- 1 - United States Court of Appeals Fifth Circuit 

## FILED January 3, 2007 Charles R. Fulbruge III Clerk IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_________________________ No. 05-60898

_________________________ LYNDON PROPERTY INSURANCE CO. Pl aint iff- Appellant, versus DUKE LEVY AND ASSOCIATES LLC Defendant-Appellee.

__________________________________________________ Appeal from the United States District Court fo r the Southern District of Mississippi (No. 1:03-CV-310)

__________________________________________________ Before HIGGINBOTHAM, DENNIS, and CLEMENT, Circuit Judges. EDITH BROWN CLEMENT, Circuit Judge: Before th e court is an appeal of the district court’s grant of summary judgment in favor of Duke Levy and Associates, LLC (“DLA”). We REVERSE the judgment of the district court regarding the negligence claim and REMAND for proceedings not inconsistent with this opinion. I. FACTS AND PROCEEDINGS The Hancock County Water and Sewer Di strict (“District”) entered into a contract with Panther Utilit ies of Mississippi, Inc. (“Panther”) to construct a sewage collection system. This contra ct included two relevant documents: the Standard Form of Agreement Between Owner and1 Lyndon has abandoned its breach of contract and breach of warranty claims on appeal by

failing t o brief t hem. See FED . R. APP . P. 28(a)(9)(A); Robinson v. Guarantee Trust Life Ins. Co. , 389 F.3d 475, 481 n.3 (5th Cir. 2004) (“Failure adequately to brief an issue on appeal constitutes waiver of that argument.”). - 2 - Contractor and th e Standard General Conditions of the Construction Contract. The contract required th at Panther achieve substantial com pletion by October 12, 2000, and final com pletion by November 11, 2000. Panther obtained a bond from Lyndon Property Insurance Company (“Lyndon”), t he surety . The District also entered into a contract with DLA to serve as the engineer of record on the proj ect. This contract included a standard document known as the Standard Form Agreement Between Owner and Engineer for Professional Services. The proj ect did not proceed as planned. On October 24, 2000, the District terminat ed P anther. At that time, DLA had accumulated $266,822.50 in inspection fees and $71,250.00 in contract adm

inist ration fees. Lyndon, as the surety, funded the com pletion of the proj ect. Aft er a bidding process, Lyndon awarded th e contract fo r com pleting the proj ect to Cooley Contracting, Inc. (“C ool ey”). Cooley subsequently completed the project, which involved substantial correction of Panther’s work. Lyndon alleges that it paid more than $900,000 to fix and test work done by Panther th at had been inspected and approved by DLA. Lyndon filed a com

plaint against DLA in which it sought damages fo r negligence, breach of contract, and breac h of warranty. DLA f iled a mo tion for summary judgment. The district court granted DLA’s mo tion on all claims and entered a final judgment. Lyndon timely filed a notice of appeal. 1 II. STANDARD OF REVIEW This court reviews th e district court’s grant of summary judgment de novo. Shell Offshore- 3 -

Inc. v. Babbitt , 238 F.3d 622, 627 (5th Cir. 2001). The district court’s grant of “[s]ummary judgment is appropri ate if th e record shows ‘that there is no genuine issue as to any materi al fact and the

mo ving party is entitled to judgment as a matter of law.’” Id . (quoting FED . R. C IV . P. 56(c)). III. DISCUSSION A. Equitable subrogation Lyndon argues th at it should be able to recover in tort against DLA under the doctrine of equitable subrogation. Equitable subrogation is a doctrine whereby a surety is permitted to stand in th e shoes of th e party th at benefit ted from it s performance of the surety obligation in order to prevent unjust enrichment on th e part of a wrongdoer who caused the surety ’s expense. P earlman v. Reliance Ins. Co. , 371 U.S. 132, 136 (1962). “[P]robably there are few doctrines better established th an th at a surety who pays th e debt of another is entitled to all the rights of th e person he paid to enforce his right to be reimbursed.” I d. at 136–37. Subrogees, however, have no greater rights than th ose of th e assignor. S t. Paul Prop. & Liab. Ins. Co. v. Nance , 577 So. 2d 1238, 1241 (Miss. 1991). The caselaw supports th e notion that Lyndon can stand in the shoes of the District. Subrogation requires (1) th e party to have paid a debt to a thir d party on behalf of the oth er party and (2) th at he must have been com pelled to do so, such as by a surety agreement. P rairie State Nat. Bank v. United States , 164 U.S. 227, 231 (1896) ; see also Nance , 577 So. 2d at 1240–41 (noting th at “[s]ubrogation is th e substitution of one person in place of another, whether as a creditor or as th e possessor of any rightful claim”). Lyndon paid expenses for the District pursuant to the surety agreement and, th erefore, can stand in th e shoes of the District fo r the purpose of this action against DLA. DLA argues that Lyndon cannot prove th at the District suffered a lo ss, apparently because- 4 -

Lyndon it self, as th e surety , had to pay the costs of com pleti on of the proj ect. For support, DLA cit es to Bagwell Coatings, Inc. v. Middle-South Energy, Inc. , 797 F.2d 1298 (5th Cir. 1986), but an examinat io n of this case shows it to be inapposite. In B agwell , the Fift h Circuit affirmed a judgment of no liabilit y in favo r of an engineer that allegedly interfered with a subcontractor’s ability to

com plete it s work in a timely fashio n. I d. at 1313. The contractor alleged that mistakes by the engineer led to a breach of th e contract between the owner and the contractor. I d. at 1301–02. The court fo und th at th e contractor had not proven a breach of the engineer’s duty to the owner because in a large, com

plicated construction proj ect, a change wit h respect to one contractor may it self cost

mo ney but may ultimately save the owner money in the overall construction process. Id. at 1312. DLA’s argument bears no meaningful relationship to the facts of Bagwell

. DLA’s argument is simply th at, regardless of whether or not there was a breach, the District suffered no lo ss because Lyndon, as th e surety , paid t he difference. This argument ignores the very principle behind the doctrine of equitable subrogation. By definit io n, the party int o whose shoes the surety steps has not suf fered a loss because the surety protected i t f rom th at loss. DLA cannot claim that the District suffered no lo ss simply because Lyndon, rather th an the District, paid the costs of DLA’s alleged negligence. Lyndon should have been permitted to stand in the shoes of the District for the purpose of this suit

. B. Exculpatory clause The Standard General Conditions of the Construction Contract contain a so-called exculpatory clause which reads as follows: Neither ENGINEER’S authority to act under [the] Contract Docum ents nor any decision made by ENGINEER in good fait h eit her to exerci se or n ot exerci se such authority shall give ri se to any duty or responsibility of ENGINEER to- 5 -

C ONTRACTOR, any Subcontractor, any Supplier, or any oth er pe rson or organization performing any of the Work, or to any surety for any of them. The district court held that the exculpatory clause entitled DLA to “judgment as a mat ter of law on Lyndon’s negligence claim.” In U .R.S. Co. v. Gulfport-Biloxi Regional Airport Authority, t he owner of a construction proj ect sued th e proj ect’s architect, th e proj ect’s contractor, and the contractor’s surety . 544 So. 2d 824, 824–25 (Miss. 1989). In additio n, the surety filed a counterclaim against the architect for retainage fees to account for costs the surety had paid because of fault y workmanship. The lower court fo und fo r th e surety and th e Supreme Court of Mississippi affirmed. The supreme court stated th at “[a]n architect is required to exercise ordinary prof essional skills and diligence and such duty is non-delegable.” Id. at 827. DLA does not di spute this general characterization of duty but instead argues that th e exculpatory clause saves it from liabilit y to anyo ne but the District. Essentially, DLA argues that it disclaimed, by contract, potenti al liabilit y to a surety standing in the shoes of th e Di strict. Under Mississippi law, “[c]lauses th at limit liabilit y are given strict scrutiny by this Court and are not to be enforced unless th e limit ation is fairly and honestly negoti ated and understood by both parties.” Royer Homes of Miss., Inc. v. Chandeleur Homes, Inc. , 857 So. 2d 748, 754 (Mi ss. 2003). The law does not lo ok wit h favor on contracts int ended to exculpate a party from the liabilit y of his or her own negligence alt hough, with som e exceptions, they are enforceable. However, such agreements are subject to close judicial scrutiny and are not upheld unless the intention of the parties is expressed in clear and unmist akable language. Turn bough v. Ladner , 754 So. 2d 467, 469 (Mi ss. 1999). When a project implicates the public int erest, courts are even less deferential to any limit ations of liabilit y. S ee Kroger Co. v. Chimneyville- 6 -

Props., Ltd. , 784 F. Supp. 331, 348–49 (S.D. Miss. 1991). Here the exculpatory clause is no t sufficient ly clear to act as a limit ati on of li abilit y under Mississippi law. Furthermore, the District cannot bargain away th e engineer’s potenti al duty to a surety th at would step int o the District’s shoes under th e doctrine of equitable subrogation. DLA’s argument that the exculpatory clause insulates it from liabilit y t o Lyndon is without merit. DLA also directs attention to the portions of the agreement th at limit the engineer’s liabilit y to th e District fo r th e contractor’s errors. DLA argues that these portions mean that “DLA owed Lyndon no duty to require Panther to repair it s work or wit hhold payment fo r deficient work, prior to Panther’s default.” DLA tries to distinguish U .R.S. on a number of grounds, mo st prom inent ly th at th e architect in U.R.S. “certified th e proj ect as com plete and acceptable wit h the full knowledge th at th e roof had not been constructed according to the plans and specifications and was in fact defective,” whereas here “Panther defaulted, and DLA did not have occasion to have the completed system tested and review and certify the final product.” These attem

pts to distinguish U.R.S. are unavailing, however, as Lynd on’s claims are not based solely on DLA’s failure to perform a final inspection of Panther’s work. Lyndon instead claims th at DLA failed in other inspection and payment duties as well. The exculpatory clause does not shield DLA from liabilit y t o Lyndon. C. Breach The district court f

ound that Lyndon failed to establish a breach of a duty to the District by DLA. In the summary judgment context, the reviewing court “views the evidence in the light most favorable to th e non-movant.” A barca v. Metro. Transit Auth. , 404 F.3d 938, 940 (5th Cir. 2005). It is clear th at DLA owed at least som e duty to th e District. U .R.S. , 544 So. 2d at 827- 7 -

(noting th at architects are “required to exercise ordinary prof essional skills and diligence and such duty is no n-delegable”). DLA argues that “the scope of [its] responsibilities may be limited by contract.” DLA cites to Hobson v. Waggoner Engineering, Inc. , 878 So. 2d 68, 73–77 (Mi ss. Ct. App. 2003), fo r this proposition. H obson is an int ermediate appellate court decision stating th at, in th e absence of contractual provisions imposing such a duty , the engineer had “no duties or responsibilit ies for supervision of the work or project safety.” I d. at 76. In H

obson , the plaint iff brought a wrongful death action alleging th at the engineer’s negligent supervision and design caused th e death of an employee of one of th e subcontractors working on the proj ect. I d. at 70. The court fo und that the engineer had no duty to warn the employee. Id. at 76. In Mayor and City Council of Columbus v. Clark-Dietz & Associates-Engineers , I nc. , a federal court in Mississippi stated th at “in the absence of an acti ve undertaking to guarantee the contractor’s work, courts have ordinarily held th at similar language absolves the ar chit ect of any liabilit y fo r th e contractor’s poor workmanship.” 550 F. Supp. 610, 627 (N.D. Miss. 1982). On the oth er hand, Clark-Dietz ’s admonition th at courts “o rdinarily” do not impo se liabilit y on an engineer in such circumstances suggests that in some extreme cases liability is appropriate. In City of Mound Bayou v. Roy Collins Construction , the Supreme Court of Mississippi stated th at “[o]ne of th e mo st impo rtant duties of an engineer/architect is to inspect the work to insure it is fully performed by th e contractor. In fact an engineer/architect will be liable if he improperly releases funds to a contractor without adequately inspecting the construction site.” 499 So. 2d 1354, 1359 (Miss. 1986) (internal citation om it ted). While t he contractual provisions in M ound Bayou appear to have impo sed th e duty to inspect on the engineer, the court’s straightforward expression of th e duty wit hout reference to th e specific contract in the case suggests it is not derived solely from such- 8 -

contracts. Turning to th e contractual provisions present here, DLA was required to “make visit s to th e sit e at int ervals appropri ate to th e various stages of construction as ENGINEER deems necessary in order to observe as an experienced and qualified design prof essional the progress and quality of th e various aspects of Contractor(s)’ work.” In fact, DLA contacted Panther twice t o n ote problems wit h th e timing of th e construction. The contractual language also supports a duty on behalf of DLA to inspect work before recommending payment. The Supreme Court of Mississ ippi in Mound Bayou clearly stated th at the engineer must “adequately” inspect a proj ect before a release of funds is proper. 499 So. 2d at 1359 (upholding the lo wer court’s finding in favor of th e contractor and against the engineer and the owner). An engineer may be held liable at least in some egregious cases for failure to inspect and for improper

recom mendations of payment if th e engineer failed to meet the standard of employing ordinary prof essional skills and diligence, even in the absence of contractual provisions specifically guaranteeing the contractor’s work. In o pposi ti on to th e mo tion for summary judgment, Lyndon presented an expert’s report articulating how DLA’s actions and inactions failed to meet this standard. This report contains extensive detail about th e actions and inactions of DLA as well as the expert’s opinio n th at DLA “did not exercise ordinary prof essional skills and diligence in performing certain duties under the Contracts” and th at DLA “should have observed the deficiencies wit h the work performed by Panther Utilit ies and either rejected the work or withheld payment for the work.” Viewing this report in a manner favorable to Lyndon, see Abarca , 404 F.3d at 940, it raises

a genuine issue of mat erial fact as to whether or not DLA breached it s inspection and payment duties- 9 -

to th e Di strict. Accordingly, the district court erred in granting DLA’s motion for summary judgment. D. Economic loss rule DLA argues th at th e econom ic lo ss rule shields it from liabilit y. The economic loss rule is a doctrine restricting recovery in products l iabilit y t o damages for physical harm, thereby excluding recovery fo r purely econom ic damages like th ose alleged here. DLA points to no Mississippi caselaw applying this doctrine outsid e of th e realm of products liability. In this diversity case, we seek to apply th e law of Mississippi as we believe the Supreme Court of Mississippi wo uld. Shanks v. AlliedSignal, Inc. , 169 F.3d 988, 993 & n.7 (5th Cir. 1999). We therefore decline to apply the

econom ic lo ss doctrine to this tort case invo lving a duty shaped by contract. S ee Primrose Operating Co. v. Nat. Am. Ins. Co. , 382 F.3d 546, 565 (5th Cir. 2004) (quoting Webb v. City of Dallas , 314 F.3d 787, 795 (5th Cir. 2002)). CONCLUSION We REVERSE th e judgment of the district court dismissing the negligence claim and REMAND for further proceedings not inconsistent with this opinion.