New Dunn Hotel, LLC et al v. K2M Design, Inc.

Filing 23

ORDER granting in part and denying in part 11 Motion to Dismiss for Failure to State a Claim. As to plaintiff NDH, claims one through ten and 12 of the complaint are DISMISSED WITH PREJUDICE, and claim 11 is allowed to proceed. As to plaintiff 510, claim 11 is DISMISSED WITH PREJUDICE. Signed by District Judge Louise Wood Flanagan on 5/21/2020. (Collins, S.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
NO. 5:20-CV-107-FL

NEW DUNN HOTEL, LLC, and 510
SPRING BRANCH, LLC,
Plaintiffs,
v.
K2M DESIGN, LLC,
Defendant.

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ORDER

This matter comes before the court on defendant’s partial motion to dismiss plaintiffs’
complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (DE 11). The issues
raised have been fully briefed, and in this posture are ripe for ruling. For the reasons that follow,
defendant’s motion is granted in part and denied in part.
STATEMENT OF THE CASE
This case concerns the numerous alleged failures of defendant, an architectural firm, to
provide agreed upon design services to plaintiff 510 Spring Branch, LLC (“510”), the aspiring
operator of a future hotel in Dunn, North Carolina, located on real property owned by plaintiff
New Dunn Hotel, LLC (“NDH”). In this action removed from Harnett County Superior Court
March 20, 2020, plaintiffs allege a total of 12 causes of action. Nine are grounded squarely on
breach of the design services agreement between plaintiff 510 and defendant (claims one through
five and seven through ten).1 Two more implicate that agreement where plaintiffs allege breach

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Those alleged breaches of the design services agreement include: providing a defective architectural design,

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of the North Carolina Architectural Code (claim six), constituting a breach of the agreement, and
identified bad acts constituting a breach of a duty of good faith and fair dealing (claim 12). They
also assert a negligence claim (claim 11).
Defendant seeks dismissal of all claims brought by plaintiff NDH on grounds plaintiff
NDH was not party to any contract, together with its negligence claim, contending that cause of
action is barred by the economic loss rule. Defendant seeks dismissal of plaintiff 510’s negligence
claim on similar grounds.
STATEMENT OF FACTS
The facts alleged in voluminous complaint2 may be summarized as follows. On July 1,
2016, plaintiff NDH purchased real estate and a two-story, 80-unit building totaling approximately
54,000 square feet (“hotel”) located at 510 Spring Branch in Dunn, North Carolina (collectively
“property”). (Compl. ¶¶ 8–10, Ex. 1). On July 18, 2016, plaintiff 510 obtained brand approval
requirements for a hotel franchised by Country Inns & Suites By Carlson, Inc. (“franchisor”),
including architecture and design requirements. (Id. ¶¶ 11–13, Ex. 2). Plaintiffs were formally
organized on August 15, 2016, with plaintiff NDH as the property owner and plaintiff 510 as the
hotel operator.3 (Id. ¶¶ 14–19, Ex. 3, Ex. 4).
On September 21, 2016, the franchisor revised its brand approval requirements to require
submission of preliminary drawings and final plans containing sufficient details to enable the

designing defective structural systems, designing defective and code noncompliant electrical systems, designing
defective and code noncompliant plumbing systems, providing a design that did not meet the requirements of the
Americans with Disabilities Act, failing to meet the brand requirements for a Country Inn & Suites franchise, failing
to provide a final and complete set of electronic design documents, causing a major design delay for the project, and
failing to respond to requests for information and other administrative tasks.
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Plaintiffs’ complaint is 41 pages long and includes 44 attached exhibits.

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Several months later, on December 10, 2016, plaintiff NDH and plaintiff 510 entered into a lease agreement,
wherein plaintiff 510 agreed to pay plaintiff NDH $25,000.00 per month to lease the hotel. (Id. ¶¶ 37–38, Ex. 10).

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franchisor’s plan reviewer to determine compliance with all brand approval requirements. (Id. ¶¶
20–22, Ex. 5). Shortly thereafter, on September 30, 2016, Kevin Coulter (“Coulter”), acting on
behalf of defendant, expressed interest in serving as architect of record for the hotel development
project. (Id. ¶¶ 23–25, Ex. 6).
On November 11, 2016, the franchisor and plaintiff 510 entered into a licensor-licensee
agreement, requiring plaintiff 510 diligently to pursue the renovation according to specific time
frames so that the hotel’s opening occurred on or before June 1, 2017. (Id. ¶¶ 29–32, Ex. 8). A
few days later, on November 16, 2016, plaintiff 510 entered into a design services agreement with
defendant, in which defendant agreed to provide a final project design based upon the prototypes
and compliant with brand approval requirements by January 2, 2017. (Id. ¶¶ 33–36, Ex. 9).
On December 29, 2016, and January 19, 2017, defendant furnished preliminary drawings
and specifications for review. (Id. ¶¶ 39–40). The franchisor rejected defendant’s preliminary
design February 8, 2017, noting key differences between defendant’s design plan and Country Inn
& Suites architecture and design standards. (Id. ¶¶ 41–42, Ex. 11). Defendant furnished revised
preliminary drawings and specifications on February 13, 2017, which seven days later, on
February 20, 2017, the franchisor again rejected, explaining that, among other things, the drawings
lacked responses to prior redlines, a site plan, notation of exterior signature colors and materials,
or elevated public spaces. (Id. ¶¶ 43–45).
Several weeks later, on April 5 and 27, 2017, and on May 31, 2017, defendant furnished
drawings and specifications for construction. (Id. ¶¶ 46–48). On June 2, 2017, the city of Dunn
(“Dunn”) denied plaintiff 510 a building permit because defendant’s construction designs did not
satisfy building permit requirements. (Id. ¶¶ 49–51, Ex. 13). Similarly, on June 23, 2017, the
franchisor issued its review of the construction design, stating that it had conducted a second

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preliminary review and found that the construction designs lacked information necessary to
complete a comprehensive architectural and interior design review. (Id. ¶¶ 52–53, Ex. 14). On
June 29, 2017, Dunn notified plaintiff 510 of its intention to consider an ordinance to demolish the
existing structure at a city council meeting on July 11, 2017. (Id. ¶¶ 54–55, Ex. 15). The day after
plaintiff received the Dunn’s notification, defendant furnished comments in response to the city’s
permit review and denial. (Id. ¶ 56).
On October 13, 2017, plaintiff 510 and defendant amended their design services agreement
to provide that “[a]ny code or city comments that need to be addressed on these plans will be
covered within the basic design as it currently stands on these plans to achieve a permittable set of
plans within the scope of the [design services agreement]” (Id. ¶¶ 59–61, Ex. 17). On October 16
and 26, 2017, defendant furnished incomplete, inaccurate, and noncompliant final drawings and
specifications in response to the city’s permit review. (Id. ¶¶ 62–63). Upon completing its
architectural review, the franchisor rejected defendant’s design as inconsistent with the brand
standards on February 20, 2018. (Id. ¶¶ 66–67, Ex. 19). Approximately two months later, plaintiff
510 was notified on behalf of Dunn that the design produced by defendant failed to meet code
requirements set forth by the city’s public works department. (Id. ¶¶ 68–69, Ex. 20).
On April 16, 2018, plaintiff 510 and defendant again amended their design services
agreement, providing that defendant would “incorporate all revision 3 comments (civil and
architectural only) received via email on March 28, 2018. Radisson Hotels branding team reviewed
the Design Professional’s drawings dated 10/26/2017 for the Country Inn & Suites; Dunn, NC.”
(Id. ¶¶ 70–72, Ex. 21). However, on May 1, 2018, defendant issued plaintiff 510 a notice that
Steven Grasley (“Grasley”), defendant’s vice-president, had ordered defendant to stop work on
plaintiff 510’s project. (Id. ¶¶ 73–74, Ex. 22). On July 10, 2018, defendant transferred to plaintiff

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510 the design documents. (Id. ¶¶ 75–76, Ex. 23).
On July 15, 2019, plaintiff 510 executed a contract with LMHT Associates to serve as
completion architect of record, responsible for completion of defendant’s final design. (Id. ¶¶ 83–
84, Ex. 26). Plaintiff NDH has incurred or will incur a total of $905,025.99 in damages resulting
from defendant’s delays, and plaintiff 510 has incurred losses in the amount of $1,022,798.32 for
the same. (Id. ¶¶ 88–90, Ex. 28). Additional facts pertinent to the instant motion will be discussed
below.
COURT’S DISCUSSION
A.

Standard of Review
To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient

factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
v. Iqbal, 556 U.S. 662, 663 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“Factual allegations must be enough to raise a right to relief above the speculative level.”
Twombly, 550 U.S. at 555. In evaluating whether a claim is stated, “[the] court accepts all wellpled facts as true and construes these facts in the light most favorable to the plaintiff,” but does not
consider “legal conclusions, elements of a cause of action, . . . bare assertions devoid of further
factual enhancement[,] . . . unwarranted inferences, unreasonable conclusions, or arguments.”
Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009) (citations
omitted). In reviewing a motion to dismiss under Rule 12(b)(6), the court “may consider
documents attached to the complaint, see Fed. R. Civ. P. 10(c), as well as those attached to the
motion to dismiss, so long as they are integral to the complaint and authentic.” Sec’y of State For
Defence v. Trimble Navigation Ltd., 484 F.3d 700, 705 (4th Cir. 2007) (internal citations omitted).

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B.

Analysis
1.

Plaintiff NDH’s Breach of Contract Claims

Under North Carolina law, the “elements of a claim for breach of contract are (1) existence
of a valid contract and (2) breach of the terms of that contract.” Crosby v. City of Gastonia, 635
F.3d 634, 645 (4th Cir. 2011) (quotations omitted). “The general rule is that one who is not a party
to a contract may not maintain an action for its breach.” Matternes v. City of Winston-Salem, 286
N.C. 1, 12 (1974). An exception to this rule “permits such an action to be maintained by a third
party who is a beneficiary of the contract.” Id.; see Raritan River Steel Co. v. Cherry, Bekaert &
Holland, 329 N.C. 646, 650–51 (1991) (collecting cases).
Here, plaintiff NDH was not a party to defendant’s design services agreement with plaintiff
510. (See Compl. ¶¶ 33, 286, Ex. 9). Furthermore, defendant and plaintiff 510’s contract expressly
agrees that “[n]othing in this Agreement shall create a contractual relationship with or a cause of
action in favor of a third party.” (Compl. Ex. 9 at 123).4 The complaint on its face indicates that
plaintiff NDH is neither party to a contract between plaintiff 510 and defendant nor third party
beneficiary to said contract. Plaintiff NDH, in responding to defendant’s motion to dismiss, does
not contend that its breach of contract claims should not be dismissed. Accordingly, as to plaintiff
NDH, claims one through ten and 12 of the complaint are dismissed with prejudice.
2.

Economic Loss Rule

“North Carolina’s economic loss rule provides that ‘ordinarily, a breach of contract does
not give rise to a tort action by the promisee against the promisor.’” Legacy Data Access, Inc. v.
Cadrillion, LLC, 889 F.3d 158, 164 (4th Cir. 2018) (quoting N. Carolina State Ports Auth. v. Lloyd
A. Fry Roofing Co., 294 N.C. 73, 81 (1978), rejected in part on other grounds, Trs. of Rowan

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Unless otherwise specified, the court uses page numbers assigned to the complaint and supporting exhibits
by its case management and electronic filing system (“CM/ECF”).

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Tech. Coll. v. J. Hyatt Hammond Assocs., Inc., 313 N.C. 230 (1985)). “More specifically, it
prohibits recovery for purely economic loss in tort when a contract, a warranty, or the UCC
operates to allocate risk.” Severn Peanut Co. v. Indus. Fumigant Co., 807 F.3d 88, 94 (4th Cir.
2015) (citation and quotations omitted). Under this rule, a “tort action does not lie against a party
to a contract who simply fails to properly perform the terms of the contract.” Legacy Data Access,
889 F.3d at 164 (quotations omitted). “It is the law of contract, not tort law, which defines the
obligations and remedies of the parties in such a situation.” Id. (quotations omitted).
“Accordingly, North Carolina law requires courts to limit plaintiffs’ tort claims to only
those claims which are identifiable and distinct from the primary breach of contract claim.” Id.
(quotations omitted) (quoting Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d 331, 346
(4th Cir. 1998)). “Only where a breach of contract also constitutes an ‘independent tort’ may tort
actions be pursued.” Strum v. Exxon Co., U.S.A., a Div. of Exxon Corp., 15 F.3d 327, 330 (4th
Cir. 1994). Furthermore, it is “unlikely that an independent tort could arise in the course of
contractual performance, since those sorts of claims are most appropriately addressed by asking
simply whether a party adequately fulfilled its contractual obligations.” Id.; see N. Carolina State
Ports Auth., 294 N.C. at 83 (“[O]ur research has brought to our attention no case in which this
Court has held a tort action lies against a promisor for his simple failure to perform his contract,
even though such failure was due to negligence or lack of skill.”).
Here, plaintiffs allege that plaintiff 510 had a contract — its design services agreement —
with defendant. (Compl. ¶¶ 33–36, 59–61, 70–72, Ex. 9, Ex. 17, Ex. 21). Defendant allegedly
defaulted on its contractual obligations under the design services agreement. (See, e.g., Compl. ¶¶
101–05, 122–23, 132–35, 148–50, 160–62, 171–74, 182, 186–87, 194, 200, 204–10, 214–15, 225–
27, 231–37, 263–68). Concurrently, plaintiffs allege that defendant’s breaches of contract are also

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negligent acts. (See id. ¶¶ 271–82). Further, plaintiffs allege each of these tortious acts caused
economic losses. (Id. ¶¶ 83, 89–90, 284).
a.

Plaintiff NDH’s Negligence Claim

Determining whether the economic loss rule applies to plaintiff NDH depends upon
resolution of a threshold legal question: whether the economic loss rule bars negligence claims
against those not in contractual privity, and if so, under what circumstances.
In certain cases, the economic loss rule bars negligence claims of parties not in contractual
privity. For example, in N. Carolina State Ports Auth., the North Carolina Supreme Court applied
the rule to a subcontractor sued by plaintiff for negligent installation of roofs, where such
negligence claim was “simply an allegation that [the subcontractor] did not properly perform its
contract with [the general contractor].” 294 N.C. at 87. In Beaufort Builders, Inc. v. White Plains
Church Ministries, Inc., the North Carolina Court of Appeals applied the economic loss rule to bar
a negligence claim of a party not in privity of contract where the defendant 1) was the president
and co-owner of the contracting corporate party; 2) defendant’s presence at the construction site
in dispute was due to his company’s performance of its contract with plaintiff, and 3) all of the
acts he undertook while at the site were related to the corporate defendant’s contractual obligation
to construct a church for plaintiff. 246 N.C. App. 27, 37 (2016).
However, North Carolina courts have also been chary of applying the economic loss rule
to nonparties to a contract. In Oates v. Jag, Inc., the North Carolina Supreme Court held that “an
owner of a dwelling house who is not the original purchaser has a cause of action against the
builder and general contractor for negligence in the construction of the house, when such
negligence results in economic loss or damage to the owner.” 314 N.C. 276, 277 (1985). Several
North Carolina Court of Appeals cases have also held that “[b]ecause there was no contract

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between [the parties], . . . the economic loss rule does not apply and therefore does not operate to
bar [plaintiff’s] negligence claims.” Lord v. Customized Consulting Specialty, Inc., 182 N.C. App.
635, 643 (2007); Rountree v. Chowan Cty., 252 N.C. App. 155, 160 (2017); White v. Collins
Bldg., Inc., 209 N.C. App. 48, 59 n.3 (2011); Hospira Inc. v. Alphagary Corp., 194 N.C. App. 695,
704–05 (2009).
“After parsing the cases mentioned above . . . we believe the relevant inquiry under North
Carolina case law is whether the plaintiff ‘ha[s] [a] basis for recovery in contract or warranty.’”
Ellis v. Louisiana-Pac. Corp., 699 F.3d 778, 786 (4th Cir. 2012) (quoting Warfield v. Hicks, 91
N.C. App. 1, 10 (1988)). Where plaintiff NDH has no basis for recovery in contract or warranty,
(see Compl. ¶¶ 33, 286, Ex. 9 at 123), the economic loss rule does not operate to bar plaintiff
NDH’s negligence claim against defendant.
The cases relied upon by defendant are not analogous to the instant dispute. In both N.
Carolina State Ports Auth. and Beaufort Builders, Inc. v. White Plains Church Ministries, Inc.,
plaintiff had a basis for recovery in contract against one defendant and sought to recover in
negligence against another defendant not party to the contract. In such cases, plaintiff had
allocated the risk of loss for injuries touching upon the subject matter of the contract and defined
its rights and remedies by way of contractual agreement. See N. Carolina State Ports Auth., 294
N.C. at 87; Beaufort Builders, 246 N.C. App. at 37.5 Here, an additional plaintiff not privy to the
design services agreement, plaintiff NDH, is claiming injury from defendant’s conduct. Plaintiff
NDH never made any contract with defendant or otherwise allocated risk of loss by contract.

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The same factor distinguishes this case from Crescent Univ. City Venture, LLC v. AP Atl., Inc., No. 15 CVS
14745, 2019 WL 3814999 (N.C. Super. Aug. 14, 2019), an unpublished opinion of the North Carolina business court,
in which the court applied the economic loss doctrine to bar a claim brought by a plaintiff owner against a third-party
manufacturer, where the plaintiff had separately exercised its “power in the bargaining process and its contractual
remedy against” a general contractor defendant on the same construction project. Id. at * 16.

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In Moore v. Coachmen Indus., Inc., the court found the economic loss rule barred plaintiff’s
negligence claims where the rights and remedies for breach of warranty governed plaintiff’s claims
against defendant manufacturer. 129 N.C. App. 389, 401–02 (1998). Although defendant cites
Moore for the proposition that a defendant does not have to be in contractual privity for plaintiff’s
claim to be barred by the economic loss rule, breach of warranty claims sound in contract, thus
triggering application of the rule. See id.; Ellis, 699 F.3d at 786.
In sum, plaintiff NDH’s negligence claim may not be dismissed under the economic loss
rule. In this part, defendant’s partial motion to dismiss is denied.6
b.

Plaintiff 510’s Negligence Claim

Plaintiff 510’s design services agreement provides a basis for recovery in contract against
defendant. (See Compl. ¶¶ 33–36, 59–61, 70–72, Ex. 9, Ex. 17, Ex. 21). Therefore, plaintiff 510’s
negligence claim must be dismissed unless its negligence claim constitutes an independent tort.
In N. Carolina State Ports Auth., the North Carolina Supreme Court held that a property
owner who contracted for construction of buildings was not entitled to recover in tort from the
contractor who allegedly did not construct the roofs as agreed. 294 N.C. at 83; see also Spillman
v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65 (1992) (applying the economic loss rule
to similar facts). In Kaleel Builders, Inc. v. Ashby, the North Carolina Court of Appeals, citing N.
Carolina State Ports Auth., explained that as between an architect in contractual privity with his
client, “the contract governs, and we recognize no injuries sounding in tort.” Kaleel Builders, Inc.
v. Ashby, 161 N.C. App. 34, 42–44, 46 (2003). Plaintiff 510’s negligence claim is analogous to
the preceding cases.

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Where defendant’s motion to dismiss is grounded upon the economic loss rule, the court leaves for a later
date the separate question of what legal duty, if any, defendant owes plaintiff NDH. See Fussell v. N. Carolina Farm
Bureau Mut. Ins. Co., 364 N.C. 222, 226 (2010).

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Plaintiff 510 argues defendant is nonetheless liable to it for negligence because of
defendant’s professional duties as an architect under North Carolina law, attempting to invoke the
public policy exception to the economic loss rule. See N. Carolina State Ports Auth., 294 N.C. at
82. The principal case on which plaintiff 510 relies held “that an architect in the absence of privity
of contract may be sued by a general contractor or the subcontractors working on a construction
project for economic loss foreseeably resulting from breach of an architect’s common law duty of
due care in the performance of his contract with the owner.” Davidson & Jones, Inc. v. New
Hanover Cty., 41 N.C. App. 661, 667 (1979) (emphasis added).
Plaintiff 510’s argument is unpersuasive. In Davidson & Jones, the architect’s negligence
towards a general contractor or subcontractor was held identifiable and distinct from the
contractual duties owed to the client, relying specifically upon the “working relationship” and
“community of interests” between the architect and the contractor to impose a duty of due care
under the law. 41 N.C. App. at 667; see Pompano Masonry Corp. v. HDR Architecture, Inc., 165
N.C. App. 401, 408 (2004); Shoffner Indus., Inc. v. W. B. Lloyd Const. Co., 42 N.C. App. 259,
271–72 (1979). Unlike the duty owed to a general contractor or subcontractor, defendant’s
“working relationship” and “community of interests” with plaintiff 510 is not distinct from the
design services agreement. See Severn Peanut, 807 F.3d at 94; Kaleel Builders, 161 N.C. App. at
42–44, 46; (Compl. ¶ 272; Ex. 9 at 122–23 (allocating risk and limiting defendant’s liability for
consequential damages)). Plaintiff 510’s negligence claim against defendant is dismissed with
prejudice.
CONCLUSION
Based on the foregoing, defendant’s partial motion to dismiss (DE 11) is GRANTED IN
PART and DENIED IN PART. As to plaintiff NDH, claims one through ten and 12 of the

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complaint are DISMISSED WITH PREJUDICE, and claim 11 is allowed to proceed. As to
plaintiff 510, claim 11 is DISMISSED WITH PREJUDICE.
SO ORDERED, this the 21st day of May, 2020.

_____________________________
LOUISE W. FLANAGAN
United States District Judge

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