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

Filing 64

ORDER denying 47 Motion for Judgment on the Pleadings; denying 61 Motion for Reconsideration. On its own initiative, the court EXTENDS the fact discovery deadline to June 28, 2021. All other terms and conditions in the court's May 6, 2020, case management order, as amended August 12, 2020, and January 11, 2021, shall remain in full force and effect. Signed by District Judge Louise Wood Flanagan on 5/12/2021. (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; 510 SPRING
BRANCH, LLC; and WHITTENTON
BUILDERS ENTERPRISES, INC.,
Plaintiffs,
v.
K2M DESIGN, INC.,
Defendant.
K2M DESIGN, INC.,
Third-Party Plaintiff,
v.
WAVE ENGINEERING, PLLC,
Third-Party Defendant. 1

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ORDER

This matter is before the court on plaintiffs’ motion for judgment on the pleadings, pursuant
to Rule 12(c) of the Federal Rules of Civil Procedure. (DE 47).

Also before the court is

defendant’s motion for reconsideration (DE 61) of the court’s May 21, 2020, order, granting in

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The court constructively amends the caption of this order to reflect joinder of Whittenton Builders
Enterprises, Inc. as a plaintiff on August 12, 2020, and filing of third-party complaint against Wave Engineering,
PLLC, on August 19, 2020.

part and denying in part defendant’s motion to dismiss. The issues raised have been briefed fully,
and in this posture, are ripe for ruling. For the following reasons, the motions are denied.
BACKGROUND
This case arises out of a dispute concerning a hotel renovation project (“the Project”)
between defendant, an architectural firm, and plaintiffs New Dunn Hotel, LLC (“NDH”), owner
of the hotel property; 510 Spring Branch, LLC (“510”), operator and lessee of a building located
on the hotel property; and plaintiff Whittenton Builders Enterprises, Inc. (“Whittenton”), the
general contractor of the Project. Plaintiffs NDH and 510 commenced this action on February 7,
2020, asserting various breach of contract claims, as well as claims for negligence and breach of
the duty of good faith and fair dealing.
Following removal from Harnett County Superior Court, and upon motion of defendant,
the court dismissed with prejudice plaintiff 510’s negligence claim, and dismissed with prejudice
all of plaintiff NDH’s claims, except its negligence claim, finding that it was not barred by the
economic loss rule. Shortly thereafter, plaintiffs filed the operative amended complaint, joining
Whittenton as a plaintiff and asserting a negligence claim on its behalf. In the meantime, the court
entered case management order, with a deadline, now extended, for discovery to conclude by July
28, 2021, and dispositive motions due August 27, 2021.2
On August 26, 2020, defendant answered the amended complaint and asserted a
counterclaim against plaintiff 510, alleging breach of an April 16, 2018, design services agreement.
Plaintiffs answered defendant’s counterclaim on September 2, 2020, attaching email
correspondence.3 Approximately one week later, plaintiffs filed the instant motion for judgment

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On August 19, 2020, defendant filed third-party complaint against Wave Engineering, PLLC, asserting a
claim for indemnification based upon an alleged subcontractor agreement between the two parties.

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Although defendant asserts the counterclaim against plaintiff 510 alone, plaintiffs designate the answer to

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on the pleadings with respect to defendant’s counterclaim. Defendant responded in opposition on
September 29, 2020.
On March 14, 2021, defendant filed the instant motion for reconsideration of the court’s
May 21, 2020, order, granting in part and denying in part defendant’s motion to dismiss. In
particular, defendant seeks reconsideration of that part of the court’s order finding that the
economic loss rule did not bar plaintiff NDH’s negligence claim.

Plaintiffs responded in

opposition on April 1, 2021, and defendant replied on April 3, 2021.
STATEMENT OF FACTS
The court summarizes, in turn below, the facts alleged in plaintiffs’ complaint, as relevant
to defendant’s motion for reconsideration, and the facts alleged in defendant’s counterclaim, as
relevant to plaintiff’s motion for judgment on the pleadings.
A.

Complaint
The court incorporates herein the summary of the alleged facts in the complaint, as set forth

in its May 21, 2020, order, for ease of reference:
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. (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 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).
the counterclaim, as well as the motion for judgment on the pleadings, as being filed by all plaintiffs.

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On November 11, 2016, the franchisor and plaintiff 510 entered into a licensorlicensee 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 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).
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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 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).
New Dunn Hotel, LLC v. K2M Design, LLC, No. 5:20-CV-107-FL, 2020 WL 2575562, at *1–3
(E.D.N.C. May 21, 2020).
B.

Counterclaim
On April 16, 2018, defendant and plaintiff 510 entered into a design services agreement

(“April 16 Design Contract”), under which defendant agreed to provide “certain limited design
services” for the Project in exchange for payment by plaintiff 510 for the same. (Counterclaim
(DE 34) ¶¶ 1-2). Pursuant to the parties’ agreement, plaintiff 510’s payment obligations included
a deposit of $2,692.00, to be paid at the start of the April 16 Design Contract. (Id. ¶ 4). Defendant
allegedly began providing services to plaintiff 510 under the April 16 Design Contract, and
invoiced plaintiff 510 for those services. (Id. ¶ 5). However, plaintiff 510 allegedly has failed to
pay defendant for any work it performed. (Id. ¶¶ 7-8).

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COURT’S DISCUSSION
A.

Motion for Reconsideration
1.

Standard of Review

Pursuant to Federal Rule of Civil Procedure 54(b), “any order or other decision, however
designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all
the parties does not end the action as to any of the claims or parties and may be revised at any time
before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.”
Fed. R. Civ. P. 54(b). Compared to post-judgment Rule 59(e) motions, Rule 54(b) gives district
courts “broader flexibility to revise interlocutory orders before final judgment as the litigation
develops and new facts or arguments come to light.” Carlson v. Boston Sci. Corp., 856 F.3d 320,
325 (4th Cir. 2017). The discretion provided by Rule 54(b), however, “is not limitless.” Id. The
court may revise an interlocutory order only in the following circumstances: (1) a subsequent trial
produces substantially different evidence; (2) a change in applicable law; or (3) clear error causing
manifest injustice. Id.; see also Am. Canoe Ass’ n v. Murphy Farms, Inc., 326 F.3d 505, 515 (4th
Cir. 2003).
2.

Analysis

Defendant seeks reconsideration of that part of the court’s May 21, 2020, order, finding
that the economic loss rule does not bar plaintiff NDH’s negligence claim.
“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
Tech. Coll. v. J. Hyatt Hammond Assocs., Inc., 313 N.C. 230 (1985)). “More specifically, it

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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, in determining whether the
economic loss rule bars a plaintiff’s negligence claim, 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)).
Here, plaintiffs allege that plaintiff 510 entered into a contract with defendant, (see Compl.
¶¶ 33–36, 59–61, 70–72, Ex. 9, Ex. 17, Ex. 21), and that defendant defaulted on its obligations
under the contract. (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 negligent acts that caused plaintiff NDH economic losses.
(Id. ¶¶ 83, 89–90, 271–82, 284). Plaintiff NDH was not a party to defendant’s contract with
plaintiff 510, and it has no basis for recovery in contract or warranty. (See Compl. ¶¶ 33, 286, Ex.
9 at 123). As a result, the economic loss rule does not operate to bar plaintiff NDH’s negligence
claim against defendant.
Defendant argues, however, that the North Carolina Supreme Court’s decision in Crescent
Univ. City Venture, LLC v. Trussway Mfg., Inc., 376 N.C. 54, 60 (2020) compels a different
result. In Crescent, the court held that the economic loss rule barred a commercial property

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owner’s negligence claim against a manufacturer, with whom the commercial property owner
lacked contractual privity. 376 N.C. at 62-63. Consistent with court’s initial analysis,4 Crescent
is distinguishable from the instant matter in a key respect. In Crescent, the commercial property
owner “possess[ed] a bargained-for means of recovery” in contract against a general contractor,
for the exact harm underlying its negligence claim against the manufacturer. Id. at 55. As the
court explained, in negotiating its contract with general contractor, the commercial property owner
had “the full knowledge of and power to control the acquisition and engagement of”
manufacturers. Id. As a result, the court held that the commercial property owner must “look
toward the breach of its contractual relationship with its supplier or general contractor to recover
[it’s] purely economic losses.” Id. at 62.
Here, in contrast, plaintiff NDH never made any contract with defendant or otherwise
allocated risk of loss by contract. Thus, unlike the commercial property owner in Crescent,
plaintiff NDH lacks a “basis for recovery in contract or warranty”, rendering the economic loss
rule inapplicable to its negligence claim. Ellis, 699 F.3d at 786. Defendant argues that the Fourth
Circuit’s decision in Ellis is no longer viable in light of Crescent. However, the court in Crescent
applied the economic loss rule to a plaintiff who had a basis for recovery in contract; therefore,
Crescent is in accord with the Fourth Circuit’s conclusion that “the relevant inquiry under North
Carolina case law is whether the plaintiff ‘ha[s] [a] basis for recovery in contract or warranty.’”
Ellis, 699 F.3d at 786.
Finally, defendant suggests that Crescent mandates application of the economic loss rule

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The court previously distinguished Crescent Univ. City Venture, LLC v. AP Atl., Inc., No. 15 CVS 14745,
2019 WL 3814999 (N.C. Super. Aug. 14, 2019) from the instant matter. See New Dunn Hotel, 2020 WL 2575562, at
*5 n.5 (“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.”).

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in the commercial context; yet, the court’s holding in Crescent is significantly narrower than
defendant contends and limited by facts not present here. See Crescent, 376 N.C. at 60 (“To the
extent that such cases as Lord spawn an argument against the application of the economic loss rule
in commercial cases where a sophisticated commercial developer attempts to recover in tort against
a subcontractor when the injury complained of concerns solely the subject matter of a valid
contract between the developer and the general contractor, as is the case here, such an argument is
unpersuasive.”) (emphasis added).
For all these reasons, defendant’s motion for reconsideration is denied.
B.

Motion for Judgment on the Pleadings
1.

Standard of Review

“After the pleadings are closed–but early enough not to delay trial–a party may move for
judgment on the pleadings.” Fed. R. Civ. P. 12(c). In reviewing a motion for judgment on the
pleadings, the court “appl[ies] the same standard as a 12(b)(6) motion to dismiss.” Mayfield v.
Nat’l Ass’n for Stock Car Auto Racing, Inc., 674 F.3d 369, 375 (4th Cir. 2012). “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 well-pled 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

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omitted).
2.

Analysis

Plaintiff moves for judgment on the pleadings on defendant’s counterclaim for breach of
the April 16 Design Contract. “The elements of a claim for breach of contract are (1) existence of
a valid contract and (2) breach of the terms of [the] contract.” Wells Fargo Ins. Serv. USA, Inc.
v. Link, 372 N.C. 260, 276 (2019).

Under the first element, a valid contract requires assent,

mutuality, and definite terms. See Horton v. Humble Oil & Refining Co., 255 N.C. 675, 679
(1961). Moreover, mutuality, or “[m]utuality of promises means that promises, to be enforceable,
must each impose a legal liability upon the promisor. Each promise then becomes a consideration
for the other.” Wellington-Sears & Co. v. Dize Awning & Tent Co., 196 N.C. 748, 751 (1929).
Under the second element, failure to comply with duties imposed by contract terms constitutes
breach. See Sale v. State Highway Comm’ n, 242 N.C. 612, 619 (1955).
Here, defendant alleges that it entered into the April 16 Design Contract with plaintiff 510,
under which the parties agreed that defendant would provide design services for the Project in
exchange for payment by plaintiff 510. (Counterclaim (DE 34) ¶¶ 2-4). Moreover, defendant
alleges that plaintiff 510 breached the April 16 Design Contract, by failing to pay defendant for
the services it provided thereunder. (Id. ¶¶ 6-8). Accordingly, defendant sufficiently states a claim
for breach of the April 16 Design Contract, based upon plaintiff 510’s alleged failure to make
payment.
Plaintiff 510 argues that it made a payment under the April 16 Design Contract and that
defendant failed to provide any of the services required by the April 16 Design Contract, relying
upon allegations in its amended complaint, that defendant does not admit in its answer, as well as
documents attached to plaintiff 510’s answer to defendant’s counterclaim, specifically an email

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written by Rod Quqa (“Quqa”), defendant’s senior project manager, dated May 1, 2018, and an
email chain between Jenna Kutsar, defendant’s accounts receivable specialist, and Quqa, dated
June 28, 2018 (hereinafter, the “2018 emails” ). (See Answer, Ex. 1 (DE 46-1); Answer, Ex. 2
(DE 46-2)). Plaintiff 510 contends the court can consider the 2018 emails upon its motion for
judgment on the pleadings, and that the 2018 emails demonstrate that plaintiff 510 is entitled to
judgment as a matter of law on defendant’s counterclaim.
Under the circumstances of this case, consideration of the contents of the 2018 emails,
particularly for the truth of the matters asserted therein, is improper upon a motion for judgment
on the pleadings. Although the United States Court of Appeals for the Fourth Circuit has not
addressed this issue in a published opinion, district courts within this circuit have stated that upon
review of a Rule 12(c) motion, the court may consider all pleadings, including answers and
attached exhibits, in addition to the complaint. See, e.g., Seneca Ins. Co. v. Shipping Boxes I,
LLC, 30 F. Supp. 3d 506, 510 (E.D. Va. 2014); Mendenhall v. Hanesbrands, Inc., 856 F.Supp.2d
717, 724 (M.D.N.C. 2012).
Nevertheless, the court must adhere to the rule that “[a] Rule 12(c) motion tests only the
sufficiency of the [counterclaim] and does not resolve . . . any disputes of fact.” Drager v. PLIVA
USA, Inc., 741 F.3d 470, 474 (4th Cir. 2014). Thus, the court must “assume the facts alleged in
the [counterclaim] are true and draw all reasonable factual inferences in [the defendant’s] favor.”
Burbach Broad. Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401, 406 (4th Cir. 2002).
Likewise, consideration of a document outside of the counterclaim relied upon by a plaintiff in
support of dismissal under Rule 12 “ordinarily is permitted only when the document is integral to
and explicitly relied on in the [counterclaim], and when the [defendant] do[es] not challenge the
document’s authenticity.” Zak v. Chelsea Therapeutics Int’l, Ltd., 780 F.3d 597, 606-07 (4th Cir.

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2015).
Here, while defendant does not raise an issue with the authenticity of the 2018 emails, they
are neither integral to nor explicitly relied upon in the counterclaim. Indeed, the counterclaim does
not reference the 2018 emails and it does not rely upon the contents of the 2018 emails to state a
claim for breach of contract. (See, e.g., Counterclaim ¶¶ 1-15). As such, consideration of the 2018
emails for purposes of the instant motion is improper.
Therefore, plaintiff’s motion for judgment on the pleadings is denied.
CONCLUSION
Based on the foregoing, plaintiffs’ motion for judgment on the pleadings (DE 47) is
DENIED and defendant’s motion for reconsideration (DE 61) is DENIED. On its own initiative,
the court EXTENDS the fact discovery deadline to June 28, 2021. All other terms and conditions
in the court’s May 6, 2020, case management order, as amended August 12, 2020, and January 11,
2021, shall remain in full force and effect.
SO ORDERED, this the 12th day of May, 2021.

_____________________________
LOUISE W. FLANAGAN
United States District Judge

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