HKS Architects Inc. v. MSM Enters. LTD

496 P.3d 228

HKS ARCHITECTS INC., Appellant,

v.MSM ENTERPRISES LTD, Real Estate Development Advisors LLC, R. Scott McQuarrie, Howard Bashford, Rondo Fehlberg, and Timothy Forstrom, Appellees.

No. 20200043-CA

Court of Appeals of Utah.

Filed July 1, 2021

Craig C. Coburn and Steven H. Bergman, Salt Lake City, Attorneys for Appellant

Jared D. Scott, Salt Lake City, Attorney for Appellees

Judge Gregory K. Orme and authored this Opinion, in which Judges Michele M. Christiansen Forster and Diana Hagen concurred.

Opinion

ORME, Judge:

¶1 HKS Architects Inc. (HKS) challenges the district court's dismissal of its complaint against MSM Enterprises, LTD (MSM), Real Estate Development Advisors, LLC (REDA), R. Scott McQuarrie, Howard Bashford, Rondo Fehlberg, and Timothy Forstrom (collectively, Appellees) for failure to state a claim upon which relief may be granted. We affirm.

BACKGROUND¹

¶2 In February 2015, Bashford organized 12x12 NW LLC (12x12) "as a single purpose, single member, manager-managed, Utah limited liability company for the avowed purpose of developing property in Utah County." MSM was 12x12's sole member. That same month, 12x12 purchased a plot of land in Utah County on which it planned to construct an office building. The purchase price of over $1,579,000 was above market value and was financed by three promissory notes payable to Sundance Debt Partners, LLC; Jive Communications, Inc. (Jive); and Matthew Peterson, a Jive principal. Other than this highly leveraged property, 12x12 had no other assets. It had no cash, bank accounts, employees, or business license.

¶3 On March 2, 2015, REDA,² acting "as agents on behalf of [12x12]," issued a request for qualifications (the RFQ) seeking design and construction management services for the project. The RFQ stated that "[t]he structure is preleased to" Jive, "a growing high-tech company." HKS responded to the RFQ and submitted proposals in April and May 2015, which 12x12 accepted. McQuarrie, the manager of MSM,³ signed the acceptance form but crossed out the words "By [REDA]" and replaced them with "By 12x12 NW LLC, Manager, R. Scott McQuarrie."

¶4 On June 15, 2015, HKS and 12x12 contracted for HKS to provide design and construction management services. That same day, "a Project ‘kick-off’ meeting" was held. HKS representatives met with representatives from construction, engineer, and real estate companies, along with Bashford, Fehlberg, McQuarrie, and Forstrom. "At this meeting, 12x12 disclosed that Jive, who had supposedly ‘pre-leased’ the building, had not, in fact, signed a lease [and] that negotiations were on-going."

¶5 On June 23, Bashford informed HKS that Jive would be signing a lease on the building "within days." On July 7, Bashford emailed HKS stating that they were working on getting money from 12x12's preconstruction funds and requested that HKS forward them an invoice for $39,500, which represented ten percent of HKS's contracted fees. By July 31, HKS, which had yet to be paid, emailed McQuarrie inquiring about the late payment. McQuarrie responded, "[W]e did fix our [line of credit] issues. Checks will be issued at the beginning of next week." On August 3, a check for $39,500 was issued to HKS from the account of BTS Investments, Inc. (BTS).⁴

¶6 On August 5, HKS invoiced REDA and 12x12 in the amount of $124,216.63 for work it performed between July 1 and July 31. Still having not been paid on this invoice, HKS performed further work in September 2015 on the project at 12x12's request, relying on promises of payment from REDA and 12x12 and on their assurances that a signed pre-lease for the building would "soon" be in place. At the end of September, "BTS ... paid REDA $30,000 for unspecified services furnished for the Project"—a payment that was not disclosed to HKS, which had still not been paid.

¶7 In October 2015, Bashford informed HKS that Jive had equity in the project and claimed that problems with Jive were the reason payment to HKS had been delayed. Between November 2015 and January 2016, HKS continued to do work on the project without getting paid and issued three more invoices to REDA and 12x12, submitting the last invoice on January 19, 2016.

¶8 Finally, on March 10, 2016, Jive signed a lease for the property. But on May 31, 12x12 failed to file its annual report with the State, causing its registration as a Utah limited liability company to expire—a fact not disclosed to HKS. In September of that year, Bashford and McQuarrie continued to promise payment to HKS for its services, now totaling $164,000, of which only $39,500 had been paid. McQuarrie emailed HKS, stating, "I'm sorry that you've had to await payment for the remainder of what I owe. Please remain confident that you'll receive compensation for the efforts you've made."

¶9 No further payment ever came, and HKS sued 12x12 on January 13, 2017 (the prior suit). While the prior suit was pending, REDA's registration as a Utah limited liability company expired in February 2017. In its complaint in the prior suit, HKS alleged that 12x12 breached their contract and was unjustly enriched by HKS's unpaid services, and that 12x12 still owed nearly $144,000 for services HKS provided. HKS further claimed more than $50,000 in lost profits, interest, other costs, and attorney fees. In May, after initial disclosures were filed and discovery begun, counsel for 12x12 withdrew and successor counsel did not appear on 12x12's behalf. In July, HKS moved for summary judgment. 12x12 did not respond, resulting in a judgment of nearly $200,000 in HKS's favor.

¶10 Between August 2017 and March 2019, HKS unsuccessfully sought to collect on the judgment, eventually leading to issuance of a supplemental proceedings bench warrant for McQuarrie as 12x12's manager. On August 28, 2018, McQuarrie appeared as required, and in the ensuing hearing HKS learned the following facts: when REDA and 12x12 issued the RFQ for the project, 12x12 had approximately $1.5 million in assets and $1.5 million in liabilities; 12x12 had never filed a tax return; 12x12 had no capital to fund its operations, did not have any financial reserves to cover potential liabilities, and had no money to pay HKS for its services, instead relying on anticipated funds from a construction loan that never materialized; 12x12 never applied for a construction loan; McQuarrie, Bashford, Fehlberg, and Forstrom owned and operated REDA, which represented 12x12 in all its meetings with various stakeholders on the project; 12x12 controlled a bank account under the name of BTS, which BTS used to pay a total of $132,000 to REDA for work REDA performed on the project.

¶11 In March 2019, HKS moved to amend its pleading in the prior suit to add Appellees as defendants, claiming a breach of implied contract and fraudulent concealment. Appellees opposed the motion under rules 59 and 60 of the Utah Rules of Civil Procedure, arguing that they could not be added to the prior suit because HKS missed the deadline for seeking to alter or amend the judgment. In response, HKS withdrew its motion.

¶12 On June 13, 2019, HKS filed the complaint at issue in this case, asserting three causes of action. Its first claim was one for fraud, alleging that Appellees falsely represented that the office building was pre-leased to Jive, a "growing high-tech company"; a signed lease from Jive would be available soon; 12x12 had acquired preconstruction funds enabling it to pay HKS for its services; and 12x12 had a line of credit from which it could pay HKS. Its second claim was for breach of a contract implied in law, which was asserted only against REDA.⁵ As part of this claim, HKS alleged that REDA requested the work HKS performed and that by performing the work, HKS conferred a value of approximately $142,000 on REDA. HKS's final claim was for fraudulent concealment, in which it alleged that Appellees failed to disclose that 12x12 paid more than market value for the property; 12x12 was a shell entity; 12x12 never filed a tax return; 12x12 lacked a business license; 12x12 had no cash reserves, no bank account, and no capital; the property had been over-leveraged, leaving it with no equity; 12x12 was not the sole owner of the property; there was no tenant who had pre-leased the building; 12x12's sole asset was the over-leveraged property; 12x12 planned to pay HKS by using a construction loan that it had yet to obtain; BTS would be the entity making payments to HKS, not 12x12; in September 2015, 12x12 paid REDA $30,000 through BTS; McQuarrie, Bashford, Fehlberg, and Forstrom were members and managers of REDA; and 12x12 "had no financing for the project" in the form of a preconstruction loan or line of credit.

¶13 In response, Appellees moved for dismissal of the complaint pursuant to rule 12(b)(6) of the Utah Rules of Civil Procedure, asserting that HKS had failed to state a claim upon which relief could be granted. Specifically, Appellees argued that "the statute of limitation bar[red HKS's] fraud claims because the alleged misrepresentations and omissions at issue occurred well outside the three year statute of limitations."⁶ See Utah Code Ann. § 78B-2-305(3) (LexisNexis 2018). Both sides asked the district court to take judicial notice of the record in the prior suit, which it did.⁷

¶14 The court granted Appellees’ motion to dismiss. Regarding HKS's first claim, for fraud, the court stated that

the specific facts which [HKS] alleges [Appellees] fraudulently represented ... are: (1) that the building was pre-leased; (2) that 12x12 had available pre-construction funds and a line of credit which could be used to pay for [HKS's] services; (3) that a signed lease would be available soon; and (4) that 12x12 would pay [HKS] for its services.

The court explained that,

according to the Complaint, [HKS] learned on June 15, 2015 that the building was not pre-leased. This date is more than three years before the filing of this case, and this claim is therefore barred by the statute of limitations.

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