Erdman Company et al v. Phoenix Land & Acquisition, LLC et al
Filing
313
ORDER granting 190 Motion for Partial Summary Judgment. Phoenix's fraud and ADTPA claims regarding Myers and Erdman's relationship are hereby Dismissed with Prejudice. Signed by Honorable Susan O. Hickey on July 17, 2013. (lw)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
FORT SMITH DIVISION
ERDMAN COMPANY; and ERDMAN
ARCHITECTURE & ENGINEERING
COMPANY
VS.
PLAINTIFFS
CASE NO. 2:10-CV-2045
Lead case
PHOENIX LAND & ACQUISITION, LLC;
PHOENIX HEALTH, LLC
DEFENDANTS
ERDMAN COMPANY; and ERDMAN
ARCHITECTURE & ENGINEERING
COMPANY
THIRD PARTY PLAINTIFFS
VS.
DATA TESTING, INC.;
OTIS ELEVATOR COMPANY; and
THIRD PARTY DEFENDANTS
______________________________________________________________________________
PHOENIX HEALTH, LLC; and
IPF, LLC
VS.
CONSOLIDATED PLAINTIFFS
CASE NO. 2:11-CV-2067
Member Case
ERDMAN ARCHITECTURE &
ENGINEERING COMPANY; and
OTIS ELEVATOR COMPANY
CONSOLIDATED DEFENDANTS
ORDER
Before the Court is Erdman Company and Erdman Architecture & Engineering
Company’s (together, “Erdman”) Motion for Partial Summary Judgment (Fraud and ADTPA
Regarding Architect). (ECF No. 190). The Phoenix entities have responded (ECF No. 217), and
Erdman has replied (ECF No. 242). The matter is ripe for the Court’s consideration. For the
following reasons, the motion will be granted.
BACKGROUND
Phoenix Land & Acquisition (“Phoenix”) entered into a contract with Erdman Company
in December 2007 to design and build a hospital addition in Fort Smith. While drilling a hole to
install an elevator on the project, the drilling company breached an abandoned mine shaft,
causing subsidence and costly remediation work. That cost, according to Phoenix, left it unable
to afford the cost of finishing the project. Phoenix blames Erdman for that mine breach and the
ensuing damages. Erdman, Phoenix argues, approved an elevator design that entailed drilling
several feet below the depth of its existing geological survey. Had it not done so, or had it done
another survey, Phoenix contends, Erdman would not have breached the mine and Phoenix
would not have been damaged.
Phoenix also claims that Erdman overbilled on the project. The overbilling allegedly
came to several million dollars. Erdman was able to overbill, according to Phoenix, because the
architect signing off on Erdman’s payment applications, George Myers, was really working for
Erdman instead of representing Phoenix’s interests. Myers allegedly held himself out as being
“independent,” but had Phoenix known of Myers’s close connection to Erdman, it says it would
not have relied on Myers in approving the allegedly overstated payment applications.
Phoenix brings two main claims against Erdman premised on its misunderstanding of
Myers and Erdman’s relationship. First, it argues that Erdman and Myers fraudulently
misrepresented their relationship. Second, it argues that the misrepresentation also violated the
Arkansas Deceptive Trade Practices Act. Erdman now moves for summary judgment on those
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claims, arguing that the undisputed facts show that Erdman and Myers did not conceal their
relationship, and that Phoenix could not legitimately have been misled about it.
STANDARD OF REVIEW
The standard of review for summary judgment is well established. The Federal Rules of
Civil Procedure provide that when a party moves for summary judgment:
The court shall grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.
Fed. R. Civ. P. 56(a); Krenik v. County of LeSueur, 47 F.3d 953 (8th Cir. 1995). The Supreme
Court has issued the following guidelines for trial courts to determine whether this standard has
been satisfied:
The inquiry performed is the threshold inquiry of determining whether there is a
need for trial—whether, in other words, there are genuine factual issues that
properly can be resolved only by a finder of fact because they may reasonably be
resolved in favor of either party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). See also Agristar Leasing v. Farrow,
826 F.2d 732 (8th Cir. 1987); Niagara of Wisconsin Paper Corp. v. Paper Indus. Union-Mgmt.
Pension Fund, 800 F.2d 742, 746 (8th Cir. 1986). A fact is material only when its resolution
affects the outcome of the case. Anderson, 477 U.S. at 248. A dispute is genuine if the evidence
is such that it could cause a reasonable jury to return a verdict for either party. Id. at 252.
The Court must view the evidence and the inferences that may be reasonably drawn from
the evidence in the light most favorable to the nonmoving party. Enterprise Bank v. Magna
Bank, 92 F.3d 743, 747 (8th Cir. 1996). The moving party bears the burden of showing that there
is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Id. The
nonmoving party must then demonstrate the existence of specific facts in the record that create a
genuine issue for trial. Krenik, 47 F.3d at 957. A party opposing a properly supported motion for
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summary judgment may not rest upon mere allegations or denials, but must set forth specific
facts showing that there is a genuine issue for trial. Anderson, 477 U.S. at 256.
DISCUSSION
I.
Fraudulent misrepresentation
An Arkansas fraudulent misrepresentation claim requires proof of: (1) a false
representation of material fact; (2) knowledge by the maker that the representation is false; (3)
the maker’s intent to induce action in reliance on the representation; (4) the hearer’s justifiable
reliance on the representation; and (5) damages caused by that reliance. Hampton v. Taylor, 318
Ark. 771, 777, 887 S.W.2d 535, 539 (Ark. 1994). Proof must be by a preponderance. Id.
Assuming all of the other elements are met, here the Court still finds as a matter of law
that “a jury could not [conclude] reasonably that [Phoenix] justifiably relied on [Myers]’s alleged
misrepresentations” in the face of overwhelming evidence that the representations were false.
McAnally v. Gildersleeve, 16 F.3d 1493, 1494 (8th Cir. 1994). 1
“Justifiable reliance is an important element of fraud and the absence of proof” on that
element causes plaintiff’s fraud claim to fail. First Financial Fed. Savings & Loan v. E.F. Hutton
Mortg. Corp., 652 F. Supp. 471, 474 (W.D. Ark. 1987). The reliance standard for
misrepresentations by positive statement and ones by silence are slightly different. Lane v.
Midwest Bancshares Corp., 337 F. Supp. 1200, 1208 (E.D. Ark. 1972). A party relying on
misrepresentation-by-silence must show “that the ascertainment of the undisclosed fact was not
within the reach of the [party]’s diligent attention or observation.” Brookside Village Mobile
Homes v. Meyers, 301 Ark. 139, 142, 782 S.W.2d 365, 367 (Ark. 1990).
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In assuming that Myers actually made a misrepresentation, the Court is merely taking the facts in Phoenix’s favor,
as it must do at the summary-judgment stage. Quinn v. St. Louis County, 653 F.3d 745, 750 (8th Cir. 2011). The
Court takes no opinion on the truth of Phoenix’s claim that Myers actually made a misrepresentation.
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A party relying on an affirmative misrepresentation must show that, exercising ordinary
care, it did not nor should not have known that the information was false. Union County v. Piper
Jaffray & Co., 741 F. Supp. 2d 1064, 1112 (S.D. Iowa 2010) (quoting Pollman v. Belle Plaine
Livestock Auction, Inc., 567 N.W.2d 405, 410 (Iowa 1997)). Indeed, it is justifiable reliance, not
blind reliance, that is required. Id. (quoting Spreitzer v. Hawkeye St. Bank, 779 N.W.2d 726, 737
(Iowa 2009)). And where an oral representation contradicts a written one, “reliance on the oral
representation…can be utterly unjustified in the face of a clear written contradiction.” Id.
(quoting Spreitzer, 779 N.W.2d at 726) (internal citations omitted). In sum, “a plaintiff must
‘observe the obvious[.]’” Waldner v. Carr, 618 F.3d 838, 847 (8th Cir. 2010) (quoting Spreitzer,
779 N.W.2d at 737).
In this case, there could be no misrepresentation-by-silence. That is because Phoenix’s
contract with Erdman disclosed, in both its terms and its nature, the fact that the design work
would be provided by Erdman’s employees or its wholly owned subsidiary.
First, the contract’s terms disclosed that Erdman’s subsidiary would provide design
services. Under the subsection titled “Basic Design Services,” the contract stated:
11.1.2. Design services shall be provided through qualified, licensed design
professionals employed by or selected and paid by Design-Builder. Persons,
other than employees of Design-Builder, or entities providing Design-Services to
the Project under a subcontract with Design-Builder are as follows:
MEA1, Inc. (a wholly owned subsidiary of Marshall Erdman & Associates,
Inc.) d/b/a MEA 1, Inc. of Wisconsin–Architectural and Engineering
Services.
(ECF No. 198-1, at 19-20). Thus, Phoenix was on notice that the default contract situation was
for Erdman, through its employees or subcontractors, to provide design services, and that
Erdman’s wholly owned subsidiary was the design subcontractor of choice.
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Second, the fundamental nature of design-build contracts, the type of contract Erdman
and Phoenix had, put Phoenix on notice that design services would be arranged and controlled by
the contractor. “The essence of the design-build process is that the owner contracts with one
entity responsible for both the design and construction services.” Philip L. Bruner & Patrick J.
O’Connor Jr., 2 Bruner & O’Connor on Construction Law § 6:34 (2012). In fact, Ed Hickman,
Phoenix’s representative, chose the design-build model precisely to avoid designer–contractor
disputes by combining those entities. Speaking of such disputes, Hickman said in his deposition:
“And I didn’t want that conflict, so I thought, if we went with a design build, they would at least
be the same entity that I could talk to to try to work out a dispute.” (ECF No. 198-1, at 11). Dr.
Keith Bolyard, another of Phoenix’s representatives, also stated that the reason Erdman was
selected for the project was “to put the design part and the build part closer together, to use that
type of firm as opposed to—as opposed to what we had before.” (ECF No. 198-2, at 16).
Of course, although design-build contracts are growing in popularity, one of their
downsides is obvious: they “leav[e] the owner with no real advocate in the design or construction
process[.]” Bruner, 2 Bruner & O’Connor on Construction Law § 6:15; see also Mark C.
Friedlander, A Primer on Industrial Design/Build Construction Contracts, 14 CONSTR. LAWYER
3, 3 (1994) (“[I]n a plan-and-spec relationship, the design professional has a business incentive
to report to the owner any problems observed with the contractor or the construction, whereas in
a design/build relationship, the opposite incentive often exists.”); Susan Linden McGreevy, What
You Need to Know About Design-Build Contracts, 18 PRACTICAL REAL ESTATE LAWYER 7, 15
(2002) (“In the past, [owners] have turned to the design professionals to be their agents, their
eyes and ears, their advocates. In design-build, that design professional is now on the other side
of the table.”).
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Based on the contract’s nature and terms, then, Phoenix was on notice that the default
relationship between Erdman and the project designer would be a close one; indeed, that it would
be one of explicit association. Therefore, to make out a fraudulent misrepresentation claim,
Phoenix must show more than mere silence—it must show an affirmative misrepresentation. 2
Phoenix claims that such a misrepresentation came from designer George Myers.
According to the summary-judgment affidavit of Ed Hickman, Myers “held himself out at all
times to be independent of the contractor,” and made “statements and representations that he was
an independent architect[.]” (ECF No. 225, at 5; 8). That is the closest Phoenix gets to alleging
any specific affirmative statement on which they could rely in believing that Myers was
independent of Erdman and was protecting Phoenix’s interests.
However, even assuming Myers did claim to be an independent architect, Phoenix could
not justifiably have relied on that claim in the face of all that it knew. First, Hickman knew that
Myers worked for Erdman, at least in the design part of the firm. Part of his cross-examination
deposition testimony went as follows:
Q.
And who did you understand George Myers to be employed by?
A.
The design part of the firm, whichever part that was, because he’s in the design.
(ECF No. 198-3, at 25).
2
The testimony and report of James Atkins, Phoenix’s architectural expert, does not support a contrary conclusion.
Atkins’s position on this issue seems to be that, although the contract between Erdman and Phoenix was labeled
“design build contract,” and although MEA1 was listed as a wholly owned subsidiary of Erdman, and although both
of Phoenix’s representatives stated that they intentionally chose a design-build model so that there would be only
one point of contact, nevertheless Myers and MEA1 behaved at times like they were providing “normal architectural
services,” and Phoenix was therefore entitled to see Myers as an ordinary architect unconnected with Erdman. (ECF
No. 224-14, at 6-9). On top of that, Atkins claims that by acting at times like a normal architectural firm, even in the
face of explicit evidence that it was not one, Myers and MEA1 became obligated to disclose their conflict of interest
with Erdman. (ECF No. 224-14-, at 8). However, in light of the fact that the contract presumed a conflict of interest
between Myers and Erdman, the Court finds as a matter of law that no disclosure was required above what was in
fact given.
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Q.
…You did know, didn’t you, that George Myers was an employee of what is
today called Erdman Company?
A.
I knew that George Myers was the employee of the design part of Erdman
Company….
(ECF No. 198-4, at 13). Moreover, Hickman admitted on cross-examination that the signature
block on Myers’s emails said: “George Myers, AIA, Senior Project Design Manager, Marshall
Erdman & Associates.” (ECF No. 198-4, at 13).
Dr. Bolyard also admits to understanding that Myers and Erdman were connected. First,
when asked if he knew what counterclaims Phoenix was bringing against Erdman in this case,
among the claims Dr. Bolyard stated was: “There’s design—faulty design by the architect side of
Erdman.” (ECF No. 198-2, at 14). Dr. Bolyard also refers to Erdman being hired “as the
contractor and the architect.” (ECF No. 198-2, at 15).
In the face of this evidence, Phoenix should have known, exercising ordinary care, that
any claim of independence by Myers was patently false. Phoenix could not, as a matter of law,
have justifiably relied on that misrepresentation. Accordingly, Erdman is entitled to summary
judgment on Phoenix’s fraudulent-misrepresentation claim regarding Myers’s approval of
overstated payment applications.
II.
Arkansas Deceptive Trade Practices Act
For its ADTPA claim, Phoenix relies on the statute’s catch-all provision, which prohibits
“[e]ngaging in any other unconscionable, false, or deceptive act or practice in business,
commerce, or trade.” ARK. CODE ANN. § 4-88-107(a)(10); State ex rel. Bryant v. R & A Inv. Co.,
336 Ark. 289, 295, 985 S.W.2d 299, 302 (Ark. 1999). Phoenix argues that the same
misrepresentation by Myers and Erdman that supports its fraudulent-misrepresentation claim also
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constituted a false or deceptive business practice. Like its misrepresentation claim, Phoenix’s
ADTPA claim must rest on an affirmative statement, since the default contract situation in this
case presumed a connection between Myers and Erdman.
The ADPTA’s catch-all provision was intended to encompass more than just traditional
fraud. Curtis Lumber Co. v. La. Pac. Corp., 618 F.3d 762, 778–79 (8th Cir. 2010). For that
reason, justifiable reliance, the missing element that dooms Phoenix’s fraudulentmisrepresentation claim, is not an element of a catch-all deceptive-trade-practices claim. See
Group Health Plan, Inc. v. Philip Morris Inc., 621 N.W.2d 2, 13 (Minn. 2001) (Under
Minnesota’s similar consumer-protection statute, “it is not necessary to plead individual
consumer reliance[.]”).
However, while reliance is not an element, causation is. Ashley County v. Pfizer, Inc., 552
F.3d 659, 666 (8th Cir. 2009). Moreover, in certain cases reliance is so wrapped up in causation
that it must in fact be proved as a predicate to showing causation. As in this case,
“where…plaintiffs allege that their damages were caused by deceptive, misleading, or fraudulent
statements or conduct in violation of the [consumer protection] laws, as a practical matter it is
not possible that the damages could be caused by a violation without reliance on the
statements[.]” Group Health Plan, 621 N.W.2d at 13. “Because [Erdman] here allegedly made
an affirmative misrepresentation and [Phoenix] could prove [it] sustained damages…only by
demonstrating [it] relied upon a [statement], the Court concludes causation includes reliance in
this case.” Picus v. Wal-Mart Stores, Inc., 256 F.R.D. 651, 658 (D. Nev. 2009).
Applying that law, the question becomes whether a reasonable jury could conclude on the
facts of this case that Phoenix relied on Myers’s alleged claim to be an “independent” architect in
making the overstated progress payments Erdman requested. It is possible, though unlikely, for
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Phoenix to have actually relied on Myers’s statements even if that reliance was unjustified;
Phoenix could have willfully ignored all the signs of Myers’s affiliation with Erdman. However,
the deposition testimony of Dr. Bolyard belies that possibility and precludes a reasonable jury
from finding reliance—even actual reliance—in this case.
In his deposition cross-examination, Dr. Bolyard was asked if he had any problem with
the way the amount of the first 13 payment applications was calculated. Dr. Bolyard responded:
“We had no reason to dispute it. One of their employees signed it and one of their architects
signed it and it was true and certified, and so we shouldn’t have any reason to dispute it.” (ECF
No. 198-2, at 47). “Their” refers to Erdman. Dr. Bolyard is saying, in other words, that while
knowing that one of Erdman’s architects signed the pay application, Phoenix had no reason to
dispute the payment amount. 3 Thus, even if Myers falsely claimed to be independent of Erdman,
Phoenix still considered the architect signature on the payment applications to have come from
Erdman’s architect, and even considering that fact, Phoenix claims to have had no reason to
dispute the amount.
Phoenix’s damages claim is essentially that, had it known Myers was not independent of
Erdman, it would not have paid the payment applications. Dr. Bolyard’s testimony says
otherwise: it says that the approval of an Erdman architect gave no reason to dispute the payment
amount. In fact, Dr. Bolyard’s testimony implies that the approval of an Erdman architect
removed any cause for disputation.
On that testimony, the Court finds that no reasonable jury could find reliance.
3
Phoenix does argue that it later had reason to dispute the amount on the applications, but Dr. Bolyard
acknowledges that at the time Erdman submitted the applications, the fact that Erdman’s architect approved it gave
them no reason to dispute it.
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CONCLUSION
For the above reasons, the Court finds as a matter of law that Phoenix could not
justifiably have relied on Myers’s claim to be independent of Erdman, and that no reasonable
jury could find that Phoenix actually did rely on Myers’s statements when it approved Erdman’s
payment applications. Those two findings cause Phoenix’s fraudulent-misrepresentation and
ADTPA claims regarding Myers’s relationship with Erdman to fail. Accordingly, the Court finds
that Erdman’s Motion for Partial Summary Judgment (Fraud and ADTPA Regarding Architect)
(ECF No. 190) should be and hereby is GRANTED. Phoenix’s fraud and ADTPA claims
regarding Myers and Erdman’s relationship are hereby DISMISSED WITH PREJUDICE.
IT IS SO ORDERED, this 17th day of July, 2013.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge
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