Free Motion in Limine - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Honorable Marcia S. Krieger Case No. 03-cv-02669-MSK-PAC LEPRINO FOODS COMPANY, Plaintiff, v. BIG-D CONSTRUCTION CORP.- CALIFORNIA, a Utah corporation; et al., 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, et al., Counterdefendant/Third Party Defendants. DEFENDANTS BIG-D CONSTRUCTION CORP.-CALIFORNIA, BIG-D CONSTRUCTION, BIG-D CORP., AND BIG-D CAPITAL CORP.'S MOTION IN LIMINE NO. 10 TO PRECLUDE REFERENCE TO EICHLEAY FORMULA UMM'S CLAIM FOR HOME OFFICE OVERHEAD DAMAGES -ANDCERTIFICATE OF COMPLIANCE WITH LOCAL RULE 7.1A ______________________________________________________________________________

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Defendants Big-D Construction Corp­California, Big-D Construction, Big-D Corp., and Big-D Capital Corp. (collectively referred to herein as "Big-D") respectfully move the Court for an Order in limine to preclude Third-Party Defendant Marelich Mechanical Co., Inc. ("UMM"), its witnesses and its attorneys from referring to and/or presenting evidence of any part of its claim for damages set forth in the Request for Equitable Adjustment or in its court pleadings relating to or referring to the Eichleay Formula or the methodology of that formula, or, in the alternative, incorrectly applying the Eichleay Formula. This motion is supported by the Declaration of Francis J. Hughes ("FJH Decl."), attached hereto. CERTIFICATE OF COMPLIANCE WITH D.C.COLO.LCivR 7.1A Pursuant to D.C.COLO.LCivR 7.1A, the parties have met and conferred with respect to the contents of this Motion In Limine and, after having met and conferred, it is Big-D's understanding that Plaintiff Leprino Foods Company ("Leprino") and UMM object to the relief requested herein. I. INTRODUCTION This action arises from a series of disputes stemming from the construction of a cheese processing facility located in Lemoore, California (the "Project.") Leprino, as owner, entered into a general contract with Big-D to construct the Project. In turn, Big-D contracted with numerous subcontractors, including UMM, to perform various works on the Project. Leprino contends that Big-D and its subcontractors delayed completion of the Project and seeks damages which it claims to have suffered as a result of the Project delays. Big-D and UMM deny that they are responsible for causing the Project delays. In addition, Big-D seeks its remaining //

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contract balance and its additional and extended general conditions, while UMM seeks additional compensation for its work on the Project. II. ARGUMENT A. The Court Has the Authority to Issue Pre-Trial Orders Barring Evidence

Although not expressly authorized by the Federal Rules of Civil Procedure or the Federal Rules of Evidence, "motions in limine are well recognized in practice and by case law." Rutter Group Practice Guide: Federal Civil Trials & Evidence (TRG), section 4.322. As with all rulings on evidence, a ruling on a motion in limine is given wide deference and will typically only be reviewed for an abuse of discretion. Den Hartog v. Wasatch Academy (10th Cir. 1997) 129 F.3d 1076, 1092. B. Under California Law, Which Governs this Issue, UMM Cannot Recover Unabsorbed Home Office Overhead according to the Eichleay Formula 1. California Law Applies to this Issue

Article 8.7 of the Terms and Conditions of the Subcontract Agreement between Big-D and UMM states: "The Subcontract shall be deemed to have been made in and shall be interpreted under the laws in the jurisdiction which the project is located." It is undisputed that the project was located in California. 2. UMM's Unabsorbed/Unallocated Home Office/Corporate Overhead Claim was Calculated According to the Eichleay Formula

Attached to the FJH Decl. as Exhibit A, are pages 186 through 188 of the Expert Narrative Report generated by UMM's expert, Mark Berry acknowledging that Berry is relying

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on the "Eichleay Formula" to calculate the category of alleged damages of UMM. The section of the report attached as Exhibit A is entitled "Unabsorbed/Unallocated Home Office/Corporate Overhead." Attached as Exhibit B to the FJH Decl. is the material behind Tab 9 of the Binder provided by Mark Berry entitled "Expert Report Part 4 Damages," which shows the methodology used by Berry in making the Eichleay calculation. 3. California Does Not Recognize the Use of the Eichleay Formula to Calculate Home Office Overhead

A Nexis-Lexis search of the published cases in California indicate that not a single case in California that has been certified for publication has recognized the use of the Eichleay to calculate an element of damages experienced by reason of a project delay. This is not surprising, because Eichleay does not even purport to capture any increase in costs incurred by a contractor. Eichleay does not purport to calculate "increased" home office overhead, it purports to calculate "unabsorbed" overhead. In the introduction to his expert report, Berry identifies several text books as learned treatises upon which he relies (see, FJH Decl., Exhibit C). One of those books is Proving and Pricing Construction Claims by Robert F Cushman, et al, Wiley Law Publication. Mr. Berry references the 1990 edition of that book which is no longer available from the publisher, but the latest edition of that book (2001) contains the following comment about the use of Eichleay on projects other than those of the Federal Government.1 "In state, local, or private claims, the application of the formula is far more nebulous. In fact, there is no uniformity in what state and local governments will accept as reasonable and accurate in the determination of extended home office overhead costs. The inconsistent standards, therefore, further complicate the selection of the method for determining these delay damages and obfuscate the ability to forecast with any certainty the outcome of the recovery." (§11.04 to the Cushman Treatise (2001 Edition).)
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All references to or quotes from the Cushman treatise (2001 Edition) can be found in Exhibit D to the FJH Decl.

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4.

Even if the Eichleay Formula Were Applicable, UMM Has Not Satisfied the Pre-Requisite to Its Use

According to the Cushman learned treatise relied on by Berry, even when the Eichleay formula is allowed in a jurisdiction, there are three pre-requisites to its use: "Despite the holding in Wickham that the Eichleay formula is the exclusive means of determining the amount of recovery for unabsorbed overhead, it should not be assumed that the Eichleay formula is to be automatically applied to determine recovery for overhead once a project has been delayed. In fact, computation of unabsorbed home office overhead using an estimated daily rate has been described as an `extraordinary remedy.' A review of recent decisions in which courts considered using the Eichleay formula reveals that its use has been limited to circumstances in which the following criteria are met: 1. 2. The delay must be compensable. There must have been a reduction in the stream of income from payments for direct costs incurred, resulting in a reduction of the income available for home office overhead costs. There must not have been an opportunity for the contractor to mitigate its damages by taking on other work during the delay period." (§11.06 to the Cushman Treatise (2001 Edition).) a) UMM Fails to Satisfy the Prerequisite for Compensable Delay

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UMM fails to meet the first prerequisite on several counts. First, a portion of its delay is caused by its own performance problems. Second, a portion of its delay is concurrent with its own delays, including delays by its own supplier, Frick/Yorke. Third, a portion of its own extended duration involves weather, which is not a compensable delay. As the first prerequisite is explained by Cushman: //

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"[A]

Compensable Delay

Delays caused by design defects, by resolution of a bid protest, or by an owner's failure promptly to respond to contractor submissions or inquiries are all compensable. This means that the contractor is entitled to both an extension of contract time and recovery of additional costs. If the other criteria are met, the compensation for unabsorbed home office overhead for a contractor who has been damaged as a result of these delays can be calculated by means of the Eichleay formula. When the delay complained of is concurrent with delays caused by the contractor or others, however, there can be no monetary compensation, only an extension of the contract time. For example, in Commerce International Co. v. United States, a contractor was not allowed compensation because the government's actions were intertwined with other, concurrent factors causing delay. In Commerce International, the government was late in obtaining certain parts required by the contractor in order to perform its work, but the court found that the contractor would have been unprepared to commence its work even if the parts had been delivered in a timely fashion. The contractor was late in setting up its plant, in staffing the project, and by its subcontractors. Because of these concurrent delays, the contractor could not prove that the government's actions caused by damage. A contractor is entitled to monetary compensation and additional time, therefore, only if the delay was caused solely by the owner. The contractor is only entitled to additional contract time if the delays caused by the contractor and owner are concurrent." (§11.06[A] to the Cushman Treatise (2001 Edition).) UMM simply fails to satisfy this test. b) UMM Fails to Meet the Prerequisite for Reduction in Income Stream

Cushman explains the second prerequisite as follows: "[B] Reduction in Income Stream

Income to support overhead costs is derived from a percentage of the payments received by a contractor for direct costs. If disruption, suspension, or delay has reduced the stream of direct costs for a particular contract, a percentage of direct costs no longer adequately compensates the contractor for home office overhead. In general, the required decrease in the income stream occurs when there has been a suspension of all or part of the work for an uncertain duration. Consequently, application of the Eichleay formula becomes appropriate when there has been a 5.

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delay in performance requiring the contractor to `stand by idly and suspend its work.' This `stand by' requirement becomes onerous because, although a contractor who has idle laborers can lay them off, it may not be able to lay off home office staff, which may be working at half speed, because of the uncertain and sporadic nature of the delay. Once it has been established that there was an actual reduction in billings, then the issue of what caused the reduction in the income stream (such as a suspension of the work or a delay in issuing a change order) can be reached." (§11.06[B] to the Cushman Treatise (2001 Edition).) Two unpublished cases in California articulate the same requirements: Continental Air Conditioning, Inc. v. Keller Construction Co., et al., 2003 Cal. App. Unpub. LEXIS 8733 (see, FJH Decl., Exh. E) and W.B. Construction v. Mountains Community Hospital District (4th District 2005) Unpub. LEXIS 5124 (see, FJH Decl., Exh. F). In Continental, the court reviewed the decision of the trial court denying damages based on extended overhead and stated: "The court, however, denied delay damages based on extended home office overhead, concluding Continental had failed to introduce sufficient evidence in support of its claim for extended home overhead damages. n6 Specifically, the court held that under the holding in A.A. Baxter Corp. v. Colt Industries, Inc. (1970) 10 Cal.App.3d 144, 88 Cal.Rptr. 842, Continental had the burden of proving the delay prevented it from taking on additional work, and Continental had not met that burden." "Continental argues the Eichleay formula n7 is the proper method of calculating extended home office overhead, citing Howard v. G.A. MacDonald Construction Co., Inc. (1998) 71 Cal.App.4th 38, 53, for the proposition that the Eichleay formula has been accepted by California courts. Continental argues that in cases where courts have approved the Eichleay formula, the burden shifts to the respondent to show the party seeking such damages could have undertaken other work during the period of delay. (Satellite Electric Co. v. Dalton (Fed. Cir. 1997) 105 F.3d 1418, 1421.)" "As respondents correctly observe, Continental misstates the holding in Howard. The Howard Court did not adopt the Eichleay formula as the appropriate office overhead formula under California law. Instead the court merely mentioned in // 6.

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passing the parties in that case had agreed to use the Eichleay formula as the measure of damages. n8" "In any event, the trial court here found, even if the Eichleay formula were used, Keller had met its burden by demonstrating that Continental experienced a steady increase in revenues before, during and after its work on the Project." "The resolution of this issue involves a question of fact. The court in Satellite Electric pointed out that, "despite the shift in the burden of production [when applying the Eichleay formula], the contractor must nevertheless 'establish. [*31] ..that it was unable to take on other work.'" (Satellite Electric Co., supra, 105 F.3d at p. 1421.) The crucial point here is whether or not Continental proved that due to the delay it was unable to take on other work, and we therefore review the trial court's holding under the substantial evidence test." In W.B. Construction, decided less than twelve months ago, the California appellate court was equally adamant about the non-admissibility of Eichleay damages under circumstances similar to the ones in the immediate case. It included the following extended discussion of the state of the Eichleay formula in California: "C. The Trial Court Properly Refused to Allow WB to Use the Eichleay Formula in Calculating an Extended Home Office Overhead Component of Its Delay Damages During the presentation [*24] of WB's case-in-chief, Hospital and HMC moved to prohibit WB from presenting evidence, through the testimony of its office manager, Valinda Boren, that part of WB's delay damages claim consisted of unabsorbed or extended home office overhead costs based on the Eichleay formula. They argued, in part, that WB had not established the foundational requirements for using the formula. The trial court agreed, and allowed Boren to testify only to WB's costs incurred as a direct result of the delay. A trial court has broad discretion to determine whether evidence is relevant (Evid. Code, § 210) and therefore admissible. We will not disturb the trial court's ruling unless it constitutes a prejudicial abuse of discretion. (DePalma v. Westland Software House (1990) 225 Cal.App.3d 1534, 1538, 276 Cal.Rptr. 214.) The Eichleay formula has long been applied by the federal courts to compensate general contractors for extended or unallocated home office overhead costs incurred as a result of a government-imposed delay on federal projects. (See, Altmayer v. Johnson (Fed.Cir. 1996) 79 F.3d 1129, 1132-1133.)

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`The Eichleay formula [*25] requires three steps: 1) to find allocable contract overhead, multiply the total overhead cost incurred during the contract period times the ratio of billings from the delayed contract to total billings of the firm during the contract period; 2) to get the daily contract overhead rate, divide allocable contract overhead by days of contract performance; and 3) to get the amount recoverable, multiply the daily contract overhead rate times days of government-caused delay.' (Wickham Contracting Co. v. Fischer (Fed.Cir. 1994) 12 F.3d 1574, 1577, fn. 3.) There are three foundational requirements to using the Eichleay formula. The contractor must show: `(1) a government-imposed delay occurred; (2) the government required the contractor to 'stand by' during the delay; and (3) while 'standing by,' the contractor was unable to take on additional work.' (Satellite Elec. Co. v. Dalton (Fed.Cir. 1997) 105 F.3d 1418, 1421.) The trial court did not abuse its discretion in excluding testimony based on the Eichleay formula. There was no evidence that Hospital required WB to `stand by' during the delay or that WB was unable to take on additional work during [*26] the delay period. Indeed, the `linchpin' of a contractor's entitlement to Eichleay damages is `the uncertainty of contract duration occasioned by government delay or disruption.' (Altmayer v. Johnson, supra, 79 F.3d at p. 1133.) This uncertainty, coupled with the requirement that the contractor remain on standby or ready to perform when required, prevents the contractor from taking on additional work during the delay period. (Ibid.) This, in turn, prevents the contractor from recouping its home office overhead costs. We further note that the Eichleay formula has not been adopted by any California decisional authority, and it is questionable whether it should be. (1 Acret, Cal. Construction Contracts and Disputes (Cont.Ed.Bar 3d ed. 1999) Public Works Contracts: Disputes and Remedies, § 4.67, p. 409.) `Fundamentally, the Eichleay formula creates a rate for home office overhead and allocates it to projects in a manner that is independent of causation. For example, contractors having a large amount of overhead and few projects will generally post a greater daily rate for home office overhead under the formula than an efficiently run firm with many [*27] projects and proportionately lower overhead. As a result, contractors working under the formula could be rewarded for inefficient or extravagant use of home office overhead.' (Ibid., italics added.)" UMM has not satisfied the standby requirement. // // //

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c)

UMM Fails to Meet the Prerequisite of Not Being Able to Mitigate Damages

UMM likewise fails to meet the third prerequisite to Eichleay that would be necessary, even if the Eichleay formula were applicable to the current dispute. Cushman articulates the third prerequisite as follows: "[C] Inability to Mitigate Damages

Before the Eichleay formula is applied, the contractor must show an additional element other than that home office overhead is unabsorbed because performance of the contract has been disrupted or suspended. If the test were merely whether the contractor's work force was idle, the contractor would, in effect, be penalized for mitigating its damages and would be deterred from reassigning its employees to other jobs or laying them off during the period of delay. It must be shown that it was imprudent or impractical to take on additional jobs during the delay period. It is not necessary that the contractor show futile attempts to obtain other work, only that it would have been imprudent or impractical to do so." (§11.06[C] to the Cushman Treatise (2001 Edition).) In the deposition of its Executive Vice President, Dan Kennedy, UMM acknowledges that for the most part, this project did not even draw UMM's conventional work force because the work was physically located in a different union jurisdiction than where UMM conventionally performed work. Thus it drew its forces from the local union hall. Moreover, UMM is a subsidiary of EMCOR, one of the largest mechanical contractor entities in the United States. There is no evidence that it lacked resources to obtain additional work. Moreover, UMM continued to perform work during the project. Having obtained this additional work, it is inappropriate to seek Eichleay damages. // // // 9.

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5.

Even if the Eichleay Formula Were Applicable, UMM Miscalculates the Formula

UMM's mathematical calculation is not in accordance with the Eichleay calculation. Among other deficiencies, it inflates the ratio of billings on this project to billings on other projects; it overstates the home office overhead, and it selected the incorrect time period. III. CONCLUSION The use of the Eichleay formula outside of contracts with the federal government is extremely controversial. It has the potential to allow the award of significant amount of money without any proof that actual damages or increase over head were experienced. The formula is not accepted in California. If it were accepted, however, UMM would not satisfy the requirements of Eichleay that would be applicable even if this were a federal project. In any event, UMM's mathematical calculations are incorrect. Respectfully submitted this 1st day of March, 2006. s/ Daniel J. Nevis Daniel J. Nevis Miller, Morton, Caillat & Nevis, LLP 25 Metro Drive, 7th Floor San Jose, California 95110 Telephone: (408) 292-1765 FAX: (408) 436-8272 E-mail: [email protected] Attorneys for Defendant Big-D Construction Corp.- California and Big-D Construction Corp.

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO CERTIFICATE OF SERVICE (CM/ECF) I hereby certify that on March 1, 2006, I electronically filed the foregoing named document: DEFENDANTS BIG-D CONSTRUCTION CORP.-CALIFORNIA, BIG-D CONSTRUCTION, BIG-D CORP., AND BIG-D CAPITAL CORP.'S MOTION IN LIMINE NO. 10 TO PRECLUDE REFERENCE TO EICHLEAY FORMULA UMM'S CLAIM FOR HOME OFFICE OVERHEAD DAMAGES -ANDCERTIFICATE OF COMPLIANCE WITH LOCAL RULE 7.1A with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: Michael Gerard Bohn [email protected] [email protected] Bret Matthew Heidemann [email protected] [email protected] Francis (Frank) J. Hughes [email protected] [email protected] Patrick Quinn Hustead [email protected] Peter J. Ippolito [email protected] Richard Carl Kaufman [email protected] [email protected] Patrick T. Markham [email protected] [email protected] John David Mereness [email protected] C. Michael Montgomery [email protected] [email protected] [email protected] Daniel James Nevis [email protected] [email protected] N. Kathleen Strickland [email protected] [email protected] Laurence R. Phillips [email protected] [email protected]

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And, I hereby certify that I have mailed or served the document or paper to the following non CM/ECF participants in the manner (mail, hand-delivery, etc.) indicated by the non-participant's name: a) Kathleen Marie Dolce Kathleen Marie Dolce s/

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