E Biofuels-Mead v. Skinner Tank

Filing 232

MEMORANDUM AND ORDER - The defendant's 162 MOTION for Partial Summary Judgment is denied. Ordered by Judge Joseph F. Bataillon. (MKR)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
E3 BIOFUELS-MEAD, LLC,
Plaintiff(s),

8:06CV706

v.
SKINNER TANK COMPANY;
MEMORANDUM AND ORDER
Defendant/Third-Party
Plaintiff,
v.
DILLING MECHANICAL CONTRACTORS,
INC.
Third-Party Defendant.

This matter is before the court on a motion for partial summary judgment filed by
defendant/third-party plaintiff Skinner Tank Company (“Skinner”), Filing No. 162. This is
an action for breach of contract, fraud, and gross negligence in connection with an
ethanol plant construction project in Mead, Nebraska.1 The plaintiffs, E Biofuels-Mead,
LLC and E3 Biofuels-Mead, LLC (hereinafter, collectively, “E3”), entered into a contract
with defendant Skinner for the purchase, design, fabrication, construction and
installation of several tanks to be used in an Integrated Solid Waste and Bio-Fuels
Facility (the “Project”) that retrieves usable energy from cattle waste. Jurisdiction is
premised on 28 U.S.C. § 1332, diversity of citizenship.

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The action also involves a counterclaim against E3 and third-party claim against Dilling
Construction, the management firm hired by E3 for the project, for tortious interference with a contract,
negligence, indemnification and contribution.

Skinner moves for a summary judgment of dismissal on the plaintiff’s claims of
fraud and gross negligence, asserting that those claims are barred under the economic
loss doctrine. Further, it argues that E3 has failed to plead fraud with particularity under
Fed. R. Civ. P. 9(b). It also contends that the plaintiff’s demand for damages including a
twenty-five percent markup under Section 27 of the contracts at issue should be
invalidated as an unenforceable penalty under Nebraska law.2
I. FACTS
In its First Amended Complaint, E3 alleges it entered into a design contract and a
contract for the purchase of fourteen tanks for a total payment of over $2 million.3
Amended Complaint, Filing No. 99 at ECF p.4. The purchase contract specified that “All
welding of tanks will be approved and inspected on site by Certified Weld Examiner,
provided by Owner.” Id. It alleges that the initial designs of certain tanks proved to be
mechanically deficient and correction of the design defects required extensive
deviations from the original designs, greatly increasing construction expense and
delayed the completion of Skinner’s work and that of other contractors. Id. at 5. E3
alleges that welding on the tanks was also grossly defective.

Id. at 5.

It alleges

Skinner’s failure to timely complete the work caused E3 to incur damages as a result of
the delay, including additional construction costs and expenses, replacement costs,

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Skinner also contended that there is no statutory basis for an award of attorney fees under
Nebraska law. E3 concedes that point and has withdrawn its claim for attorney fees. Accordingly,
Skinner’s motion to dismiss with respect to attorney fees is moot.
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Five of the tanks were shop fabricated, and the remaining nine tanks were to be field erected
“on site” at the Project in Mead, Nebraska, from prepared materials supplied by Skinner Tank’s
manufacturing facility. Id. A fifteenth shop fabricated tank was added by purchase order revision on
October 3, 2005, but subsequently removed by change order on May 12, 2006. Id.
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repair expenses, operating expenses and overhead, interest expenses on borrowed
money, and loss of operating revenue. Id. at 9.
Specifically, it alleges Skinner breached the Design and Purchase Contracts by
“failing to properly design and assemble the tanks and supporting structures and to
deliver in a timely fashion tanks which meet the specifications and express and implied
warranties of the contracts.” Id. E3 also claims fraud in that Skinner “represented to
[E3] that it would provide a qualified engineer to fulfill its on-site quality control
obligation, that it would provide tradesmen who were qualified and competent to
complete the work and that its engineer was capable of inspecting the work of its
welders and certifying them qualified for the job without outside oversight,” but those
representations were false and fraudulent in that unskilled workers were used and no
certification was provided. Id. E3 also alleges Skinner was grossly negligent and failed
to live up to its duties as engineers and craftsmen. Id. at 11.
Section 27.0 of each of the contracts between E3 and Skinner provides as
follows:
If Supplier by its action or inaction indicates that it is unable or unwilling to
proceed with the Work in a reasonable time, Purchaser may, upon five
calendar days after written notice to Supplier, accomplish the Work in
question by the most expeditious means available and backcharge
Supplier for the costs incurred, plus twenty-five percent markup and
overhead.
Filing No. 1, Complaint, Ex. A, Purchase Order #0018 (Filing No. 1-1 at ECF p. 4); id.,
Ex. B, Purchase Order (Filing No. 1-2 at ECF p. 4).
Skinner denies the plaintiff’s allegations, asserts a counterclaim for breach of
contract and asserts defenses of failure to state a claim, lack of subject matter
jurisdiction, intervening cause, contributory negligence, unclean hands, in pari delicto,
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mitigation of damages, unforeseeability, breach of contract and breach of covenant of
good faith and fair dealing, estoppel and waiver, release, consent/ratification, economic
loss doctrine, and champerty. Filing No. 107.
II. LAW
Summary judgment is appropriate when, viewing the facts and inferences in the
light most favorable to the nonmoving party, “the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue as to
any material fact and that the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(c). The plain language of Rule 56(c) mandates the entry of summary
judgment, after adequate time for discovery and upon motion, against a party who fails
to make a showing sufficient to establish the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial. Celotex Corp.
v. Catrett, 477 U.S. 317, 322 (1986).
“The movant ‘bears the initial responsibility of informing the district court of the
basis for its motion, and must identify ‘those portions of [the record] . . . which it believes
demonstrate the absence of a genuine issue of material fact.’” Torgerson v. City of
Rochester, 643 F.3d 1031, 1042, (8th Cir. 2011) (en banc) (quoting Celotex, 477 U.S. at
323). If the movant does so, “the nonmovant must respond by submitting evidentiary
materials that set out ‘specific facts showing that there is a genuine issue for trial.’” Id.
(quoting Celotex, 477 U.S. at 324). A “genuine” issue of material fact exists “when there
is sufficient evidence favoring the party opposing the motion for a jury to return a verdict
for that party.”

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).

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If

“reasonable minds could differ as to the import of the evidence,” summary judgment
should not be granted. Id. at 251.
The evidence must be viewed in the light most favorable to the nonmoving party,
giving the nonmoving party the benefit of all reasonable inferences. Kenney v. Swift
Transp., Inc., 347 F.3d 1041, 1044 (8th Cir. 2003). “In ruling on a motion for summary
judgment, a court must not weigh evidence or make credibility determinations.”

Id.

“Where the unresolved issues are primarily legal rather than factual, summary judgment
is particularly appropriate.” Koehn v. Indian Hills Cmty. Coll., 371 F.3d 394, 396 (8th
Cir. 2004).
Under Nebraska law, “the character of an action as one in tort or on contract is
determined by the nature of the grievance, not by the form of the pleadings, with
consideration being given to the facts which constitute the cause of action.” Henriksen
v. Gleason, 263 Neb. 840, 846, 643 N.W.2d 652, 657 (Neb. 2002).

To determine

whether an action is based on a contract or a tort, a court must examine and construe a
petition’s essential and factual allegations by which the plaintiff requests relief, rather
than the legal terminology utilized in the petition or the form of a pleading. Id. Contract
actions, which arise from a breach of a duty imposed on one by an agreement, protect a
plaintiff’s interest in or right to performance of another’s promises; whereas, tort actions,
which arise from a breach of a duty imposed by law, protect a plaintiff’s interest or right
to be free from another’s conduct which causes damage or loss to the plaintiff’s person
or property. Id.
In order to recover in an action for breach of contract, the plaintiff must plead and
prove the existence of a promise, its breach, damage, and compliance with any

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conditions precedent that activate the defendant’s duty. Henriksen, 643 N.W.2d at 657.
In order to prove a breach of a service contract, the plaintiff must show that the
defendant failed to exercise the skill and knowledge normally possessed by members of
that trade in good standing in similar communities. Id. A plaintiff may maintain an
action for professional negligence against an architect or engineer.

See Board of

Regents v. Wilscam Mullins Birge, 433 N.W.2d 478, 483 (Neb. 1988);
One may sue in tort when there has been negligence in the performance of a
contract. Lincoln Grain, Inc. v. Coopers & Lybrand, 345 N.W.2d 300, 305 (Neb. 1984).
The injury in such a case results not from a breach of the contract but from negligence
in the performance of it, for accompanying every contract is a common-law duty to
perform with care, skill, reasonable expediency, and faithfulness the thing agreed to be
done. Id. A negligent failure to observe any of these conditions is a tort as well as a
breach of contract. Id.
The economic loss doctrine is a “judicially created doctrine that sets forth the
circumstances under which a tort action is prohibited if the only damages suffered are
economic losses.” Lesiak v. Cent. Valley Ag. Co-op., Inc., 808 N.W.2d 67, 80 (Neb.
2012).

The doctrine serves to “‘weed[] out cases involving nothing more than an

allegedly negligent failure to perform a purely contractual duty—a duty that would not
otherwise exist.’” Id. The economic loss doctrine precludes tort remedies only where
the damages caused were limited to economic losses and where either: (1) a defective
product caused the damage or (2) the duty which was allegedly breached arose solely
from the contractual relationship between the parties. Id. at 81. Economic losses are
defined as commercial losses, unaccompanied by personal injury or other property

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damage. Id. Where only economic loss is suffered and the alleged breach is of only a
contractual duty, then the action should be in contract rather than in tort. Id. at 83
(affirming the continued validity of the doctrine in the context of products liability).
The doctrine, however, does not bar tort theories in cases wherein either: (1) the
damages alleged are not solely economic losses; or (2) there exists an independent tort
duty alleged to be breached that is separate and distinct from the contractual duty. Id.
at 83, nn. 51 & 52. The economic loss doctrine does not apply to bar claims that a
party’s negligent conduct caused damages to property other than the property that was
sold pursuant to the contract. Id. at 83; see also Thomas v. Countryside of Hastings,
524 N.W.2d 311, 313 (Neb. 1994) (negligent installation of furnace damaged home and
caused carbon monoxide injuries to residents); Getzschman v. Miller Chem. Co., 443
N.W.2d 260, 270 (Neb. 1989) (action for professional negligence of an architect);
Schuster v. Baumfalk, 429 N.W.2d 339, 346 (1988) (negligent repair of farm equipment
damaged other buildings and equipment); Lincoln Grain, 345 N.W.2d at 304-05 (action
for professional negligence); Driekosen v. Black, Sivalls & Bryson, 64 N.W.2d 88, 92
(Neb. 1954) (negligent installation of propane system resulted in destruction of
residence).
It is well established that both fraudulent misrepresentation and negligent
misrepresentation are tort causes of action. Zawaideh v. Nebraska Dept. of Health and
Human Servs. Regulation and Licensure, 825 N.W.2d 204, 212 (Neb. 2013); see
Restatement (Second) of Torts §§ 525 and 552 (1977).

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Importantly, none of the

elements of a fraudulent or negligent misrepresentation claim “require an underlying
contract.”4 Id. The Nebraska Supreme Court explains:
Although contracts are often the end result of the plaintiff’s reliance
on the defendant’s misrepresentation, the true legal dispute for a
misrepresentation cause of action is the tortious actions of the defendant.
We have stated that where a contractual relationship exists between
persons and at the same time a duty is imposed by or arises out of the
circumstances surrounding or attending the transaction, the breach of the
duty is a tort. In such case, the tortious act, and not a breach of the
contract, is the gravamen of the action; the contract is the mere
inducement creating the state of things which furnishes the occasion for
the tort. Thus, we have held that fraud and deceit provide a ground for
recovery that is independent of contract.
Id. at 212-13.
Under the Federal Rules, a party alleging fraud must state with particularity the
circumstances constituting fraud.

Fed. R. Civ. P. 9(b).

The rule is interpreted in

harmony with the principles of notice pleading, and to satisfy it, the complaint must
allege such matters as the time, place, and contents of false representations, as well as
the identity of the person making the misrepresentation and what was obtained or given
up thereby. Drobnak v. Andersen Corp., 561 F.3d 778, 783 (8th Cir. 2009) (quoting
Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 746 (8th Cir. 2002)).
Essentially, the complaint must plead the who, what, where, when, and how of the
alleged fraud. Drobnak, 561 F.3d at 783 (quoting United States ex rel. Joshi v. St.
Luke’s Hosp., 441 F.3d 552, 556 (8th Cir. 2006)). Because this higher degree of notice
is intended to enable the defendant to respond specifically and quickly to potentially
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To state a claim for fraudulent misrepresentation, a plaintiff must allege (1) that a representation
was made; (2) that the representation was false; (3) that when made, the representation was known to be
false or made recklessly without knowledge of its truth and as a positive assertion; (4) that the
representation was made with the intention that the plaintiff should rely on it; (5) that the plaintiff did so
rely on it; and (6) that the plaintiff suffered damage as a result. Zawaideh, 825 N.W.2d at 212. Negligent
misrepresentation has essentially the same elements as fraudulent misrepresentation with the exception
of the defendant’s mental state. Id.
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damaging allegations, conclusory allegations that a defendant’s conduct was fraudulent
and deceptive are not sufficient to satisfy the rule.

Drobnak, 561 F.3d at 783.

Allegations pleaded on information and belief usually do not meet Rule 9(b)’s
particularity requirement, except when the facts constituting the fraud are peculiarly
within the opposing party’s knowledge. Id. at 783-84 (stating that the rule is satisfied if
the allegations are accompanied by a statement of facts on which the belief is founded).
Generally, the question of whether a sum mentioned in a contract is to be
considered as liquidated damages or as a penalty is a question of law, dependent on
the construction of the contract by the court. Berens and Tate, P.C. v. Iron Mountain
Information Management, Inc., 747 N.W.2d 383, 387 (Neb. 2008). Under Nebraska
law, a stipulated sum is for liquidated damages only: (1) where the damages which the
parties might reasonably anticipate are difficult to ascertain because of their
indefiniteness or uncertainty; and (2) where the amount stipulated is either a reasonable
estimate of the damages which would probably be caused by a breach or is reasonably
proportionate to the damages which have actually been caused by the breach. Id.;
Growney v. CMH Real Estate Co., 238 N.W.2d 240, 242-43 (1976). The focus on
liquidated damages versus penalty only arises when the contractual provision seeks to
determine, in advance, the measure of damages resulting from a party’s breach or
nonperformance of the contract. Berens and Tate, P.C., 747 N.W.2d at 388.
III. DISCUSSION
The court finds that the economic loss doctrine has no applicability to the present
case. This case involves claims that a party’s negligent conduct caused damages to
property other than the property that was the subject of the contract. The plaintiff seeks

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consequential damages as a result of the delays allegedly caused by the defendant’s
wrongful conduct.

Also, this case involves alleged breach of services and design

contracts. It is not a products liability action. There are duties imposed on architects
and tradesmen that are independent of the contract. The court finds the defendant’s
motion for a summary judgment on the plaintiff’s negligence claim should be denied.
Further, the court finds that, under the circumstances of this case, the plaintiff
alleges fraud with sufficiently particularity. The allegations are more than conclusory.
The alleged misrepresentations are specifically set forth and essentially the “who, what,
where, when, and how” of the alleged fraud is provided—the plaintiff alleges that the
defendant made misrepresentations, in the contract and otherwise, with respect to the
skills of its welders and inspectors. The amended complaint adequately enabled the
defendant to respond to the allegations.
Also, the court finds that the defendant has not shown as a matter of law that
Section 27 of the contracts is an unenforceable penalty, rather than a valid liquidated
damages provision. Depending on the evidence, the plaintiff may be able to show that
damages of this type were difficult to estimate at the time the contract was negotiated
and that a 25% charge is a reasonable and fair attempt to compensate for the loss
occasioned by the alleged breach. It appears that the plaintiff would have incurred
some overhead, supervision, interest expense and administrative costs whether or not
the defendant fulfilled its duties under the contracts. Those expenses could be difficult
to quantify and it is reasonable that the parties could have agreed to a percentage
markup to compensate for those costs. Whether or not the markup can be recovered
as a remedy for the delay will depend on the evidence at trial on the nature of the

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contracting parties, the negotiations, the extent of delay, and the proof of and
proportionality to actual damages. Accordingly, the court finds Skinner’s motion for
summary judgment precluding liquidated damages should be denied at this time.
IT IS ORDERED that the defendant’s motion for partial summary judgment (Filing
No. 162) is denied.
Dated this 30th day of January, 2014.
BY THE COURT:

s/ Joseph F. Bataillon
United States District Judge

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