Kemper/Prime Indus v. Montgomery Watson ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-1144
KEMPER/PRIME INDUSTRIAL PARTNERS,
Plaintiff-Appellant,
v.
MONTGOMERY WATSON AMERICAS, INC.,
Defendant-Appellee,
v.
THE PRIME GROUP, INC.,
Third-Party Defendant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 4278—Ronald A. Guzman, Judge.
____________
ARGUED NOVEMBER 27, 2006—DECIDED JUNE 12, 2007
PUBLISHED JUNE 19, 2007
____________
Before BAUER, WOOD, and EVANS, Circuit Judges.
WOOD, Circuit Judge. This case concerns who is respon-
sible for certain environmental clean-up costs. Kemper/
Prime Industrial Partners (“Kemper/Prime”), the plaintiff,
claims that an environmental assessment of a parcel of
land performed by Warzyn, Inc., the predecessor of defen-
dant Montgomery Watson Americas, Inc. (“Montgomery”),
was deficient insofar as it failed to reveal to Kemper/Prime
2 No. 05-1144
the full extent of contamination and clean-up costs. The
property in question was called the Chicago Enterprise
Center (“the Property”), which Kemper/Prime purchased
after receiving Warzyn’s report in 1990. Later, when it
decided to refinance the Property in 1996, Kemper/Prime
conducted another environmental assessment of the
land. The new assessor discovered contamination that
was present in 1990 but that Warzyn had not detected.
Kemper/Prime sued Montgomery, Warzyn’s successor,
claiming negligent misrepresentation on Warzyn’s part,
but the district court ruled that its evidence of damages
was insufficient and dismissed the case with prejudice.
We affirm.
I
In February 1990, an entity called the Prime Group, not
to be confused with plaintiff Kemper/Prime, hired Warzyn
to conduct an environmental assessment of the Property,
a 120-acre stretch of industrial land in south Chicago, to
determine whether the Property had unknown environ-
mental hazards or problems. Warzyn understood that the
Property would soon be bought by a new partnership to be
known as Kemper/Prime, which was created to make that
purchase by partners in the Prime Group. As planned,
Kemper/Prime purchased the Property after Warzyn
issued its final reports in June of 1990.
As part of its assessment, Warzyn conducted a four-
month evaluation of the Property, including a site visit, an
historical records search, a review of previous reports
about the Property, an investigation of information from
state and federal sources relevant to the Property, soil
testing, soil boring, installation of monitoring wells,
analyses of decontamination procedures, water level
measurements, ground water sampling, PCB wipe sam-
pling procedures and other field testing. Warzyn concluded
No. 05-1144 3
that there were still unreviewed areas in the Property, but
based on the scope of the work that the Prime Group had
commissioned, it did not investigate these additional
areas.
Warzyn published two reports for the Prime Group in
June of 1990. The reports identified some contamination,
focusing in particular on two sections of land (identified
as SB17 and SB8) within the Property that were part of
a “major area of concern” south of Building S. The Prime
Group had expected Warzyn to retrieve Sanborn Fire Maps
for the Property, but Warzyn reported that such maps
were unavailable. At some point after Warzyn’s assess-
ment, the parties learned that this was incorrect, and that
Sanborn Maps were available for the years 1897, 1913,
1947, 1950, 1976, and 1987. The Sanborn Maps for 1947
and 1950 showed 26 underground storage tanks on the
Property. The later two Sanborn Maps showed none of
these tanks.
After issuing its reports, Warzyn sent a short letter to
the Prime Group noting that Warzyn had “developed a
proposal to quantify the extent of contamination identi-
fied.” Neither the reports nor the letter stated that Warzyn
had taken the next step and quantified the full environ-
mental remediation costs for the Property. Instead, the
reports and the letter identify some costs for cleaning
up some of the identified contamination. In context, it
appears that the costs may relate to the “major area of
concern” near Building S, because the cost discussion
follows immediately after the discussion of the Building S
area. That area is not a part of the Property at issue in
this litigation.
Between 1993 and 1996, two other environmental
assessments were done on the Property—one by Dunn
Corporation in 1993 and one by Carlson Environmental,
Inc., in 1996. Also during this time, Kemper/Prime subdi-
4 No. 05-1144
vided and sold significant sections of the Property. Taken
together, these sales yielded millions of dollars in profits
for Kemper/Prime.
Kemper/Prime was nevertheless displeased to learn that
the Property had more environmental contamination than
it had been led to believe before its initial purchase. In
1997, Kemper/Prime sued Montgomery. Then in 1999,
several of the entities that had purchased sections of the
Property joined the suit as plaintiffs. Also in 1999, Mont-
gomery filed a third-party claim against the Prime Group
pursuant to an indemnification provision in the 1990
agreement between the Prime Group and Warzyn. In 2003,
the district court dismissed the claims brought by the
1999 plaintiffs. No claims have been filed between
Kemper/Prime and the Prime Group. (This is important
because a defendant’s impleader under FED. R. CIV. P. 14
of a party that is not diverse from the plaintiff does not
destroy jurisdiction. See 28 U.S.C. § 1367(b).)
Although Kemper/Prime filed its complaint against
Montgomery in 1997, the litigation dragged on for several
years. In 2003, Montgomery made two motions in limine
about the standard of damages the district court should
employ, questioning whether Kemper/Prime would be able
to satisfy its burden of proof under the appropriate
standard. The district court expressed “serious doubts
about the ability of . . . Kemper/Prime . . . to provide
evidence of damages.” Kemper/Prime then filed a “Memo-
randum Of Evidence On Damages That It Will Present At
Trial.” After Montgomery filed a responsive brief, the
district court concluded that “Plaintiff cannot offer proof
of all necessary parameters of the damages calculation,
and [therefore] Plaintiff is barred from presenting evidence
of damages at trial” and dismissed the case with prejudice,
in substance granting summary judgment in Montgomery’s
favor. Kemper/Prime appeals its dismissal to this court.
We note that Montgomery’s claim for indemnification
No. 05-1144 5
against the Prime Group is still pending in the district
court, which would ordinarily mean that the judgment
is not yet final in this case for purposes of 28 U.S.C.
§ 1291. Here, however, the court issued an order under
FED. R. CIV. P. 54(b) certifying that all claims between
Kemper/Prime and Montgomery were resolved and there
was no just reason for delay for purposes of appeal. Our
appellate jurisdiction is therefore secure.
II
Because the district court’s jurisdiction was based on
diversity of citizenship, 28 U.S.C. § 1332(a), we look to
state law (here, that of Illinois) for the rules of decision.
See 28 U.S.C. § 1652; McClain v. Owens-Corning Fiberglas
Corp., 139 F.3d 1124, 1126 (7th Cir. 1998) (specifically
addressing the question of whether evidence supports an
award of damages). The Illinois Supreme Court allows
suits alleging negligent misrepresentation “where [the
defendant] is in the business of supplying information for
the guidance of others in their business transactions.”
Brogan v. Mitchell Int’l, 692 N.E.2d 276, 278 (Ill. 1998);
Moorman Mfg. Co. v. National Tank Co., 435 N.E.2d 443,
452 (Ill. 1982). A plaintiff alleging negligent misrepresen-
tation must prove (1) the defendant made “a false state-
ment of material fact,” (2) the defendant had the “intention
to induce the other party to act,” (3) the plaintiff relied “on
the truth of the statements,” (4) “damage to the other
party resulting from such reliance,” and (5) the “defendant
owes a duty to the plaintiff to communicate accurate
information.” Board of Educ. v. A, C & S, Inc., 546 N.E.2d
580, 591 (Ill. 1989). At issue in this appeal is the fourth
element, “damage . . . resulting from such reliance.”
The Illinois state courts have not adopted a particular
approach to damages for negligent misrepresentation
cases. Montgomery argued before the district court that
6 No. 05-1144
the proper measure of damages here is the diminution of
value of the land at issue, while Kemper/Prime asked the
district court to adopt the damages standard set forth in
§ 552B of the Second Restatement of Torts. The district
court agreed with Kemper/Prime and looked to § 552B
for its standard.
This court faced a similar lack of standards for damages
in a diversity action in Trytko v. Hubbell, Inc., 28 F.3d 715,
721-24 (7th Cir. 1994). In Trytko, the plaintiff brought a
negligent misrepresentation action under Indiana law. Id.
at 718. The Trytko court noted that “[a]lthough the [Indi-
ana Supreme Court] adopted § 552 of the Restatement
(describing the elements of the tort of negligent misrepre-
sentation), no Indiana court has discussed or adopted
§ 552B’s view of damages. Nevertheless, the Restatement,
in its stature, seems an appropriate starting point for
our discussion.” Id. at 721-24. The Trytko court, consis-
tently with many others, adopted § 552B and its commen-
tary as the proper standard of damages, including that
section’s limitation of damages in negligent misrepresenta-
tion cases to reliance damages only, not expectancy
damages. Id. at 724 (citing § 552B(2)). See also Becker v.
PaineWebber, Inc., 962 F.2d 524, 527 (5th Cir. 1992);
Cunha v. Ward Foods, Inc., 804 F.2d 1418, 1426 (9th Cir.
1986); Battenfeld of Am. Holding Co. v. Baird, Kurtz &
Dobson, 60 F. Supp. 2d 1189, 1202 (E.D. Pa. 1999); Rosales
v. AT&T Information Systems, Inc., 702 F. Supp. 1489,
1501 (D. Colo. 1988); First Interstate Bank of Gallup v.
Foutz, 764 P.2d 1307, 1310 (N.M. 1988); Law Offices of
L.J. Stockler v. Rose, 436 N.W.2d 70, 85-86 (Mich. Ct. App.
1989).
We agree with the district court that if Illinois courts
were to address the issue of standard of damages in a
negligent misrepresentation action, they likely would
adopt § 552B as their standard. Section 552B reads:
No. 05-1144 7
Damages for Negligent Misrepresentation
(1) The damages recoverable for a negligent misrepre-
sentation are those necessary to compensate the
plaintiff for the pecuniary loss to him of which the
misrepresentation is a legal cause, including
(a) the difference between the value of what he has
received in the transaction and its purchase price
or other value given for it; and
(b) pecuniary loss suffered otherwise as a consequence
of the plaintiff ’s reliance upon the misrepresenta-
tion.
(2) the damages recoverable for a negligent misrepre-
sentation do not include the benefit of the plain-
tiff ’s contract with the defendant.
Relying on § 552B, the district court concluded that in
order to prove damages, Kemper/Prime needed to “offer
evidence of (1) the cost of remediating the contamina-
tion listed in the 1990 Report, and (2) the total cost of
remediating the contamination that existed on the Prop-
erty at the time of the 1990 Report.” This evidence could
satisfy either § 552B(1)(a) or (b) because it would either
show the extent to which Kemper/Prime overpaid for the
Property or the additional costs Kemper/Prime was
forced to incur because of its reliance on Warzyn’s reports.
In fact, this interpretation of § 552B was generous to the
plaintiff, as § 552B can be read more narrowly. Indeed,
Montomgery contends that the district court’s approach to
pecuniary loss is “expansive.” Because Kemper/Prime’s
evidence of damages does not satisfy even the district
court’s standard, however, we do not need to consider
further whether Illinois would adopt a narrower reading
of § 552B. Instead we move directly to the district court’s
conclusion that Kemper/Prime failed to raise a genuine
issue of fact on allowable damages.
8 No. 05-1144
III
Illinois law requires that the plaintiff ’s “evidence shall
with a fair degree of probability tend to establish a basis
for the assessment of damages.” Schatz v. Abbott Laborato-
ries, Inc., 281 N.E.2d 323, 326 (Ill. 1972). If it meets that
standard (which we understand for purposes of a federal
diversity case to mean evidence that, if believed by a trier
of fact, would suffice to show damages), it need not be
exact. Here, Kemper/Prime needed to proffer evidence
of (1) the cost of remediating the contamination listed in
the 1990 Report, and (2) the total cost of remediating the
contamination that existed on the Property at the time
of the 1990 Report.
A
In order to meet this burden, Kemper/Prime pointed to
the 1990 Warzyn report, the testimony of an expert, Gary
Vajda, the testimony of one of its officers, James Martell,
the other Warzyn materials, a draft letter from Warzyn to
Martell on May 31, 1990, and a few lines of handwritten
notes following a conversation between Martell and
Warzyn on June 1, 1990. We agree with the district court
that this evidence does not “establish a basis for the
assessment of damages” with any degree of probability,
let alone “with a fair degree of probability.” First,
Kemper/Prime has identified no statement by Warzyn in
the 1990 reports or in any supporting documentation
from Warzyn produced at the time of the reports of the
cost of remediation for the Property. Second, Kemper/
Prime identifies nothing in the reports or other Warzyn
documents from which a court could infer the cost of
remediation. Third, even if Kemper/Prime could point to
such a remediation cost, Kemper/Prime has not demon-
strated how a court could infer from that data what the
cost of remediating only the sections of the Property at
No. 05-1144 9
issue in this litigation would be or compare the cost of
remedying the problems Warzyn found on the relevant
parcel to the cost of full remediation in 1990, the second
fact required by the district court.
Kemper/Prime contends that the affidavit by its expert
Gary Vajda concerning the standard of care in environ-
mental assessment reports is evidence of the cost of
remediating the contamination identified by Warzyn in
1990. Vajda stated that it is “the standard practice of
consultants performing this type of work to at least
provide a qualitative but more often a quantitative evalua-
tion of the potential liabilities . . . [and] it was not unusual
to provide order of magnitude costs (or cost ranges) that
bracket the potential liabilities.” (emphasis added). This
statement is far too vague, however, to support a claim
that Kemper/Prime was entitled to view the Warzyn
reports as a definitive statement of the costs of
remediation, nor does it demonstrate an industry
standard practice that requires cost estimates for all
possible remediation.
Montgomery correctly states in its brief to this court that
there is no evidence that Warzyn made any statement to
Martell, Senior Vice President of the Prime Group and an
officer of Kemper/Prime and the Prime Group, or anyone
else, that the cost to remediate all the contamination on
the Property in 1990 was $300,000. Although Kemper/
Prime may have been technically correct when it told the
district court that Warzyn “failed to quantify the contami-
nation for locations where it found contamination,” a lack
of quantification is a far cry from a representation by
Warzyn that there were no remediation costs.
Kemper/Prime’s Evidence Memo to the district court stated
that it “relied on [Warzyn] to determine the potential
environmental concerns or liability at the Property,” not
the costs of remediating the Property. The short letter
from Warzyn drafted on May 31, 1990, states that Warzyn
10 No. 05-1144
“developed a proposal to quantify the extent of contamina-
tion identified,” but again it does not state that Warzyn
quantified any of the remediation costs or that it was
expected to do so.
Even if Kemper/Prime had expected a full remediation
cost estimate, it could not reasonably have viewed the
$300,000 figure it references to be such an estimate. The
notes from the phone call and the short draft letter from
Warzyn, on which Kemper/Prime relies, refer specifically
to just two sections of land (labeled SB17 and SB8) within
the Property. These two sections of land were part of a
larger section that Warzyn labeled a “major area of con-
cern” south of Building S. We have doubts that this letter,
with the word “DRAFT” stamped in large print on every
page, could be considered relevant evidence of guaranteed
remediation costs. At best, the $300,000 is part of the
remediation costs implied by the contamination identified
in the reports. Yet not only were the costs for remediating
the rest of this problem area not discussed, but this
portion of the Property is not at issue in this litigation.
Warzyn’s comprehensive reports were issued in June
1990, just days after the draft letter was written. Taking
just one example, one of the reports notes the presence of
chromium at MW4 (a monitoring well used for the report).
MW4 appears to be within the area of the Property at
issue in this case. After noting the MW4 chromium, among
other findings, the report states “[a]dditional sampling
would be required to determine the extent of soil contami-
nation, the presence of additional inorganics, and the
migratory nature of compounds found.” This is one of
many statements to Kemper/Prime underscoring the
limited scope of Warzyn’s work. Kemper/Prime’s conten-
tion, then, that the “Defendant left Martell with the
impression that except for the remedial estimate provided
to Martell, there were no other remedial costs” has no
basis in the evidence that was proffered.
No. 05-1144 11
Kemper/Prime could have used its expert to analyze the
Warzyn reports, take note of every measurable amount of
contamination identified, and calculate remediation costs
based on some industry standard cost, but it did not do so.
Without such additional materials, the district court was
left with no means of identifying or inferring the cost of
remediation from the Warzyn reports.
Finally, we are left with two insurmountable calculation
problems. Kemper/Prime has sold significant sections of
the Property since 1990; indeed, in post-argument submis-
sions the parties discussed the effect of Kemper/Prime’s
sale of its remaining holdings in October 2004. Any
remediation costs identified in the Warzyn reports would
need to be reduced by the costs associated with the
sections of the Property no longer owned by Kemper/
Prime. This has not been done. Second, there is no evi-
dence that even the $300,000 figure, nor any other figure,
is what is called a Tier One remediation cost, or that it
was calibrated to any particular standard of remediation.
There are many such standards for cleaning up contami-
nated land, depending on what the planned use of the
land is. As the district court noted, in order to come up
with a valid comparison of the cost of remediating the
problems that were identified with the cost of remediating
all problems that existed, both must be calibrated to the
same standard. Kemper/Prime offers only Tier One
evidence of the full cost of remediating the contamination
that existed in 1990. A court given these two cost esti-
mates would be left to compare them not knowing if it
was making an apples-to-apples comparison or an apples-
to-oranges comparison. That level of uncertainty is insuffi-
cient to “establish a basis for the assessment of damages”
with any “degree of probability.”
Therefore, we are led to the same conclusion as the
district court: Kemper/Prime has not shown a genuine
12 No. 05-1144
issue of material fact for the remediation costs for the
contamination listed in the 1990 Warzyn reports.
B
Kemper/Prime’s evidence of the total cost of remediating
all of the contamination that existed on the Property at the
time of the 1990 reports is equally flawed. Again,
Kemper/Prime’s cost estimates do not make any adjust-
ments for the sections of the Property it no longer owns.
Moreover, Kemper/Prime’s cost estimates are calculated
only for the Tier One standard. Beyond the comparison
problems to which these gaps give rise, it appears from
the record that the Tier One standard is not normally
used to remediate industrial properties. There is nothing
in the record to suggest that Kemper/Prime or any subse-
quent owner of the Property wants to use it for non-
industrial use. Therefore, even if the estimates were
tailored to the correct sections of the Property, they
would still be unusable in this case. This evidence too
therefore fails to raise a triable fact issue.
IV
Montgomery also urges this court to accept an alterna-
tive basis for affirming the district court’s opinion. Mont-
gomery contends that the district court’s interpretation of
pecuniary loss is too “expansive” because it includes
benefit-of-the-bargain damages, which are not available
in negligent misrepresentation actions. See Restatement
(Second) of Torts § 552B(2), Comment b (“[T]here is as a
general rule no liability for merely negligent conduct that
interferes with or frustrates a contract interest or an
expectancy of pecuniary advantage.”) Although we see the
logic of Montgomery’s argument, there is no need to
address its merits. Kemper/Prime’s evidence of damages
No. 05-1144 13
falls short under the more generous standard set forth by
the district court, and so it would inevitably fail under the
stricter standard Montgomery prefers. We cannot help
but note, however, that yet another Kemper/Prime entity,
the Prime Group Partners, has agreed to remediate all the
contamination and indemnify Kemper/Prime against
environmental liabilities at the Property. It also appears
that since this lawsuit began, Kemper/Prime has sold its
remaining interests in the Property for a profit. We are
left with a plaintiff that appears to have benefitted
significantly from the purchase of the Property, with no
sign of any pecuniary loss.
V
The district court gave Kemper/Prime every opportunity
to put forth evidence of its recoverable damages, but it
failed at every turn. We therefore AFFIRM the decision of
the district court.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-19-07