UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
OOTEN COAL CORPORATION
DEBTOR CASE NO. 96-70182
OOTEN COAL CORPORATION PLAINTIFF
VS. ADV. NO. 97-7042
JOHN L. CARMAN AND ASSOCIATES, INC.;
MARTIN ENGINEERING AND CONSTRUCTION, INC.;
CUMBERLAND SURETY INSURANCE COMPANY, INC.;
MARTIN COUNTY BOARD OF EDUCATION; FLOYD
COUNTY BOARD OF EDUCATION; REED ENGINEERING
COMPANY, INC.; BROKENARROW, INC.; CARBON TECH
FUELS, INC.; and JASPER IRON & METAL CO., INC. DEFENDANTS
This matter is before the Court on Motions for Summary Judgment filed by defendants John L. Carman and Associates, Inc. (ACarman@) and Cumberland Surety Insurance Company, Inc. (ACumberland@), and the relevant responses filed by the plaintiff. Both of these motions were heard and have been taken under consideration by the Court. The Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); the plaintiff has alleged that it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(C)(E) and (O).
1. Defendant John L. Carman & Associates= Motion for Summary Judgment
This matter is concerned with two construction projects in eastern Kentucky. The plaintiff=s allegations against Carman relate to one of the projects, the construction of the Warfield Middle School in Martin County, Kentucky. The parties entered into various contracts with the Martin County School Board (Athe Board@) in regard to these projects. The allegations against Carman may be summarized as follows:
Carman first contends that all of these claims are time-barred by KRS 413.245 which provides a one-year limitation period for actions against architects in connection with their professional services. The time period is calculated from the date of the occurrence or the date when the action was, or reasonably could have been, discovered.
In response, the plaintiff has raised the issue of the application of 11 U.S.C.'108(a), which provides in pertinent part:
If applicable nonbankruptcy law, .... fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of--
. . . . .
(2) two years after the order for relief.
In order for'108 to benefit the plaintiff, the period provided for filing actions under KRS 413.245 must not have expired before the plaintiff filed its Chapter 11 petition on March 6, 1996. Carman has contended that the time period had expired in regard to all of the plaintiff=s allegations against it.
Deposition testimony of principals of the plaintiff, Nancye and Phillip Blackburn, supports Carman=s position in most instances. During January and February 1995, the plaintiff experienced problems as a result of the mud seams, and outside consultants advised the plaintiff that the mud seams should have been identified by Carman and that its failure to identify them was the cause of the excavation problems the plaintiff was experiencing. (Depo. of Phillip Blackburn, p. 68; Depo. of Nancye Blackburn, pp. 158; 87). Further, throughout the same period and into March 1995, Phillip Blackburn met with Carman and discussed problems associated with the mud seams. (John Carman depo., pp. 27-28; 84).
In regard to the excavation of additional material, Nancye Blackburn testified that sometime between January and March 1995, the plaintiff concluded that it was excavating more material from the project site than what it believed was called for in the Project Manual. (Depo. of Nancye Blackburn, pp. 63; 75; 158). As to the discovery of the presence of the gas transmission line, however, Phillip Blackburn testified that the plaintiff became aware of the line inAspring of 1995.@ He was not sure of the exact date. In posing a question to Mr. Blackburn, counsel for Carman stated the following: AWell, for clarification, the Martin daily reports indicate that the first notice was provided on March 23 of 1995.@ (Depo. of Phillip Blackburn, p. 112)
Testimony given by Phillip Blackburn concerning the refusal to prepare change orders indicates that it was Sam Martin of Martin Engineering who refused to request a change order. (Depo. of Phillip Blackburn, pp. 86-87). The only reference to Carman has to do with its being made aware of the mud seam problems. (Depo. of Phillip Blackburn, p.84). Nancye Blackburn, however, testified that she heard her husband verbally request change orders from Carman in late January or early February 1995. These requested change orders were directed at the costs associated with removal of the material containing the mud seams. (Depo. of Nancye Blackburn, p. 116).
As concerns the three invoices which the plaintiff alleged that Carman had failed to consider, and then reduced the payment amounts through the assessment of liquidated damages, Carman states that payment of the reduced amount on the three invoices was authorized on May 31, 1996. There is no reference to testimony indicating that the plaintiff knew or had reason to know that it had a cause of action in this regard before that time.
Finally, Carman does not refer to testimony concerning when the plaintiff=s cause of action in regard to negligent or inadequate supervision of the project arose. However, the allegation in the plaintiff=s Complaint states in part that ACarman failed to provide adequate supervision of the project with respect to the drilling and blasting operations which revealed the mud seams. Had Carman been present at the Warfield job site, the remedial measure could have been taken such as approval of change orders requested by Ooten.@ This indicates that this cause of action arose at the same time as that related to the mud seams.
In fact, all the major causes of action relate to the discovery of, and attempts to deal with, the discovery of the mud seams and therefore all occurred in January or February of 1995. The time period for filing an action under KRS 413.245 would therefore have run by February 1996, at the latest, before the Chapter 11 petition was filed. Consequently, 11 U.S.C.'108(a) does not extend the time for filing these actions, and they are time-barred. The only two which are not time-barred are those relating to the gas transmission line and the three invoices.
The two remaining causes of action allege breach of a duty of good faith dealing, negligence and malpractice. Carman has contended that it owed no duty of care or good faith dealing to the plaintiff because there was no privity of contract between them. Carman has further contended that theAEconomic Loss Doctrine@ bars any tort action by the plaintiff because it seeks recovery of economic losses. The AEconomic Loss Doctrine,@ as enunciated in the cases cited by Carman applies in commercial settings, usually in product liability cases. Another crucial element of these cases is the applicability of UCC provisions governing commercial transactions. As stated in Bowling Green Mun. Utilities v. Thomasson Lumber Co., 902 F.Supp. 134 (W.D.KY. 1995),
The economic loss rule applies only in a commercial context. The policy reasons which courts have articulated in support of the economic loss doctrine reflect the perceived realities of commercial transactions. First, any loss based on damage to the product itself can, and should, be addressed by the contracting parties during negotiations. .... Arms length bargaining parties can choose to allocate between themselves the risk that a product will not perform properly. .... Second, the rule serves to preserve warranty law in the commercial setting. .... Finally, it is thought that the economic loss rule limits liability in an appropriate manner. In a warranty action consequential damages are limited to those which are foreseeable.
At 136. Carman has argued that this doctrine has been extended by Kentucky courts to areas other than product liability. It cites Real Estate Marketing, Inc. v. Franz, 885 S.W.2d 921, Ky. (1994), in support. This case, while not a product liability case as such, still falls within the profile set out in the Bowling Green opinion, supra. It involved aAproduct,@ a house which was alleged to be defective in its construction. One of the questions the court was asked to rule on was whether an action for breach of warranty could be extended beyond the original purchasers. This Court does not believe that Carman has established that the Economic Loss Doctrine applies here.
However, even assuming that the Economic Loss Doctrine is inapplicable, there is still the question of whether the plaintiff was owed any duty of care or good faith dealing on which a negligence action could be based. In response to Carman=s assertion that there was no privity of contract between them, the plaintiff has raised the issue of agency. Agency is a question of fact to be determined from consideration of all the evidence, circumstances, acts and conduct of the parties. The burden of establishing agency is on the party alleging it. Crump v. Sabath, 88 S.W.2d 665, 667, Ky. (1935). The plaintiff has done nothing to establish that Carman was the agent of the Martin County School Board.
On the other hand, Carman has provided case law that supports his contention that as an independent contractor on the project he could not be an agent of the Board. As stated in United Engineers & Constructors, Inc. v. Branham, 550 S.W.2d 540, Ky. (1977),
It would not be disputed that in determining whether one is an agent or servant or an independent contractor, substance prevails over form, and that the main dispositive criterion is whether it is understood that the alleged principal or master has the right to control the details of the work. Here we have a major construction project, undertaken by a company whose principal occupation is construction and for a company whose principal business is to produce steel. There was nothing in the contract between them, or in the evidence, such as it was, bearing upon the manner in which that contract was carried out, to suggest that Armco either had the qualifications and capacity to superintend the construction work, or intended, expected or actually did undertake to do so. The paper relationship between Armco and United obviously was designed for the purpose of placing upon Armco the burden of financing the project from beginning to end. In substance, United was its prime contractor.
At 543. This is the situation in this matter. The Board is not in the business of landscape architecture or construction site preparation, or their related activities. The plaintiff has not brought forth any facts to indicate that the Board was involved in the work that Carman performed, not to mention directly superintending it. In short, there is nothing in the record here to support the idea that Carman was an agent of the Board.
Carman contends that the plaintiff cannot show that it was owed any duty because there was no contract between them, and because the principles of agency do not apply here. It cited Penco, Inc. v. Detrex Chemical Industries, Inc., 672 S.W.2d 948, Ky.App. (1984), in which the court, quoting from B & C Construction Company v. Grain Handling Corp., 521 S.W.2d 98, 102-03, Tex.Ct.Civ.App. (1975), stated as follows:A[I]t is fundamental that for there to be actionable negligence there must be a violation of duty owed to the party claiming on the ground of negligence. If no duty exists no legal liability can arise from or on account of negligence ....@ At 951. While the Court agrees with this maxim, this case does not necessarily stand for the proposition that Carman owed the plaintiff no duty of care. In Penco the court held that a company that had advised a subcontractor about the use of paint owed no duty to the general contractor, but only to the subcontractor which had hired it.
As concerns the duty of care owed by an landscape architect, architect or engineer on a construction project, there are no Kentucky cases cited as controlling. However, in a case remarkably similar to the case at bar, Farrell Const. Co. v. Jefferson Parish, 693 F.Supp. 490 (E.D.La. 1988), Farrell filed suit against the engineer/architect on two construction projects on which it was the general contractor. Farrell claimed that drawings, plans and specifications upon which it relied in doing its work were inadequate and defective. Farrell further alleged that it was required to perform work beyond that called for in its contracts and that approval of shop drawings and other documents was unreasonably delayed.
The court found that there was no privity between Farrell and the engineer/architect, but concluded that privity was not essential to the tort claim. The court made note of the fact that case law in Louisiana and other jurisdictions recognizedAthe existence of a duty of care owed by an architect to persons with whom it does not have privity.@ Id. at 492. It referred to Milton J. Womack, Inc. v. State House of Representatives, 509 So.2d 62 (La.App. 1st Cir.), in which it was held that Athe contractor on a project to renovate the state capitol building could recover in tort for economic injuries from the architectural firm which negligently prepared defective plans.@ Id. at 492.
Further, in In re Designed Ventures, Inc., 132 B.R. 677 (Bkrtcy.D.R.I. 1991), the court held that a supervising architect owed a duty of care to the surety on the construction project, notwithstanding that there was no privity between them. The court quoted from Forte Bros. V. National Amusements, Inc., 525 A.2d 1301, 1303 (R.I. 1987):
>A supervising architect, in the performance of its contract with the owner, is required to exercise the ability, skill and care customarily exercised by architects in similar circumstances. This duty of care extends to contractors who share an economic relationship and community of interest with the architect on a construction project. The duty is based on circumstances establishing a direct and reasonable reliance by the contractor on the contractual performance of the architect when the architect knows, or should have known, of the reliance.=
This Court agrees with this reasoning, and finds that Carman owed a duty of care to the plaintiff. The question of whether Carman breached that duty, and if so, whether the plaintiff was injured by that breach, are issues of fact to be resolved at trial. Carman=s Motion for Summary Judgment as to the cause of action in regard to the discovery of the gas transmission line should therefore be overruled.
The reasoning set out above does not, however, support the plaintiff=s position concerning the review and approval of the three invoices. This is strictly a contract issue to be resolved between the plaintiff and the Board. Carman=s Motion for Summary Judgment as to this cause of action should be sustained.
2. Defendant Cumberland Surety Insurance=s Motion for Summary Judgment
Cumberland Surety Insurance (ACumberland@) has moved the Court to grant it summary judgment on Counts V and VI of the plaintiff=s Complaint, contending that there is no genuine issue as to any material fact in regard to those counts, and that it is entitled to judgment as a matter of law. Cumberland has based its motion on the entire record before the Court, including the depositions of Nancye and Phillip Blackburn, principals of the plaintiff.
The plaintiff had alleged in Count V of its Complaint that Cumberland made a material representation that it would provide bridge financing to enable the plaintiff to complete the Warfield Middle School project. Instead of providing financing, however, Cumberland took over the project and completed it. The plaintiff further alleged that Cumberland materially represented that it would be responsible for maintaining and repairing the plaintiff=s equipment at the job site, but that it damaged the equipment instead.
In Count VI, the plaintiff alleged that it had been kept from pursuing and engaging in other business opportunities, that it could not obtain bonding from other companies, that it had been denied a reasonable expectation of profit, and that its line of credit had been destroyed, all as a result of Cumberland=s actions.
Cumberland=s position in regard to the claim that it promised bridge financing is that there is no writing supporting such a promise, and that a writing is required by the Statute of Frauds, KRS 371.010. The record in this case does not contain any evidence of a writing wherein Cumberland promises to provide bridge financing. In fact, by letter dated January 29, 1996, Cumberland=s Claim Administrator, Carl Rogers, advised Nancye Blackburn that while Cumberland was willing to investigate the possibility of providing financing, it was making no commitment to do so. Mrs. Blackburn signed the letter acknowledging the fact that no promise had been made or agreement to finance had been reached.
The plaintiff=s response is that Cumberland is estopped from denying that it promised the plaintiff bridge financing, the lack of a writing notwithstanding. It claims that it relied to its detriment on representations by Cumberland that it would provide financing. The concept of promissory or equitable estoppel is well established in Kentucky law. The elements of estoppel as set out in Gray v. Jackson Purchase Production Credit Association, 691 S.W.2d 904, Ky.App. (1985) include:
(1) Conduct, including acts, language and silence, amounting to a representation or concealment of material facts; (2) the estopped party is aware of these facts; (3) these facts are unknown to the other party; (4) the estopped party must act with the intention or expectation his conduct will be acted upon; (5) the other party in fact relied on this conduct to his detriment.
At 906. See also Electric & Water Plant Board v. Suburban Acres Development, Inc., 513 S.W.2d 489, Ky. (1974), and Louisville & N.R. Co. v. Sergent, 242 S.W.2d 97, Ky. (1951). In order to prevail under a theory of promissory estoppel the plaintiff would have to show that Cumberland falsely promised to provide bridge financing, that Cumberland made this promise with the expectation that the plaintiff would act on it, and that the plaintiff relied on the promise to its detriment.
Both Nancye and Phillip Blackburn have testified that oral promises to provide financing were made. The plaintiff has tendered the affidavit of an employee of Pikeville National Bank (now Community Trust Bank) concerning such representations by Cumberland. The plaintiff maintains that it relied to its detriment on these promises by continuing to perform under the contract; that if it had known that Cumberland was not going to provide financing it would have exercised its option to pull out because it was not being paid timely. These appear to be issues of fact in regard to the elements of equitable estoppel which must be resolved at trial. To the extent that the remaining allegations against Cumberland have their basis in the alleged promise to provide bridge financing, they too have issues of fact to be resolved. Cumberland=s Motion for Summary Judgment should therefore be overruled.
The attorneys are directed to prepare and tender orders in conformity with this opinion.
By the Court -
Douglas C. Brandon, Esq.
Buckner Hinkle Jr., Esq.
Shelby C. Kinkead Jr., Esq.
Michael Schmitt, Esq.
John R. Triplett, Esq.
Jerry Patton, Esq.
Randall S. May, Esq.
Clint J. Harris, Esq.
Bruce Levy, Esq.
Broken Arrow, Inc.
Carbon Tech Fuels, Inc.