Erdman Company et al v. Phoenix Land & Acquisition, LLC et al
ORDER denying 170 Motion for Partial Summary Judgment; and denying 185 Motion for Partial Summary Judgment. Signed by Honorable Susan O. Hickey on July 18, 2013. (lw)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
FORT SMITH DIVISION
ERDMAN COMPANY; and ERDMAN
ARCHITECTURE & ENGINEERING
CASE NO. 2:10-CV-2045
PHOENIX LAND & ACQUISITION, LLC;
PHOENIX HEALTH, LLC
ERDMAN COMPANY; and ERDMAN
ARCHITECTURE & ENGINEERING
THIRD PARTY PLAINTIFFS
DATA TESTING, INC.;
OTIS ELEVATOR COMPANY; and
THIRD PARTY DEFENDANTS
PHOENIX HEALTH, LLC; and
CASE NO. 2:11-CV-2067
ERDMAN ARCHITECTURE &
ENGINEERING COMPANY; and
OTIS ELEVATOR COMPANY
Before the Court are summary judgment motions filed by Otis Elevator Company
(“Otis”) (ECF No. 170), Erdman Company, and Erdman Architecture & Engineering Company
(together, “Erdman”) (ECF Nos. 185 & 234). Both motions concern the Phoenix entities’
damages claims. Phoenix has responded (ECF No. 248), and Erdman and Otis have replied.
(ECF Nos. 255 & 256). The matter is ripe for the Court’s consideration. For the following
reasons, the motions will be denied.
To understand the pending motions, some fairly extensive background is necessary. This
dispute involves a group of doctors—the Phoenix entities—who set out to build and run their
own surgery hospital. “Phoenix Land & Acquisition” (“Phoenix Land”) contracted with Erdman
for the design and construction of the project. Erdman subcontracted the elevator installation
work to Otis. Otis then subcontracted the required drilling work to Long’s Drilling. 1
The project encountered a problem in July 2008. While drilling a hole to install an
elevator, Long’s Drilling breached an abandoned mine shaft no one knew existed. The mine shaft
breach damaged other parts of the project and had to be fixed at great expense to Phoenix.
Phoenix argues that Erdman and Otis’s negligence caused the breach and resulting damages.
Phoenix Health (“PH”), a group mostly of orthopedic doctors, purchased land in Fort
Smith in February 2004. PH planned to build a medical complex on the land, consisting
primarily of a specialty hospital and a medical-office building and, later, an urgent-care center.
The plan was to build the hospital first, but the last-minute imposition of certain regulations
made that impractical. Accordingly, PH decided to build the office building first.
Erdman was hired to design and build the office building. It was hired in November 2005
and finished the building in October 2006. Erdman was also hired in November 2005 to build an
ambulatory surgery center (“ASC”). The ASC was finished in December 2006.
Several sub-entities of Phoenix had roles in the above projects. Phoenix Health leased the
land in two tracts to Phoenix Land, another legal entity made up of mostly orthopedic surgeons.
Phoenix Land was the actual entity that hired Erdman to build the project. One of the tracts was
All claims against Long’s Drilling have been voluntarily dismissed. (ECF Nos. 209 & 221).
used for the office building, and another for the ASC. When the ASC was finished, it was
operated by “Phoenix Health Associates of Fort Smith” (“PHA”), which the Court assumes to be
another entity of doctors.
In mid-2006, the regulatory impediment to the specialty hospital was removed, and
Phoenix Land decided to go ahead with their plan to build it. The specialty hospital was to be
built as an addition to the existing ambulatory surgery center. The plans allowed for a future
second-floor expansion, to accommodate a possible group of OB/GYN doctors who were
thinking of joining the venture. The plan was for Phoenix Land to own and operate the hospital
building and for a new entity to own the hospital operations.
The OB/GYN doctors opted to join the venture shortly after Phoenix Land signed the
contract with Erdman for the hospital addition. These OB/GYNs, along with the orthopedic
doctors making up Phoenix Land, subsequently formed IPF, LLC. IPF was not technically a
legal replacement for Phoenix Land, but it was meant to serve the same function and to supplant
Phoenix Land as a practical matter. As a replacement for Phoenix Land, IPF became Phoenix
Health’s lessee on the property.
When the hospital was finished, the group of doctors would practice out of that facility
and would offer inpatient services on top of the outpatient services the ASC already offered. The
group of doctors did in fact practice out of the ASC for a time, in addition to seeing patients
through privileges at area hospitals. Because the hospital project fell apart prior to completion,
they never had the opportunity to practice out of the new facility.
Although plan expansions, including the second floor, pushed the contract price from its
original $13.25 million dollars to upwards of $30 million, the doctors expected the new venture
to be profitable. Several studies projected that the annual profits would be between $3.4 million
to $9.6 million.
Phoenix Land paid for the hospital addition through financing. The initial financing came
from Benefit Bank, but in September 2008, roughly a couple months after the mine shaft
incident, Benefit Bank informed Phoenix Land and IPF that it could no longer finance the
project. After that, IPF worked out a financing arrangement with Bank of the Ozarks, but that
deal was conditioned on IPF finding a suitable corporate partner. The only partner IPF came
close to partnering with was Cirrus Health. Cirrus and IPF had a tentative partnership
arrangement that involved several ownership transfers between existing and newly created subentities. The complex details of that arrangement are not important here. The most important
point is that the end result would have been for Cirrus and IPF to essentially split ownership of
all aspects of the ASC and hospital addition 50–50.
The Cirrus deal ultimately fell through due to Cirrus’s concerns about the cost and
viability of the project. There is some dispute about whether Cirrus’s concerns were directly
related to the cost of repairing the mine shaft. In a November 2009 letter to Phoenix, Cirrus
stated that “a number of prior expenditures” drove the cost of the project “beyond achievable
returns for a successful investment….” The letter went on to say that Cirrus was concerned that
the project would not be commercially financeable due to “a lack of physician equity, lack of a
tenant for the second floor, and the non-preservation of lender lien rights.” The mine shaft repair
costs were not specifically cited in Cirrus’s letter, but Phoenix representatives have testified that
the cost of repairing the mine breach came up in discussions with Cirrus representatives prior to
the deal falling through. A Cirrus representative has also testified that the mine breach was a
factor in their decision not to partner with Phoenix.
When a partnership with Cirrus did not come to fruition, Phoenix was left unfinanced.
As a result, Phoenix Land stopped paying Erdman to finish the project. Erdman walked off the
job and filed liens on the project, and Phoenix Health, the landowner, was forced to sell to St.
Edward Mercy Health System, Inc. in 2011. That sale, according to Phoenix, was for much less
than the property would have been worth were the project completed.
The Phoenix entities allege that the negligence of Erdman, Otis Elevator (Erdman’s
subcontractor), and Data Testing (which Erdman hired to do a geological survey) was
responsible for the mine collapse and ultimate failure of the project. Phoenix has sued for
damages, including lost profits and diminution in land value. Erdman and Otis contend that
Phoenix is not entitled to those damages for several reasons. They now ask the Court to grant
them summary judgment declaring Phoenix barred from those damages.
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
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
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.
Erdman and Otis give two reasons why Phoenix should be precluded from seeking lostprofit and diminution damages: (1) Otis and Erdman did not cause the damages; and (2) the
damages are too speculative. Phoenix disagrees.
Whether Phoenix and Otis caused the damages
Phoenix claims that Otis, Erdman, and Data Testing’s negligent actions involving the
mine shaft prevented Phoenix from securing financing for the hospital project, thereby causing
the project to fail and damages to be incurred. Erdman and Otis maintain that their alleged
actions and the costs related to repairing the mine did not cause the hospital project to fail.
To establish causation in a negligence action, a plaintiff must show that a defendant’s
actions produced injury “in a natural and continuous sequence” and that the injury would not
have happened but for the defendant’s actions. Ouachita Wilderness Inst., Inc. v. Mergen, 329
Ark. 405, 414 (Ark. 1997). Arkansas courts have consistently recognized that proximate cause is
typically a question for the jury. Id. See also St. Louis Sw. Ry. Co. v. White, 302 Ark. 193, 199
(Ark. 1990). “Proximate cause becomes a question of law only if reasonable minds could not
Otis and Erdman argue that no proximate cause exists in this case because Phoenix’s
inability to secure financing for the project had little to do with the mine shaft breach and the
costs resulting from it. They maintain that the hospital project would have failed regardless of
their actions. In support of this claim, Otis and Erdman point to the letter sent by Cirrus Health,
Phoenix’s last hope of obtaining financing, explaining its reasons for backing out of a
partnership arrangement with Phoenix. Cirrus Health’s letter does not specifically mention the
costs of repairing the mine as a reason for not partnering with Phoenix. Rather, the letter
generally refers to “a number of prior expenditures” and “a lack of physician equity, lack of a
tenant for the second floor, and the non-preservation of lender lien rights.”
Despite what was or was not included in the letter, Phoenix maintains that the cost of
repairing the mine was a “deal-breaker” for Cirrus Health. Phoenix representatives have testified
that when Cirrus Health began crunching the numbers on the project, the cost of the mine repair
surfaced as a sticking point. (ECF No. 198, Exh. 3, p. 30; ECF No. 198, Exh. 2, p. 52).
According to these representatives, a deal with Cirrus Health was contingent on Cirrus not
carrying any of the mine repair costs. Cirrus Health’s representative, Barry Smith, testified that,
while the mine repair costs were not the only reason for the deal falling through, they were
certainly a “significant” factor in the decision. (ECF No. 250, Exh. 11, p. 2). Smith stated that,
had the mine repair costs been removed from consideration, discussions with Phoenix would
have “moved  down the road.” Id.
In viewing the facts above in a light most favorable to the non-movant, the Court finds
that there is sufficient evidence to submit this question of proximate cause to a jury. The Court
recognizes that mine repair costs may not be solely to blame for the failure of the project.
Nonetheless, Phoenix has submitted sufficient evidence to create an issue of fact regarding the
cause of its lost financing and its loss of Cirrus Health as a potential partner.
Whether the damages are speculative
The Phoenix entities are pursuing damages for both lost profits and diminution of
property value and sales price. The overarching rule of lost-profit damages is that they must not
be arrived at through speculation. If speculation is required, the damages are disallowed.
Boellner v. Clinical Study Centers, LLC, 2011 Ark. 83, at 15, 378 S.W.3d 745, 755. It must be
reasonably certain, based on a reasonably complete set of figures, that the plaintiff would have
profited if the deal had gone as the parties intended. Little Rock Wastewater Util. v. Larry Moyer
Trucking, Inc., 321 Ark. 303, 312, 902 S.W.2d 760, 766 (Ark. 1995); Ishie v. Kelley, 302 Ark.
112, 114, 788 S.W.2d 225, 226 (Ark. 1990). That certainty is more important in proving that lost
profits actually occurred than it is in proving the specific amount of profit that was lost. Acker
Constr., LLC v. Tran, 2012 Ark. 214, at 11, —–S.W.3d—–. Stated another way, as long as it is
“reasonably certain” that lost profits have occurred “it is enough if they can be stated only
proximately.” Dr. Pepper Bottling Co. of Paragould v. Frantz, 311 Ark. 136, 144 (Ark. 1992).
Moreover, loss may be determined in any manner reasonable under the circumstances, Tremco,
Inc. v. Valley Aluminum Prods. Corp., 38 Ark. App. 143, 146, 831 S.W.2d 156, 158 (Ark. Ct.
App. 1992); and it is the net, rather than the gross, revenues that counts. Cinnamon Valley Resort
v. EMAC Enterprises, Inc., 89 Ark. App. 236, 246, 202 S.W.3d 1, 7 (Ark. Ct. App. 2005).
Erdman and Otis contend that, because Phoenix was a new business with no track record
of profitability, Phoenix is automatically banned by Arkansas’s purported “new business rule”
from seeking lost profit damages. In the alternative, if the Court finds that there is no per se rule
against Phoenix seeking lost profit damages, Erdman and Otis offer a number of reasons why
Phoenix’s lost profit calculations are too speculative.
The “new business rule”
Erdman and Otis rely on Marvell Light & Ice Co. v. Gen. Elec. Co., 162 Ark. 467 (Ark.
1924) for the proposition that, as a new business, Phoenix is not entitled to recover damages for
lost profits. Marvell states that “the anticipated profits of [a] new business are too remote,
speculative, and uncertain to support a judgment for their loss.” Id. Erdman and Otis argue that
this statement amounts to a per se rule banning the recovery of lost profits for new businesses.
Phoenix, on the other hand, contends that there is no per se rule and that the age of a business is
only a factor to be considered when determining whether lost profits damages are excessively
A minority of states subscribe to the “new business” rule when determining whether lost
profit damages may be recovered. 2 For those applying the rule, once it has been determined that
a business can be classified as “new,” as opposed to “established,” damages for lost profits
become unavailable. The logic behind the rule is certainly understandable—when there is no
provable data of past profits from an established business, predicting future profits becomes a
more speculative endeavor. Even so, the majority of courts have rejected a per se rule and have
recognized that flexibility is needed in determining whether lost profit forecasts are overly
The “new business” rule appears to still be in force in Georgia, Illinois, and New Jersey. See Dominion Nutrition,
Inc. v. Cesca, 467 F. Supp. 2d 870, 883-84 (N.D. Ill. 2006); RSB Lab. Servs. Inc. v. BSI Corp., 847 A.2d 599, 609612 (N.J. Sup. Ct. 2004); Lowe's Home Centers, Inc. v. General Elec. Co., 381 F.3d 1091, 1096 (11th Cir. 2004);
Blair-Naughton L.L.C. v. Diner Concepts, Inc., 369 F. App'x 895, 904 (10th Cir. 2010).
speculative in the context of a new business. See Robert L. Dunn, Recovery of Damages for Lost
Profits § 4.3 (6th ed. 2005) (collecting cases). In these courts, the newness of a business “enters
into judicial consideration of the damages claim not as a rule but as a factor in applying the
standard.” MindGames, Inc. v. W. Pub. Co., Inc., 218 F.3d 652, 658 (7th Cir. 2000). The issue
before the Court is whether Arkansas adheres to this widely accepted flexible approach or the
per se application of the new business rule.
The new business rule, as articulated by the Marvell court in 1924, has never been cited
to or relied upon by another Arkansas court. Nor has it been overruled. However, the Marvell
decision has been thoroughly examined by the Seventh Circuit Court of Appeals in MindGames,
Inc. v. W. Pub. Co., Inc., with Chief Judge Richard Posner writing for the majority. Id. The
court rightly noted that in a federal case where state law applies, “the federal court must predict
how the state's highest court would decide the case, and decide it the same way.” Id. at 655-56.
See also 19 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL
PROCEDURE § 4507, pp. 123-50 (2d ed.1996) (“…Erie presumably directs the
federal courts to decide a state law issue as it would have been decided had the case been brought
in the state court system, which includes a court of last resort that is able to change state
law….”). Applying that principle, the court found that the Arkansas Supreme Court would likely
not follow the per se new business rule that was purportedly set out in Marvell. MindGames,
Inc. at 656. In support of this conclusion, the court took notice of the fact that the new business
rule had not been applied in a per se manner in Arkansas post-Marvell. Id. The court also
expressed doubt that the Marvell opinion even intended to foreclose the possibility of lost profit
damages for every new business. 3 Id. at 655. Most importantly, the court recognized that
“Arkansas cases decided since Marvell that deal with damages issues exhibit a liberal approach
to the estimation of damages that is inconsistent with a flat rule denying damages for lost profits
to all businesses that are not well established.” Id. See also Acker Const., LLC v. Tran, 396
S.W.3d 279, 288 (Ark. Ct. App. 2012); Jim Halsey Co. v. Bonar, 683 S.W.2d 898, 902-03 (Ark.
1985); Tremco, Inc. v. Valley Aluminum Products Corp., 831 S.W.2d 156, 158 (Ark. Ct. App.
1992); J.W. Looney, The ‘New Business Rule’ and Breach of Contract Claims for Lost Profits:
Playing MindGames with Arkansas Law, 1997 Ark. L. Notes 43, 46-47 (1997).
The Court is inclined to agree with the Seventh Circuit’s analysis regarding the state of
the new business rule in Arkansas. Assuming arguendo that the Marvell court’s statement was
intended as a blanket rule extending beyond the specific facts of that case, close to 90 years of
intervening law suggests that Arkansas has taken a more flexible approach to the award of lost
profit damages. If faced with this question today, the Arkansas Supreme Court would likely
follow the lead of the other states that have abandoned the new business rule and find that a
business’s age and lack of track record are simply factors to be considered when determining
whether lost profit damages are too speculative.
Whether Phoenix’s lost profit damages are too speculative
Because the Court has determined that there is no per se ban on a new business obtaining
lost profit damages, the question is now whether Phoenix’s alleged damages are too speculative
to survive summary judgment. Erdman and Otis argue that Phoenix’s lost profit projections are
While the Marvell quotation at issue “is taken to have made Arkansas a ‘new business’ state… the rest of the
Marvell opinion indicates that the court was concerned that the anticipated profits of the particular new business at
issue, rather than of every new business, were too speculative to support an award of damages.”
speculative due to Phoenix’s lack of profitable history and the unreliable methodology used to
project lost profits in this case. 4
As evidence of lost profits, Phoenix has submitted multiple pro formas, including one
generated by Erdman, which forecast the completed hospital earning a yearly net operating
income of anywhere between $3.4 million to $9.6 million. (ECF No. 251, Exh. 2-3). Phoenix
has also submitted an expert report and financial pro forma completed by Bryan Cali for the
purpose of this litigation. 5 (ECF No. 251, Exh 1). Because the methodology and numbers used
in the Cali pro forma are explained at length, the Court has principally relied on this report in
considering the present motion. This report is described by Cali as a “reasonable 2010 financial
pro forma reflecting the potential hospital operations assuming the hospital was opened and
licensed according to the original timing in early 2009.” (ECF No. 251, Exh 1, p. 3). The report
is largely based on a comparative analysis of: similar physician owned hospitals; Phoenix’s
ambulatory surgery center patient volume; and Phoenix’s physician shareholder patient volumes
in other hospitals.
Cali’s report concluded that the hospital operation in 2010, the first full year of
anticipated hospital operations, would yield an EBITDA (earnings before interest, taxes,
depreciation, and amortization) of $11,535,678. This amount represents 27% of the hospital’s
potential net surgical revenue. Cali reports that this profit margin falls just below the median
profit margin for 16 other hospitals who met his comparison criteria.
Erdman and Otis also contend that lost profit damages are speculative because of the possibility that Phoenix
would lose its financing for reasons unrelated to the mine shaft incident. Essentially, Erdman and Otis are making
their previous negligence causation arguments in a slightly different context. As explained above when addressing
Phoenix’s negligence claims, the Court finds that the factual circumstances surrounding Phoenix’s potential
financing arrangements (or lack thereof) are contested enough to survive summary judgment.
Bryan Cali is the Director of healthcare practice at the Chicago office of Navigant Consulting.
While it is not necessary at this time for the Court to go into great detail regarding Cali’s
methodology in coming to this profit margin, a few basic figures are worth noting. The potential
inpatient volumes, outpatient volumes, and operating expenses are the most pertinent figures for
the Court’s purposes. The report’s outpatient volumes for 2010 reflect the actual outpatient
volumes for Phoenix’s ambulatory surgery center in 2010. In other words, the report assumes
that the outpatient volume of the hospital expansion would be comparable to the outpatient volume
from Phoenix’s ambulatory surgical center. The report’s inpatient volumes are based upon the
2010 inpatient volumes of Phoenix’s physician shareholders (i.e. the physicians expected to
operate out of the new hospital) produced at other Forth Smith area hospitals.
The hospital expenses in the report are based upon specific information provided by
Phoenix and Erdman and Cali’s own experience with comparable physician-owned hospitals.
The report notes that “rent and facility operating expenses were derived from data provided by
[Erdman] to representatives of Phoenix on January 10, 2008….Expenses related to the land lease
are based on the lease agreement entered into between Phoenix Health, LLC and IPF, LLC.” Id.
at 18. In sum, Cali concluded that expenses would amount to 72.5% of the hospital’s revenue.
Based upon the facts and figures above, which are viewed in the light most favorable to
Phoenix, the Court finds that summary judgment as to Phoenix’s lost profit claim is not
appropriate. There is at least some competent, statistical evidence to support Phoenix’s claim of
lost profits, despite the fact that this hospital was a new business. While the evidence as
summarized above is enough to withstand summary judgment, this does not mean that Phoenix
has carried its burden of proving that it is reasonably certain that lost profits have occurred. The
Court will reserve its judgment on that matter until after Phoenix has had the opportunity to
present evidence at trial. 6 Phoenix’s proof of lost profits will be subject to the rules of evidence
and any sustainable objections by Erdman and Otis.
The evidence actually admitted will
determine whether Phoenix has proven lost profit damages to the extent that they may be
considered by the jury. 7
For the above reasons, the Court finds that the summary judgment motions filed by Otis
Elevator Company (ECF No. 170) and Erdman (ECF No. 185) should be and hereby are
IT IS SO ORDERED, this 18th day of July, 2013.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge
This reservation of judgment includes Erdman’s claims that IPF, Inc., one of the Phoenix entities, was not an entity
that would have been a part of the Cirrus partnership deal. Erdman contends that there can be no reasonable
certainty that IPF would have experienced lost profits if they were never an intended party to the failed Cirrus
arrangement. Phoenix maintains that all of the testimony by its witnesses demonstrates that IPF was a part of the
Cirrus deal and that IPF was intended to receive profits from the hospital once it was completed. Evidence
regarding this dispute may be presented at trial.
In this opinion, the Court has generally referred to “Phoenix” entities having the right to put on evidence of lost
profits at trial. However, the Court has previously determined that Phoenix Land & Acquisition is limited as to the
consequential damages it can pursue against Erdman Company based on a consequential damages waiver in the
parties’ contract. (ECF No. 314). The Court’s previous findings regarding the consequential damages waiver
should be read in conjunction with the present order.
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