The state prison system suffered another legal setback in its seven-year journey to avoid paying $207,000 to an insurer after contractors installed the wrong electric generator at a Cleveland detention center.

The Tenth District Court of Appeals on Tuesday upheld a ruling by the Ohio Court of Claims awarding Selective Insurance Company of America $207,000 from the Ohio Department of Rehabilitation and Correction (ODRC). The funds will reimburse Selective for paying a subcontractor working on the Northeast Pre-Release Center that was not paid after ODRC disputed the work.

ODRC had hired DDC+. Inc., as the principal contractor to upgrade the electric generator at the Pre-Release Center. In filing its bid in February 2007, DDC secured a contract bond from Selective to insure its work. DDC subcontracted with Buckeye Power Sales Company to purchase and install the new generator.

While the contract called for a front access control panel, Buckeye installed one with a rear access panel. ODRC indicated the generator didn’t meet the plan and failed a state inspection. Buckeye agreed to replace and reinstall the correct generator with no additional cost to the state. Buckeye claimed DDC did not pay it for the work, and it filed an affidavit of mechanic’s lien for $359,000 with DDC and ODRC.

After not receiving payment, Buckeye sought funds from Selective, which ultimately over the course of the two years paid Buckeye $207,000. Buckeye settled for a total of $331,000 with DDC paying $100,000 and the state paying about $24,000. Selective then sought recovery of the $207,000 it paid Buckeye from the state. The insurer argued that state law required ODRC to hold the $359,000 in escrow after Buckeye filed its lien. Instead, Selective argued, ODRC violated the law by paying DDC after it received Buckeye’s lien, which DDC kept.

Writing for the Tenth District, Judge Gary Tyack noted the long procedural history of the case. While Selective originally filed suit in the Franklin Common Pleas Court in 2009 against DDC and the state, the court determined that Selective needed to pursue its case in the Court of Claims. The Court of Claims disagreed that it had jurisdiction and the Tenth District in 2011 ruled the Court of Claims should hear the case. In November 2012, the Court of Claims granted summary judgment to Selective agreeing the state jumped the gun in paying DDC when Buckeye had a claim pending. ODRC appealed that decision back to the Tenth District.

In affirming the Court of Claims decision, Judge Tyack ruled that R.C. 1311.26 gave Buckeye the right to serve the affidavit of lien on ODRC, and that RC 1311.28 requires a government entity to detain funds in an escrow account for the amount of the lien until a court hears arguments regarding the validity of the lien or the parties come to an agreement.

“An affidavit of claim constitutes a stop notice due to the public authority, preventing the payments of moneys due to the principal contractor,” Judge Tyack wrote. ODRC had determined the work by Buckeye was defective and its lien would be rejected, so it did not detain the funds. Judge Tyack said ODRC can’t take it upon itself to decide that.

Because Selective believed it had to pay Buckeye, it made the payments and then sought the $207,000 back from ODRC for violating the procedures presented in RC 1311.28. Judge Tyack wrote that Selective was financially harmed because had ODRC withheld the payment to DDC it could have paid Buckeye and Selective’s bond would not have been tapped.

“ODRC is not entitled to recover damages from Selective for its own negligence in failing to detain funds,” Judge Tyack concluded.

Judges Susan Brown and William A. Klatt concurred in the decision.

Selective Ins. Co. of Am. v. Dept. of Rehab. & Corr., 2015-Ohio-741
http://www.supremecourt.ohio.gov/rod/docs/pdf/10/2015/2015-Ohio-741.pdf
Civil Appeal From: Court of Claims
Judgment Appealed From Is: Upheld
Date of Judgment Entry on Appeal: March 3, 2015

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