Court Opinion

ID: 3179114
Source: CourtListenerOpinion
Date Created: 2016-02-19 21:29:44.220255+00
Date Added: 2024-06-11T09:36:27.804089
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                             AT KNOXVILLE
                                    October 27, 2015 Session

       H & J DITCHING & EXCAVATING, INC. V. CORNERSTONE
                       COMMUNITY BANK

                      Appeal from the Circuit Court for Knox County
                       No. 2-560-13   Jon Kerry Blackwood, Judge1

              No. E2015-01060-COA-R3-CV-FILED-FEBRUARY 19, 2016

Plaintiff H & J Ditching & Excavating, Inc. (Contractor) was hired by JRSF, LLC
(Developer) to perform excavating and grading work on a subdivision construction
project (the project) in West Knox County. Defendant Cornerstone Community Bank
(Lender) provided financing for the project with a $2,512,500 construction loan.
Complications arose, including the bankruptcy of one of Developer‟s primary members.
Developer defaulted on the construction loan. Lender foreclosed and took possession by
bidding on the property at the foreclosure sale. Contractor alleges that it completed the
grading and infrastructure work but that it only received 90% of the contract price.
Contractor brought this tort action against Lender, alleging intentional and negligent
misrepresentation to-wit, by assuring Contractor that the construction loan to Developer
was “fully funded” and that Contractor would be paid for its work. The trial court
granted Lender summary judgment, finding that (1) Lender made no false or misleading
statements and (2) the proximate cause of Contractor‟s alleged injury in not receiving its
final 10% payment was Contractor‟s failure to request and obtain an engineer‟s certificate
of final completion, a condition precedent to payment under its contract with Developer.
We affirm.

          Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
                              Affirmed; Case Remanded

CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which D. MICHAEL
SWINEY, C.J., and JOHN W. MCCLARTY, J., joined.

Arthur F. Knight, III, and Jonathan Swann Taylor, Knoxville, Tennessee, for appellant,
H & J Ditching & Excavating, Inc.
      1
          Sitting by designation.
                                               1
P. Edward Pratt, Knoxville, Tennessee, for appellee, Cornerstone Community Bank.

                                         OPINION

                                            I.

       On December 18, 2007, Contractor excuted agreements with Developer to perform
excavation, grading, and other work for the project, a residential subdivision known as
Terra Vista. In a one-sentence letter dated December 31, 2007, Lender notified
Contractor that “[f]inancing is in place for [Developer] for the residential subdivision
named „Terra Vista.‟ ” The contract between Developer and Contractor provided for
periodic payments, prior to substantial completion of the project. Upon substantial
completion, Contractor was to receive the balance due on its contract less a 10%
retainage. Contractor commenced work on the project and received periodic payments
for 90% of the total work completed and approved.

       In November 2008, Derek Keck, Knox County Stormwater Department‟s primary
inspector for the project, inspected the Terra Vista property and found it in violation of
environmental regulations requiring stablization and erosion control of the newly
excavated and graded soils. Keck stated in his affidavit:

             on November 18, 2008, Knox County Stormwater issued a
             Notice of Violation to the owner of the Project . . . [I]t was
             noted that all grading of the Project was final but that no
             stabilization as is required by environmental regulations had
             been performed. It was my understanding that [Contractor]
             was the contractor on the Project responsible for stabilization
             of the exposed and graded portions of the Project.

                                     *      *      *

             On November 21, 2008, [Contractor] gave Notice of
             Termination - Storm Water Discharges Construction Activity
             to TDEC [Tennessee Department of Environment and
             Conservation] for the Project with the explanation: “Due to
             financial decline in the economy we are no longer working at
             the job site. . . .”

                                            2
             The Project was not substantially complete at this time. My
             understanding is that [Contractor] pulled off the Project
             because it was not being paid.

                                     *       *    *

             Following a change in ownership, on March 19, 2010, I
             prepared and my supervisor forwarded a Notice of Violation
             to [Lender] documenting that: “An inspection of your site on
             March 17 found your site to be deficient in this area.
             Approximately 75% of this property is not adequately
             stabilized. All raw areas should be stabilized. Prior to
             applying stabilization measures, any rills and ruts should be
             regraded.”

             On or about March 17, 2010, I took numerous photographs
             documenting the lack of stabilization and incomplete
             condition of the Project. . . . [T]hey document the lack of
             stabilization on the Project through March 17, 2010, but this
             lack of stabilization on the Project existed at least from
             November 2008.

             [Lender] undertook stabilization through a contractor other
             than [Contractor] which was not completed and signed off on
             by Knox County Stormwater, and the Knox County Law
             Director‟s Office, until November 1, 2010.

(Paragraph numbering in original omitted.)

      According to the affidavits of Contractor‟s shareholders, Contractor “substantially
completed the project on February 11, 2009.” They further stated as follows:

             Essentially, [Contractor] cleared, excavated and graded the
             entire Terra Vista development. We cut all the roads of the
             subdivision into the land, built ponds, implemented the
             drainage plan designed by the engineers, and installed all
             utilities, including sewer, water and electric into the
             subdivision. It was a turn-key job, and we did everything but
             lay the asphalt.

                                     *       *    *
                                             3
             Back in late November 2008, [Lender] suddenly and abruptly
             told us that the bank would no longer fund the project. We
             inquired about the retainage that [Lender] was holding and
             whether that would be disbursed to us. We were told it would
             not be so disbursed.        Nevertheless, we substantially
             completed the project and upheld our version of the
             Contracts. [Lender] was well aware that we completed our
             work, and that they were withholding the retainage that was
             fully owed under the Contracts.

        The contract between Developer and Contractor required the issuance of a
certificate of substantial completion before final payment to Contractor would become
due. No certificate was ever issued, and there is no proof in the record that Contractor
ever requested the project engineer to issue one.

       As previously noted, following Developer‟s default under its agreements with
Lender, Lender foreclosed in early December 2009 and took possession of the property as
high bidder at the foreclosure sale. Lender hired another contractor to complete the Terra
Vista project, expending an additional $410,556.60 above the roughly $2.5 million
construction loan proceeds.

       Contractor brought this action alleging intentional and negligent misrepresentation
by Lender. Contractor argues that Lender “made multiple false statements . . . that
[Developer] was financially sound, that [Lender‟s] loan to [Developer] was „fully funded‟
and that [Contractor] would be paid for the work it completed on the Terra Vista project.”
Lender moved for summary judgment and filed, among other things, the affidavit of
Lynn Vandergriff, special assets officer for Lender, which states:

             [Lender] foreclosed its deed of trust on the Project in
             December 2009. The Project was far from complete, so much
             so, that in March 2010, [Lender] received a Notice of
             Violation from Knox County Stormwater that 75% of the
             stabilization measures for the raw grading had never been
             implemented and that [Lender] would receive substantial
             daily fines if not immediately remedied.

                                     *      *      *

                                            4
              [Lender] funded $2,511,927.76 of the Loan to [Developer],
              which was in the initial amount of $2,515,500.00.2 In
              addition, [Lender] made payments toward completion of the
              Project . . . of $410,556.60, for total payments related to the
              Project of $2,922,484.36.

              Not only did [Lender] fully fund the Loan, to complete the
              unfinished work of [Contractor] on the Project, it expended
              an additional $406,984.36 above the Loan proceeds limit . . .
              for work on the Project.

(Paragraph numbering in original omitted.) Following a hearing, the trial court granted
Lender summary judgment, stating in pertinent part:

              [Contractor] has sued [Lender] for misrepresentation.
              [Contractor] alleges that employees of [Lender]
              misrepresented to [Contractor] that the project was fully
              funded and that they would be paid. At the time of
              [Contractor‟s] conclusion of their work, a 10% retainage in
              the amount of $220,119.17 was owed to [Contractor]. . . .

              The contracts that are relevant to the payment of funds to
              [Contractor] are the construction contract and the construction
              loan agreement. It is undisputed that the final payment of the
              retainage was dependent upon the issuance of a certificate of
              substantial completion by the project engineer. It is further
              undisputed that a certificate of substantial completion has
              never been issued. The reasons for failure of the project
              engineer to issue the certificate are the issues that relate to
              [Developer‟s] suit against [Contractor]. Nevertheless, the fact
              that no certificate has been issued is undisputed.

              The purported injury in this case is the failure to receive the
              final retainage held by [Lender]. Even if misrepresentations
              were made by [Lender], the proximate cause of [Contractor‟s]
              alleged injury is not based upon false or misleading
              statements. The proximate cause for their alleged injury is
       2
          There is a $3,000 discrepancy between this amount and the actual amount of the loan,
according to the loan documents themselves, which were attached as an exhibit to Vandergriff‟s
affidavit. The correct amount of the loan is $2,512,500, not $2,515,500. Lender argues that the
amount stated in the affidavit is the result of a “scrivener‟s error.”
                                              5
             their failure to obtain the issuance of the certificate.
             Consequently, [Lender] has refuted an essential element of
             [Contractor‟s] claim and [s]ummary [j]udgment is
             appropriate.

             Additionally, the affidavit of Mr. Vandergriff establishes that
             the loan was fully funded. There may exist a four thousand
             dollar discrepancy in his affidavit and the actual loan amount.
             However, [Lender] eventually expended more on the project
             than the original loan required. Furthermore, the lack of four
             thousand dollars to a 2.5 million dollar loan could hardly be
             classified as a material misrepresentation. Consequently, the
             Court concludes that [Lender] has refuted an essential
             element of [Contractor‟s] claim, i.e. false statement.
             Summary [j]udgment in [Lender‟s] favor is warranted.

The trial court also denied Contractor‟s motion to amend its complaint. Contractor
timely filed a notice of appeal.

                                            II.

        The issues presented are (1) whether the trial court erred in granting Lender
summary judgment on the ground that it negated two elements of Contractor‟s
misrepresentation claims ‒ false statement and proximate causation; and (2) whether the
trial court erred in denying Contractor‟s motion to amend its complaint.

                                           III.

       Regarding our standard of review of a grant of summary judgment, the Supreme
Court has recently determined:

             Summary judgment is appropriate when “the pleadings,
             depositions, answers to interrogatories, and admissions on
             file, together with the affidavits, if any, 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.” Tenn. R.
             Civ. P. 56.04. We review a trial court‟s ruling on a motion
             for summary judgment de novo, without a presumption of
             correctness.

                                     *      *       *
                                            6
             [I]n Tennessee, as in the federal system, when the moving
             party does not bear the burden of proof at trial, the moving
             party may satisfy its burden of production either (1) by
             affirmatively negating an essential element of the nonmoving
             party‟s claim or (2) by demonstrating that the nonmoving
             party‟s evidence at the summary judgment stage is
             insufficient to establish the nonmoving party‟s claim or
             defense. . . . The nonmoving party must demonstrate the
             existence of specific facts in the record which could lead a
             rational trier of fact to find in favor of the nonmoving party.

Rye v. Women’s Care Ctr. of Memphis, MPLLC, No. W2013-00804-SC-R11-CV, 2015
WL 6457768, at *12, *22 (Tenn., filed Oct. 26, 2015) (italics in original). In making the
determination of whether summary judgment was correctly granted,

             [w]e must view all of the evidence in the light most favorable
             to the nonmoving party and resolve all factual inferences in
             the nonmoving party‟s favor. Martin v. Norfolk S. Ry. Co.,
             271 S.W.3d 76, 84 (Tenn. 2008); Luther v. Compton, 5
S.W.3d 635, 639 (Tenn. 1999); Muhlheim v. Knox Cnty. Bd.
             of Educ., 2 S.W.3d 927, 929 (Tenn. 1999). If the undisputed
             facts support only one conclusion, then the court‟s summary
             judgment will be upheld because the moving party was
             entitled to judgment as a matter of law. See White v.
             Lawrence, 975 S.W.2d 525, 529 (Tenn. 1998); McCall v.
             Wilder, 913 S.W.2d 150, 153 (Tenn. 1995).

Wells Fargo Bank, N.A. v. Lockett, No. E2013-02186-COA-R3-CV, 2014 WL 1673745,
at *2 (Tenn. Ct. App. E.S., filed Apr. 24, 2014).

                                          IV.

      The elements of a claim for intentional misrepresentation are as follows:

             (1) the defendant made a representation of an existing or past
             fact; (2) the representation was false when made; (3) the
             representation was in regard to a material fact; (4) the false
             representation was made either knowingly or without belief in
             its truth or recklessly; (5) plaintiff reasonably relied on the

                                           7
              misrepresented material fact; and (6) plaintiff suffered
              damage as a result of the misrepresentation.

Stanfill v. Mountain, 301 S.W.3d 179, 188 (Tenn. 2009) (quoting Walker v. Sunrise
Pontiac–GMC Truck, Inc., 249 S.W.3d 301, 311 (Tenn. 2008)). The Supreme Court
further observed in Stanfill that “[t]o succeed on a negligent misrepresentation claim, a
plaintiff must establish that: (1) the defendant supplied information to the plaintiff; (2)
the information was false; (3) the defendant did not exercise reasonable care in obtaining
or communicating the information; and (4) the plaintiffs justifiably relied on the
information.” Id. at 189.

        The allegedly false statement claimed by Contractor is Lender‟s assurance that the
construction loan was “fully funded.” It is not disputed that Lender‟s agents made such a
statement to Contractor. Neither is it disputed that Lender funded $2,511,927.76 of the
construction loan, the initial amount of which was $2,512,500. Contractor argues that
“what was supposed to be” the correct amount of the loan was $2,515,500, as stated in
Vandergriff‟s affidavit, notwithstanding the fact that both the construction loan
agreement and the construction disbursal agreement executed by Lender and Developer
state that the loan is in principal amount of $2,512,500. As stated in its brief, Contractor
further argues:

              [Lender] admittedly did not fully fund the loan prior to the
              foreclosure, as Lynn Vandergriff‟s affidavit states that
              [Lender] funded only $2,511,927.76 of what was supposed to
              be a $2,515,500.00 loan. The trial court found that this
              discrepancy “could hardly be classified as a material
              misrepresentation;” however, [Contractor] contends that the
              discrepancy is material and that it creates an issue of fact
              which should be submitted to a jury.

(Emphasis in original; citation to record omitted.) Using the correct amount of the loan,
Lender paid out $572.24, or 0.0228 percent, less than the $2,512,500 construction loan.
Using Contractor‟s numbers, Lender funded $3,572.24, or 0.142 percent, less than the
amount alleged by Contractor, $2,515,500. Either way, the resulting deficiency is not
material. It is de minimus. Furthermore, the construction loan agreement provides as
follows:

              COMPLETION OF IMPROVEMENTS BY LENDER. If
              Lender takes possession of the Collateral, it may take any and
              all actions necessary in its judgment to complete construction
              of the Improvements . . .
                                             8
                                       *      *      *

              In any event, all sums expended by Lender in completing the
              construction of the Improvements will be considered to have
              been disbursed to Borrower and will be secured by the
              Collateral for the loan.

(Capitalization and bold font in original.) It is undisputed that, after Contractor pulled off
the project, Lender made payments toward its completion to contractors other than
plaintiff in the amount of $410,556.60. In addition, it is clear that the Lender funded
roughly 99.98% of the construction loan to Developer. On appeal, Contractor argues that
Lender did not “take possession” of the collateral property by foreclosing on it and
purchasing it at the foreclosure sale. This argument is unpersuasive. We agree with the
trial court that Lender‟s statement to Contractor that the construction loan was “fully
funded” was neither false nor misleading.

       We further hold that the trial court correctly decided that the undisputed facts
establish that the proximate cause of Contractor‟s alleged injury was its failure to request
and obtain the project engineer‟s certificate of final completion as contractually required.
The contracts executed by Developer and Contractor call for payments in the amount of
90% of the work completed, until Contractor believes that all work is substantially
complete. At that point, the agreements provide:

              When Contractor considers the entire Work ready for its
              intended use Contractor shall notify Owner and Engineer in
              writing that the entire Work is substantially complete (except
              for items specifically listed by Contractor as incomplete) and
              request that Engineer issue a certificate of Substantial
              Completion.

(Emphasis added.) As can be seen, after the project engineer issues the certificate of
substantial completion, final payment to Contractor becomes due and payable. It is
undisputed that the project engineer did not issue a certificate, and there is no proof that
Contractor requested one.

       The affidavits of Contractor‟s shareholders state that “we substantially completed
the project on February 11, 2009.” Contractor‟s appellate brief does not address or
mention the statements in the affidavits of Keck and Vandergriff that the project lacked
sufficient stabilization and erosion controls. Keck‟s affidavit was supported by
documentation of several notices of violation issued by the Knox County Stormwater
                                              9
Department and numerous photographs showing the lack of stabilization and incomplete
condition of the project from November 2008 through March 2010.

       The agreement between Contractor and Developer provides the following
description of the work that Contractor agreed to complete:

             Contractor shall complete all Work as specified or indicated
             in the Contract Documents. The Work is generally described
             as follows:

             Clearing & grubbing, demolition of one existing house,
             removal of debris, grading and ditching to subgrade,
             construction of storm drain system, construction of detention
             pond and related structures, backfill and shaping behind
             curbs, construction of water distribution network,
             construction of sanitary sewer system, installation and
             maintenance of all erosion control measures, inspections and
             record keeping as required by storm water pollution
             prevention plans (SEPP), smoothing of lots after final grading
             completed, final soil stabilization according to storm water
             pollution prevention plan. All of the above as specified in the
             contract drawings and documents.

(Emphasis added.) Lender, arguing that the proximate cause of Contractor‟s failure to
receive the final 10% payment was due to Contractor‟s own failures, asserts that

             [a]s an experienced excavating and grading contractor,
             [Contractor] knew precisely what it was doing by abandoning
             newly graded earth without stabilization and erosion control
             in the middle of winter. The Project literally washed away.

Even if we assume, arguendo, that the evidence is sufficient to create a genuine issue of
material fact regarding whether Contractor actually completed all the work it contracted
to do, it remains undisputed that no certificate of substantial completion was ever issued,
a condition precedent to final payment.

      Contractor argues that the trial court erred in denying its motion to amend the
complaint. The Supreme Court has provided the following guidance regarding our
review of the denial of a motion to amend:

                                            10
The grant or denial of a motion to amend a pleading is
discretionary with the trial court. Harris v. St. Mary’s Med.
Ctr., Inc., 726 S.W.2d 902, 904 (Tenn. 1987). Generally,
trial courts must give the proponent of a motion to amend a
full chance to be heard on the motion and must consider the
motion in light of the amendment policy embodied in Rule
15.01 of the Tennessee Rules of Civil Procedure that
amendments must be freely allowed; and, in the event the
motion to amend is denied, the trial court must give a
reasoned explanation for its action. Henderson v. Bush Bros.
& Co., 868 S.W.2d 236, 238 (Tenn. Workers‟ Comp. Panel
1993). Although permission to amend should be liberally
granted, the decision “will not be reversed unless abuse of
discretion has been shown.” Welch v. Thuan, 882 S.W.2d
792, 793 (Tenn. Ct. App. 1994). Factors the trial court should
consider when deciding whether to allow amendments
include “[u]ndue delay in filing; lack of notice to the
opposing party; bad faith by the moving party, repeated
failure to cure deficiencies by previous amendments, undue
prejudice to the opposing party, and futility of amendment.”
Merriman v. Smith, 599 S.W.2d 548, 559 (Tenn. Ct. App.
1979).

In Branch v. Warren, 527 S.W.2d 89 (Tenn. 1975), we
discussed the effect of Rule 15.01 of the Tennessee Rules of
Civil Procedure:

      The new Rules of Civil Procedure, in this
      regard “come not to destroy the old law, but to
      fulfill.” They were designed to simplify and
      ease the burden of procedure under the
      sometimes harsh and technical rules of common
      law pleading.        Accordingly, Rule 15.01
      provides that leave (to amend) shall be freely
      given when justice so requires. This proviso in
      the rules substantially lessens the exercise of
      pre-trial discretion on the part of a trial judge.
      Indeed, the statute (§ 20–1505, T.C.A.) which
      conferred a measure of discretion on trial judges
      was repealed and Rule 15 stands in its place and
      stead. That rule needs no construction; it means
                             11
                     precisely what is says, that “leave shall be
                     freely given.”

              Id. at 91–92 (emphasis added). Later, in Gardiner v. Word,
              731 S.W.2d 889, 891 (Tenn. 1987), this Court confirmed that
              Branch required trial courts to be liberal in allowing pretrial
              motions to amend.

Cumulus Broad., Inc. v. Shim, 226 S.W.3d 366, 374-75 (Tenn. 2007) (emphasis in
original).

        We have reviewed the proposed amended complaint filed by Contractor and
compared it with the original complaint. It contains slightly reworded restatements of the
initially filed causes of action. There are no new substantive allegations or assertions; it
just rehashes the complaint in somewhat different and a few additional words. At oral
argument, Contractor‟s counsel admitted that the proposed amended complaint “didn‟t
change the substance of the misrepresentation claim; it did reword things a little bit just
to make it more clear.” The proposed amendment was obviously futile and would not
have changed the outcome of this case if it had been granted. The trial court did not
abuse its discretion in denying the motion to amend.

                                            V.

      The trial court‟s summary judgment in Lender‟s favor is affirmed. Costs on
appeal are assessed to the appellant, H & J Ditching & Excavating, Inc. The case is
remanded for collection of costs assessed below, pursuant to applicable law.

                                                    _______________________________
                                                    CHARLES D. SUSANO, JR., JUDGE

                                            12