This article appeared in the June 2007 issue of "The Construction Advisor" published by Lang Baker & Klain, PLC. Free Subscription to the Construction Advisor View the Construction Advisor index

Fulton Homes Corporation, et al., v. BBP Concrete and Trojan Concrete, Inc.

In October 2003, a group of homeowners in a Fulton Homes subdivision sued Fulton because, they claimed, their homes were improperly “designed and/or constructed.” They further claimed that the problems with their homes were due, in part, to Fulton’s decision to build the homes on unreinforced slabs instead of on heavily reinforced slabs as recommended by a civil engineer.

In anticipation of having to defend against claims of poor concrete work, Fulton Homes filed a third-party complaint against the two concrete subcontractors, BPP Concrete and Trojan Concrete, that had poured the slabs. The legal action against the subs was based on what Fulton considered the subs’ contractual duty to indemnify Fulton in case the court awarded damages arising from BBP’s or Trojan’s work.

In January 2005, in their response to interrogatories from BPP, the homeowners stated that they were seeking damages resulting from design defects, not from poor workmanship. As this appeared to relieve BPP and Trojan of liability, the subcontractors sought to be dismissed from the suit, and Fulton Homes ultimately agreed.

By that time, the subcontractors had incurred legal expenses, and they asked the trial court to order Fulton Homes to pay their attorneys’ fees (about $6,000 for each subcontractor), pursuant to A.R.S. § 12-341.01. Fulton objected to the request, arguing that BPP and Trojan were proper third-party defendants (under Rule 14 of the Arizona Rules of Civil Procedure). The trial court rejected Fulton’s argument and awarded the requested attorneys’ fees to the two subcontractors. Fulton appealed the awarding of attorneys’ fees.

Factors

Fulton Homes’ arguments on appeal, and the court’s responses to them, offer a useful refresher course on the circumstances under attorneys’ fees may be awarded in Arizona.

First, A.R.S. § 12-341.01(A) provides for the awarding of attorneys’ fees, at the trial court’s discretion, to the “successful party” in a “contested action arising out of a contract” (emphasis added).

Second, to justify such an award, the parties must actually be “adverse,” and it is up to the trial court to determine which party is successful.

Finally, in exercising its discretion, the trial court should consider certain factors set forth in a 1985 ruling, Associated Indem. Corp. v. Warner. These factors include the following:

• the merits of the unsuccessful party’s claim;

• whether the claim could have been avoided or settled (this factor proved to be significant in the Fulton Homes decision);

• whether the successful party’s efforts were completely superfluous in achieving the result;

• whether assessing attorneys’ fees against the unsuccessful party would cause an extreme hardship;

• whether the successful party did not prevail with respect to all of the relief sought; and

• whether an award to the successful party would discourage other parties with valid claims from litigating a contract dispute for fear of having to pay the other parties’ attorneys’ fees.

Successful Parties

On the question of whether the subcontractors were “successful” parties, Fulton Homes had contended in its appeal that they were not, since the court never ruled in their favor. Fulton further argued that the subs were successful in avoiding indemnity only because the homeowners chose not to seek damages for faulty workmanship, not because Fulton’s claim against the subs lacked merit.

The Court of Appeals rejected both arguments, ruling that, first, “adjudication on the merits is not a prerequisite to recovering attorneys’ fees”; second, a party may be deemed “successful” when a plaintiff (in this case, the group of homeowners) decides not to sue that party; and, finally, calling a party “successful” is within the trial court’s discretion.

Adverse Parties

As part of its argument against the awarding of attorneys’ fees, Fulton Homes contended that the subcontractors and Fulton were not adverse parties in this case. (You read that correctly.) Fulton based its contention on the fact that it had “asserted only contingent claims” (emphasis added) – that is, the subcontractors would have been liable to Fulton only if the homeowners had shown that the subs had performed faulty workmanship. Predictably, the Court of Appeals did not buy into Fulton’s position. The Court noted its 1986 ruling in Pioneer Roofing Co. v. Mardian Constr. Co., in which it determined that “adversity is not determined solely from the parties’ alignment in pleadings, but rather must be ascertained from the opposing positions or interests of the parties.” In short, Fulton and the subs became adverse parties the moment Fulton filed its third-party complaint against them.

Merits

Regarding the merits of Fulton Homes’ claim against the subs and whether it could have been avoided or settled, the Court of Appeals stood by the trial court’s finding that, since the homeowners did not allege faulty workmanship, Fulton should not have taken legal action against the subs. The Court of Appeals acknowledged that “the homeowners’ initial complaint might reasonably have supported Fulton’s filing” of the complaint against the subcontractors but deferred to the trial court’s conclusion that “Fulton should have known very quickly that the homeowners were not asserting faulty concrete workmanship claims.” Thus, Fulton bore responsibility for the legal costs that the subcontractors incurred from that point forward.

Ruling

Fulton challenged the awarding of attorneys’ fees on a variety of other grounds, none of which proved persuasive to the Court of Appeals. In its ruling, the Court found as follows:

• Fulton Homes could have protected its rights against BBP and Trojan by methods other than, to use the Court’s term, “dragging” them into a lawsuit;

• Fulton should not have filed the third-party complaint against the subs;

• Fulton should have dismissed the complaint much sooner than it did;

• the subcontractors’ legal efforts to defend themselves against Fulton’s complaint were appropriate;

• Fulton provided no evidence that paying a little more than $12,000 to the subcontractors would create a financial hardship; and

• ordering Fulton to pay the $12,000 would not have a chilling effect on future potential third-party plaintiffs.

Be Careful

The bottom line for companies that may find themselves in Fulton Homes’ position: If you don’t want to be on the hook for another company’s legal fees, don’t drag them into a lawsuit unless you are on solid legal ground and you have no alternative remedies.