Shaw Development, LLC – the developer of the Captain’s Galley condominium project in Crisfield, Maryland that was the subject of the Shaw Development v. Southern Builders litigation that I have discussed extensively both here at GRELJ and over at gbNYC – recently filed for Chapter 11 bankruptcy protection. Since the development was completed back in 2006, only 3 of the 17 units available had proceeded to contract. In late December, a foreclosure auction was to take place for the remaining units, but Shaw filed for bankruptcy protection in order to restructure and allow the pending sales to ultimately proceed. Asking prices now start at $250,000.00 for the remaining units (apparently Shaw expects to close on a number of additional contracts by the spring), though all prices are off 50 percent from when the project came on line back in 2006. When I saw the article detailing Shaw’s Chapter 11 filing, I was curious to very generally consider whether the specter of a bankruptcy filing might allow us to add an additional twist to the discussion of the Shaw Development litigation.
Assume for a moment that the owner had never counterclaimed against the contractor, but that the contractor never secured the tax credits and the loss of those same credits were what ultimately drove the project into foreclosure. Would the bankruptcy trustee have the ability to assert any claims that the owner might have, including those against the contractor? Probably, so it seems to me that the potential exposure for the contractor – in the absence of language in its agreement with the owner that limited its liability for consequential damages – would be significantly higher. The damages flowing from the contractor’s failure to secure the tax credits would no longer be just the $635,000.00 in credits, but those incidental to the bankruptcy filing itself, which, arguably, would include the decrease in sales prices during the course of the automatic stay that is imposed over the property, any other sales that were lost due to the bankruptcy reorganization, and associated professional fees and other carrying costs that the owner/trustee incurred during the course of the stay.
This line of analysis should reinforce – once again – the notion that contract documents on green construction projects must account for all potential legal permutations in the event that the project does not proceed as planned. The absence of a cap on consequential damages in the contractor’s agreement with the owner in this scenario could expose it to significant liability; on the other hand, if the owner simply signed a form AIA agreement waiving its right to consequential damages, it too would be barred from attempting to recover the damages that flowed from the contractor’s breach. The next question – which I will reserve considering for a separate post on consequential damages in green construction – is whether the damages incidental to a bankruptcy filing were foreseeable by the parties and therefore recoverable in any action asserted by the owner or the bankruptcy trustee on its behalf.
Finally, just a quick word of thanks to Brian Anderson for forwarding me the link below noting the bankruptcy filing.
- Owner of Captain’s Galley Condominiums in Crisfield Bankrupt (ESH.com)
- The Anatomy of America’s First Green Building Litigation (gbNYC)