Construction Law Insights

Krauss v. Apex Custom Homes, LLC, 2019 Va. Cir. LEXIS 1203 (Loudoun Cnty. Cir. Ct. Nov. 26, 2020)

On March 24, 2015, Paul and Holly Krauss (“Krausses”) contracted with Scott Prendergast (“Prendergast”) and Apex Custom Homes, LLC (“Apex Homes”) for the construction of a home (the “Home”) and with Daniel Morgan (“Morgan”) and Apex Custom Pools, LLC (“Apex Pools”) for the construction of a swimming pool at the Home (the “Pool”). Prendergast was the sole member of Apex Homes. Morgan was the sole member of Apex Pools. Apex Pools, through Morgan, used Apex Homes’ general contractor license, but neither Prendergast nor Apex Homes knew that Morgan used the general contractor’s license of Prendergast or that Morgan was unlicensed when Prendergast referred the Krausses to Apex Pools. Before the bench trial, Apex Pools filed for bankruptcy.

The Home passed inspection on September 15, 2016 and the Krausses moved in on September 16, 2016. The Krausses and Apex Homes conducted a 2-day walkthrough and, on September 24, 2016, Apex Homes issued a punch list. Between September 2016 and February 2017, Apex Homes performed the punch list work. On January 26, 2017, Apex Homes issued a final punch list. On February 8, 2017, Apex Homes sent the Krausses a letter stating the original punch list was complete. A dispute subsequently arose with the Krausses claiming Apex Homes needed to perform additional work and Apex Homes taking the position that all work was complete.

The Krausses claimed Apex Homes breached the Home Contract ($350,000.00 in claimed damages) and Apex Pools breached the Pool Contract ($195,000.00 in claimed damages) by performing work defectively and failing to complete their work. The Krausses sought to pierce the corporate veils and contended that Prendergast is an alter ego of Apex Homes and Apex Pools, and that Apex Homes is an alter ego of Apex Pools. Apex Homes and Prendergast contended that neither was an alter ego of Apex Pools, that Prendergast was legally separate and distinct from Apex Homes and Apex Pools, that Apex Homes did not perform work defectively, and that Apex Homes fully performed and completed its work. With respect to the allegedly defective work, Apex Homes argued that the Krausses (i) failed to make a proper Warranty Notice or follow the Apex Homes Contract’s Dispute Resolution Procedures and (ii) failed to present competent evidence of breach of the standard of care or damages. As to the Krausses claims that Apex Homes failed to complete its work, Apex Homes argued that the Krausses (i) waived those claims by failing to include them in the punch list and (ii) failed to present competent evidence of damages. Apex Homes claimed the Krausses’ Marketing Fee claim failed because it was the subject of a separate dispute with Creighton Farms that was resolved by a settlement agreement. In its Counterclaim, Apex Homes alleged that the Krausses breached the Apex Homes Contract by failing to pay $22,849.00 upon substantial completion and that Apex Homes provided the Krausses with approximately $90,000.00 in benefits outside the Apex Homes Contract, which the Krausses had not paid.

Proof of damages is an essential element of a breach of contract claim. Damages for breach of contract claims are generally limited to the pecuniary loss sustained. Such damages may be proven by either the “cost rule” or the “value rule.” Under Virginia law, claims of defective workmanship under a construction contract are express warranty claims. The Home Contract contained a warranty that required the Krausses give written notice of warranty claims via certified mail, return receipt requested, to Apex Homes at least 30 days before the expiration of the warranty period (the “Warranty Notice”). The Home Contract’s warranty provision also contained a mandatory dispute resolution procedure that required mediation before commencing litigation. The Krausses did not provide Apex Homes with any Warranty Notice or offer to submit to mediation prior to filing suit, so their claim was procedurally barred by the Home Contract. Additionally, the Home Contract contained a walkthrough procedure, which required the Krausses to create a punch list upon Apex Homes’ substantial completion of the Home. Except for latent or hidden defects, any work not listed on the punch list was deemed accepted by the Krausses under the Homes Contract. The items complained of by the Krausses could be discovered by visual inspection, but were not included in any punch list.

Even if the Krausses’ claims were not procedurally barred, the Krausses failed to produce competent evidence to show a breach of the standard of care or any resulting damages. No expert testimony was provided to establish the applicable standard of care in the construction industry for the allegedly defective work, a breach of that standard of care, or how much it would cost to correct or complete the allegedly defective work. As to the Krausses’ damages for delays claim, the Court found that the Krausses failed to present evidence to support their averment that they incurred additional mortgage, insurance, and related costs, which are considered to be consequential damages. Even if the Krausses had presented such evidence, the Apex Homes Contract barred the claim because it limits Apex Homes’ liability to its warranty obligations and excludes liability for consequential damages.

Next, the Court held that the Krausses’ request to pierce the corporate veil failed as a matter of law. The decision to ignore the separate existence of a corporate entity and impose personal liability upon shareholders for debts of the corporation is an extraordinary act to be take only when necessary to promote justice. Factors a court will consider in determining whether an individual equity holder is an alter ego of the corporation include (i) whether the corporation observed corporate formalities, (ii) whether the corporation was adequately capitalized, and (iii) whether the individual and the entity commingled assets.

No Virginia authority has approved veil-piercing between individuals or entities that have no common ownership. As to Apex Pools, Morgan was the sole member of Apex Pools at the time Apex Pools entered the unsigned Apex Pools Contract with the Krausses. As such, there was no unity of interest between Apex Homes or Prendergast and Apex Pools. Additionally, there was no evidence that Apex Pools failed to observe corporate formalities, that Prendergast or Apex Homes were de facto equitable owners of Apex Pools or exercised any control over Apex Pools. As to Apex Homes, evidence showed that it observed corporate formalities, maintained a bank account separate from Prendergast’s bank account, transacted business like a small business, and was well capitalized.

As to the Krausses’ claim against Apex Pool, the Court held that it failed as a matter of law. Virginia law required the Krausses to prove the cost to complete the contract according to its terms or the cost to repair what was done so that the contract terms are met. The Krausses’ expert, however, did not perform any tests, was unable to opine on the causation of any alleged deficiencies or what needed to be fixed, and provided an estimate for the complete demolition and reconstruction of the installed pool and the addition of new features. As such, the Court found the Krausses’ expert’s testimony unhelpful in determining the cost of repair required to be performed under the Apex Pools Contract.

The Court held that Apex Homes’ breach of contract counterclaim for $22,849.00 failed because Apex Homes never presented evidence that it provided the Krausses with a final release of lien and indemnity against liens, warranties relating to the Home, and documents reasonably required by the Krausses, which were conditions precedent to Apex Homes’ entitlement to receive its final payment. Finally, the Court held that Apex Homes’ unjust enrichment counterclaim for $90,000.00 failed because there was an express written contract covering the subject matter of the claim and no change orders were executed, as required by the Apex Homes Contract, for the items included in the claim.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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