Link to Eighth Circuit Opinion
In Weitz Company LLC v. Mackenzie House, LLC, the appellant challenged the trial court’s award of liquidated damages on the basis that it had failed to apply Missouri law limiting liquidated damages for construction delay to the time before the owner removes the contractor from the project. The Eighth Circuit denied this claim on the basis that the original holding was flawed and the Supreme Court of Missouri would therefore not uphold their previous decision.
I. Facts and Holding
MacKenzie House, LLC (MacKenzie House) was the developer of a multi-building apartment project, as well as the managing member of MH Metropolitan, LLC (MH Metropolitan), the owner of the apartments.[2] Weitz Company, LLC (Weitz) was hired by MH Metropolitan as general contractor to build the apartments.[3] Construction of the apartments was delayed.[4] Weitz attributed the delays to its subcontractors, which included Arrowhead and Concord.[5] MH Metropolitan attributed the delays to Weitz and exercised its contractual right to withhold payment on two of Weitz’s applications, asserting several material breaches of contract, including failing to provide required lien waivers, allowing liens to be filed against the project, providing poor quality construction, and falsifying a pay application.[6] Weitz responded by stopping work.[7] With the entire project months behind schedule, MH Metropolitan terminated Weitz for cause and finished the project with another general contractor.[8]
Weitz brought suit against MacKenzie House and MH Metropolitan for recovery of the unpaid contract balances.[9] MH Metropolitan responded that Weitz’s mismanagement gave cause to stop payment and terminate the contract, and counterclaimed under breach of contract for liquidated damages and completion costs.[10] Weitz also brought third-party claims against Arrowhead and Concord alleging their defective work caused additional costs and delays.[11] Arrowhead argued that they were improperly terminated by Weitz and counterclaimed for the amounts due under their subcontract.[12]
After a jury trial, MH Metropolitan was awarded liquidated damages of $3,022,520 due to project delay, and $1,969,450.87 for the cost of completion.[13] Arrowhead was awarded $556,110, and the jury also found for Concorde.[14] Post-judgment motions were denied by the district court and judgment was entered on the jury’s verdict.[15]
On appeal, Weitz claimed that the district court erred as a matter of law by miscalculating the liquidated damages and completion costs.[16] Relying on the Missouri Court of Appeals decision in Twin River Const. Co., Inc. v. Pub. Water Dist. No. 6, Weitz argued that the trial court should have limited the liquidated damages for construction delay to the time before the owner removes the contractor from the project, in accordance with the Supreme Court of Missouri’s holding in Moore v. Bd. of Regents.[17]
The Eighth Circuit determined Moore should not be applied because there was clear evidence the Supreme Court of Missouri would not uphold the Moore decision.[18] Moore relied on a New York case, Gallagher v. Baird, for the principle that liquidated damages are not the correct measure of damages when the contractor does not complete the project.[19] The court determined what Gallagher actually stated is that the cost to complete is a better measure of damages when a contractor abandons the project before the contracted completion date.[20] Because the current case involves the calculation of liquidated damages where the project is late when the owner terminates the contract, neither Moore nor Gallagher apply, meaning the Supreme Court of Missouri would not follow the decision in Twin River either.[21] “If the Missouri Supreme Court were to address the issue today, it would allow liquidated damages for a reasonable time after abandonment by the contractor or termination by the owner.”[22]
II. Legal Background
The Eighth Circuit is not required to apply a prior state decision when there is clear evidence that the state Supreme Court would not uphold the decision.[23] “[I]n an appropriate case, a federal court must not consider itself bound by old state court decisions if it is convinced by other persuasive data that the highest court of the state would decide otherwise.”[24] Federal appellate courts are to follow the decisions of the intermediate state appellate courts when there is no convincing evidence that the law of the state is otherwise.[25] Decisions from the Missouri Court of Appeals must be followed when they are the best evidence of Missouri law.”[26]
In Gallagher v. Baird, the New York Appellate Division held that liquidated damages are an inappropriate remedy for failure to complete a contract.[27] Liquidated damages for delay are an appropriate remedy in the event that the contract is completed behind schedule.[28] When the contract is not completed, the cost to complete is a better measure of damages.[29]
In Moore v. Bd. of Regents, the plaintiff was contracted by the defendant to construct a gymnasium.[30] The plaintiff claimed that the defendant wrongfully terminated the contract after construction had begun.[31] Defendant counter-claimed that the plaintiff had failed to comply with the contract and was therefore entitled to recover $20 per day as liquidated damages.[32] The court found that the liquidated damages were conditioned on the plaintiff’s failure to complete the project on time, but were not provided for under the conditions that the defendant terminated the contract, and were therefore inappropriate.[33]
In Twin River Const. Co., Inc. v. Pub. Water Dist. No. 6, the Missouri Court of Appeals interpreted Moore as standing for the principle that liquidated damages are not permitted after the contract has been terminated and the owner has taken charge of the work.[34] The court recognized that other jurisdictions were split on the issue; with some courts holding that liquidated damages are no longer available after abandonment of the work, because the contractor should not be responsible once he loses his ability to control the date of completion; while other courts allow liquidated damages for a reasonable time after abandonment by the contractor or termination by the owner.[35] However, the Court of Appeals felt that Moore was the only case on point under Missouri law, and was not disposed to depart from its judgment until the Supreme Court of Missouri issued a contrary ruling.[36]
III. Comment
The Eighth Circuit’s decision in Weitz Company LLC v. MacKenzie House, LLC seems to stretch the boundaries of the court’s license to predict how the state supreme court would decide a case. While the court makes a compelling argument by pointing out how the opinion in Gallagher has been misinterpreted, it remains to be seen whether the Supreme Court of Missouri would disregard a 100-year-old decision on these grounds. It is worth noting however that there seems to be very little subsequent case law that relies upon the principle stated in Moore, and in this event, the Supreme Court of Missouri may be more willing to accept the Eighth Circuit’s interpretation if it represents a minimum of disruption.
While the Eighth Circuit spends considerable time demonstrating why Moore would be overturned, it is unclear how it came to the conclusion that “[i]f the Missouri Supreme Court were to address the issue today, it would allow liquidated damages for a reasonable time after abandonment by the contractor or termination by the owner.”[37] The Eighth Circuit provides no authority to support this conclusion. Furthermore, in Twin River, the Missouri Court of Appeals acknowledged that the states are split on whether or not liquidated damages are available for a reasonable time after work has been abandoned, but chose to follow Missouri precedent rather than either side of the jurisdictional split. In light of this, it becomes more difficult to determine whether the Eighth Circuit’s decision would survive scrutiny by the Supreme Court of Missouri.
-Andrew C. Hooper
[1] No. 10-3713 (8th Cir. January 5, 2012), available at http://www.ca8.uscourts.gov/opndir/12/01/103713P.pdf. The West Reporter citation is Weitz Co. LLC v. MacKenzie House, LLC, 665 F.3d 970 (8th Cir. 2012).
[2] Id. at 2.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id. at 2-3.
[11] Id. at 3.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id. at 6. On appeal, Weitz also argued that the district court erred as a matter of law by: not granting judgment as a matter of law against MH Metropolitan; excluding evidence of two other construction projects involving the parties; declining to enter judgment on Weitz’s breach-of-contract claims against Arrowhead; not entering a default judgment against Concorde for failing to appear at trial; and ruling that MacKenzie House could not be vicariously liable for the acts of MH Metropolitan. These claims were also dismissed by the court. Id.
[17] Id. at 6-7.
[18] Id. at 7. (The Eighth Circuit also determined it would be inappropriate to apply Moore because the project in Moore was not yet late when the owner terminated the contract.)
[19] Id.
[20] Id.
[21] Id.
[22] Id. at 8.
[23] Gilstrap v. Amtrak, 998 F.2d 559, 561 (8th Cir. 1993).
[24] Id. At 562.
[25] Bogan v. General Motors Corp., 500 F.3d 828, 831 (8th Cir. 2007) (citing Six Cos. of Cal. v. Joint Highway Dist. No. 13 of State of Cal., 311 U.S. 180, 188 (1940)).
[26] Washington v. Countrywide Home Loans, Inc., 655 F.3d 869, 873 (8th Cir. 2011).
[27] Gallagher v. Baird, 66 N.Y.S 759, 762-63 (App. Div. 1900).
[28] Id.
[29] Id.
[30] Moore v. Bd. of Regents for Normal Sch. in Dist. No. 2, 115 S.W. 6, 6 (Mo. 1908).
[31] Id.
[32] Id. at 12.
[33] Id. at 13.
[34] Twin River Const. Co., Inc. v. Pub. Water Dist. No. 6, 653 S.W.2d 682, 693-94 (Mo. App. E.D. 1983)
[35] Id.
[36] Id.
[37] Weitz Co. LLC v. MacKenzie House LLC, No. 10-3713, slip op. at 8 (8th Cir. January 5, 2012).
