Bankruptcy Court Holds That “Economic Waste” Doctrine, as Adopted in Wisconsin, Prevented Owner From Recovering Costs to Repair Defectively Designed Digester and Awards No Damages, Even Though the Digester Was Not Designed to the Applicable Code

WTE-S&S AG Enters., LLC v. GHD, Inc., 2017 Bankr. LEXIS 2343 (Bankr. N. D. Ill. August 18, 2017) 

This breach of contract dispute arises out of a contract to design and build a cow-manure digester on a farm in Wisconsin.  The digester vessel designed and constructed by Defendant, DVO, Inc. (formerly known as GHD, Inc.), consisted of a 300-foot long tank with two side-by-side chambers which were each 35 feet wide.  A thick concrete cover sat atop the vessel to prevent “free oxygen” from entering the digester.  A center wall ran the length of the vessel, separating the two chambers and also serving as the interior load-bearing wall.

The Debtor/owner commenced this action against DVO, contending, among other things, that the interior center wall footing of the vessel was defectively designed in that it was undersized and not compliant with the applicable code for waste-storage facilities.  Debtor’s expert testified that the undersized and overstressed wall footings could lead to settlement of the vessel and cracks in the foundation, which would compromise its structural integrity.  Debtor’s expert further testified that to properly support the vessel weight, the currently constructed three-foot wall footing needed to be three-and-a-half to four foot wide.

The court agreed that DVO’s design was defective and constituted a breach of the contract because it failed to comply with the applicable code.  However, applying the “economic waste” doctrine, the court denied Debtor’s request for damages of $988,475 to replace the entire vessel or, in the alternative, $655,000 to shut down and clean out the vessel to check for cracks or settlement issues. 

In so holding, the court first summarized Wisconsin law regarding the measurement of damages.  The court noted that there are three ways to measure damages occasioned by injury to property: (1) the cost of repair; (2) the cost to restore; and (3) the diminished value of the property (i.e. the hypothetical value of the property without the defect, minus the actual value of the current property with the defect.)  If the cost-of-repair/restoration approach and the diminished-property-value approach result in different damages estimates, the court must award the smaller of the two.  The court further explained that where reconstruction involves unreasonable “economic waste”, then the measure of damages is the difference between the value the building would have had if properly constructed and the value that the building actually has as constructed.  Repairs result in “economic waste” when they either result in “unreasonable destruction of the work done” or the cost of the repairs is “materially disproportionate to the value of the corrections.”

The court noted that Debtor offered no evidence to indicate that an inspection of an empty/cleaned vessel would reveal any damage, or that the wall footing and/or vessel floor had settled beyond the parties’ expectations or that any cracks had formed in the floor slab.  Nor did Debtor offer any evidence that the vessel was leaking or failed to operate safely or effectively due to the lack of code compliance.  In short, the court held that Debtor had failed to prove that the structural integrity of the vessel had been compromised in any way because of the undersized center wall footing.  Given these facts, the court found that the “economic waste” doctrine required it to award as damages the smaller of the estimates calculated under the cost-of-repair/restoration approach and the diminished-property-value approach.  The court found that the undersized wall footings had not diminished the value of the property at all, and thus, refused to award Debtor any damages for the design defect.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Robert A. Gallagher

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