2:23-bk-02832
Bankr. D. Ariz.Jul 15, 2025Background
- Legacy Cares, Inc. was formed to construct a large sports and entertainment complex, financed by over $250M in municipal bonds.
- Kearney Electric performed electrical work as a subcontractor to Okland Construction (the general contractor); the project was complex and changed scope frequently via numerous change order requests (CORs).
- Kearney alleged it was owed about $5 million at project completion; Okland and Legacy were both unable to pay all claims. Legacy defaulted, leading to bankruptcy, mechanics’ liens, and foreclosure actions.
- Amid bankruptcy, the Sports Park was sold at a steep loss, and settlement discussions ensued over payouts to contractors; a “no-look” agreement settled most claims at a 75.14% payout, but a dispute persisted between Okland and Kearney over the amount actually due to Kearney on its indirect claim.
- The court needed to determine whether Okland could withhold funds, reduce Kearney’s claim, or deduct attorney’s fees, and who had the authority to approve or reject Kearney’s CORs.
- A $500,000 holdback was set aside pending resolution of the Kearney-Okland dispute in bankruptcy court.
Issues
| Issue | Plaintiff's Argument (Kearney) | Defendant's Argument (Okland) | Held |
|---|---|---|---|
| Can Okland reduce or withhold Kearney’s pass-through payment from sale proceeds? | Okland must pay 75.14% of Kearney’s full indirect claim approved by Legacy; Okland just a conduit. | Only CORs approved in writing are payable; Okland can pay a lower amount reflecting its/Legacy’s challenges. | Okland must pay Kearney 75.14% of $3,169,965; cannot withhold/reduce payment or deduct fees. |
| Are written approvals of CORs by Okland required for Kearney’s payment? | Legacy and Pacific’s acceptance in the settlement suffices—formal Okland signature not required. | Written approval by both Okland and Legacy is a contract condition precedent. | Legacy’s settlement acceptance overrides; Okland cannot unilaterally block payment. |
| May Okland deduct/allocate legal fees from Kearney’s awarded payment? | No basis to deduct; fees were non-apportioned and not solely for the benefit of Kearney. | Common Fund Doctrine allows pro rata deduction of fees incurred for recovery. | Deduction unjustified; common fund doctrine requirements not met; Okland cannot deduct fees. |
| Did Kearney agree to a lower labor rate or payment reduction beyond 75.14%? | Only agreed to isolated rate reduction; never accepted global reduction or lower payout. | Claims Kearney agreed to reductions reflected in Okland’s accounting. | Kearney did not agree to further reduction; only 75.14% accepted by all parties; 76.5% rejected. |
Key Cases Cited
- Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240 (U.S. 1975) (sets out common fund doctrine factors for attorney’s fee awards)
- Burke v. Arizona State Retirement System, 77 P.3d 444 (Ariz. Ct. App. 2003) (attorney fees awarded only when authorized by contract/statute; explained Arizona common fund doctrine)
- Chambers v. NASCO, Inc., 501 U.S. 32 (U.S. 1991) (fee awards in federal courts generally follow American Rule; bad faith exceptions)
- Kerr v. Killian, 3 P.3d 1133 (Ariz. Ct. App. 2000) (application of the common fund doctrine and its requirements under Arizona law)