Standard Bank, Plc v. Runge, Inc. , 443 F. App'x 347 ( 2011 )

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
TENTH CIRCUIT October 6, 2011
Elisabeth A. Shumaker
Clerk of Court
STANDARD BANK, PLC,
Plaintiff - Appellant,
v. No. 10-1045
(D.C. No. 1:07-CV-01989-RPM)
RUNGE, INC., f/k/a Runge Mining, Inc., (D. Colo.)
d/b/a Pincock, Allen & Holt,
Defendant - Appellee.
ORDER AND JUDGMENT
Before BRISCOE, Chief Circuit Judge, HOLLOWAY, and O'BRIEN, Circuit Judges.
Standard Bank, PLC appeals from the district court’s grant of summary judgment
in favor of engineering firm Runge, Inc., d.b.a. Pincock, Allen & Holt (PAH). Standard
filed tort claims against PAH for preparing an allegedly flawed viability report in
connection with Standard’s financing of a coal mine that went bankrupt. The district
court concluded the claims were barred by the economic loss rule. We affirm.

This order and judgment is an unpublished decision, not binding precedent. 10th
Cir. R. 32.1(A). Citation to unpublished decisions is not prohibited. Fed. R. App. 32.1.
It is appropriate as it relates to law of the case, issue preclusion and claim preclusion.
Unpublished decisions may also be cited for their persuasive value. 10th Cir. R. 32.1(A).
Citation to an order and judgment must be accompanied by an appropriate parenthetical
notation B (unpublished). Id.
BACKGROUND
In 2005, Bronco Hazleton, Co., a wholly owned subsidiary of Bronco Energy
Fund, Inc. (Bronco) entered into a contract to purchase the Hazleton coal mine in Indiana
for $25 million. Royal Bank of Scotland (RBS), which was to provide the financing for
the deal, required an evaluation by an independent engineer as part of its due diligence.
To that end, RBS contacted PAH and instructed it to deal directly with Bronco. When
Bronco retained PAH as the independent engineer, it made an immediate payment of
$35,000 to be credited toward PAH’s fees.
The contract1 between Bronco and PAH required PAH to perform its work at
Hazleton “in accordance with the standard of care of its profession, which means
generally accepted professional practices, in the same or similar localities, related to the
nature of the work accomplished, at the time the services are performed.” (R. Vol. 6 at
1188.) It limited PAH’s total liability to the greater of the amount of fees paid under the
contract or $50,000 but offered the possibility of increased exposure to liability in
exchange for a higher fee. The contract explicitly said no third party beneficiaries were
intended and required each party to obtain written permission from the other before
disclosing the contents of the report to outsiders. PAH presented a preliminary report to
Bronco in August 2005. [Vol. 1 at 32] Included in the report was pointed language saying
Bronco had retained PAH and “PAH has prepared this report for use by RBS as RBS
1
There was no signed contract between Bronco and PAH. The district court
concluded PAH’s written proposal to provide services became the contract when Bronco
made payment for PAH’s services. The parties do not argue otherwise. When we refer
to the contract, we are referring to PAH’s proposal.
-2-
evaluates the merits of the Hazelton venture.” (R. Vol. 1 at 37).
RBS pulled out of the deal on September 26, 2005, the day before closing. A few
days later, an independent broker mentioned the deal to Standard, which stepped in to
provide financing. Internal documents show Standard was projecting a 69% internal rate
of return on the transaction. Standard, like RBS, required a report from an independent
engineer. RBS “release[d]” the contractors it had used to perform the due diligence,
including PAH, to Standard. (R. Vol. 7 at 1513.) In November 2005, PAH submitted a
report nearly identical to the one provided to RBS. It was “[p]repared for Standard” and
the recitals were amended to read, “PAH, in its role as IE [independent engineer], intends
that this report will be used by Standard as Standard evaluates the merits of the Hazelton
venture.” (R. Vol. 1 at 98, 103.) The total amount of the loan was $35 million. The
transaction closed in December 2005 and PAH’s outstanding fees were paid out of the
funds Standard loaned to Bronco, but listed under “Lender Transaction Expenses.” (R.
Vol. 7 at 1461.)
In January 2006, Standard started the process of syndicating the loan. In
connection with its plan to market the project to other banks, it asked PAH to change the
recitals in its report. Standard wanted the language saying Bronco had retained PAH to
be replaced by language less likely to cause other banks to be concerned about PAH’s
independence. PAH complied. Its new report contained no reference to Bronco having
retained it; instead it simply said PAH had been retained as an independent engineer to
perform work on behalf of Standard and other potential lenders evaluating the mine.
Standard was unable to syndicate the loan because the mine soon failed and Bronco
-3-
declared bankruptcy in May 2006, less than six months after the purchase.
By March 2006 serious problems with the mine became evident. Standard alleges
the problems should have been, but were not, flagged in PAH’s report.2 Standard
retained another engineering firm to reevaluate the mine (that firm, incidentally, limited
its liability to Standard to the amount of its fee). Standard attempted to rescue the mine
by providing Bronco with debtor-in-possession financing. The efforts were unsuccessful.
In September 2007, Standard sued PAH for negligent misrepresentation and
professional negligence. The parties later filed cross-motions for summary judgment.
Concluding the economic loss rule barred Standard’s claims, the district court entered
summary judgment in favor of PAH.
DISCUSSION
“We review a grant of summary judgment de novo.” Grantham v. Ohio Cas. Co.,
97 F.3d 434, 435 (10th Cir. 1996) (citation omitted). Whether Colorado’s economic loss
rule applies to bar a claim is a question of law also subject to de novo review.3 Level 3
Commc’ns, LLC. v. Liebert Corp., 535 F.3d 1146, 1162 (10th Cir. 2008).
The Colorado Supreme Court adopted the economic loss rule in Town of Alma v.
2
Standard claims PAH miscalculated the mine’s reserves of Clean Air Act
compliant coal, overstating the amount by one hundred percent. Bronco quickly
discovered it could not extract enough compliant coal to satisfy its obligations under
existing contracts. Standard also claims PAH failed to disclose that its geologist had
discovered a number of partings (layers of rock in the coal seam) rendering portions of
the mine unworkable. According to Standard, the report also overstated the mine’s coal-
preparation ability and neglected to account for royalties required to be paid on all coal
sales. PAH disagrees with the substance and legal effect of Standard’s allegations.
Those quarrels do not impact the narrow issue before us.
3
Both parties agree that Colorado law applies in this diversity action.
-4-
AZCO Construction, 10 P.3d 1256, 1264 (Colo. 2000). “[A] party suffering only
economic loss from the breach of an express or implied contractual duty may not assert a
tort claim for such a breach absent an independent duty of care under tort law.” Id. “The
scope of this rule includes third-party contract beneficiaries who may have a cause of
action for breach of contractual duties.” Id. at n.12. The application of the rule focuses
on the source of the duty alleged to have been breached. Id. at 1263.
In Town of Alma, the town and several individuals sued AZCO for shoddy
workmanship on the town’s water distribution system. Id. at 1258. Appearing to depart
from an earlier trend in its case law, the Colorado Supreme Court decided the economic
loss rule barred the plaintiffs’ tort claims. Id. at 1264-65. The court concluded the
claims were based on the duties stated in the construction contract and not on an
independent tort duty. Id. at 1264. As it was the first case to apply the economic loss
rule, the court felt the need to reconcile its earlier, seemingly inconsistent, cases, which
did not discuss (or even mention) the rule. It distinguished the cases on the following
bases: (1) the common law duty underlying the tort in one case was not limited where the
contract did not address the duty of care (the standard of workmanship); (2) the duty
underlying the tort in another was entirely separate from the duty created by the contract
between the parties, and (3) in the third case policy concerns required finding a builder
had an independent duty to act without negligence in constructing a residence.4 Id. at
4
These cases also all involved private homeowners. Colorado apparently applies
the independent duty rule differently in residential construction cases, i.e., it allows
negligence claims by private homeowners against subcontractors despite the fact the
-5-
1265-66.
Four years later, the Colorado Supreme Court expanded the application of the rule
in commercial cases. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).
Dufficy, a subcontractor on a municipal construction project, attempted to sue the
project’s engineer (BRW) and its inspector for negligence and negligent
misrepresentation.5 Id. at 67. Dufficy claimed it incurred additional costs due to BRW’s
faulty plans and the inspecting entity’s failure to timely inspect the project and its
misrepresentations concerning another subcontractor’s work. Id. at 70. The court
applied the economic loss rule even though there was no contract between Dufficy and
BRW or the inspector. Id. at 72. It extended the rule, saying it “applies when the
claimant seeks to remedy only an economic loss that arises from interrelated contracts.”
Id. It also rejected the notion that “a licensed engineer owes an independent duty of care
under tort law to the contractors and subcontractors with respect to the plans and
specifications drafted and prepared by the engineer and relied upon by the contractor or
subcontractor.”6 Id. at 71. If there was a duty in tort, it was not sufficiently independent
claims were based on duties set forth in contracts between the subcontractors and prime
contractors. See infra n.7.
5
Standard pled professional malpractice in addition to a negligent
misrepresentation claim of the type considered in BRW. It is not clear whether a
professional malpractice claim against an engineer can be brought by a third party non-
client in Colorado or whether malpractice should be dealt with differently from other tort
claims under the economic loss rule. However, the parties have not attempted to draw a
distinction between the two claims on appeal so we will not consider the malpractice
claim separately. See Kokins v. Teleflex, Inc., 621 F.3d 1290, 1302 n.6 (10th Cir. 2010)
(arguments not raised on appeal are deemed to be waived).
6
There is some tension in the line of Colorado cases applying the economic loss
-6-
of the contract to preclude application of the economic loss rule.
The court reasoned the economic loss rule barred Dufficy’s claims because:
[The case] involve[d] contractual duties that arose out of a network of
agreements of which all parties had notice. The [p]roject involved
commercially sophisticated parties able to negotiate and bargain for an
allocation of risks, duties, and remedies. Dufficy was aware that it would
be bound by BRW’s plans and specification before it entered into a contract
[with another subcontractor]. Dufficy had the opportunity to allocate the
risks that might occur in following BRW’s plans and relying on [the
inspector’s] inspection of the [p]roject, but failed to do so. Rather, when
Dufficy contracted with [another subcontractor], it agreed to be bound by
BRW’s plans and specifications and did not obtain provisions protecting
itself from economic loss.
Id. at 73.
To determine if the economic loss rule bars recovery in tort in this case, we first
rule. In A.C. Excavating v. Yacht Club II Homeowners Association, Inc., the yacht club
homeowners sued subcontractors who worked on their homes for negligent construction.
114 P.3d 862 (Colo. 2005). The subcontractors had contracted with the general
contractor and developer, but not with the homeowner’s association or its members. The
court held “the economic loss rule has no application to negligent residential construction
claims against subcontractors because subcontractors owe homeowners an independent
duty of care to act without negligence in the construction of homes.” A.C. Excavating,
114 P.3d at 870. The court appears to have concluded the existence of an independent
tort duty was enough to render the economic loss rule inapplicable, id. at 866, even
though the standard of care was laid out in the contracts between the subcontractors and
the general contractor and developer. Id. at 873 (Kourlis, J., dissenting). The court
mentioned BRW, but did not discuss the case in depth or resolve the tension created by its
decision. Id. at 865-66.
We are left to identify and apply distinguishing principles. The economic loss
rule, as articulated in BRW, “applies between and among commercial parties,” 99 P.3d at
72, and Colorado courts apparently provide heightened protection for private consumers,
particularly in the context of residential construction.
This case is analogous to BRW, not A.C. Excavating; it involves sophisticated
commercial entities and presents none of the concerns present in the residential
construction cases cited by Standard.
-7-
turn to whether the duties between these commercial parties were governed by a set of
“interrelated contracts.” Id. at 72. Standard argues BRW does not apply here for several
reasons. First, Standard would have us limit the “interrelated contracts” analysis in BRW
to construction cases. The language in BRW, however, indicates a broader reach was
intended. It refers consistently to “commercial parties” and the distinction between
commercial and consumer transactions is logical, given the purposes and history of the
economic loss rule in Colorado. Id. at 72 (“The economic loss rule applies between and
among commercial parties for three main policy reasons, none of which depends upon or
is limited to the existence of a two-party contract: (1) to maintain a distinction between
contract and tort law; (2) to enforce expectancy interests of the parties so that they can
reliably allocate risks and costs during their bargaining; and (3) to encourage the parties
to build cost considerations into the contract because they will not be able to recover
economic damages in tort.”).
Standard also claims the contracts here were not interrelated because they were not
negotiated or agreed to contemporaneously and therefore it had no opportunity to bargain
in advance of PAH’s work. In BRW, “BRW completed the drawings and specifications”
before the City invited bids for the general contractor. Id. at 68. The general contractor
then contracted with a subcontractor, who contracted with Dufficy. The opinion does not
say how long it took for the series of contracts to be negotiated, but clearly the design
work was completed before Dufficy’s contract, just as PAH’s work was completed before
-8-
Standard entered the picture. 7
Additionally, Standard argues PAH had an independent duty as an “evaluative
professional” to provide “an accurate evaluation to all intended recipients of its report.”
(Appellant’s Opening Br. at 42.)
[Colorado has] recognized that some special relationships by their nature
automatically trigger an independent duty of care that supports a tort action
even when the parties have entered into a contractual relationship. See,
e.g., Bebo Constr. Co. v. Mattox & O’Brien, P.C., 990 P.2d 78, 83 (Colo.
1999) (attorney-client relationship creates independent duty of care);
Greenberg v. Perkins, 845 P.2d 530, 534 (Colo. 1993) (physician-patient
relationship creates independent duty of care, as does physician's
independent medical examination of non-patient); Farmers Group, Inc. v.
Trimble, 691 P.2d 1138, 1141-42 (Colo. 1984) (quasi-fiduciary nature of
insurer-insured relationship creates independent duty of care).
Town of Alma, 10 P.3d at 1263.
However, in BRW, the Colorado Supreme Court was reviewing an appellate
court’s conclusion that engineers and its inspectors owe an independent duty sufficient to
preclude application of the economic loss rule to parties relying on their work. It
reversed the appellate court. In doing so, the supreme court identified three factors for
7
In Level 3 Communications, LLC, Level 3 purchased electrical backup systems
and batteries for the systems from Liebert. 535 F.3d at 1151-52. When permanent
batteries were delayed by the manufacturer (not Liebert), Liebert agreed to provide
temporary batteries for the systems. Id. at 1149, 1151-52. The batteries, which Level 3
claimed Liebert represented as new, turned out to be two years old. Id. at 1149. We
concluded the economic loss rule did not apply because the subject of the alleged
misrepresentation was outside the scope of the original contract; it involved a separate
negotiation to provide temporary batteries not contemplated under the original contract.
Liebert, 535 F.3d at 1163 (“the sale of the [temporary] batteries laid outside [the
contract’s] scope, and the parties were merely negotiating a new contract rather than
operating under the existing one”). Here, the alleged misrepresentation was made in the
course of the evaluation required by the very contracts at issue. The conduct clearly falls
within the scope of the contracts.
-9-
determining the source of the duty at issue: “(1) whether the relief sought in negligence is
the same as the contractual relief; (2) whether there is a recognized common law duty of
care in negligence; and (3) whether the negligence duty differs in any way from the
contractual duty.” BRW, Inc., 99 P.3d. at 74. It clearly identified the tipping point, “[i]f
we conclude that the duty of care owed by BRW [and the inspector] was memorialized in
the contracts, it follows that the plaintiff has not shown any duty independent of the
interrelated contracts and the economic loss rule bars the tort claim and holds the parties
to the contracts’ terms.” Id. It decided Dufficy’s claims of negligence and negligent
misrepresentation against BRW and the inspector were barred by the economic loss rule
because the contract between BRW and the city and the contract between BRW and the
inspector set forth the duties BRW and the inspector allegedly breached. Id. at 74-75.
That is also the case here. Standard is alleging PAH breached the very duty of care set
forth in the Bronco/PAH contract -- the duty to provide professionally competent services
in its evaluation of the mine.8
The relationships here were governed by a set of interrelated contracts between
sophisticated commercial entities, all of which had the opportunity to allocate risk and
loss through negotiation of their separate contracts. The Senior Credit Agreement
between Bronco and Standard references the “Independent Engineer’s Report” and sets
forth requirements for its contents in order for the transaction to go forward. (R. Vol. 2 at
210). When it drafted and executed the Senior Credit Agreement, Standard knew it
8
The contract not only set forth the duty, it also expressly limited PAH’s liability
for any breach of that duty to the amount of its fees.
- 10 -
would be relying on the PAH report in its process of approving the deal.
When Standard took over the deal, RBS sent it a “release” of all consultants,
including PAH, but “ma[d]e no representation or warranty as to any of the[] consultants
and legal advisors or any of the reports and other documents they ha[d] prepared” and
disclaimed “any and all liability to you resulting from your use of these consultants and
legal advisors or your use of any of those reports and other documents.” (R. Vol. 7 at
1513). Yet, even after RBS disclaimed liability, Standard made no effort to ensure it had
protections in place from another source.
The BRW court noted, “[e]ven though a subcontractor may not have the
opportunity to directly negotiate with the engineer or architect, it has the opportunity to
allocate the risks of following specified design plans when it enters into a contract with a
party involved in the network of contracts.” 99 P.3d at 72. There is no reason Standard
could not have taken action to allocate the risk of any inaccuracies in the report. It could
have, for example, required Bronco to pay PAH to increase its liability exposure,
contracted with PAH directly for its services and requested it to add Standard as a named
insured on its professional liability insurance coverage for the transaction, or sought an
opinion from another engineer who was willing to bargain on liability issues. Standard
argues it was never given the contract between Bronco and PAH, but nothing suggests
Standard ever requested to see the contract. It is simply trying to skirt liability for its lack
of diligence.9 It is also undisputed that Standard was generally familiar with these types
9
Standard’s focus on a possible 69% internal rate of return may have caused it to
- 11 -
of contracts and their terms.
Finally, Standard argues the economic loss rule should not apply because in this
case, it would deprive a plaintiff who has no remedy in contract from asserting a tort.10
However, that is precisely what happened in BRW - the subcontractor was left with no
claim against the engineer or inspector in contract or tort – its only remedy was against
let down its guard. Its internal reports note the risk of proceeding at the pace required by
its late takeover of the financing:
[W]e have some degree of discomfort with respect to the speed at which we
have had to put this deal together. Although we have sought to cover all
the avenues, realistically in the time available we have some concern that
certain aspects may not have received the typical level of scrutiny. This
fact combined with the fact that there is little additional liquidity to address
such errors is a real risk in this transaction. . . . [T]he risk profile is reflected
in the return . . . .
(R. Vol. 7 at 1420.) It ultimately decided to proceed, despite the possibility some
contingencies might be left unaddressed, because of the “highly remunerative” nature of
the transaction. (Id. at 1421.)
10
Standard claims it has no contract remedy available because the contractual
relationship between PAH and Bronco did not extend to it through novation or a third-
party beneficiary theory nor was there an implied contract between it and PAH. On the
other hand, PAH argues Standard’s remedy, if any, is to recover its losses on one of those
theories and Standard would be limited to contract damages – the fees paid to PAH,
approximately $95,000. The district court did not address this issue because it found the
claims were barred entirely. Because the economic loss rule bars Standard’s claims, we
need not address it either.
Standard requests permission to amend its complaint to include contract claims if
we find the tort claims are barred. We “ha[ve] repeatedly and unequivocally held that,
once judgment is entered, the filing of an amended complaint is not permissible until
judgment is set aside or vacated . . . .” The Tool Box, Inc. v. Ogden City Corp., 419 F.3d
1084, 1087 (10th Cir. 2005) (quotations omitted). “The fact that a party desiring to
amend after judgment has been entered is obliged first to obtain relief from the judgment
imposes some important restrictions on the ability to employ Rule 15(a) [of the Federal
Rules of Civil Procedure, which governs amendment of complaints].” Id. (quotations
omitted). Because we affirm the judgment of the district court, Standard’s request to
amend is denied.
- 12 -
the city. BRW makes it clear the Colorado courts do allow the economic loss rule to
deprive a sophisticated commercial plaintiff of its only remedy against a particular
defendant. One of the purposes of the rule announced by the Colorado Supreme Court is
“to encourage the parties to build the cost considerations into the contract because they
will not be able to recover economic damages in tort.” Id. at 72 (emphasis added).
Standard is left with no contract remedy because it failed to bargain for such a remedy
when it had the opportunity. A party who fails to protect itself in a contract may be left
without any remedy at all as a result of its oversight. The district court properly
determined the economic loss rule bars Standard’s recovery.
AFFIRMED. Standard’s request for a remand with directions to permit it to
amend its complaint is DENIED.
Entered by the Court:
Terrence L. O’Brien
United States Circuit Judge
- 13 -