Minnesota Determines That Victim Compensation Fund Legislation May Be Used To Revive Claims Barred By The Statute Of Repose

Vol. 14 No. 3

By

Ringle Law Group, LLC

The decision in Jacobs Engineering Group, Inc. v. Minnesota, 806 N.W.2d 820 (Minn. 2011) is a landmark construction law case. The Jacobs case arose out of the catastrophic collapse of the I-35W Bridge over the Mississippi river in August of 2007. The case is a landmark because the Minnesota Supreme Court held that Minnesota could use its I-35W bridge victim compensation fund as a means to retroactively revive claims against the companies that designed and constructed the bridge back in the 1960's. In essence, the Jacobs decision eviscerated the engineer's statute of repose defense more than twenty-five years after the repose defense vested.

On May 29, 2012, the U.S. Supreme Court refused to hear Jacobs' appeal claiming that the Minnesota Supreme Court wrongly allowed its state legislature to use its victim compensation fund statute as a mechanism to revive claims in violation of the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution. As a result, the Jacobs decision casts doubt on the efficacy of the statutes of repose that forty-eight states (all except New York and Vermont) plus the District of Columbia and Puerto Rico have enacted to bar claims arising from improvements to real property after the passage of certain number of years. Also, the Jacobs decision changes the landscape for those that represent and insure contractors and designers — particularly those contractors and designers that work on infrastructure projects like bridges, dams, railways, and levees.

Factual Background

Sverdrup & Parcel and Associates (Sverdrup) designed the I-35W Bridge (the Bridge). The Bridge drawings were complete in 1965 and the Bridge opened to traffic in 1967. Sverdrup's 1962 contract with the Minnesota Department of Transportation (Mn/DOT) included a broad indemnity obligation for all claims arising out of its work. At the time of the contract, Minnesota did not have a statute of repose for improvements to real property. In 1965, Minnesota enacted its first statute of repose, which provided that any action, including an action for indemnification, could not be brought more than 10 years after completion of the construction. 1 The 10-year statute of repose was later declared unconstitutional and void. Then, in 1980, Minnesota enacted a new statute of repose with a 15-year repose period. Per that statute, all liabilities related to the design or construction of the I-35W Bridge expired in 1982 — 15 years after substantial completion of the Bridge. The 15-year statute also provided that all actions for contribution or indemnity would accrue "upon payment of a final judgment, arbitration award or settlement arising out of the defective and unsafe condition." 2

In 1999, Sverdrup merged with Jacobs Engineering Group, Inc. (Jacobs) and Jacobs was the surviving corporation.3 Around the same time period, Mn/DOT inspectors identified cracking in eight of the 48" deep span girders. In 2001, the University of Minnesota performed a fatigue study which concluded that despite many poor fatigue details, the replacement of the bridge could be deferred.4 In 2003, the Mn/DOT entered into a series of contracts with URS Corporation (URS) to determine the nature and scope of maintenance that needed to be performed on the Bridge. In 2006, a Fracture Critical Bridge Inspection Report was prepared by a Mn/DOT bridge inspection team and identified various deficiencies that needed to be repaired or monitored. In 2006, the Mn/DOT started its planning process to retrofit the bridge. In 2007, URS made three recommendations to the Mn/DOT: (1) add redundancy to the most critical truss members, (2) conduct a visual examination of all suspected weld details and remove measurable defects, or (3) do a combination of both. The Mn/DOT authorized visual inspections and repairs of measurable defects only.5 At the time of the collapse in 2007, URS was still completing its study and Progressive Contractors, Inc. (PCI) was resurfacing the concrete bridge deck. The bridge was scheduled for reconstruction sometime between the years 2020 and 2025.

In May of 2007, Minnesota amended its statute of repose to eliminate repose for contribution and indemnity actions and replaced it with a 2-year statute of limitation period, regardless of when the repose period on the direct claims expired. The 2007 amended statute provided:

An action for contribution or indemnity arising out of the defective . . . condition of an improvement to real property . . . [must] be brought . . . [within] two years after the cause of action . . .has accrued, regardless of whether it accrued before or after the . . . [repose] period. . . . nothing in this subdivision shall limit the time for bringing an action for contribution or indemnity.6

On August 1, 2007, the Bridge collapsed. At that time, the Bridge reached 90% of its intended 50-year life span. As a result of the collapse, 13 people died and 145 more people were injured. The Bridge collapse also caused substantial property damage.

Thereafter, more than $1.255 million in private contributions were made to the Minnesota Helps — Bridge Disaster Fund.7 In addition to the private donations, Minnesota was tasked with determining whether a legislative response to the catastrophic occurrence was appropriate. On May 8, 2008, Minnesota's legislature appropriated $37 million to pay the victims and survivors of the collapse, a sum far exceeding the State's $1 million maximum occurrence cap on liability. As part of Minnesota's victim compensation fund legislation,8 the State also increased its individual tort claim cap, waived its sovereign immunity, and established the State's right to seek reimbursement from any third party that caused or contributed to the bridge collapse. Specifically, the compensation fund statute provided:

Notwithstanding any statutory or common law to the contrary, the state is entitled to recover from any third party, including an agent, contractor, or vendor retained by the state, any payments made from the emergency relief fund or under [the emergency relief fund established by] section 3.7393 to the extent the third party caused or contributed to the catastrophe.9

The compensation fund statute's findings described the Bridge collapse "a catastrophe of historic proportions" and noted that "[n]o other structure owned by this state had ever fallen with such devastating physical and psychological impacts on so many."10

The National Transportation Safety Board's November 14, 2008 investigation report concluded that inadequate load capacity of the Bridge's main gusset plates related to a design error on the part of Sverdrup and that error was a major reason that caused lateral shifting instability at the Bridge and the subsequent failure of the Bridge's gusset plates.11

Over one hundred plaintiffs filed personal injury and wrongful death cases that were consolidated for pretrial purposes.12 Jacobs was sued in two separate lawsuits.

In the first action, individual plaintiffs commenced lawsuits against URS and PCI for negligence and resulting damages but they did not sue Jacobs because those potential claims were barred by Minnesota's statute of repose. Nevertheless, URS and PCI brought third-party complaints against Jacobs for contribution and indemnity on the basis that Jacob's predecessor, Sverdrup, negligently designed the Bridge. PCI also filed a third-party complaint against Minnesota. In the first suit, Jacobs filed a motion to dismiss URS' claims as time-barred. The trial court granted Jacobs' motion to dismiss and the trial court's decision was affirmed by Minnesota's Court of Appeals and Supreme Court.13

The second lawsuit is the subject of this article. That action involved Minnesota's cross-claims against Jacobs for common law contribution and indemnity, contractual contribution and indemnity, and statutory reimbursement of the funds paid to the individual survivor-claimants pursuant to the reimbursement provision of the compensation fund statutes.14 Jacobs filed a motion to dismiss Minnesota's claims arguing that they were barred by the 15-year statute of repose and could not be retroactively revived. Jacobs further argued that if the claims could be revived, the retroactive legislation violated the Due Process Clauses of the United States and Minnesota Constitutions. The trial court denied Jacobs' motion, which was later upheld by the Minnesota Court of Appeals.15

Jacobs' Appeal to the Minnesota Supreme Court

Jacobs appealed the adverse decision to the Minnesota Supreme Court. On appeal, the threshold inquiry was whether the State's contractual indemnity and statutory reimbursement claims were time-barred by a vested right in the applicable statute of repose. The Court therefore first needed to address whether the 2007 amendments to Minnesota's statute of repose or the compensation fund legislation could retroactively revive causes of action previously extinguished by the statute of repose.16 The Court agreed with Jacobs that the 2007 amendments to the 15-year statute of repose could not retroactively revive contractual indemnity claims.

Next, the Court needed to address whether the compensation fund's revival of the State's indemnity claims violated Jacobs' due process rights because it effectively voided the statute of repose and resuscitated liabilities that ended decades earlier. Jacobs argued that it had a protectable property right in the defense of the statute of repose and the retroactive revival of claims extinguished by the statute of repose violated due process.17 The Court disagreed. The Court concluded that the compensation fund established the State's right to recover from responsible third parties and could revive previously extinguished claims.18 The Court acknowledged that it may be economically unfair to allow a cause of action previously extinguished to be revived by subsequent legislation.19 Nevertheless, the Court determined that Minnesota's revival of claims did not violate Jacobs' due process rights. The Court concluded that the compensation fund statute was rationally related to a legitimate governmental interest — the State's interest in addressing a "catastrophe of historic proportions."20

The Court then addressed Jacobs' argument that the compensation fund statute wrongfully impaired its contractual rights under the 1962 design contract because it increased Jacobs' indemnity obligations by allowing the State to pay survivor-claimants and then recover a portion of those payments without the benefit of the sovereign immunity defense.21 Jacobs argued that the State was entitled to a sovereign immunity defense at the time of the contract and that defense became part of the contract. Specifically, Jacobs argued that Sverdrup anticipated the right to be free from liability to the State for contribution, indemnity or other reimbursement for tort claims and to vicariously enjoy the defense of sovereign immunity.22 The Court disagreed and stated that sovereign immunity is "an affirmative defense available to the State" that can be waived.23 Furthermore, the indemnity clause was very broad. The 1962 contract provided:

[Sverdrup] indemnifies, saves, and holds harmless the State and any agents or employees thereof from any and all claims, demands, actions or causes of action whatsoever nature or character arising out of or by reason of the execution or performance of the work of [Sverdrup] provided for under this agreement.24

The Court concluded that absent an affirmative obligation on the part of the State to invoke sovereign immunity, there was no impairment of Jacobs' contractual rights.25

Last, the Court addressed Jacobs' arguments that the State's statutory reimbursement claims should be dismissed because: (1) the terms of the releases executed by the survivor-claimants barred the State's claims; and (2) the State voluntarily incurred liability in excess of its tort cap limits and the State's recovery of those excess payments was barred.26 Jacobs argued that no other litigant could have exposed the State to $37 million in liability. Jacobs further argued that the State could not strip repose rights in order to compensate itself for liability that was voluntarily assumed when it waived its $1 million aggregate tort liability cap under sovereign immunity principals. The Court disagreed. The Court concluded that the State's reimbursement claims were not barred because the general common law principals of release and the voluntary payments doctrine negated by the compensation fund statute's language expressing the legislature's intent to establish reimbursement rights "notwithstanding any statutory or common law to the contrary."27

Jacobs' Petition for Writ of Certiorari

On April 2, 2012, Jacobs filed a Petition for Writ of Certiorari with the United States Supreme Court. A supporting amicus brief was filed by the Associated General Contractors of America (AGC), the Associated General Contractors of Minnesota, the American Council of Engineering Companies, the American Council of Engineering Companies of Minnesota, the ASCE and the Construction Industry Round Table. On May 29, 2012, the U.S. Supreme Court denied Jacobs' petition for certiorari, thereby allowing Minnesota's lawsuit to proceed against Jacobs.

Furthermore, because the Minnesota Supreme Court decision was allowed to stand, it is likely to have broad sweeping repercussions to the construction, design and insurance industries. According to the AGC and the ASCE, the Jacobs decision leaves insurers without a way to price the risk of retroactive changes to statutes of repose.28 The AGC has also stated that "it would be foolish to think that another tragic failure will not occur in the future."29 As a result of the "advanced (and advancing) age of our national infrastructure, inevitable deterioration, and the shortage of public funds for proper maintenance," the AGC believes a life-threatening event could occur anywhere, at any time.30 Although the Jacobs case arose out of a bridge collapse, the AGC also believes the next case could involve a highway, a public or private water works, or a privately owned structure, such as a hospital or hotel.31

The AGC's position is supported by independent data. The American Society of Civil Engineers (ASCE) issues a report card every four years on the state of America's infrastructure.32 In 2009, the overall grade received for our nation's infrastructure was a "D." According to the ASCE, "years of delayed maintenance and lack of modernization have left Americans with an outdated and failing infrastructure that cannot meet our needs."33 The 2009 ASCE report identified 85,000 dams and more than 600,000 bridges in the United States. According to the AGC and the ASCE, 26% of the nation's bridges are "structurally deficient" or "functionally obsolete" and 7,980 of our nation's bridges are "facing the same problems that the I-35W bridge encountered in the years leading up to its collapse."34

On November 3, 2011, Kiplinger reported that America's failing infrastructure is a "scary picture."35 A recent bridge closing from this article author's home-state of Indiana illustrates this point. On September 9, 2011, the Sherman Minton Bridge was closed by Indiana's governor because cracks were discovered in the main load bearing structural element the bridge. The Sherman Minton Bridge spans the Ohio River and carries I-64 and US 150 between Kentucky and Indiana. The bridge closing was referenced by President Obama as an example of our nation's rapidly deteriorating infrastructure.

Questions Following Jacobs

The Jacobs decision raises several important questions. For example, how can design and construction firms manage their risks if there is a possibility of never-ending liability? Second, how can insurance carriers reasonably estimate the risks of covering extinguished claims? Third, could a future mass disaster involving our nation's infrastructure or a privately-owned project prompt another state's enactment of a similar victim compensation fund statute that would revive claims that are otherwise barred by the statute of repose?36

Contractors and designers cannot control how the insurance industry will ultimately respond to the Jacobs decision. However, in the wake of the Jacobs decision, contractors, designers and design-builders might consider optional insurance coverage protection such as: defense costs outside the limits of liability, coverage for breach of a client contract, full civil liability coverage in lieu of negligence-based coverage or punitive and exemplary damages coverage.

Further, these industry groups can manage some of their risk by avoiding agreements to broad form indemnity clauses, particularly when contracting with a public owner. The Jacobs decision also begs the question of whether it is practical for contractors and designers working on public projects or public-private projects to negotiate an indemnity provision obligating the public owner to assert its sovereign immunity defense to all claims for which the public owner seeks indemnity.

The Jacobs decision also illustrates the importance of a good document retention policy and perhaps a policy to maintain documents related to high-risk or infrastructure projects on an indefinite basis. Imagine how difficult it would be to defend claims decades after a project's substantial completion when key witnesses are no longer available and crucial documents have disappeared or were destroyed consistent with reasonable standard document destruction policies.

Last, the Jacobs decision emphasizes the care and consideration that must be taken when two companies merge. Jacobs' successor-in-interest liability for Sverdrup's design errors might have been different if Jacobs had negotiated a stock purchase in lieu of an asset purchase.

Endnotes

1. Act of May 21, 1965, ch. 564 § 1, 1965 Minn. Laws 803, 803 (codified at Minn. Stat. § 541.051 (1965)).

2. Act of Apr. 7, 1980, ch. 518 §§ 2-3, 1980 Minn. Laws 596, 596 (codified at Minn. Stat. § 541.051 (1982)).

3. In re Individual 35W Bridge Litigation, 787 N.W. 2d 643, 645 (Minn. Ct. App. 2010).

4. O'Connell, Heather M., Robert J. Dexter, Paul Bergson, Fatigue Evaluation of the Deck Truss Bridge of 9340, Final Report 2001-2010 (University of Minnesota, Department of Engineering, March 2001).

5. Minnesota Department of Transportation, Fact Sheet (October 16, 2007).

6. Act of May 21, 2007, ch. 105 § 4, 2007 Minn. Laws 624, 625-26 (codified at Minn. Stat. § 541.051 (2008)).

7. Greater Twin Cities United Way and The Minneapolis Foundation, Minnesota Helps — Bridge Disaster Fund™ Update (Press Release, July 29, 2008).

8. Minn. Stat. §§ 3.7391 - 3.7395 (2010).

9. Minn. Stat. § 3.7394, subd. 5(a) (2010).

10. Minn. Stat. § 3.7391, subd. 1 (2010).

11. National Transportation Safety Board, NTSB Determines Inadequate Load Capacity Due to Design Errors of Gusset Plates Caused I-35W Bridge to Collapse (Press Release, November 24, 2008).

12. In re Individual 35W Bridge Litigation, 787 N.W.2d at 646.

13. The Minnesota Supreme Court's separate decision in the URS v. Jacobs Eng'r. Group action is available at In re Individual 35W Bridge Litigation, 806 N.W.2d 811 (Minn. 2011).

14. In re Individual 35W Bridge Litigation, 787 N.W. 2d at 646.

15. Id. at 654. During the pendency of Jacob's appeal to the Minnesota Supreme Court, Attorneys Robert J. Huber and Mark R. Becker presented the broad-reaching impacts of the Jacobs case at the ABA Forum's 2012 Midwinter Meeting.

16. Jacobs Eng'r. Group. v. Minnesota, 806 N.W.2d 820, 827 (Minn. 2011).

17. Id. at 832.

18. Id. at 827.

19. Id. at 833.

20. Id.

21. Id. at 834.

22. Id.

23. Id. at 835.

24. Id.

25. Id.

26. Id. at 835-836.

27. Id. at 836, quoting Minn. Stat. § 3.7394, subd. 5(a).

28. Brief for the Associated General Contractors of America as Amicus Curiae, pp.19-20 available at http://www.cirt.org/resources/Documents/AGC%20Amicus%20Brief%20-%20Final.pdf.

29. Id. at p.21.

30. Id. at p.23

31. Id. at p.21.

32. American Society of Civil Engineers, Report Card for America's Infrastructure (2009).

33. Id. at Preface p. iii.

34. Id. at p.22.

35. Available at https://www.kiplinger.com/printstory.php?pid=215933.

36. See ABA Forum on Construction Division 3 June 2012 Hot Topic Presentation, The Crumbling Statute of Repose?, a joint presentation by this author, Greg Bundschuh of Greyling Insurance Brokerage, and Richard Cook of Kimley-Horn & Associates.


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