argues that it should not be responsible for punch
list items because the City is provided a remedy through warranty.
ASCIC’s argument is in opposition with Bayshore Constructors, which
held a performance bond open under a one year warranty period.
Furthermore, in this case, the contract reinstituted liquidated damages
in the event the punch list items were not remedied within the allotted
time-frame. CR 418-19. In other words, there was no warranty period if
the punch list items were not remedied within 30 days, and it follows that
ASCIC contemplated liability under the terms of the contract beyond the
issuance of substantial completion when it issued the bond. Therefore,
because liquidated damages were reinstituted after the issuance of
substantial completion, ASCIC argument, that punch list items should
be covered under warranty, fails.
C. Change Order No. 2 was not a confirmation of substantial
completion.
ASCIC also erroneously argues that the City confirmed substantial
completion through Change Order No. 2. ASCIC’s argument is erroneous
because the date contained on Change Order No. 2 was an estimated
completion date. Change orders are a routine practice in the construction
industry because the scope of any given project typically changes over the
Appellant’s Amended Reply Brief Page 13
life of the project. It follows that if a project is to change in scope, the time
of completion will also change, hence the necessity to input a date of
substantial completion (time of performance) on the change order. For
instance, in this case, Change Order No. 1 contained the date of October
13, 2012. Change Order No. 1 did not confirm that the project was
completed on October 13, 2012, it merely adjusted the time of
performance based on the change of scope. See CR 1464-65. If the date
on Change Order No. 1 was merely a time of performance, then it follows
that Change Order No. 2, which contained a different date, merely
adjusted the time of performance from October 13, 2012 to March 21,
2013 to account for the change of scope in the project. Even if Change
Order No. 2 constitutes an agreement that confirmed substantial
completion, the City is excused because it was obtain fraudulently or in
bad faith.
4. The City could not have objected to the certificate of substantial
completion within the contractual time-frame because Hayter acted
fraudulently or in bad faith.
ASCIC argues that the City did not comply with the requirements
to contest Hayter’s certificate of substantial completion. ASCIC further
argues that the City offered no summary judgment evidence that Hayter
Appellant’s Amended Reply Brief Page 14
acted fraudulently or in bad faith. Simply, the former fails because of the
latter fails. The evidence was very clear from the engineer’s deposition
that he acted intentionally in opposition with the terms of the Contract
and in opposition with his duties as a professional engineer to the
detriment of the City. CR 415-17, 531, 537-40. ASCIC attempts to
downplay his actions as mere negligent acts within an engineer’s
discretion. However, as noted by the City’s expert, Hayter’s actions were
contrary to that of a licensed professional engineer in Texas. See CR
1462-64. Even if the testimony of the City’s expert is not admissible as
newly discovered evidence, ASCIC cannot deny that Hayter’s actions
were intentional conduct to the detriment of the City, which meets the
requirements for gross negligence, gross mistake, and/or bad faith.
It follows that since the evidentiary standard for summary
judgment indicates that Hayter acted in bad faith to the City’s detriment,
the City would have never known whether to contest Hayter’s certificate
of substantial completion within the contractual time frame. Hayter’s
admission of its actions certainly were not volunteered within 30 days
after substantial completion. Indeed, only through the deposition of Mike
Tibbets did the City confirm the scope of the engineer’s betrayal. See CR
Appellant’s Amended Reply Brief Page 15
760-61. Further, it is pointless for ASCIC to argue that the City did not
contest Hayter’s issuance of the certificate of substantial completion. If
this Court holds the substantial completion valid, there is no need to
consider this point, and if this Court holds the certificate invalid due to
fraud, gross mistake, or bad faith, as the City contends, then ASCIC’s
argument collapses because there would have been no valid certificate for
the City to contest.
5. The Trial Court contemplated that additional evidence would be
discovered after the hearing on ASCIC’s motions for summary judgment.
Although the issue of newly discovered evidence has been debated
at great length between Appellant and Appellee, when considering
whether the Trial Court abused its discretion in denying the City’s
Motion for Reconsideration, it is important to note that the Trail Court
contemplated that there would be newly discovered evidence after
ASCIC’s hearing on its motions for summary judgment. The morning of
and prior to the hearing, the Trial Court signed an agreed order, which
extended the discovery deadline. CR 780-81. The principle reason for this
order was to extend deadlines due to the addition of Hayter as a named
defendant only 11 days prior to ASCIC’s hearing.
Appellant’s Amended Reply Brief Page 16
Conclusion
In its no-evidence MSJ, ASCIC improperly attempted to increase
the no-evidence MSJ threshold (which the City met) by shifting to the
City the burden to prove ASCIC’s “Design-Defect” defense and then
claiming that the City falls short of the shifted burden. In its traditional
MSJ, ASCIC fell short of the standard to conclusively prove its “Design-
Defect” defense.
Further, ASCIC should be held accountable to the terms of its bond
and the contract that it secured. Even though the AMR System was not
a contractual punch list item, the Contract explicitly required contract
damages to be reinstated if any deficiency on the punch list was not
corrected within 30 days. In addition, ASCIC’s argument that Change
Order No. 2 confirmed substantial completion is erroneous and against
industry practice because the change in date simply noted a change in
time of performance. The City did not agree to actual substantial
completion via Change Order No. 2, and it could not have contested
Hayter’s certificate of substantial completion because it had no
knowledge of Hayter’s bad faith and/or fraudulent actions until the
deposition of its engineer. Because bad faith or fraudulent actions are
Appellant’s Amended Reply Brief Page 17
frequently denied until the bitter end, the Trial Court should have
contemplated that newly discovered evidence would be forthcoming,
especially since it signed an order extending the discovery period the very
morning of ASCIC’s hearing on its motions for summary judgment.
Respectfully Submitted,
/s/ Daniel W. Ray_____________
Daniel W. Ray
Texas Bar No. 24046685
Daniel@scottraylaw.com
Scott, Ray & Sullivan, PLLC
P.O. Box 1353
2608 Stonewall Street
Greenville, Texas 75403
Tel: (903) 454-0044
Fax: (903) 454-1514
ATTORNEY FOR APPELLANT THE
CITY OF WOLFE CITY, TEXAS
Appellant’s Amended Reply Brief Page 18
CERTIFICATE OF COMPLIANCE
This brief was prepared using Microsoft Word in Century font with
14-point type. This brief contains 2,717 words, not counting the sections
excluded by Tex. R. App. P. 9.4(i)(1).
/s/ Daniel W. Ray_____________
Daniel W. Ray
CERTIFICATE OF SERVICE
On January 4, 2018, a copy of this brief was served through
efileTexas.gov on all counsel, as indicated below:
James D. Cupples
Texas Bar No. 05252300
CUPPLES & ASSOCIATES, PLLC
700 Gemini Street #200
Houston, Texas 77058
Tel. (281) 218-8888
Fax (281) 218-8788
Cupplesjd@comcast.net
Byron C. Keeling
State Bar No. 11157980
KEELING & DOWNES, P.C.
bck@keelingdownes.com
1500 McGowen, Suite 220
Houston, Texas 77004
Tel (832) 214-9900
Fax (832) 214-9908
/s/ Daniel W. Ray_____________
Daniel W. Ray
Appellant’s Amended Reply Brief Page 19