Black Hills Excavating Services, Inc. v. Retail Construction Services, Inc.

#27357, #27358-a-GAS
2016 S.D. 23

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****

BLACK HILLS EXCAVATING
SERVICES, INC., Plaintiff and Appellant,

v.

RETAIL CONSTRUCTION
SERVICES, INC., Defendant, Third-Party
Plaintiff and Appellee,

v.

MITCHELL E. MORRIS, Third-Party Defendant.

****

APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA

****
THE HONORABLE JANINE M. KERN
Judge

****
STEVEN T. IVERSON
THOMAS E. BRADY of
Brady Pluimer, P.C.
Spearfish, South Dakota Attorneys for plaintiff
and appellant.

EDWARD C. CARPENTER
STEPHEN C. HOFFMAN of
Costello, Porter, Hill, Heisterkamp,
Bushnell & Carpenter, LLP
Rapid City, South Dakota Attorneys for defendant, third-
party plaintiff and appellee.

****
CONSIDERED ON BRIEFS
ON NOVEMBER 30, 2015
OPINION FILED 03/09/16
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SEVERSON, Justice

[¶1.] Retail Construction Services, Inc. (RCS) and Black Hills Excavating,

Inc. (BHE) entered into three subcontract agreements whereby BHE agreed to

perform construction services for RCS. BHE brought this suit and asserted that

RCS breached the contracts by ejecting BHE from the projects. RCS

counterclaimed against BHE. It also filed a complaint against BHE’s president

Mitch Morris, alleging that he was personally liable for BHE’s actions. After a trial

to the court, the circuit court awarded damages for breach of contract to RCS. It did

not impose personal liability on Morris. BHE appeals a number of issues and RCS

has filed a notice of review. We affirm.

Background

[¶2.] RCS hired BHE as a subcontractor for three projects: University

Center (University Project), LaCrosse Street Apartments (LaCrosse Project), and

Toyota of the Black Hills (Toyota Project). BHE and RCS executed virtually

identical subcontract agreements for the projects. All three subcontracts were the

subject of this lawsuit, but only issues relating to the LaCrosse and Toyota Projects

are being appealed. All of the projects involved excavation work and installation of

utilities. BHE was terminated from the projects and commenced this action,

alleging that RCS breached the contracts by wrongfully terminating BHE. RCS

counterclaimed, alleging that BHE breached its agreements by failing to hold the

necessary license to perform parts of the work, failing to maintain a schedule, and

failing to adequately staff the job. It also filed a third-party complaint against

Morris, the president and sole shareholder of BHE. It alleged that he was

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personally liable for BHE’s actions because he purported to act on behalf of BHE

despite knowing that the corporation had been administratively dissolved. We

address each of the projects in turn.

LaCrosse Project

[¶3.] RCS and BHE entered into a subcontract for the LaCrosse Project on

April 9, 2010. The work BHE was to perform included site grading, storm sewer,

sewer and water, and final grading of the base course. By June, BHE was behind

the construction schedule. On June 30, 2010, RCS sent its first notice letter to BHE

to “serve as [its] warning notice and request to cure breaches for . . . failure to

maintain performance schedule[.]” The letter gave BHE until July 5, 2010, to

correct deficiencies before RCS proceeded with its remedies. On July 22, 2010, RCS

issued a termination letter to BHE. However, instead of terminating BHE, RCS

created a remedial schedule and attempted to solve the problems with BHE. When

attempts to meet the remedial schedule failed, RCS issued another termination

letter to BHE on August 20, 2010. The letter stated that RCS was invoking sections

16 and 17 of the subcontract agreement and that RCS would be replacing BHE.

BHE was finally ejected from the project on or about August 23, 2010.

[¶4.] Ultimately, the circuit court found that BHE breached the LaCrosse

Project subcontract by failing to maintain a schedule consistent with project

requirements and failing to adequately staff the job. It also found that BHE failed

to submit certified payrolls as required and it was not licensed, as required, to

perform the water and sewer part of the work. As a result, the court found that

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BHE was properly terminated under section 16 of the contract, which provides in

full:

That in case the Subcontractor shall fail to correct, replace
and/or re-execute faulty or defective work done and/or materials
furnished under this Subcontract, when and if required by the
Contractor, or shall fail to complete or diligently proceed with
this Subcontract within the time herein provided for, the
Contractor upon twenty-four (24) hours notice in writing, via
facsimile, or otherwise written means to the Subcontractor shall,
have the right to correct, replace and/or re-execute such faulty or
defective work, or to take over this Subcontract and complete
same either through its own employees or through a contractor
or subcontractor of its choice, and to charge the cost thereof to
the Subcontractor, together with any liquidated damages caused
by a delay in the performance of the Subcontract. Subcontractor
shall be responsible for all costs or expenses incurred by
Contractor as a result of Subcontractor’s failure to perform
satisfactorily. In addition, as/if Subcontractor creates delays,
the Subcontractor shall be responsible for any/all additional
costs attributable to such schedule delays as it impacts other
trades; all additional costs for overtime/second or split shift, will
be borne by this Subcontractor to get the project back on
schedule.

Due to the termination under section 16 and the expenses incurred by RCS to finish

the project, the court awarded back charges in the amount of $387.32 to RCS.

Toyota Project

[¶5.] BHE and RCS entered into the Toyota Project contract on June 4,

2010. 1 Under the subcontract, BHE was to perform excavation and utility work

similar to the LaCrosse Project. Again, BHE fell behind on the project. RCS issued

written notice of defective work to BHE on October 15, 2010. The letter informed

BHE that it was failing to maintain a schedule in accordance with the subcontract.

1. The court found that this contract was entered into on May 21 as dated at the
top of the contract. However, Morris signed the contract on June 4, 2010.

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It gave BHE until October 18 to remedy the problems. RCS issued another written

notice of breach to BHE on November 20, 2010. Again, the notice indicated that

BHE would have time to cure the breaches enumerated in the letter. It gave BHE

until November 22 to cure the breach, after which time RCS would “proceed with

remedies as stipulated in the subcontract agreement section 16 for breach[.]” 2 RCS

finally terminated the subcontract in January 2011. The circuit court found that

this was a proper termination under section 16 of the subcontract. The court

awarded RCS $191,208.11 in damages.

[¶6.] BHE’s appeal raises the following issues:

1. Whether the circuit court erred by awarding damages to RCS under
section 16 of the subcontracts.
2. Whether the court awarded damages to RCS on the Toyota Project
for work outside the scope of the subcontract.
3. Whether the court erred when it determined that RCS was entitled
to attorney’s fees under the subcontracts.

Through notice of review, RCS asserts that the court erred when it determined that

Morris was not responsible for acts purportedly done on behalf of the corporation

during a period of time when the corporation was administratively dissolved.

Standard of Review

[¶7.] “We review the circuit court’s findings of fact under the clearly

erroneous standard.” Vander Heide v. Boke Ranch, Inc., 2007 S.D. 69, ¶ 17, 736

N.W.2d 824, 831 (quoting City of Deadwood v. Summit, Inc., 2000 S.D. 29, ¶ 9, 607

N.W.2d 22, 25). “Contract interpretation is a question of law reviewable de novo.”

2. Section 16 of the Toyota Project subcontract is identical to section 16 of the
LaCrosse Project subcontract. Supra ¶ 4.

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Id. (quoting Ziegler Furniture & Funeral Home, Inc. v. Cicmanec, 2006 S.D. 6, ¶ 14,

709 N.W.2d 350, 354).

Analysis

Whether the circuit court erred by awarding damages under section 16 of the
subcontracts.

[¶8.] Section 16 of the subcontracts provides: “Subcontractor shall be

responsible for all costs or expenses incurred by Contractor as a result of

Subcontractor’s failure to perform satisfactorily.” BHE contends that the circuit

court erred in awarding damages to RCS pursuant to this section because RCS

terminated the contract under section 17 rather than section 16. BHE asserts that

RCS did not terminate BHE for defective work as allowed under section 16.

Although RCS did notify BHE of defective work, BHE submits that because BHE

was not terminated within twenty-four hours of the defective work notices, the

breaches must have been cured or waived and a new notice of defective work was

required from RCS. According to BHE, this waiver or cure of the breaches resulted

in BHE’s termination under section 17, termination for convenience, rather than for

cause under section 16. Thus, BHE maintains damages to RCS are inappropriate

because section 17 requires RCS to compensate BHE for BHE’s “out-of-pocket costs

for labor and material” related to “work performed . . . through the date of

termination[.]”

[¶9.] The circuit court found that BHE breached the subcontracts by failing

to proceed with work in an orderly and reasonable manner and by failing to obtain

necessary licenses to perform the work. The court found that “BHE was properly

terminated for cause under paragraph 16 of the Subcontract Agreement.” It also

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“specifically reject[ed] BHE’s contention that a new notice to cure was required to be

issued when the items set forth in the earlier notice were not completed. Morris

specifically testified as to receiving a written notice of termination, although the

written notice was not introduced at trial.” BHE has failed to demonstrate to this

Court that the circuit court’s findings of fact are clearly erroneous. It has also failed

to point us to language in the contract that required BHE to be ejected from the

construction premises within twenty-four hours after it received notice of defective

work. We affirm the court’s determination that RCS terminated the contracts for

cause under section 16 due to BHE’s breaches; thus, RCS was entitled to damages

pursuant to that provision.

Whether the court awarded damages to RCS on the Toyota Project for work outside
the scope of the subcontract.

[¶10.] Next, BHE contends that the court erred when it awarded back-

charges to RCS on the Toyota Project for items that were outside the scope of BHE’s

work as enumerated in the subcontract. It alleges that the court erroneously relied

on witness testimony to determine the scope of the work under the subcontract.

BHE contends that neither the final grading of the base course in preparation for

pavement nor the moving and placing of topsoil around the site was within the

scope of its work. “When contract language is unambiguous, extrinsic evidence is

not considered because the intent of the parties can be derived from within the four

corners of the contract.” Vander Heide, 2007 S.D. 69, ¶ 37, 736 N.W.2d at 835.

“However, when the language is ambiguous, we may go beyond the four corners to

ascertain the intent of the parties.” Id., 736 N.W.2d at 836. “A contract is not

rendered ambiguous simply because the parties do not agree on its proper

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construction or their intent upon executing the contract.” Id. (quoting Pesicka v.

Pesicka, 2000 S.D. 137, ¶ 10, 618 N.W.2d 725, 727).

[¶11.] In this case, after a review of the integrated agreement, we do not find

it ambiguous and need not address witness testimony on the scope of work. BHE

submitted a bid proposal that was incorporated into the agreement. The bid

proposal specified “Stock Pile Top Soil”, “Site Grading + or – .1 ft.” and “Final, .1 ft

grading, furnish & place separation fabric.” The subcontract also incorporated the

site specifications, including “Construction Drawing” C1.03R, which is the “Grading

Plan.” The Grading Plan clearly provided that “[c]ontours shown are finished

grade.” 3 The Grading Plan also provided that “[a]ll disturbed areas not covered

with building or concrete shall be restored per landscaping plan.” In light of the bid

proposal and subcontract, we need not look outside the four corners of the

agreement to determine the parties’ intent. BHE’s “site grading” and “final . . .

grading” was to be done in accordance with the grading plan, which included the

work that BHE now maintains is outside its scope. Additionally, we disagree with

BHE’s contentions that its scope of work “did not include any landscaping work,

specifically moving and placing topsoil around the site.” The subcontract and

Grading Plan clearly provide otherwise. Therefore, we affirm the circuit court’s

award of damages on the Toyota Project. 4

3. The grading plan provides notes in all caps, we have normalized the
capitalization for ease of reading.

4. Because we find no ambiguity in the agreement, we do not address BHE’s
contentions that the court erred by considering witness testimony on the
scope of the work.

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[¶12.] Further, section 16 of the subcontract provides for correcting and

replacing defective work. The quantity of work left to complete upon termination of

the subcontract and the quantity of defective work that needed to be corrected or

replaced are questions of fact. We do not find that the circuit court clearly erred in

its factual findings on either the scope of unfinished work covered by the

subcontract or the repairs to defective work.

Whether the court erred when it determined that RCS was entitled to attorney’s fees
under the subcontracts.

[¶13.] “South Dakota follows the American rule for attorney fees in ‘that each

party bears the burden of the party’s own attorney fees.’” Eagle Ridge Estates

Homeowners Ass’n, Inc. v. Anderson, 2013 S.D. 21, ¶ 28, 827 N.W.2d 859, 867

(quoting In re S.D. Microsoft Antitrust Litig., 2005 S.D. 113, ¶ 29, 707 N.W.2d 85,

98). There are two exceptions to the rule: “first, when a contractual agreement

between the parties entitles the prevailing party to attorney fees, and second, when

an award of attorney fees is authorized by statute.” Id. (quoting In re S.D. Microsoft

Antitrust Litig., 2005 S.D. 113, ¶ 29, 707 N.W.2d at 98). The circuit court awarded

attorney fees to RCS pursuant to section 6 of the subcontract agreements, which

provides:

To save harmless the Contractor and all other subcontractors
from any and all losses or damage (including without limiting
the generality of the foregoing, legal fees and disbursements)
paid or incurred by the Contractor to enforce the provisions of
the paragraph occasioned by the failure of the Subcontractor to
carry out the provisions of this Subcontract unless such failure
results from causes beyond the control of the Subcontractor.

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BHE maintains that this is an indemnity clause, as demonstrated by the “hold

harmless” language and thus does not allow for recovery between the two

contracting parties. 5 We disagree.

[¶14.] BHE relies on our decision in Icehouse, Inc. v. Geissler, 2001 S.D. 134,

636 N.W.2d 459. In Icehouse, we briefly addressed an indemnity provision in a

lease which provided that the lessee agreed to

indemnify and save [lessor] harmless from all penalties, claims,
demands, liabilities, expenses and losses, of whatever nature
arising from [lessee’s] use of the lease premise. This
indemnification shall extend to and include a reasonable
attorney fee incurred by [lessor] for any litigation to which the
[l]essor is made a party or threatened to be made a party and
which arises out of the use and occupation of the lease premises
by [lessee].

Id. ¶ 29, 636 N.W.2d at 466. We stated that the provision was inapplicable to the

instant case because such provisions “are generally recognized to provide indemnity

when third parties bring an action against the indemnitee, but not, as here, when

the dispute is between the two contracting parties.” Id., 636 N.W.2d at 466-67.

However, several of the cases we cited with approval in support of this proposition

recognize that the clear language of the parties’ agreement controls and may

indicate an intent to the contrary. 6 This case is distinguishable from Icehouse

5. “Indemnify . . . derives from indemnis (= harmless) combined with facere (to
make). Thus, indemnify has long been held to be perfectly synonymous with
hold harmless and save harmless.” A Dictionary of Modern Legal Usage 436
(2d ed. 1995). See also Indemnify (1), Black’s Law Dictionary (10th ed. 2014)
(“To reimburse (another) for a loss suffered because of a third party’s or one’s
own act or default; hold harmless.”).

6. See Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 21-
22 (2d Cir. 1996) (“Intent to provide for counsel fees as damages for breach of
(continued . . .)
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because the contracts contain more than one indemnification clause and the

language in section 6 clearly provides for and contemplates litigation between the

contracting parties. Section 6 of the subcontracts applies if the Contractor suffers

“losses or damage . . . to enforce the provisions . . . occasioned by the failure of the

Subcontractor to carry out the provisions of this Subcontract.” Such language

clearly indicates an intent that the provisions apply if the Subcontractor breaches

the subcontract and the Contractor incurs expenses to enforce the Subcontractor’s

duties.

[¶15.] Further indication that section 6 contemplates litigation between the

contracting parties can be gleaned from section 7 of the contract, which is an

indemnification clause that also allows for the recovery of attorney fees, providing:

Subcontractor agrees to assume entire responsibility and
liability . . . for all damages or injury to all persons, whether
employees or otherwise, and to all property, arising out of it,
resulting from or in any manner connected with, the execution of
the work provided for in this Subcontract . . . and agrees to
defend, indemnify and save harmless the Contractor . . . from all
such claims . . . for which the Contractor may be or may be
claimed to be liable and legal fees and disbursements paid or
incurred to defend Contractor and enforce the provisions of this
paragraph and the Subcontractor further agrees to obtain,
maintain and pay for such general liability insurance coverage

_________________________________________________
(. . . continued)
contract must be ‘unmistakably clear’ in the language of the contract. . . .
The language may be easily read as limited to third party actions . . . . The
award of fees cannot, therefore, be supported by the contract’s
indemnification clause.”)(citations omitted); Hooper Assoc., Ltd. v. AGS
Computers, Inc., 548 N.E.2d 903, 905 (N.Y. 1989) (“Inasmuch as a promise by
one party to a contract to indemnify the other for attorney’s fees incurred in
litigation between them is contrary to the well-understood rule that parties
are responsible for their own attorney’s fees, the court should not infer a
party’s intention to waive the benefit of the rule unless the intention to do so
is unmistakably clear from the language of the promise.”)

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and endorsements as will insure the provisions of the
paragraph.

As one court noted, “when confronted with indemnification provisions that include

both broad indemnity clauses and narrower clauses that specifically target third-

party claims, courts have determined that the broad provisions cover claims

between the contracting parties, thereby ensuring that neither clause is

superfluous.” In re Refco Sec. Litig., 890 F. Supp. 2d 332, 342 (S.D.N.Y. 2012)

(collecting cases). Such an approach is consistent with our longstanding rule that

“[t]he contract is to be read as a whole, making every effort to give effect to all

provisions.” Nelson v. Schellpfeffer, 2003 S.D. 7, ¶ 8, 656 N.W.2d 740, 743.

Accordingly, we agree with the circuit court. The language of section 6 is clear; it

applies to causes of actions between the contracting parties. In this case, that

includes the recovery of attorney fees by RCS because those fees are specifically

provided for, and RCS’s defense and counterclaims were to “enforce the provisions of

the paragraph occasioned by the failure of the Subcontractor to carry out the

provisions of [the] Subcontract[s].”

[¶16.] Lastly, BHE maintains that section 6 is ambiguous because of the

phrase “enforce the provisions of the paragraph occasioned by the failure of the

Subcontractor[,]” which fails to identify a specific paragraph. We agree with the

circuit court; this is certainly not a model of clarity, however, it does provide for the

payment of legal fees and disbursements. Notwithstanding its awkward

arrangement of words, the contract is not “capable of more than one meaning when

viewed objectively by a reasonably intelligent person who has examined the context

of the entire integrated agreement.” Vander Heide, 2007 S.D. 69, ¶ 37, 736 N.W.2d

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at 836. It is clear that the contracting parties intended section 6 to apply to actions

between them where they have otherwise provided for the possibility of third-party

suits. “When the words of a contract are clear and explicit and lead to no absurd

consequences, the search for the parties’ common intent is at an end.” Nelson, 2003

S.D. 7, ¶ 8, 656 N.W.2d at 743. Therefore, we affirm the court’s grant of attorney

fees.

[¶17.] RCS has moved for appellate attorney fees pursuant to SDCL 15-26A-

87.3. “[A]ppellate attorney fees may be granted ‘only where such fees are

permissible at the trial level.’” Ellingson v. Ammann, 2013 S.D. 32, ¶ 12, 830

N.W.2d 99, 102 (quoting Grynberg Expl. Corp. v. Puckett, 2004 S.D. 77, ¶ 33, 682

N.W.2d 317, 324). RCS asks for 60% of the fees and tax incurred in this appeal, the

same percentage the circuit court awarded. RCS is the prevailing party in this

appeal and has complied with the requirements of SDCL 15-26A-87.3. Therefore,

we grant RCS’s motion for appellate attorney’s fees in the amount of $10,696.07

plus tax in the amount of $641.76, for a total amount of $11,337.83.

Whether Morris is individually liability.

[¶18.] Through notice of review, RCS alleges that the circuit court erred

because it did not impose individual liability on Morris. BHE was administratively

dissolved as of May 14, 2009, prior to entering into the subcontracts with RCS. The

circuit court found that Morris, who signed the subcontracts on behalf of BHE, was

not aware of the dissolution until December 2010. BHE was not reinstated until

August of 2011.

[¶19.] The circuit court found that Morris had no personal liability because of

SDCL 47-1A-1422, which provides in relevant part:
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A corporation administratively dissolved under § 47-1A-1421
may apply to the Office of the Secretary of State for
reinstatement any time after the effective date of
dissolution. . . .
If the Office of the Secretary of State determines that the
application contains the information required by this section
and that the information is correct, the Office of the Secretary of
State shall cancel the certificate of dissolution and prepare a
certificate of reinstatement that recites that determination and
the effective date of reinstatement, file the original of the
certificate, and serve a copy on the corporation.
When the reinstatement is effective, it relates back to and takes
effect as of the effective date of the administrative dissolution
and the corporation resumes carrying on its business as if the
administrative dissolution had never occurred.

RCS asserts that this statute does not allow those acting on behalf of the

corporation during a dissolution period to be shielded from liability for acts

purportedly done on behalf of the corporation. Instead, RCS asserts that the

statute is silent on whether reinstatement retroactively shields corporate officers.

Because it is silent, RCS directs us to the common-law rule of agency principles,

which it contends is applicable in this case—“a person who makes a contract with a

third party purportedly as an agent on behalf of a principal becomes a party to the

contract if the purported agent knows or has reason to know that the purported

principal does not exist or lacks capacity to be a party to a contract.” Restatement

(Third) of Agency § 6.04 (2006). For the following reasons, the common-law rule is

inapplicable to this case.

[¶20.] Statutory interpretation is a question of law reviewable de novo.

Expungement of Oliver, 2012 S.D. 9, ¶ 5, 810 N.W.2d 350, 351. We have previously

addressed this statute on just one occasion. We stated that it “clearly provides upon

reinstatement the corporate existence ‘relates back’ as if no dissolution had taken

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place.” Yankton Ethanol, Inc. v. Vironment, Inc., 1999 S.D. 42, ¶ 14, 592 N.W.2d

596, 599. Accordingly, BHE has had a “seamless existence.” See Pannell v.

Shannon, 425 S.W.3d 58, 78 (Ky. 2014) (construing identical provision and holding

that “[t]he reinstatement is retroactive to the date of dissolution, and it is as if the

dissolution never occurred, giving the company a seamless existence. The

limitation on the agent’s liability simply for being an agent is likewise seamless.”).

Because the statute provides that it is “as if no dissolution . . . occurred,” and the

Secretary of State has “cancel[led] the certificate of dissolution[,]” the corporation

has never ceased existing, and Morris is not personally liable for the corporation’s

acts. SDCL 47-1A-1422; see also Mobridge Cmty. Indus., Inc. v. Toure, Ltd., 273

N.W.2d 128, 132 (S.D. 1978) (“The general rule is that the corporation is looked

upon as a separate legal entity until there is sufficient reason to the contrary.”).

The circuit court found no grounds existed for piercing the corporate veil, and BHE

has not asserted that the court erred in that determination. Therefore, we affirm.

Conclusion

[¶21.] The circuit court did not clearly err in determining that BHE had

breached the subcontracts. It correctly determined that BHE was properly

terminated pursuant to section 16 of the subcontract and awarded damages

appropriately. BHE was properly back-charged for work within the scope of the

Toyota Project that RCS was required to perform. Lastly, Morris is not personally

liable for the corporation’s acts because the corporation has had a seamless

existence according to SDCL 47-1A-1422.

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[¶22.] GILBERTSON, Chief Justice, and ZINTER and WILBUR, Justices,

and PARDY, Circuit Court Judge, concur.

[¶23.] PARDY, Circuit Court Judge, sitting for KERN, Justice, disqualified.

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