Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-4_04-cv-00258/USCOURTS-azd-4_04-cv-00258-0/pdf.json

Nature of Suit Code: 380
Nature of Suit: Other Personal Property Damage
Cause of Action: 28:1332 Diversity-Property Damage

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 Defendant's Statement of Facts is herein abbreviated as "DSOF;" Plaintiff's response to

DSOF (appearing on page 1 and 2 of the pleading captioned "Plaintiff's Controverting Statement of

Facts") is abbreviated herein as "PSOF"; Plaintiff's Controverting Statement of Facts (beginning on

page 2 of the pleading captioned "Plaintiff's Controverting Statement of Facts") is abbreviated herein

as "PCSOF," and Defendant's Response to Plaintiff's Controverting Statement of Facts is abbreviated

herein as "DCSOF."

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Giles Construction, Inc.,

Plaintiff, 

vs.

Commercial Federal Bank, Inc.,

Defendant. 

)

)

)

)

)

)

)

)

)

)

CV-04-258-TUC-CKJ (JCG)

REPORT AND

RECOMMENDATION

Pending before the Court is the Defendant's Motion for Summary Judgment filed on

October 3, 2005 (Doc. No. 28). The Plaintiff filed a response on November 16, 2005 (Doc.

No. 35) and the Defendant filed a reply on December 5, 2005 (Doc. No. 37). Pursuant to

the Rules of Practice in this Court, the matter was assigned to Magistrate Judge Guerin for

a report and recommendation. The Magistrate Judge recommends the District Court, after

its independent review of the record, enter an order granting the Defendant's Motion for

Summary Judgment on all claims.

Factual Background

Plaintiff Giles Construction, Inc. ("Giles") is a general contractor. (DSOF ¶¶17, 61;

PSOF ¶¶1, 13.)1

 In this action, Giles seeks compensation for construction and improvements

to a medical facility owned by Canada del Oro ("CDO"). (DSOF ¶37, PSOF ¶8.) Giles does

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 1 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

not seek damages from CDO, the LLC that contracted with Giles for the construction work.

CDO is not a party to this action. Rather, Giles brings this action against Defendant

Commercial Federal Bank ("CFB"), the commercial lender that financed construction of

CDO's medical facility. (DSOF ¶33; PSOF ¶8). The undisputed facts regarding the

relationship between Giles, CDO, and CFB are as follows.

Between June 9, 1999, and June 29, 2000, CDO obtained three loans from CFB for

ongoing construction of and improvements to the Canada del Oro Medical Center ("the

Project"). (DSOF ¶13; PSOF ¶1.) The initial work on the Project was done by a contractor

other than Giles. 

In approximately April, 2000, CDO sought to hire Giles to construct further

improvements to the Project. (PCSOF ¶1; DCSOF ¶1.) Before Giles entered into an

agreement with CDO, Giles' President, Patrick Macuilla, called Doug Wingert, the CFB Vice

President in charge of the lending relationship between CFB and CDO. (DSOF ¶33; PSOF

¶8.) Macuilla asked Wingert about CDO's financial strength and what had happened to the

original contractor on the Project. (DSOF ¶34; PSOF ¶8.) Wingert responded to these

inquiries by stating that the members of CDO were well-to-do physicians and that he had

heard, but did not know, that the prior general contractor was relieved due to lack of

performance. (DSOF ¶35; PSOF ¶8.) Although Giles questioned the bank about CDO's

financial strength, Giles did not make similar inquiries to CDO. (DSOF ¶37; PSOF ¶8.)

Thereafter, on May 12, 2000, Giles and CDO entered into four contracts for

construction of improvements to various portions of the Project and, on August 24, 2000, a

fifth contract. (DSOF ¶¶32, 42; PSOF ¶¶8, 10.) In addition, in connection with CFB's third

loan to CDO, CFB and CDO executed a Construction Loan Agreement dated June 29, 2000,

which Giles acknowledged. (DSOF ¶16; PSOF ¶1.) 

Giles' work on the project included improvements to the Arizona Audiology building

and the Alster/Zwart building, both housed at the Project. (DSOF ¶¶32, 47; PSOF ¶¶ 8, 12.)

Giles began its construction on the Project on May 17, 2000. (DSOF ¶39; PSOF ¶8.) Giles

completed construction on or about December 29, 2000. (DSOF ¶57; PSOF ¶13.) 

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 2 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

In September, 2000, Jerry Hoyler, Giles' project manager, became concerned about

the fact that CDO was delinquent in its payments to Giles. (PCSOF ¶1, 13, 14; DCSOF ¶14,

17, 61.) Hoyler called Wingert at CFB to inquire into the status of the Project. (DSOF ¶70;

PSOF ¶16.) At that time, Wingert told Hoyler that CFB had financed only 75% of the

construction costs for the Project, and that the remaining 25% would be loaned to CDO by

CFB once the Project was completed. (DSOF ¶70; PSOF ¶16.) 

On September 19, 2000, Hoyler had another conversation with Wingert, which he

secretly tape-recorded. (DSOF ¶72; PSOF ¶18.) During that conversation, Wingert stated

that construction of the Arizona Audiology building had been completed, had passed

inspection, and had been fully funded by CFB. (DSOF ¶72; PSOF ¶18.) In response,

Hoyler commented that Giles would have to recover any amounts it was owed on that portion

of the Project from CDO. (DSOF ¶73; PSOF ¶18.) Wingert also stated that with respect to

construction of the Alster/Zwart space, the funding might dry up before Giles finished its

work. (DSOF ¶76; DSOF Exh 20, pg. 47, lines 2-10.) Giles nonetheless continued to work

on the Project, completing its work on the Alster/Zwart space on November 7, 2000 and

performing other work on the Project into December, 2000. (DSOF ¶¶45, 57; PSOF ¶¶ 12,

13.)

Both Giles and CFB separately attempted to collect monies owed to them from CDO.

Giles recorded mechanic's liens against the Project on September 22, 2000, November 29,

2000 and January 21, 2001. (DSOF ¶¶45, 50, 58; PSOF ¶¶12, 13.) On March 9, 2001, Giles

filed a lawsuit in Pima County Superior Court against CDO and CFB alleging breach of

contract and seeking to foreclose the three mechanic's liens it had previously recorded. 

(DSOF ¶83; PSOF ¶22.) CFB was dismissed from the lawsuit because it was never served

with the complaint. (DSOF ¶85; PSOF ¶22.) Judgment against CDO and in favor of Giles

was entered in September 3, 2002. (DSOF ¶84; PSOF ¶22.)

CFB's efforts to collect included, on January 12, 2001, sending a demand letter to

CDO informing it that the three loans provided by CFB to CDO had been in default since

November, 2000. (DSOF ¶22; PSOF ¶5.) In addition, on February 28, 2001, CFB recorded

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 3 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

a Notice of Trustee's sale against the Project and eventually foreclosed on the property.

(DSOF ¶¶23, 24, 28; PSOF ¶5.) CFB suffered a $522,000 loss as a result of its loans to

CDO. (DSOF ¶31; PSOF ¶7.)

Two years later, in January, 2003, Giles received documents which had been

subpoenaed from CFB by Giles as part of its action against CDO. (PCSOF ¶22; DCSOF

¶22.) In reviewing the documents, Giles claims that it discovered information that supports

bringing an action against CFB, specifically that: CFB had been sending letters to CDO in

1999 informing them of late payments on loans; in 2000 the main tenant of the Project failed

to make three rent payments; CFB had sent notices of late payment to CDO in August, 2000;

and CFB had listed CDO on its "watch" list in 2000 because CDO had required further

funding. (PCSOF ¶22; DCSOF ¶22.) 

Procedural History

On February 4, 2004, Giles filed an action in the Pima County Superior Court

asserting claims for fraudulent misrepresentation, negligent misrepresentation, concealment

and non-disclosure against CFB. (Doc. No. 1, Notice of Removal, Exh. B.) In its complaint,

Giles alleged that CFB misrepresented to Giles the funding status of the loan in order to

induce Giles to complete the Project, despite the fact that CFB knew that CDO would default

or had defaulted on the loan. (Doc. No. 1, Notice of Removal, Exh. B.) Giles further alleged

that CFB engaged in this misrepresentation in order to recover a completed Project which it

could then sell to recover its losses, leaving Giles to take the financial hit. (Doc. No. 1,

Notice of Removal, Exh. B.) 

On May 14, 2004, CFB removed the action to the United States District Court for the

District of Arizona on the basis of diversity jurisdiction. (Doc. No. 1, Notice of Removal.)

On October 3, 2005, CFB moved for summary judgment against Giles on all of its claims.

(Doc. No. 28.) On December 28, 2005, oral argument on the motion was held before

Magistrate Judge Guerin.

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 4 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

Summary Judgment Standard

In deciding a motion for summary judgment, the Court views the evidence and all

reasonable inferences therefrom in the light most favorable to the party opposing the motion.

See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d

202 (1986); Eisenberg v. Insurance Co. of North America, 815 F.2d 1285, 1289 (9th Cir.

1987). Summary judgment is appropriate if the pleadings and supporting documents "show

that there is no genuine issue as to any material fact and that the moving party is entitled to

a judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317,

322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986). Material facts are those "that might

affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248, 106 S.

Ct. at 2510. A genuine issue exists if "the evidence is such that a reasonable jury could

return a verdict for the nonmoving party." Id. 

 A party moving for summary judgment initially must demonstrate the absence of a

genuine issue of material fact. Celotex, 477 U.S. at 325, 106 S. Ct. at 2553-54. The moving

party merely needs to point out to the Court the absence of evidence supporting its

opponent's claim; it does not need to disprove its opponent's claim. Id.; see also Fed. R. Civ.

P. 56(c).

If a moving party has made this showing, the nonmoving party "may not rest upon the

mere allegations or denials of the adverse party's pleading, but . . . must set forth specific

facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). See also

Anderson, 477 U.S. at 256, 106 S. Ct. at 2514; Brinson v. Linda Rose Joint Venture, 53 F.3d

1044, 1049 (9th Cir. 1995). The nonmoving party may not "replace conclusory allegations

of the complaint or answer with conclusory allegations of an affidavit." Lujan v. National

Wildlife Federation, 497 U.S. 871, 888, 110 S. Ct. 3177, 3188, 111 L. Ed. 2d 695 (1990). 

Discussion

In its Motion, CFB argues that summary judgment in its favor is appropriate because:

Giles' claims are barred by the economic loss rule; Giles' claims are time-barred; and facts

do not exist to establish the legal elements of Giles' claims. CFB also argues that it is entitled

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 5 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

to its attorneys' fees incurred in this action. The Magistrate Judge recommends finding that,

based on the undisputed facts before the Court, Giles cannot establish the legal elements of

its claims, and that even if it did, Giles' claims would be barred on statute of limitations

grounds. The Magistrate Judge recommends that the District Court not reach the issue of

whether the economic loss rule applies in this case. Finally, the Magistrate Judge

recommends denial of the request for attorneys' fees. 

A. Misrepresentation and Non-disclosure

1. Fraudulent and Negligent Misrepresentation:

To state a claim for fraudulent misrepresentation, Giles must prove that CFB made

representations regarding the funding status of the Project that CFB knew to be false, the

representations were material, CFB intended Giles to rely on the representations, Giles did

not know the representations were false, Giles actually and justifiably relied on the

representations, and Giles suffered harm as a result of its reliance. See Wells Fargo Credit

Corp. v. Smith, 803 P.2d 900, 905 (Ariz.App. 1990). 

To state a claim for negligent misrepresentation, Giles must demonstrate that CFB,

in the course of its business, supplied false information for the guidance of Giles, Giles

reasonably relied on the false information, and CFB failed to exercise reasonable care in

communicating the information. See St. Joseph's Hosp. and Medical Center v. Reserve Life

Ins. Co., 742 P.2d 808, 814 (Ariz. 1987) (citing Restatement (Second) of Torts § 552). 

 Giles cannot support its claims for fraudulent or negligent misrepresentation because

(a) there is no evidence that the representations made by CFB were false, and (b) there is no

evidence that Giles reasonably relied on the representations. Giles claims that CFB made

false statements regarding the funding status of the Project to induce Giles to continue work

on the Project. (Complaint, ¶XIV.) Giles cites two statements by CFB: (1) Mr. Wingert's

statement to Patrick Macuilla in approximately April 2000 that all of the members of CDO

were well-to-do individuals with strong financial portfolios (DSOF ¶35, PCSOF ¶9), and (2)

Mr. Wingert's statement to Mr. Hoyer in September, 2000 that CFB had financed 75% of the

CDO construction costs and that the remaining 25% would be loaned to CDO "once the

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 6 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

 Giles alleges that Mr. Leon, the managing member of CDO, also made false statements

regarding the funding status for the Project. Giles cannot, however, attribute to CFB, statements

made by CDO representatives regarding actions by CFB. Moreover, the terms of the June 29, 2000

loan agreement between CDO and CFB, which Giles also, signed, expressly stated that CDO would

not be CFB's agent for any purpose. (DSOF ¶18; PSOF ¶2.)

3

 Review of the record is difficult because Giles' Response to CFB's Motion for Summary

Judgment does not include specific references to any portion of the record. When asked at oral

argument to identify evidence of specific false statements in the record, Giles' attorney stated she

believed that the false statements may be found in Mr. Leon's affidavit (attached as unnumbered

exhibit to PSOF, Doc. No. 36) and Mr. Hoyer's deposition. (DSOF, Exh. 20.)

7

project was completed, meaning a full product, buildings complete." (DSOF ¶70, PSOF ¶16

and PCSOF ¶15.)2

 There is no evidence in the record that either of these statements were

false. CFB's knowledge of CDO's late payments in early 1999, does not demonstrate that Mr.

Wingert's statement was false. CDO's members could have been well-to-do individuals with

strong portfolios, even if CDO, as an entity, was experiencing financial difficulty. Similarly,

there is no evidence suggesting that Mr. Wingert's statement that CDO would loan the

remaining 25% upon project completion was false. Although Giles was never paid the full

amount that it was owed pursuant to its contract with CDO (PCSOF ¶17, DCSOF ¶17), Giles

admitted that its failure to receive payment was attributable to CDO, not a lack of funding

by CFB. (DSOF ¶¶ 73, 75; PSOF ¶18.) Giles also alleges generally that "Plaintiff was misled

by Defendant into believing that once the project work was completed that Plaintiff would

be paid in full." (Plaintiff's Response, pg. 5.) Giles, however, fails to identify, either in its

papers or at oral argument, any specific false statement by CFB which would support this

claim.3

 

In addition, no reasonable fact finder could conclude that Giles reasonably relied on

either or both statements to support its belief that it would be paid in full by CDO once the

Project was completed. The financial status of the members of an LLC would not indicate

the financial strength of the entity. Nor would the fact that CFB intended to loan additional

funds to CDO ensure that CDO would in turn remit these funds to Giles. In fact, Giles'

president testified that when he learned that CFB had known in 1999 that CDO was having

difficulty paying its loans on time, it did not strike him as the type of information that CFB

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 7 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

 Notably, Giles also knew just weeks after CFB allegedly promised to fund the remaining

25% of the Project upon completion that in fact CFB was concerned that funding would dry up

before completion. (DSOF ¶76; DSOF Exh 20, pg. 47, lines 2-10.) Giles knew that it was CFB's

position that additional funds would have to be obtained from CDO, not CFB. (DSOF ¶¶ 73, 75;

PSOF ¶18.) Giles nevertheless continued work on the Project. (DSOF ¶ 45; PSOF ¶ 12.) Macuilla

also testified that he never asked Joseph Leon, the managing member of CDO, for any information

regarding CDO's financial strength. (DSOF ¶37; PSOF ¶8.) Thus, in addition to Giles not expecting

CFB to provide information regarding CDO's financial status, Giles did no other investigation into

the financial security of the Project or CDO before signing on as general contractor.

8

should have shared with him or with Giles, nor did he expect CFB to share information

regarding the financial health of their borrower, CDO.4

 (DSOF ¶87-88; PSOF ¶22.) 

This Court concludes that no reasonable factfinder could conclude that Giles

reasonably relied on statements made by agents or representatives of CFB. Giles also had

no right to rely on statements made by CFB. The right to rely corresponds with the existence

of a duty. See Arizona Title Co. v. O'Mally Lumber Co., 484 P.2d 639, 646 (Ariz. App. 1971)

(recognizing a duty on the part of a lender on a project that gives rise to a corresponding right to

reliance in the contractors on the project). Because, for the reasons stated in Section A.3, CFB did

not owe a duty to Giles, Giles also did not have a right to rely on CFB.

2. Fraudulent Concealment

In order to state a claim for concealment, Giles must prove that CFB and Giles were

parties to a transaction in which CFB intentionally prevented Giles from acquiring material

information. See Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons

Local, 38 P.3d 12, 34 (Ariz. 2002) (citing Restatement (Second) of Torts § 550)). Fraudulent

concealment must be proven by clear and convincing evidence. See id., 38 P.3d at 36, n.24.

Giles cannot establish a claim for fraudulent concealment because: (a) CFB was not a party

to a transaction with Giles, and (b) Giles cannot establish by clear and convincing evidence

that CFB intended to prevent Giles from discovering the truth regarding CDO's financial

status. 

Giles' only support for its claim that it was a party to the transaction with CFB is the

fact that it acknowledged the June 29, 2000 contract between CFB and CDO. It is clear from

that contract, however, that CFB and CDO were the only intended parties to the transaction.

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 8 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

The contract expressly provides: "this agreement is made for the sole benefit and protection

of BORROWER and BANK . . . no person, persons or entities shall constitute a creditor,

third party or incidental beneficiary hereto, or be otherwise entitled to any rights or benefits

hereunder." In addition, CFB and CDO were bound by several other loan agreements that

made no mention of Giles and to which Giles was not a party. 

Similarly, there is no evidence in the record, much less clear and convincing evidence,

from which a jury could reasonably conclude that CFB intentionally withheld information

from Giles. There is no evidence to suggest that when Wingert reported in September, 2000,

that CFB would be providing additional funding to CDO for the Project upon completion,

that he knew CFB would not in fact do so and intentionally withheld that fact from Giles.

Likewise, although CFB knew in 1999 that CDO was having difficulty making its payments,

there is no evidence to suggest that when Wingert told Giles in April of 2000 that CDO's

members were individuals with strong portfolios that he intended to conceal the status of

CDO's payment history. In fact, in direct contrast to Giles' claims, CFB likely had a duty not

to disclose to Giles confidential information regarding its borrower's financial status. See

Kesselman v. National Bank of Arizona, 937 P.2d 341, 343-44 (Ariz.App. 1996). CFB's

performance of its duty to protect client confidences should not be misconstrued as

intentional concealment. 

3. Non-Disclosure

In order to state a claim for non-disclosure, Giles must demonstrate that CFB failed

to disclose to Giles information regarding the funding status of the Project that CFB knew

would justifiably induce Giles to refrain from getting involved in the Project and/or

continuing on the Project, and that CFB was under a duty to Giles to exercise reasonable care

to disclose the funding information. See Restatement (Second) of Torts § 551; see also Wells

Fargo, 201 Ariz. at 496, n.22. 

Summary judgment in favor of CFB is appropriate on this claim because CFB did not

owe Giles a duty of care. Whether a duty exists is a question of law for the court. See Luce

v. State Title Agency, Inc., 950 P.2d 159, 161 (Ariz.App. 1997). In some circumstances, the

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 9 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

existence of a duty may depend on preliminary questions that must be determined by a fact

finder. See Diggs v. Arizona Cardiologists, Ltd., 8 P.3d 386, 388 (Ariz.App. 2000). As a

general rule, a bank has no duty to third parties to disclose information about a customer's

account. See Kesselman v. National Bank of Arizona, 937 P.2d 341, 343-44 (Ariz.App. 1996)

(collecting cases). However, if a bank is "directly involved with the third parties [to the

lending transactions],"id. at 345, this special circumstance may give rise to a duty on the part

of the bank such that "if [the bank] knows that the [third party] is about to enter into [the

transaction] under a mistake as to facts basic to the transaction, and that the [third party],

because of [its relationship with the bank], the customs of the trade or other objective

circumstances, would reasonably expect a disclosure of those facts," the bank must exercise

reasonable care to disclose such facts to the other party. Frazier v. Southwest Sav. & Loan

Ass'n, 653 P.2d 362, 367-68 (Ariz.App. 1982). 

CFB may have owed a duty of care to Giles if CFB was directly involved with Giles;

however, there is no evidence that CFB's involvement in the Project was anything other than

the standard involvement of a commercial lender on a construction project. Giles relies on

Arizona Title Co. v. O'Mally Lumber Co., 484 P.2d 639 (Ariz. App. 1971) in support of its

argument that CFB did in fact owe it a duty of care. This case is factually inapposite. In

Arizona Title, a borrower obtained a $27,000 loan from one lender in order to pay off

existing mortgage debt on the borrower's property. See id. at 642. The lender agreed to

provide the borrower with a $195,000 construction loan on the condition that the $27,000

loan would be paid off and the $195,000 construction loan would have a first priority

position. See id. The borrower then obtained financing from a second lender to pay off the

$27,000 loan from the first lender, as well as a judgment lien that had been recorded against

the property. See id. The borrower and the second lender agreed that the second lender

would receive the $195,000 construction loan from the first lender, use large portions of the

first four installments of that loan to pay itself back for the two loans that it had issued to the

borrower, and then apply the remainder to construction costs. See id. At the outset, the

second lender had information in its possession which demonstrated that once it reimbursed

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 10 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11

itself, the remainder of the construction loan would not cover the costs of construction.

Nevertheless it told contractors that they would be paid for their construction work. See id.

When the contractors sued that lender for negligent misrepresentation and nondisclosure, the

Arizona Court of Appeals concluded that the second lender was directly involved with the

contractors because the lender (1) acted as the disbursing agent to the contractors and (2) had

a substantial financial interest in the project's completion. The court reasoned that it served

the lender's pecuniary interests to keep the contractors working so as to assure that continued

draws of money would be available to repay its own loan. See id. at 645-646.

In the present case, there is no evidence to suggest that CFB's involvement in the

Project rose to the level of the lender's involvement in Arizona Title. Although CFB issued

checks to Giles for its work on the Project (PCSOF ¶13, DCSOF ¶13), CFB was not

receiving funds from another source and allocating/disbursing those funds to itself and the

contractors. In addition, while CFB had an interest in the Project's completion, recovery of

its loan did not depend upon the performance of the contractors, as was the case in Arizona

Title. The fact that Macuilla, Giles' president, testified that he did not expect CFB to disclose

financial information regarding CDO to Giles is further evidence that CFB and CDO did not

have the type of relationship that the bank and contractors had in Arizona Title. In sum,

because CFB was not directly involved with Giles in the Project, CFB did not owe a duty

to Giles to disclose information regarding the funding status of the Project and Giles' claim

for non-disclosure must fail. 

B. Statute of Limitations

Summary judgment in favor of CFB is appropriate for the additional reason that Giles'

claims are time barred. 

Giles' claims for fraudulent misrepresentation and concealment are governed by a

three-year statute of limitations, pursuant to A.R.S. § 12-543, and its claims for negligent

misrepresentation and non-disclosure are governed by a two-year statute of limitations,

pursuant to A.R.S. § 12-542. Under Arizona's discovery rule, a statute of limitations begins

to run when the plaintiff discovers or reasonably should have discovered facts giving rise to

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 11 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12

his/her claim. See Mister Donut of America, Inc. v. Harris, 723 P.2d 670 (Ariz. 1986)

(applying discovery rule to A.R.S. § 12-543); Doe v. Garcia, 5 F.Supp.2d 767, 770 (D. Ariz.

1998) (applying discovery rule to A.R.S. § 12-542). 

1. Negligent and Fraudulent Misrepresentation

The statute of limitations on Giles' claims for negligent and fraudulent

misrepresentation began to run when Giles knew or should have known that CFB's

representations were allegedly false. The statements by CFB which Giles alleges to be false

were made over three years before this lawsuit was initiated. Wingert's statement that all

members of CDO were well-to-do individuals with strong financial portfolios was made in

April 2000. His statement that CFB had financed 75% of the CDO construction costs was

made in September 2000. Assuming that these statements did amount to false representations

that Giles would be fully paid upon completion of the Project, as Giles contends, Giles knew

or should have known that the statements were false by late 2000 or, at the latest, early 2001.

It is undisputed that as early as September 2000, Hoyler, Giles' project manager, was

concerned about the fact that CDO was delinquent in its payments to Giles. Giles knew in

November, 2000 that CFB was concerned that the funding would dry up before Giles' work

was completed. Giles began recording mechanic's liens against the Project in September and

recorded additional liens in November, 2000, and January 2001. Further, Giles initiated a

lawsuit against Giles and CFB in March 2001. By January 2001, Giles should have been

aware that the veracity of promises by CFB that Giles would be fully paid (assuming Mr.

Wingert's statements amounted to such a promise) was questionable. Accordingly, Giles'

claim for negligent misrepresentation is barred by the two-year statute of limitations and

Giles' claim for fraudulent misrepresentation is barred by the three-year statute of limitations.

2. Fraudulent Concealment and Non-Disclosure 

Even if Giles were able to support its claims for fraudulent concealment and nondisclosure, the claims also would be barred by the statute of limitations. The statute of

limitations on Giles' fraudulent concealment and non-disclosure claim began to run when

Giles knew, or should have known with the exercise of due diligence, that CFB concealed

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 12 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

13

information. Giles contends that it did not discover evidence of intentional concealment until

January, 2003, when, during discovery in its state law action, it was provided with documents

suggesting that CFB knew CDO was struggling to make loan payments in 1999. Giles may

not have been provided with actual documents until January 2003, but no reasonable juror

could conclude that Giles did not know or with reasonable diligence could not have

discovered that CDO was struggling financially and that CFB was aware of that struggle at

least three years before this lawsuit was filed in May 2004. As noted above, Giles knew in

September or November of 2000 that no further funding was forthcoming from CFB. In

September 2000, Giles was aware that CFB was concerned that the funding for the Project

would dry up before Giles completed its work; CFB told Giles of this concern. (DSOF ¶76;

DSOF Exh 20, pg. 47, lines 2-10.) By CFB's statement to Giles, it is clear that CFB also

knew that CDO may not have had the money to pay Giles for all of its work on the Project.

 If CFB had intentionally misled Giles with respect to the funding status of the Project, Giles

was aware at least three years before initiating suit, that it had been misled when CFB

acknowledged its concerns about the available funding in September, 2000. Similarly, if

CFB failed to disclose information regarding the funding status, Giles was sufficiently aware

of the existence of the information at least two years prior to bringing this action. 

C. Application of the Economic Loss Rule

The economic loss rule bars a party from recovering economic damages in tort unless

accompanied by physical harm, either in the form of personal injury or secondary property

damage. Carstens v. City of Phoenix, 206 Ariz. 123, 126, 75 P.3d 1081, 1084 (Ct. App.

2003). In general, the rule prevents plaintiffs from converting contract claims into tort

claims. Where a plaintiff alleges purely economic losses, the damages sound in contract, and

tort recoveries are prohibited by the economic loss rule.

CFB contends that Giles' claims are barred by the economic loss rule because Giles

does not claim personal injury or property damage. Giles acknowledges that the economic

loss rule prevents recovery in certain cases, but contends that the economic loss rule applies

only in tort cases involving defective construction in a construction project or a defect in

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 13 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14

some type of product. As this case involves neither defective construction nor a defective

product, Giles asserts that the economic loss rule does not apply. 

The economic loss rule has received limited application in Arizona courts. The

Arizona courts have repeatedly recognized the economic loss rule in construction defect

cases, where the plaintiff has sustained purely economic loss as a result of a contractor's

faulty construction and seeks to recover from the contractor under both contract and tort

theories. See generally Woodward v. Chirco Constr. Co., 687 P.2d 1269 (Ariz. 1984);

Colberg v. Rellinger, 770 P.2d 346 (Ariz. App. 1988); Hayden Business Center

Condominiums Ass'n v. Pegasus Development Corp., 105 P.3d 157 (Ariz. App. 2005);

Carstens, 75 P.3d 1081; Menendez v. Paddock Pool Constr. Co., 836 P.2d 968 (Ariz. App.

1991); Matusik v. Dorn, 756 P.2d 346 (Ariz. App. 1988); Nastri v. Wood Bros. Homes, Inc.,

690 P.2d 158 (Ariz. App. 1984). The Arizona courts have also recognized the economic loss

rule as one factor to consider in determining whether a claim arising from a defective product

should be treated as a contract or tort claim. See Salt River Project Agr. Imp. and Power

Dist. v. Westinghouse Elec. Corp., 694 P.2d 198 (Ariz. 1984). 

Other than construction and product defect cases, however, the Arizona courts have

not applied the economic loss rule as a bar to the recovery of economic damages in tort cases.

To the contrary, Arizona courts have issued numerous decisions permitting the recovery of

purely economic losses in tort actions. See generally Paradigm Ins. Co. v. Langerman Law

Offices, P.A., 24 P.3d 593 (Ariz. 2001); St. Joseph's Hosp. and Medical Center v. Reserve

Life Ins. Co., 742 P.2d 808 (Ariz. 1987); Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677

P.2d 1292 (Ariz. 1984); Fillmore v. Maricopa Water Processing Systems, Inc., 120 P.3d 697

(Ariz. App. 2005); Kuehn v. Stanley, 91 P.3d 346 (Ariz. App. 2004); Luce v. State Title

Agency, Inc., 950 P.2d 159 (Ariz. App. 1997); Standard Chartered PLC v. Price Waterhouse,

945 P.2d 317 (Ariz. App. 1996). 

Federal courts, however, have construed Arizona's economic loss rule more broadly

than the Arizona courts. The Ninth Circuit has applied the economic loss rule in the context

of product liability, not as a factor to be considered in evaluating whether a claim arising

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 14 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

15

from a defective product should be treated as a contract or tort claim, but as a complete bar.

See Apollo v. Avnet, Inc., 58 F.3d 477 (9th Cir. 1995). The Ninth Circuit's decision in Apollo,

however, can be distinguished from the present case both because it was a product liability

case whose holding was limited to "the facts before the panel," Apollo, 58 F.3d at 480, and

because the Arizona courts have clarified the intended scope of the economic loss rule since

Apollo was decided. See, e.g., Carstens, 75 P.3d 1081.

Following on the Ninth Circuit's broad construction of the economic loss rule in

Apollo, the Arizona District Court has concluded that the economic loss rule bars the

recovery of economic damages in tort unless the plaintiff lacks privity with the defendant,

see Southwest Pet v. Koch Indus., Inc., 89 F.Supp.2d 1115 (D. Ariz. 2000), and more recently

that the economic loss rule bars recovery of economic damages in a negligent

misrepresentation case. See Wojtunik v. Kealy, 394 F.Supp.2d 1149 (D. Ariz. 2005). These

decisions are not firmly supported by Arizona law, however, and the district court in this case

is not required to treat these cases as precedential. 

Given the discrepancy between Arizona and federal law on the application of the

economic loss rule, and given that Giles' claims do not withstand summary judgment for the

reasons stated in Sections A and B above, the Magistrate recommends that the district court

not reach the issue of whether the economic loss rule also bars Giles' recovery in this case.

D. The prevailing party is not entitled to its attorneys' fees incurred in this action

CFB contends that it is entitled to an award of its attorneys' fees because the action

arises as a result of CFB's contract with CDO. Giles contends that CFB, CDO and Giles

were all parties to that contract, and therefore attorneys' fees are recoverable by the

prevailing party to this action. 

The Magistrate Judge recommends finding that, because this action arises in tort,

attorneys' fees are not recoverable by either party. The fact that there were numerous

contracts involved during construction of the Project does not change the fact that Giles has

asserted tort claims. Attorneys' fees are not recoverable in a tort action. See In re Larry's

Apartment, L.L.C., 249 F.3d 832 (9th Cir. 2001) (collecting Arizona state court cases that

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 15 of 16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

16

stand for the proposition that where a contract is merely somewhere within the factual

background, an award of fees under § 12-341.01(A) is not proper).

Recommendation

The Magistrate Judge recommends the District Court, after its independent review of

the record, enter an order

GRANTING the Defendant's Motion for Summary Judgment (Doc. No. 28) on all of

Plaintiff's claims and DENYING the Defendant's request for an award of attorney's fees.

Pursuant to 28 U.S.C. § 636(b), any party may serve and file written objections within

10 days of being served with a copy of this Report and Recommendation. If objections are

not timely filed, they may be deemed waived. If objections are filed, the parties should use

the following case number: 04-0258-TUC-CKJ.

DATED this 3rd day of August, 2006.

Case 4:04-cv-00258-CKJ Document 42 Filed 08/03/06 Page 16 of 16