Construction Law Insights

Am. Cigar Factory, LLC v. City of Norfolk, 2020 Va. Cir. LEXIS 116 (City of Norfolk Cir. Ct. Aug. 14, 2020)

American Cigar Factory, LLC (“ACF”) purchased property located in the City of Norfolk (the “Property”) in September 2014 and developed plans to rehabilitate the American Cigar Factory building (the “Historic Structure”). Because the Historic Structure had fallen into disrepair, ACF reduced the four-story structure to three and a half walls – with no roof – and shored the south-facing wall with steel beams and concrete barriers. On June 29, 2015, ACF received a letter from the City of Norfolk (“City”) code enforcement official stating that the Historic Structure was unsafe and uninhabitable, ACF had 35 days to repair the building, and, if ACF failed to comply, the Historic Structure would be demolished. On October 9, 2016, an upper portion of the west-facing brick wall collapsed during a hurricane. Three days later, the City notified ACF that intended to demolish all structures on the Property. On October 14, 2016, the Court granted a temporary injunction. The

Court subsequently heard testimony from engineers that ACF’s bracing repairs were successful and the Historic Structure was safe. On November 21, 2016, the City and ACF entered into a settlement agreement (the “Settlement Agreement”), which allowed the City to demolish any structures on the Property if ACF did not commence construction within 150 days and provide written letters of intent from lenders and tax credit purchasers within 120 days. On April 21, 2017, ACF received an email form the City’s attorney stating that the City was going to demolish all structures on the Property. ACF sought a temporary injunction, which the Court denied because ACF was unlikely to establish compliance with the Settlement Agreement. In May 2017, the City demolished the Historic Structure, assessed the related costs (the “Demolition Costs”) against ACF, and attached associated liens to the Property.

On October 24, 2017, ACF entered into an agreement to sell the Property to S.L. Nusbaum Realty Co. (the “Nusbaum Sale”). On July 12, 2018, the City filed an action against ACF to sell the Property to recover the delinquent real estate taxes and amounts owed under the nuisance abatement lien (the “Lien Sale Case”). On January 24, 2019, the City and ACF entered into a Forbearance and Release Agreement (the “Forbearance Agreement”), which provided that, if the City was paid the outstanding amount it claimed it was owed at the time of the Nusbaum Sale, then the City would refrain from collecting any unpaid taxes or acting on any liens against the Property. At the Nusbaum Sale closing on December 19, 2019, ACF paid all amounts claimed to the City. ACF contended that, as a result of an overpayment to the City, two creditors who had liens on the Property were not paid the full amounts to which they otherwise were entitled. On December 30, 2019, the Court entered an Order dismissing the delinquent tax case with prejudice. ACF filed a complaint seeking reimbursement of the Demolition Costs, contending that the City was not authorized to assess the costs against ACF or attach liens to the Property. The City filed a demurrer and a plea in bar, claiming that ACF did not have standing.

The Court sustained the City’s demurrer based on ACF’s lack of standing, but granted ACF leave to amend its Complaint. Courts determining standing must consider whether the party has a sufficient interest in the subject matter of the case so that the parties will be actual adversaries and the issues will be fully and faithfully developed. Based on the face of ACF’s Complaint, the Court was unclear on who paid the Demolition Costs. Because ACF presented testimony at a hearing that it paid the Demolition Costs, the Court granted ACF leave to amend its Complaint.

The Court overruled the City’s plea in bar on the basis of res judicata. Generally, res judicata encompasses four preclusive effects (merger, direct estoppel, bar, and collateral estoppel), which can be segregated into two categories, i.e. claim preclusion and issue preclusion. A final judgment on the merits concludes questions actually raised and decided by the parties and every claim which property belonged to the subject litigation that, through reasonable diligence, should have been raised at the time. The prior Lien Sale Case was voluntarily dismissed with prejudice after the parties executed the Forbearance Agreement, which constituted a final judgment on the merits. The City and ACF were the same parties that litigated the Lien Sale Case and it did not matter that ACF was the defendant in the Lien Sale Case and the plaintiff in the current case. Although the Lien Sale Case and the current case had elements that are related, the two cases did not arise out of the same conduct, transaction, or occurrence. The Lien Sale Case arose before the Forbearance Agreement and this case arose after the Forbearance Agreement. In the Lien Sale Case, the City sought to recover the Demolition Costs incurred after ACF failed to comply with the Settlement Agreement. In this case, the claim for relief focuses on the City’s right to assess the Demolition Costs against ACF despite the provisions of the Forbearance Agreement. The clause in the Forbearance Agreement allowing ACF to contest the City’s assessment of the Demolition Costs also evidenced the parties’ expectations that ACF could assert the present case.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

Thomas Wolf 002 Kenneth Stout 002 Jason Goldsmith 002


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