Assignment agreements, asset-purchase agreements, or other assumption of obligation agreements (collectively, “Assumption Agreements”) are documents that are not unique to the construction industry. There are numerous corporate and business reasons why these documents are executed, whether it being a contractor selling its assets to another company or assigning receivables or obligations to another contractor for financial reasons. Irrespective of the reason, it is not uncommon for construction contracts to contain an anti-assignment provision that prevents the hired or performing party (e.g., subcontractor) from assigning its rights, obligations, or receivables under the contract without express written consent from the hiring or paying party (e.g., general contractor).
When one of these Assumption Agreements are executed, a dilemma occurs if the assignor / seller (the party assigning its rights and/or selling its assets) is liable to a third party for providing labor, services, or materials on a construction project. There are two major reasons for this dilemma. First, the third party naturally will be concerned over the solvency of the assignor / seller and may want to assert an argument (in successor liability, alter ego, or other) to go after the assignee / buyer (the party receiving the assigned rights and/or buying the assets). Second, the third party may want to maximize potential insurance coverage thinking that the assignee will have separate liability insurance and assert a claim against the assignee / seller.
The new case of The Weitz Company, LLC v. MCM Acquisitions, LLC, 38 Fla. L. Weekly D1472a (Fla. 3d DCA 2013), illustrates this dilemma. In this case, a general contractor was building an assisted living facility and hired a waterproofing subcontractor. Their subcontract contained an anti-assignment clause that prohibited the waterproofing subcontractor from assigning its rights under the subcontract without prior written consent from the general contractor. Notwithstanding, the water proofing subcontractor (“Seller”) sold its assets to another waterproofing company (“Buyer”) as construction was winding down. Under the Buyer and Seller’s asset-purchase agreement, the Buyer expressly assumed the Seller’s obligations under its subcontracts including the Seller’s subcontract with the general contractor for the assisted living facility project. After the closing of the asset-purchase agreement, the Buyer performed punch-list waterproofing work at the project and submitted two payment applications to receive payments for completing the Seller’s subcontract. The anti-assignment provision was not raised by the general contractor when the Buyer was performing punch-list work and/or submitted its two payment applications.
After the project was finished, the owner sued the general contractor and others for water-intrusion related defects. The general contractor filed a third-party claim against the Seller (original waterproofing subcontractor it hired), but did not initiate a claim against the Buyer. This action was settled and included releases by and amongst the Seller, the project owner, and the general contractor. The Buyer was not a party to this settlement and the settlement and release agreement specifically carved out claims the general contractor may have against the Buyer.
The general contractor then sued the Buyer asserting, among other claims, that the Buyer breached the subcontract (and the contractual indemnity obligations) it assumed from the Seller. The Buyer moved for summary judgment arguing: (i) the Seller performed the waterproofing work that the owner alleged was defective; (ii) any work it performed after the closing date with the Seller was minor punch-list work that had nothing to do with the defects alleged by the owner; and (iii) the general contractor was not a third-party beneficiary under its asset-purchase agreement with the Seller. The general contractor opposed the summary judgment contending: (i) the Buyer not only performed punch-list work but performed warranty-related work years after the Buyer and Seller’s closing date; (ii) the Buyer billed the general contractor for completing the Seller’s subcontract; and (iii) the general contractor was sued by the owner, and incurred damages, due to the Buyer’s waterproofing work at the project. The trial court however granted the Buyer’s summary judgment.
The Third District reversed the summary judgment finding an issue of fact precluded summary judgment because the Buyer assumed liabilities under the Seller’s subcontracts after the closing date and the Buyer performed certain work after the closing date.
Although the Buyer argued that the general contractor was not an intended third party beneficiary of the asset-purchase agreement because the general contractor never consented to the assignment, the Third District dismissed this argument. The Third District held that the anti-assignment provision was a matter within the general contractor’s discretion, i.e., the general contractor could unilaterally elect to waive the enforcement of this provision.
A third party (whether an owner against a general contractor or a general contractor against a subcontractor) should not dismiss arguments against an assignee or buyer. The argument can focus on work the buyer performed after it purchased the assets or was assigned certain rights from the seller as was the case in Weitz Company. The argument can focus on language in the Assumption Agreement to understand what liabilities the buyer assumed from the seller. Or, the argument can focus on successor liability, etc. (legal theories not discussed in this article) to establish that the buyer should be liable for ALL of the seller’s liabilities to the third party. This last argument does not appear to be the focus in Weitz Company, nor did it need to be the focus because the seller had separate CGL liability insurance that contributed to an original settlement. However, in certain cases where insurance coverage is not triggered or a concern in the case, such as a payment dispute or when there may not be any resulting damage, the third party will likely want to explore all arguments to ensure the collectibility / recoverability if it prevails on its claims. As shown in Weitz Company, an issue of material fact will preclude a party from being entitled to a summary judgment. With this in mind, there are times when it is worth asserting the claim against the assignee / buyer to create or expose potential liability against the assignee / buyer based on the circumstances and dynamics of the dispute.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.