Free Response to Motion - District Court of Colorado - Colorado

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 1 of 11

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Case No. 03-cv-02669-MSK-PAC LEPRINO FOODS COMPANY, Plaintiff, v. BIG-D CONSTRUCTION CORP. - CALIFORNIA, a Utah corporation; BIG-D CONSTRUCTION CORP., a Utah corporation; BIG-D CORPORATION, a Utah corporation; BIG-D CAPITAL CORP., a Wyoming corporation; and Does 1-100, inclusive, Defendants/Counterclaimants, BIG-D CONSTRUCTION CORP. - CALIFORNIA, a Utah corporation; BIG-D CONSTRUCTION CORP., a Utah corporation; and Does 1-100, inclusive, Third Party Plaintiffs, v. MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL, a California corporation, Third Party Defendant. MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL, a California corporation, Third Party Plaintiff/Counterclaimant, v. BIG-D CONSTRUCTION CORP. - CALIFORNIA, a Utah corporation; FEDERAL INSURANCE COMPANY, an Indiana corporation; and Roes 20 through 80, inclusive, Counterdefendant/Third Party Defendants.

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 2 of 11

THIRD PARTY DEFENDANT AND COUNTERCLAIMANT MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL OPPOSITION TO DEFENDANTS AND THIRD PARTY PLAINTIFFS BIG-D CONSTRUCTION CORP.-CALIFORNIA ETC. MOTION IN LIMINE NO. 10 TO PRECLUDE REFERENCE TO EICHLEAY F R L U O MU A MM' C A M F RH ME S LI O O OFFICE OVERHEAD DAMAGES Third Party Defendant and Counterclaimant Marelich Mechanical Co., Inc. dba U i rtMa lh cai l" MM"fe t fl wn O psi tD f dn ad n ei v sy r i Mehn a( ec c U )ish o o i poio o e nat n l e l g tn e s Third Party Plaintiffs Big-D Construction Corp.-C lon ' e .clcvlr e e t a afri s t ( l t e e r d o s i a , c oe i y f r " i "Mo o i Lm n N .0 h h ek t pel e MM f m r e i t ad r Bg ) t n n i i o1 w i seso r u U -D i e c cd r e rn o n/ o frg o presenting of evidence of the Eichleay Formula or the methodology of that formula, or in the alternative, incorrectly applying the formula. I. INTRODUCTION Big-D s t n n i i N .0 'Mo o i Lm n o1 seeks to preclude the introduction of evidence and i e testimony regarding the Eichleay formula, a method for calculating an allocable portion of a cn at 'hm of overhead expenses attributable to delays during the performance of a ot c r o e fce r os i project. Big-D s tce ei ne n l aat ri s p d ntuprt pooio 'aahd v ec ade lu oie i l o o spoth rpsi t d g h ts m y e tn that the use of the formula is prohibited in a case tried under California law, nor that the formula has been applied incorrectly in the instant case. Instead, there is no established law in California prohibiting the use of this recognized federal law-based formula and instead, its application by U MM'dm gs xe , r B r , this action is justified, appropriate and allowable under s a ae epr Ma e yin t k r California law. As a result, this Motion must be denied.

2

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 3 of 11

II. ARGUMENT A. The Eichleay Formula The Eichleay formula originated with an Armed Services Board of Contract Appeals (ASBCA) case, in which the ASBCA specifically approved the contractor'three step formula s for determining the amount of recoverable home office overhead incurred on a project. Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688, reheard and reaffirmed at 61-1 BCA ¶ 2894 (1960).1 Since that decision, this formula has become the mandatory method for calculating claims for unabsorbed home office overhead on federal government construction contracts. Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1580 (Fed. Cir. 1994); E.R. Mitchell Construction Co. v. Danzig, 175 F.3d 1369, 1372 (Fed. Cir. 1999). In essence, the Eichleay formula is used to calculate the amount of unabsorbed home office overhead a contractor can recover when the owner suspends or delays work on a contract for an indefinite period. The formula operates as follows: first, the overhead allocable to the contract is determined by multiplying the total overhead by a ratio of the contract b l g tt ' ii so h s ln e total billings of the contractor for the contract period. Second, a daily overhead rate for the contract is computed by dividing the overhead allocable to the contract by the number of days of contract performance. Third, the total overhead recoverable is determined by multiplying the daily overhead rate for the contract by the number of days of delay. See, Wickham Contracting Co., supra, 12 Fed.3d at 1577, footnote 3.

1

The recovery of Home Office Overhead as a result of a compensable delay did not start with Eichleay. As far back as 1941, federal courts have awarded recovery for this component of damages for delay. See, Herbert M. Baruch v. United States, 93 Ct.Cl. 1078 (1941); Fred R. Comb v. United States, 103 Ct.Cl. 174 (1945).

3

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 4 of 11

B.

California Does to Prohibit the Use of the Eichleay Formula The absence of published cases in California specifically adopting the formula should not,

as advanced by Big-D, constitute support for the argument that California law does not permit the use of the formula. In fact, the mandatory adoption of the formula in the federal courts is a clear signal that this is not some novel or untested theory to which there is no support or justification. The excerpt from the treatise cited by Big-D does not stand for the proposition that the formula can not be used in California but instead, simply acknowledges that there is no agreed upon approach among the states in how to account for this damage component. Cushman, Proving and Pricing Construction Claims. (Motion, p. 3.) In fact, James Acret, a well known author and commentator on California construction law, recognized the practical usefulness and purpose of the formula when he recently wrote: Although no reported California case has applied the Eichleay formula, it is commonly utilized in trials and arbitrations dealing with delay claims. Although the use of the Eichleay formula is controversial, the Wickham court makes a very convincing argument that once overhead costs are properly distinguished from direct costs, the Eichleay formula must be applied, since it is the only legally approved theoretical construct for measuring delay damages that are not capable of direct proof. Acret, California Construction Law Manual (6th ed. 2005) §1:90, p. 91. Big-D has provided no published cases from California that prohibit or reject the use of the Eichleay formula. In the two unpublished decisions cited by Big-D discussing Eichleay, neither finds that the use of the formula is clearly unavailable under California law. Continental Air Conditioning v. Keller Construction Co., 2003 Cal.App.Unpub. LEXIS 8733, at pp. 28-32 (2003); W.B. Construction v. Mountains Community Hosp. Dist., 2005 Cal.App.Unpub. LEXIS

4

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 5 of 11

5124, pp. 23-27 (2005). Instead, the courts in those matters do not allow the use of the formula due to a lack of the appropriate evidence necessary under the formula. Big-D s nulhd ae a cr i y not dispositive of the status of California law on 'upb se css r e a l i e tn the subject. In Zurn Constructors, Inc. v. Castaic Lake Water Agency, 2003 WL 22846350 (Cal.App. 2 Dist. 2003)2, the water agency moved in limine and at trial to preclude the cn at 'eprfrom testifying regarding home office overhead costs incurred using the ot c r xe r os t Eichleay formula. The Court of Appeal, in its unpublished opinion, held that the trial court did not err in allowing the introduction of such evidence. The Court found: A contractor is entitled to recover dm gsfn w e s r c o cn ateu s a ae ia o nr be h fot cr l ' a r st in an increase in the amount of overhead expenses incurred for the project. (citations) A delay in contract performance caused by errors and inconsistencies in the plans and specifications, requests for extra work, and design changes, as occurred here, can result in an increase in the amount of indirect overhead expenses incurred to support the project. The contractor need not calculate the amount of the increase with precision, as stated ante. The increase ordinarily would be directly proportional to the number of days of delay. A daily overhead rate can provide a reasonable approximation of the amount of the increase. . . Conflicting evidence as to the amount of damages actually incurred presents a question of fact for the trier of fact. Zurn Constructors, Inc. v. Castaic Lake Water Agency, supra, at p. 4. Zurn confirms that in California, the amount of damages need not be calculated with precision but may be shown with simply a reasonable basis of computation that results in a reasonable approximation. Id. citing Acree v. General Motors Acceptance Corp., 92 Cal.App.4th 385, 398 (2001) and GHK Associates v. Mayer Group, Inc., 224 Cal.App.3d 856, 873 (1990). California law clearly does allow for the recovery of damages for a breach of contract to
2

A copy of this unpublished decision is attached as Exhibit A to the Declaration of Richard Kaufman in Support of Opposition to Big-DC nt co C r.,t, t n n i i N .0 o r l e e osut n op se . i I Lm n o1 t pe u R ference to Eichleay Formula r i ' c Mo o e cd

5

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 6 of 11

include those sums that will compensate the party for all detriment proximately caused by the breach. California Civil Code section 3300. In California, the basic object of damages is to put the injured party in as good a position as he would have been had performance been rendered as promised. Brandon & Tibbs v. George Kevorkian Accountancy Corp., 226 Cal.App.3d 442, 455 (1990). The rules of law governing the recovery of damages for breach of contract are very flexible and must be regarded merely as guides to the court leaving to the court the ability to accommodate special circumstances of a particular case. Id. Gvn afri s praho l wn frh r oe o dm gso hrm incurred, i C lon 'apoc t ao i o t e vr f a ae fr a e i a l g e c y there is every reason to permit the introduction of a formula that quantifies damages such as unallocated and unabsorbed home office overhead. Of course, in order for UMM to ultimately recover such damages, it must demonstrate entitlement to these damages. However, once that is done, and there being no other reasonable method for discretely identifying and accounting for such damages, the Eichleay formula does nothing more than allow the jury to consider the quantification of these claimed losses. The mandatory establishment of the use of this method in the context of federal contracting, the absence of contrary authority in California, and the Zurn opinion, provide ample grounds to find that such a method should be allowed before a jury applying California law. C. UMM Has Established that the Formula May Apply In This Case Big-D claims that if the Eichleay formula was allowed in this case, UMM has failed to establish the necessary prerequisites for its use. Big-D has simply failed to introduce evidence to support this contention and this motion must be denied.
iU n MM'Ca fr o e fc O e ed a ae. s lm o H m O f e vr a D m gs i i h

6

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 7 of 11

First, Big-Dc i sht MM " i t stf t pe qitt th dl ai u i lm t U a a f l o as h r eu i h t e y ts es as iy e r se a e a s cm esb . ( t np4 Bg cites no specific references to the massive and factuallyo pnal" Mo o,.. i e i ) -D intense underlying record developed in this case, including either the attached report of Mark B r , MM'shdlad a ae epr or his deposition. Instead, this argument is e yU r s ceu n dm gs xe , e t supported only by an excerpt from the Cushman treatise. Big-D does not even relate the treatise to the claimed facts of this case. An examination of Mr. Be yseot the other hand, demonstrates that he has r 'r r on r p , accounted for the issue of whether the delay is compensable and this section is even included by Big-D in its motion. (See, Affidavit of Francis J. Hughes in Support of Motion in Limine No. 10, Exhibit A, Report p. 187, Section C.1.) Next, Big-D claims that " UMM fails to meet the prerequisite for reduction in income sem "( t np5 A a , i has simply included an excerpt from the Cushman t a . Mo o,.. gi Bg r i ) n -D treatise, references two unpublished cases, ad i p ed wt t c i t tU n s l ns i h lm h " MM hs o m y h e a a a nt stf dh s nb r u e et ( t np. ase t t dy e i m n " Mo o,p5-8.) Big-D makes no references to the ii e a qr . i underlying record, does not tie the treatise excerpts to any particular facts from this case and never supports its ultimate contention. However, again, Mr. Berry provides his opinion, and factual support, on this issue in his report at p. 187, section C.2. Further, Big-D claims that " UMM fails to met the prerequisite of not being able to m t a i dm gs ( t np9 As before, Mr. Berry addresses this issue in his report and igt t a ae. Mo o,.. i es " i ) provides the factual support for demonstrating compliance with the formula. (Report, pp. 187188, section C.2.). Big-D does not support its argument that this element is somehow missing from the proposed evidence to be supplied by UMM. 7

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 8 of 11

Moreover, Big-D argues that even if Eichleay applied to this case, UMM has miscalculated the formula. (Motion, p. 10.) The motion is again deficient for failing to identify with any particularity the grounds and evidence for its claims. Although a copy of the method by which Mr. Berry applied the formula to this project is included in the motion (Exhibit B), along with backup sheets with further data, Big-D fails to specify which documents support this vague set of allegations. The evidence supporting the alleged misapplication is missing or simply not identified. UMM, as is the Court, is forced to speculate about exactly what evidence supports Big-D claims. Finally, even if there were any error in the application of the formula, which UMM in no way concedes, California law does not preclude the use of a modified or varied use of the formula so long as it meett t ehl o poi n a r snb bs o cm u t n ht sh h so f rv i " aoal ai fo pti t e r d dg e e s ao a r u sn r snb apoi ao. Acree v. General Motors Acceptance Corp., supra, 92 e l iae oal prx t n st a e m i " Cal.App.4th at 398; GHK Associates v. Mayer Group, Inc., supra, 224 Cal.App.3d at 873-874. In other words, even though a strict and unmodified use of the formula is mandated in federal contracting cases, nothing prohibits the use of a reasonably modified formula under California law. Howard Contracting, Inc. v. G. A. McDonald Construction Co., 71 Cal.App.4th 38, 52 (1998) (federal decisional authority is neither binding nor controlling in matters involving state law.) D. Dispute is Over the Weight of the Evidence Not its Admissibility Because there is no prohibition over the use of the Eichleay formula, or even an appropriately modified version of it, under California law, the question of whether UMM may introduce evidence of the underlying facts supporting the application of the theory relates only to 8

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 9 of 11

the weight that the jury may be give to that formula and the facts and assumptions, not whether the method and the facts are admissible. Zurn, supra, p. 4 (conflicting evidence as to amount of damages presents a question of fact for the trier of fact). Big-D will have the opportunity to test and cross-examine Mr. Berry, the foundational witnesses, the assumptions used to apply the formula, as well as the underlying facts relating to the values assigned to each component of the formula. With a proper instruction on California law relating the right to recover reasonably ascertainable damages, the jury will be able to decide for itself whether UMM has satisfied its burden of producing the facts to support its claim for these damages. III. CONCLUSION In light of the foregoing, Big-D s t n n i i No. 10 must be denied. The 'Mo o i Lm ne i argument and evidence offered in support simply do not make the case that either Eichleay can not be used generally under California law, or that it can not be used in the instant case to capture damages suffered by UMM as a result of Big-D s r c o t sbot c 'be h fh ucn at a e r . Respectfully submitted,

9

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 10 of 11

Dated: March 20, 2006 McKENNA LONG AND ALDRIDGE LLP Respectfully submitted, s/ Peter J. Ippolito Peter J. Ippolito Laurence R. Phillips MCKENNA LONG & ALDRIDGE LLP 750 B Street, Suite 3300 San Diego, CA 92101 Telephone: (619) 595-5400 Facsimile: (619) 595-5450 Email: [email protected] Email: [email protected] Richard C. Kaufman Lino S. Lipinsky de Orlov John H. Tatlock McKenna Long & Aldridge LLP 1875 Lawrence Street, Suite 200 Denver, CO 80202 Telephone: (303) 634-4000 Facsimile: (303) 634-4400 [email protected] [email protected] [email protected]

Attorneys for Counter-Defendant UNIVERSITY MARELICH MECHANICAL

10

Case 1:03-cv-02669-MSK-PAC

Document 267

Filed 03/20/2006

Page 11 of 11

CERTIFICATE OF SERVICE I hereby certify that on March 20, 2006, I electronically filed the foregoing THIRD PARTY DEFENDANT AND COUNTERCLAIMANT MARELICH MECHANICAL CO., INC. dba UNIVERSITY MARELICH MECHANICAL OPPOSITION TO DEFENDANTS AND THIRD PARTY PLAINTIFFS BIG-D CONSTRUCTION CORP.-CALIFORNIA ETC. MOTION IN LIMINE NO. 10 TO PRECLUDE REFERENCE TO EICHLEAY FR L U O MU A MM' C A M F RH MEO FC O E H A D MA E with the S LI O O F IE V R E D A G S Clerk of Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: Michael G. Bohn at [email protected] Bret Matthew Heidermann at [email protected] Francis (Frank) J. Hughes at [email protected] Christopher J. Hersey at [email protected] Patrick Q. Hustead at [email protected] Patrick T. Markham at [email protected] John D. Mereness at [email protected] Daniel J. Nevis at [email protected] C. Michael Montgomery at [email protected] N. Kathleen Strickland at [email protected] and I hereby certify that I have mailed or served the document or paper to the following nonCM/ECF participants in the manner indicated by the non-participant'nm : sa e Kevin A. Coles (via U.S. Mail) Coles Baldwin & Craft, LLC 1261 Post Road P.O. Box 577 Fairfield, CT 06824 s/Richard C. Kaufman Richard C. Kaufman Attorney for Third-Party Defendant Marelich Mechanical Co. MCKENNA LONG & ALDRIDGE LLC 1875 Lawrence Street, Suite 200 Denver, CO 80202 Telephone: (303) 634-4000 Fax: (303) 634-4400 e-mail: [email protected]
SD:22143899.1

11