Star City School District v. ACI Building Systems, LLC

United States Court of Appeals
For the Eighth Circuit
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No. 15-3723
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Star City School District
lllllllllllllllllllll Plaintiff - Appellant
v.
ACI Building Systems, LLC
lllllllllllllllllllll Defendant - Appellee
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ACI Building Systems, LLC
lllllllllllllllllllllThird Party Plaintiff
v.
Southeast Building Concepts, Inc.; Metal Building Components, Inc.
lllllllllllllllllllllThird Party Defendants
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Appeal from United States District Court
for the Eastern District of Arkansas - Pine Bluff
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Submitted: September 21, 2016
Filed: January 6, 2017
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Before WOLLMAN, ARNOLD, and KELLY, Circuit Judges.
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WOLLMAN, Circuit Judge.
Star City School District (the District) filed suit against ACI Building Systems,
LLC (ACI), a company that manufactured and supplied roofing materials that were
used in the construction of a high school building. The complaint alleged that the
building’s roof was not watertight and that ACI had failed to repair or replace the
roof, despite its promises and obligation to do so. The district court1 granted ACI’s
motion to dismiss the claims of fraud and constructive fraud and later granted
summary judgment in favor of ACI on the remaining claims of breach of warranty,
breach of contract, and negligence. We affirm.
I. Background
In 2003, the District entered into a construction contract with Southeast
Building Concepts, Inc. (SBC), for SBC to construct a new high school building.
SBC served as the general contractor for the project and issued a performance and
payment bond that named the District as the obligee. Steve Elliot served as the
District’s architect.
SBC began working on the project in late April 2003 and thereafter entered
into an agreement with ACI, under which ACI agreed to supply SBC with certain
metal building and roofing materials to be used in the construction of the high school
building. ACI was not a party to the construction contract between SBC and the
1
The Honorable Kristine G. Baker, United States District Judge for the Eastern
District of Arkansas.
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District, and ACI did not install the roof. That work was completed by SBC or others
as directed by SBC.
The school’s roof was not properly installed and has never been watertight. In
a December 2004 letter addressed to the president of SBC and copied to the District’s
superintendent, Elliot’s architectural firm expressed concerns that SBC had not yet
repaired “several major roof leaks that [had been] brought to the job superintendent’s
attention several months ago.” An ACI employee also discovered problems related
to the roof’s installation while inspecting the roof in March 2005. In an email to
another ACI employee, he wrote: “I did a preliminary inspection on this roof
yesterday-3/23/05. Absolutely pitiful. . . . I don’t know if it will ever pass inspection.
This is primarily FYI and to have a record in file.” SBC later assured ACI that it had
made the necessary repairs.
Elliot’s architectural firm issued a certificate of substantial completion on
March 28, 2005, and the District took possession of the building that June. In
February 2006, ACI and SBC issued a 10-year warranty on the roof that provides, in
part:
[T]he total liability and warranty of [SBC] shall be only to provide such
workmanship as is necessary to repair or replace any defective material
or workmanship without cost to the original owner, and the total liability
and warranty of [ACI] shall be only to repair or replace any material
without cost to the original owner.
The warranty further provides:
2.) This warranty shall not be enforceable if the roof system was not
erected in accordance with ACI Building Systems, Inc. erection
drawings . . . .
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3.) This warranty does not apply to cover any damages or leakage
caused by or associated with . . . roof penetrations, trim, flashing,
evidence of repair work done by unqualified or un-authorized
personnel, or any modifications or alterations to material beyond
ACI’s control. . . .
Despite the continued leaks, the District did not make a claim on the bond. It
made the final payment to SBC in May 2006. SBC thereafter continued work to
repair the roof, but in early 2007, it advised the District that it would no longer make
repairs. SBC eventually went out of business and filed for bankruptcy protection.
ACI vice president and chief operating officer Ron Knapp testified that he first
became aware of the leaks in September 2006, when Elliot wrote to him and reported
that the roof was leaking. Sometime after SBC stopped making repairs to the roof,
both the District and ACI asked Steve Naff, the owner of a local construction
company, to inspect the roof and advise whether it could be repaired. Naff, who had
worked on other construction projects for the District, believed that he could fix the
roof. ACI authorized him to do the work, even though ACI believed that the
problems were caused by improper installation and poor workmanship and that the
work thus was beyond the scope of ACI’s warranty. According to Knapp, ACI paid
for the repairs as a gesture of goodwill.
According to the District, ACI repeatedly promised to repair or replace the
roof. Naff made numerous repairs from 2007 through April 2011, but the roof
continued to leak. Naff thereafter advised ACI and the District that he no longer
believed that he could repair the roof. In December 2012, the District made a claim
on the bond, which was denied.
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The District filed suit against ACI in Arkansas state court in February 2013.
ACI removed the action to federal district court on the basis of diversity jurisdiction.2
The District alleged in its amended complaint that it “ha[d] been damaged by reason
of ACI’s failure to appropriately manufacture and repair the roof on the Building in
a workmanlike manner.” The District claimed that ACI had issued a warranty on the
roof, even though an inspection by ACI “revealed significant deficiencies, which ACI
failed to disclose.” The District further alleged that ACI had repeatedly promised to
repair or replace the roof, that the repairs were unsuccessful, and that the roof
continued to leak. The District alleged claims of fraud, constructive fraud, breach of
warranty, breach of contract, and negligence.
Applying the substantive law of Arkansas, the district court dismissed the
District’s claims of fraud and constructive fraud for failure to state a claim. In its
summary judgment order, the district court determined that the remaining claims were
barred by the five-year statute of repose set forth in Arkansas Code § 16-56-112(a).
II. Discussion
A. Fraud and Constructive Fraud
The District argues that the district court erred in dismissing its claims of fraud
and constructive fraud. We review de novo a district court’s order granting a motion
to dismiss, accepting as true the allegations set forth in the complaint and drawing all
reasonable inferences in favor of the nonmoving party. Farm Credit Servs. of Am.,
FLCA v. Haun, 734 F.3d 800, 803-04 (8th Cir. 2013). To withstand a motion to
dismiss, the complaint must set forth sufficient factual allegations to provide the
2
ACI filed a third-party complaint against SBC and Metal Building
Components, Inc., seeking apportionment of fault and contribution. The third-party
complaint was dismissed as moot after the district court granted summary judgment
in favor of ACI.
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grounds on which the plaintiff’s claims rest. See Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007). Rule 9(b) of the Federal Rules of Civil Procedure requires
that circumstances constituting fraud be pleaded with particularity. “We interpret this
rule in harmony with the principles of notice pleading, and to satisfy it, the complaint
must allege such matters as the time, place, and contents of false representations, as
well as the identity of the person making the misrepresentation and what was obtained
or given up thereby.” Drobnak v. Andersen Corp., 561 F.3d 778, 783 (8th Cir. 2009)
(internal quotation marks and citation omitted).
Under Arkansas law, a cause of action for actual fraud requires proof of the
following elements: “(1) a false representation, usually of a material fact; (2)
knowledge or belief by the defendant that the representation is false; (3) intent to
induce reliance on the part of the plaintiff; (4) justifiable reliance by the plaintiff; and
(5) resulting damage to the plaintiff.” Country Corner Food & Drug, Inc. v. First
State Bank & Trust Co. of Conway, Ark., 966 S.W.2d 894, 897 (Ark. 1998). The
district court determined that Star City failed to plead a false representation or actual
reliance. We agree.
The District first argues that it adequately pleaded a false representation,
pointing to its allegations related to ACI’s assurances “that ACI would do whatever
was necessary to repair or replace the roof.” Those assurances, however, relate to a
future event of repairing or replacing the roof, and generally a “misrepresentation
must relate to a past event or a present circumstance.” Rice v. Ragsdale, 292 S.W.3d
856, 864 (Ark. Ct. App. 2009); see also Delta Sch. of Commerce, Inc. v. Wood, 766
S.W.2d 424, 427 (Ark. 1989) (“In general, an action for fraud or deceit may not be
predicated on representations relating solely to future events.”); Anthony v. First
Nat’l Bank of Magnolia, 431 S.W.2d 1015, 1028 (Ark. 1968) (“Representations that
are promissory in nature or of facts that will exist in the future, though false, do not
support an action for fraud.”).
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The District argues that ACI’s assurances are nonetheless actionable because
they fall within “an exception to the ‘future events’ rule [that] arises if the promisor,
at the time of making the promise, has no intention to carry it out.” Trakru v.
Mathews, 434 S.W.3d 10, 17 (Ark. Ct. App. 2014). “[A] statement of future events
may constitute fraud if the statement is false and the person making the representation
or prediction knows it to be false at the time it is made.” See Morrison v. Back Yard
Burgers, Inc., 91 F.3d 1184, 1187 (8th Cir. 1996) (citing Delta Sch. of Commerce,
766 S.W.2d at 426-27). The exception “requires actual knowledge of falsity.” Id.
The District did not allege that ACI always knew the roof could not be repaired or
that ACI had no intention of carrying out its promises to repair or replace the roof.
The amended complaint alleged that ACI had discovered “significant deficiencies”
before ACI issued the warranty. It further alleged that ACI had “repeatedly assured
[the District] that ACI would repair or replace the roof in order to stop the water
intrusions,” that ACI tried to repair the roof, and that the repairs were unsuccessful
and the roof continued to leak. In effect, the amended complaint alleged that ACI did
not fulfill its promise to repair or replace the roof, but it did not plead any false
representation. See P.A.M. Transp., Inc. v. Ark. Blue Cross & Blue Shield, 868
S.W.2d 33, 36 (Ark. 1993) (“An assertion limited to a future event may be a promise
that imposes liability for breach of contract or a mere prediction that does not, but it
is not a misrepresentation as to that event.” (quoting 1 E. Allan Farnsworth,
Farnsworth on Contracts § 4.11 (1990))).
The amended complaint also did not plead actual reliance by the District on
ACI’s alleged misrepresentations. The Arkansas Supreme Court “has defined actual
reliance to mean that the plaintiff acted or did not act by reason of the defendant’s
misrepresentation.” SEECO, Inc. v. Hales, 22 S.W.3d 157, 172-73 (Ark. 2000). The
District now argues that it “would have filed a claim on the surety bond or brought
this action much sooner but for ACI’s representations,” but the amended complaint
did not identify these or any other acts that the District took or refrained from taking
based on ACI’s alleged misrepresentations. The district court thus properly dismissed
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the fraud and constructive fraud claims for failure to plead actual reliance. See
Yarborough v. DeVilbiss Air Power, Inc., 321 F.3d 728, 730 (8th Cir. 2003) (“A
claim for constructive fraud, which lies when there is a confidential relationship
between the parties, requires proof of all of the elements of actual fraud except
scienter.” (citing Morrison, 91 F.3d at 1188; SEECO, Inc., 22 S.W.3d at 172-73)).
B. Breach of Warranty, Breach of Contract, and Negligence
The District argues that the district court erred in granting summary judgment
in favor of ACI on its remaining claims. We review de novo the district court’s grant
of summary judgment, viewing the evidence in the light most favorable to the
nonmoving party and drawing all reasonable inferences in that party’s favor. PHL
Variable Ins. Co. v. Fulbright McNeill, Inc., 519 F.3d 825, 828 (8th Cir. 2008).
Summary judgment is appropriate if the moving party shows that there is no genuine
dispute as to any material fact and the moving party is entitled to judgment as a matter
of law. Fed. R. Civ. P. 56(a).
Arkansas Code § 16-56-112(a) sets forth a statute of repose that “protect[s]
persons engaged in the construction industry from being subject to litigation arising
from work performed many years prior to the initiation of the lawsuit.” Okla Homer
Smith Furniture Mfg. Co. v. Larson & Wear, Inc., 646 S.W.2d 696, 698 (Ark. 1983).
The Arkansas Supreme Court has explained that the statute “establishes a maximum
five year period within which an injured party can bring suit against a person who
deficiently constructs or repairs an improvement to real property.” E. Poinsett Cty.
Sch. Dist. No. 14 v. Union Standard Ins. Co., 800 S.W.2d 415, 417 (Ark. 1990). The
effect of the statute of repose “is to cut off entirely an injured person’s right of action
before it accrues, when that action does not arise until after the statutory period has
elapsed.” Curry v. Thornsberry, 128 S.W.3d 438, 441 (Ark. 2003). The statute
provides, in relevant part:
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(a) No action in contract, whether oral or written, sealed or unsealed,
to recover damages caused by any deficiency in the design,
planning, supervision, or observation of construction or the
construction and repair of any improvement to real property or
for injury to real or personal property caused by such deficiency,
shall be brought against any person performing or furnishing the
design, planning, supervision, or observation of construction or
the construction or repair of the improvement more than five (5)
years after substantial completion of the improvement.
...
(f) Nothing in this section shall be construed as extending the period
prescribed by the laws of this state for the bringing of any cause
of action, nor shall the parties to any contract for construction
extend the above prescribed limitations by agreement or
otherwise.
Ark. Code Ann. § 16-56-112.
The broad language of the statute of repose seems to include “virtually
everyone involved in the construction project.” See 2 David Newbern et al.,
Arkansas Civil Practice and Procedure § 5:11 (5th ed. May 2016 Update). The statute
has not been applied, however, to manufacturers of standardized goods or materials
who are not involved in the installation process. See Brown v. Overhead Door Corp.,
843 F. Supp. 482 (W.D. Ark. 1994). The District alleged in its complaint that it had
“been damaged by reason of ACI’s failure to appropriately manufacture and repair
the roof on the Building in a workmanlike manner.” The District does not argue on
appeal that the roofing material itself caused the roof to leak, and we agree with the
district court’s determination that there was no evidence that roofing material was at
fault.
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The District argues that the five-year statute of repose does not apply in this
case because the building was never substantially completed. The term “substantial
completion” is not defined in the statute, but it “generally means that the building or
project has reached a point where it is ready for the use for which it was intended and
whatever work remains to be done is minor.” Newbern et al., supra, § 5:11 (citations
omitted). The District alleged in its complaint that “[t]he Building was substantially
completed on March 28, 2005.” The District took possession of the building in June
2005, and the superintendent testified that the building was furnished and ready to
function as a high school by the time of an open house held in July 2005. Because
the building was substantially completed well before February 21, 2008—which is
five years before the District filed this action—the statute of repose bars the District’s
claims.
The District next argues that the statute was tolled while ACI attempted to
repair the roof. In support of its argument, the District cites Little Rock School
District v. Celotex Corp., 574 S.W.2d 669 (Ark. 1978), a case in which the Arkansas
Supreme Court determined that it was for the jury to decide whether the “statute of
limitations” was tolled while repairs were made to an improvement to real property.
The Arkansas Supreme Court later clarified, however, that Ҥ 16-56-112(a) is more
accurately described as a ‘statute of repose’ than a ‘statute of limitations’” because
the statute extinguishes the injured person’s right of action. Rogers v. Mallory, 941
S.W.2d 421, 423 (Ark. 1997). Absent fraudulent concealment of the deficiency, any
right of action ceases to exist five years after the date of substantial completion of the
improvement. See Ark. Code Ann. § 16-56-112(d); Curry, 128 S.W.3d at 441;
Carlson v. Kelso Drafting & Design, Inc., 374 S.W.3d 726, 729 (Ark. Ct. App. 2010)
(refusing “to adopt a ‘repair doctrine’ that would have the effect of tolling the statute
during the period that appellees attempted repairs and representations were made that
the repairs would cure the defect”). Because the record contains no evidence that
ACI fraudulently concealed the roof’s deficiencies, we reject the District’s argument
that the statute of repose was tolled while ACI tried to repair the roof.
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Finally, the District argues that the statute of repose does not apply because the
District is suing ACI under the warranty, and not a construction contract. The statute
of repose is not limited to parties to a construction contract, however. In First
Electric Cooperative Corp. v. Black, Corley, Owens & Hughes, P.A., the plaintiff
entered into a construction contract with an architect, who hired a company to design
the building’s heating, ventilation, and air-conditioning (HVAC) system. No. CA 10-
1257, 2011 WL 2473105 (Ark. Ct. App. June 22, 2011) (unpublished). The plaintiff
later entered into a tolling agreement with the architect and the HVAC company to
extend the limitations period. The Arkansas Court of Appeals rejected the plaintiff’s
arguments that § 16-56-112(f) applied only to the terms of an original construction
contract and that it was against public policy to prohibit the tolling agreement in that
case, stating: “We . . . decline to interpret subsection (f) in a manner that would
permit the parties to toll, by agreement, section 16-56-112’s statute of repose.
Subsection (f) reflects a clear legislative mandate against such agreements, and we
will not alter that mandate by judicial fiat.” Id. at *5. Similarly, in Varadan v.
Pagnozzi, the Arkansas Court of Appeals rejected the plaintiffs’ argument that the
statute of repose did not apply to a claim based not on a construction contract, but on
a separate builder’s warranty, stating: “Even though they rely on the written builder’s
warranty, the crux of appellants’ complaint is that they were damaged by the
defective construction of their house. This fits squarely within the statute of repose.”
No. CA 12-216, 2012 WL 6200384, at *7 (Ark. Ct. App. Dec. 12, 2012)
(unpublished). Here, the crux of the District’s remaining claims is that it was
damaged by the defective installation of the roof and ACI’s subsequent failure to
repair or replace the roof under the terms of the warranty. We thus conclude that the
breach of warranty, breach of contract, and negligence claims fall within the statute
of repose. See Okla Homer Smith Furniture Mfg., 646 S.W.2d at 698 (applying the
statute of repose to a negligence claim where the character of the claim was negligent
performance of a construction contract).
The judgment is affirmed.
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