Construction Contracts: Nothing Beats a Meeting of the Minds

Waldschmidt v. Singletary Construction LLC (In re Tackett), 516 B.R. 498 (Bankr. M.D. Tenn. 2014) –

A bankruptcy trustee sought turnover of profits from the sale of homes constructed by a contractor.  The trustee contended that there were contracts between the debtor and the contractor pursuant to which the debtor agreed to reimburse the contractor for its costs plus pay a $15,000 contractor’s fee for each home.

The debtor bought and the contractor (Singletary) constructed houses on five lots.  The parties agreed that the arrangement for the first lot was as described by the trustee.  However, although the debtor expected that the same terms would apply to the additional lots, Singletary asked for a larger payment.  This was the subject of a continuing discussion and exchange of emails.

Notwithstanding the failure to agree on terms, construction proceeded on the next three lots.  During this period, Singletary stopped providing detailed statements to support invoices.  Instead it would make a verbal draw request, the debtor would issue a check, and Singletary would send an invoice stating only the amount paid and the project.

The debtor paid ~$700,000 and Singletary incurred or paid charges of ~$656,000 for these three lots, including a contractor’s fee for one of the lots.  The trustee sought turnover of (1) the difference between the amount paid and the invoices plus (2) the contractor’s fee of $47,250 for a total of ~$97,000.  Singletary counterclaimed, seeking an additional ~$75,000.

The fifth house was to be built for a buyer that required a VA approved builder in order to qualify for a loan.  The debtor needed Singletary to sign the contract since Singletary was VA qualified and the debtor was not.  Singletary refused to sign the contract prepared by the debtor, but eventually did sign a contract prepared by the buyer’s real estate agent.  Singletary kept the net proceeds of ~$49,000.

In support of his case, the trustee first argued that there was an oral contract.  While acknowledging that if the evidence shows a meeting of the minds between the parties a court may be justified in finding oral contract – which can be just as binding as a written contract – in this case it was clear to the bankruptcy court that there was no meeting of the minds for the last four lots.  Consequently, there was no contract.

The trustee also argued that there was a “joint enterprise.”  The court identified the essential elements for a joint enterprise, which included “a community of pecuniary interest” in the joint enterprise’s purpose.  This means that “it is necessary to the relationship that there be a sharing of the profits and losses.”  The court reiterated that the parties were not able to agree on sharing profits and losses.  In fact, they were not able to agree on their respective roles:  the debtor viewed Singletary as a subcontractor entitled to a set fee, while Singletary viewed the relationship as more of a partnership entitling it to share a percentage of profits.  They never came to a consensus, but just “continued to plow forward.”  So, no joint enterprise existed.

In addition, with respect to the fifth VA lot the trustee argued that there was tortious interference with the debtor’s contract with the buyers.  The trustee contended that Singletary went behind the back of the debtor and induced the buyers to enter into a new contract with Singletary.  However, the court noted that the debtor never signed a purchase agreement with the buyer because it had to be signed by a VA approved contractor.  Since there was never a contract, there could not be tortious interference with the contract.

The final theory considered by the court was quantum meruit.  It identified the elements as: (1) valuable services were rendered, (2) to the person from whom recovery is sought, (3) which were accepted, received or rendered with the knowledge and consent of that person, and (4) the person was on reasonable notice that the plaintiff expected to be paid.  The court concluded without going into any detail that (a) both the debtor and Singletary contributed to the construction and sale of the lots, and (b) “equity demands that the parties split the profits equity.”  The court analyzed the numbers and concluded that the net result was that the bankruptcy estate owed Singletary ~$39,000.

It seems obvious that when there is an ongoing dispute, it can be risky to proceed on the assumption that the dispute will eventually be resolved.  In this case, neither party was left out in the cold, but there is no assurance that this will always be the case.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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