Opinion
No. C99-38 MJM.
September 20, 2001.
OPINION and ORDER
This action arises out of Plaintiffs' construction and ultimately unsuccessful operation of a fibre extraction facility in the City of Iowa Falls ("Iowa Falls" or "City"), Iowa. In short, Plaintiffs allege that the City misrepresented its ability and intention to handle the waste generated by Plaintiffs' proposed plant, that those misrepresentations induced Plaintiffs to enter into a contract with the City and undertake financial obligations in conjunction with the project, and that Plaintiffs have incurred significant damages as a result. Plaintiffs allege breach of contract, negligent misrepresentation, fraudulent misrepresentation and fraudulent concealment by Defendant Iowa Falls. They assert the same charges, absent the breach of contract claim, against Defendant Fox Engineering Associates, Inc. ("Fox Engineering"), the consulting firm retained by Iowa Falls throughout the project's negotiation process.
Presently before the Court are motions by both Defendants requesting summary judgment on all claims. (Doc. nos. 100 and 105). All parties have filed numerous briefs and statements of fact in support of their respective positions. (Doc. nos. 102, 103, 120, 121 (Fox Engineering); nos. 106, 110, 125, 127 (Iowa Falls); nos. 117, 118, 132, 134 (Plaintiffs)).
I. Summary Judgment Standard
The standard for granting summary judgment is well established. A motion for summary judgment may be granted only if, after examining all of the evidence in the light most favorable to the nonmoving party, the Court finds that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Montgomery v. John Deere Co., 169 F.3d 556, 559 (8th Cir. 1999). A fact is material if it might affect the outcome of the suit under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). An issue of material fact is genuine "if it has a real basis in the record." Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (citing Matsushita, 475 U.S. at 586-87).
The party moving for summary judgment bears the "initial responsibility of informing the district court of the basis for its motion and identifying those portions of the record which show lack of genuine issue." Celotex, 477 U.S. at 323. Once the moving party has carried its burden, the opponent must go beyond the pleadings and designate specific facts-by such methods as affidavits, depositions, answers to interrogatories, and admissions on file-that show there is a genuine issue for trial. See Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324. The evidence of the nonmoving party is to be considered as true, and justifiable inferences arising from the evidence are to be drawn in his or her favor. Anderson, 477 U.S. at 255. If the evidence of the nonmoving party is "merely colorable," or is "not significantly probative," summary judgment may be granted. Id. at 249-50. Thus, although the nonmoving party does not have to provide direct proof that genuine issues of fact exist for trial, the facts and circumstances that the nonmoving party relies upon must "attain the dignity of substantial evidence and must not be such as merely to create a suspicion." Metge v. Baehler, 762 F.2d 621, 625 (8th Cir. 1985). In essence, the evidence must be "such that a reasonable jury could find a verdict for the nonmoving party." Anderson, 477 U.S. at 248.
II. Factual and Procedural Summary
This case involves a physical plant which was constructed to extract dietary fibre from soy bean hulls. Dietary fibre is an additive used in bread and other foods. The process of extracting dietary fibre from soybean hulls was developed by Fibred, Inc. ("Fibred"), a Maryland corporation created by Lewis Ort.
Fibred, Inc. subsequently merged with Ort's, Inc., a Maryland bakery business also established by Lewis Ort, to become Fibred-Maryland, Inc.
In the early 1990s, a related entity, Fibre Formulations Incorporated ("Fibre Formulations") was formed, initially for the purpose of marketing fibre overseas. Because a consequent need for more fibre was foreseen, Lewis Ort and others decided to build another fibre extraction plant. Locations were explored, including Iowa Falls which has a Cargill soybean processing plant that could provide a ready supply of the necessary raw material, soybean hulls. Iowa Falls was contacted by Fibred, Inc. to determine whether the City had the ability to accept the wastewater generated by a fibre extraction plant.
Water pollution is regulated by the EPA, which in turn delegates regulatory authority to the states. The state agency in Iowa which regulates water quality is the Iowa Department of Natural Resources (IDNR). Municipalities which discharge wastewater into bodies of water in the State of Iowa (referred to as "receiving streams") have discharge permits from the IDNR.
A municipality's wastewater treatment facility is referred to as a publicly owned treatment works (POTW). The POTW receives domestic waste from residential users and typically defines by ordinance concentrations for domestic wastewater. Non-residential users are referred to as "contributing industries" and must enter into a "treatment agreement" with the municipality, which agreement in turn must be approved by the IDNR. The IDNR mandates use of its "Form 31" for specification of certain discharge issues. Treatment agreements can, and in the case of Iowa Falls, do, consist of a written agreement, with the IDNR Form 31 attached.
Fibre extraction plants in general, and Fibred's process in particular, produce large amounts of wastewater. The fibre plant's wastewater does not contain any toxic chemicals but contains organic waste. There are three classifications of organic waste: biological oxygen demand (BOD), total suspended solids (TSS) and nitrogen. BOD refers to the extent to which the waste will draw oxygen from the water. The BOD level discharged by a POTW into a receiving stream is important because BOD is a measure of the extent to which the discharge will draw oxygen from the water which would otherwise support aquatic life. TSS refers to the total amount of material which is suspended in water. Nitrogen is the most complex component of organic wastewater and is typically measured in terms of TKN (Total Kejdal Nitrogen). The concern with nitrogen is ammonia nitrogen as opposed to non-biodegradable nitrogen. The nitrogen component of the fibre extraction plant's wastewater is predominantly non-biodegradable.
Generally, the process involves putting soybean hulls through a several stage process using water, heat and various chemicals, the result of which is food grade soy fibre.
Concentration levels for BOD, TSS and nitrogen are measured in parts per million (ppm) or milligrams per liter (mg/l). Domestic discharge levels generally refer to the concentration or mass of BOD, TSS and other waste components which may be discharged by a residential customer to a POTW. Typical domestic discharge levels for BOD and TSS are 300 ppm-mg/l. Direct discharge levels refer to what can be discharged from a POTW into a receiving stream. Typical direct discharge levels for BOD and TSS are 25 ppm-mg/l.
When Fibred Formulations approached Iowa Falls regarding the possibility of constructing a fibre extraction plant, the City was told that the plant would generate approximately 185,000 gallons per day of wastewater containing concentration levels for BOD and TSS in the 300 ppm-mg/l range. This information was provided by the City to its engineer, Fox Engineering, Inc. Leslie Wolfe was the engineer at Fox Engineering primarily responsible for Iowa Falls' wastewater issues. Based on the information provided to him, Mr. Wolfe prepared a memorandum to the City dated September 2, 1992. In that memorandum, Mr. Wolfe stated that the City's POTW could handle waste from the proposed fibre extraction plant. This memo was forwarded to Plaintiffs.
From Fibred's perspective, the BOD and TSS levels proposed to the City were premised on the understanding that the plant's wastewater would have to be "pretreated" down to the domestic discharge levels by Fibred itself. Fibred would then discharge the pretreated wastewater to the POTW for final treatment and disposal into the receiving stream in accord with direct discharge levels.
In late 1992, Fibred purchased land in Iowa Falls as a site for the fibre extraction facility. Prior to purchase, Fibred knew it would have to enter into a wastewater treatment agreement and receive a discharge permit before discharging wastewater to the City. Fibred-Iowa, Inc. was formed in late 1992 or early 1993 as the operating company for the Iowa venture. Fibred Properties Limited Partnership ("Fibred Properties") was established to serve as owner of the property in Iowa and to construct the physical plant. Fibre Formulations was made general partner of Fibred-Iowa. Royalties were to be paid to Fibred as the owner of the patented fibre extraction process.
On August 25, 1993, Mike Hays, the City Manager of Iowa Falls, sent Plaintiffs a draft treatment agreement which set out discharge levels for BOD and TSS of 300 ppm — similar to those in the September 1992 memo. The draft consisted of a two-page "Treatment Agreement" which referenced a two-page "Discharge Permit" as IDNR Form 31. Form 31 was not sent along with the draft. Plaintiffs understood these documents were drafts subject to revision and that the final treatment agreement and discharge permit would have to be approved and adopted by the Iowa Falls City Council before it became effective or binding.
On April 5, 1994, James Davey, a mining engineer by trade who was negotiating the wastewater issues on behalf of Fibre Formulations, sent a letter to the City requesting a wastewater discharge permit. The letter did not request any specific discharge levels but did reference Public Utilities ordinance Chapter 9.08 which cited the following maximum concentrations: BOD of 290 mg/l, TSS of 340 mg/l, and degradable ammonia TKN of 50 mg/l. Also included with the letter was a Pilot Study regarding wastewater disposal in Fibred's Cumberland, Maryland plant. The pilot study had been prepared by Plaintiffs' prior engineering consultant, Black Veatch, and was apparently sent to demonstrate that the nitrogen component of Fibred's discharge was non-biodegradable and thus not of particular concern in the waste treatment context.
On April 28, 1994, Mr. Wolfe wrote to Mr. Davey stating the permit application had been received but more information was needed before action could be taken on it. Mr. Wolfe specifically noted that Fibred's "application letter does not indicate the proposed discharge loadings for flow, BOD, TSS, TKN and ammonia-N," and clarified that "to evaluate the impact on the existing POTW and develop the Agreement, we must be provided with the Industry's intended loadings (pretreated effluents)." Mr. Wolfe requested average and maximum concentrations for all of the above discharge levels as well as average and maximum daily instantaneous flow rates.
"Load" means the amount of wastewater and its constituents actually discharged to a POTW. Loads include flow of wastewater and the mass of pollutants. See Wolfe Affidavit, at p. 5.
On June 24, 1994, Mr. Davey responded to Mr. Wolfe's April 28, 1994 letter but provided only a portion of the information requested. With regard to BOD and TSS maximum concentrations, Mr. Davey again did not provide specific levels for the proposed Iowa plant but stated that they "are assumed to be in compliance with the ordinance."
On July 11, 1994, Mr. Wolfe sent another draft treatment agreement and cover letter, noting therein that Mr. Davey had not yet provided all of the data previously requested. The letter again referenced IDNR Form 31: "I have prepared and attached a Draft Treatment Agreement with Exhibit I — DNR Form 31." The letter then requests specific information regarding numbered items on Form 31, including Item 8 — average day, maximum day and maximum hour discharges. Unlike the August 1992 draft agreement, however, this version did not put specific discharge levels in the body of the Agreement itself. Instead, specific levels were to be included in Item 8 of IDNR Form 31. To this effect, page 1, point # 2 of the draft Treatment Agreement states that in consideration of the City's acceptance of such wastewater, the contributor agrees to "[d]ischarge pretreated wastewater that does not exceed the flows and mass limits listed for Item 8 — Compatible Waste in Exhibit I, does not exceed the concentrations listed for Item 9 — Incompatible Waste in Exhibit I, and does not contain prohibited discharges as specifically listed in Section 9.08.100." Elsewhere the draft Treatment Agreement states that IDNR Form 31 is "attached and by reference made a part of this Agreement as Exhibit I . . ." The discharge levels proposed by Mr. Wolfe on the purportedly attached Form 31 apparently reflected a significant change in the City's position as they were one-tenth that which had been stated in the August, 1993 draft agreement and effectively constituted direct discharge levels. Mr. Davey claims the correspondence from Mr. Wolfe did not include any attachment with delineated discharge limits and thus Mr. Davey saw nothing to indicate that discharge levels for BOD and TSS had changed to direct discharge levels.
The inferences to be drawn on this point from the substance of the cover letter — even absent Form 31 — are a major point of contention between the parties. To the extent relevant, details of the letter will be discussed more fully in the Court's subsequent discussion.
Mr. Davey did not respond to Mr. Wolfe's July 11, 1994 letter until March 23, 1995. The response provided information for Items 1 through 7 of Form 31, but no information for, or mention of, Item 8.
There was no further correspondence between Fibred and the City before the final Treatment Agreement was signed. Mr. Davey never inquired as to the attachments purportedly sent with the July 1994 correspondence, including page 2 of Form 31, where the discharge information was supposed to be contained. Mr. Davey did not compare the July 1994 draft Treatment Agreement with the earlier August 1993 draft to see if there had been any changes. He testified that he did not even read the draft Treatment Agreement that was attached to the July 1994 letter and instead assumed it to be the same as the one he had previously received.
In April 1995, in accordance with official approval by the City of Iowa Falls, Plaintiffs borrowed approximately $8 million in an industrial revenue bond lending transaction. The loan and financing agreement was signed by Mr. Davey on behalf of Plaintiffs and by the Mayor and City Clerk for the City.
In May 1995, Karen Sullivan and Margaret Ort signed the final Treatment Agreement. Form 31 was not attached to the Treatment Agreement but they signed anyway relying, per Ms. Sullivan, on Mr. Davey's representations that Mr. Wolfe had assured him that Form 31 would be forthcoming and that "this was the way business is done in Iowa." Plaintiffs knew when they signed the Treatment Agreement that it referred to and would include Form 31. They testified that they read and understood the Treatment Agreement before signing. They agreed there was nothing requiring them to sign before Form 31 was attached but signed when they did because they wanted to expedite the permit. They admit they signed without asking for assurances as to the specific contents of the forthcoming Form 31.
Mr. Davey signed the first page of Form 31 at the offices of Fox Engineering on June 5, 1995. Mr. Davey claims he signed only a single page and that the second page, which contained Item 8, was not attached. The signed page 1 includes the following attestation: "I am the duly authorized representative for the major industrial contributor identified above and state that the proposed discharge to the system receiving waste identified above shall not exceed the quantities listed on page two of this form . . ." Mr. Davey admits he never asked for the second page or inquired about its contents before signing page 1. The City Council approved the Treatment Agreement on October 2, 1995. After the City Council voted to adopt the agreement, the Mayor and City Clerk signed for the City.
Fibred's Iowa Falls plant began operations in late fall 1995. In mid-February 1996, Plaintiffs claim they saw the second page of the completed Form 31 for the first time and were shocked and angry to learn that it contained treatment and discharge levels in Item 8 substantially less than purportedly anticipated. The discharge levels were a flow rate of 185-216,000 gallons per day with concentrations of BOD averaging 38 pounds per day and TSS averaging 46 pounds per day. This represented a reduction in magnitude from the levels represented in the 1992 and 1993 documents.
Fibred-Iowa's first discharge to the City in February 1996 contained BOD concentrations approaching 13,000 ppm-mg/l. This figure far exceeded the allowable levels in the Treatment Agreement or even the 300 ppm-mg/l anticipated by Plaintiffs. To discuss the discharge level problems, Glenn Anderson, a CPA and attorney who had done work for Fibred entities in private practice and had recently joined Fibred as in-house counsel and Chief Financial Officer, arranged several meetings with the City in late February and early March of 1996.
As a result of these meetings, the City contacted the IDNR seeking authority to accept higher concentrations of TSS and BOD in the wastewater received from Fibred's Iowa Falls plant. Fibred-Iowa and the City agreed to jointly ask the IDNR for relief through an Administrative Consent Order ("ACO") and on October 29, 1996, a joint letter was written to the IDNR proposing terms for such an order. An ACO was subsequently signed by Fibred-Iowa and the City on November 16, 1996, and adopted by the IDNR. The parties operated under the ACO for the remainder of their relationship. Fibred-Iowa moved forward on the Iowa Falls project as well as on a pilot study required by the ACO. Fox Engineering worked with Black Veatch, Plaintiffs' engineering consultant, to achieve a final written report recommending various options to resolve the waste treatment problems. Fibred-Iowa's steps to implement the suggestions effectively came to a halt after Fibred-Iowa and Fibred Properties filed bankruptcy on May 2, 1997.
Fibred-Iowa ceased operations on September 10, 1997. Fibred-Iowa filed a multi-count complaint against the City in its bankruptcy proceedings pending in United State Bankruptcy Court for the District of Maryland. The case was transferred to this court by the United States District Court for the District of Maryland based on considerations of forum non-conveniens. In December 1999, Plaintiffs filed an Amended and Substituted Complaint adding Fox Engineering as an additional defendant. The Amended and Substituted Complaint directs four counts at the City: Negligent Misrepresentation (Count I); Breach of Contract (Count II); Fraudulent Misrepresentation (Count III); and Fraudulent Concealment/Nondisclosure (Count IV). The breach of contract claim is based on an alleged unwritten, unsigned express or implied contract that existed before the Treatment Agreement was signed in 1995. In Counts V through VII, Plaintiffs assert the same three fraud claims against Fox Engineering.
III. Discussion
Both Iowa Falls and Fox Engineering move for summary judgment on all counts. Although there is significant overlap in their respective arguments as to the three claims in common — negligent misrepresentation, fraudulent misrepresentation and fraudulent concealment — each raises additional issues or faces distinct hurdles as well. Thus, the Court shall address Defendants' motions separately.
A. Fox Engineering's Motion for Summary Judgment
Fox Engineering raises both substantive and procedural challenges to Plaintiffs' claims. Because Fox Engineering's statute of limitations defense potentially disposes of the entire case against it, the Court will address that issue first.
Plaintiffs' claims against Fox Engineering for negligent misrepresentation, fraudulent misrepresentation and fraudulent concealment are based on representations made by Fox Engineering in the September 1992 memo and August 1993 draft Treatment Agreement prepared by Leslie Wolfe. Plaintiffs did not move to add Fox Engineering as an additional Defendant until December 7, 1999. (Doc. no. 79). As such, Fox Engineering argues that Plaintiffs' claims are barred under Iowa law by the five year statute of limitations applicable under Iowa Code (IC) § 614.1(4).
Plaintiffs' motion was granted and an amended and substituted complaint naming Fox Engineering as an additional Defendant was filed on January 3, 2000. (Doc. no. 82).
Iowa Code § 614.1(4) provides that "those [actions] founded on unwritten contracts, those brought for injuries to property, or for relief on the ground of fraud in cases heretofore solely cognizable in a court of chancery, and all other actions not otherwise provided for in this respect, [shall be brought] within five years . . ." See also McCracken v. Edward D. Jones Co., 445 N.W.2d 375, 383 (Iowa Ct.App. 1989) (statute of limitations for negligent misrepresentation is five years).
Plaintiffs tacitly concede that § 614.1(4)'s general five year statute of limitations governs the case at bar, but argue that they brought their claims against Fox Engineering within the § 614.1(4) five year period. To this end, Plaintiffs argue that the limitations period begins to run only when all of the elements of the cause of action have been established. In this case, each of the claims brought against Fox Engineering include, among other essential elements, that Plaintiffs show by a preponderance of clear, satisfactory and convincing evidence that they relied on the challenged representations and that they suffered damage as a proximate result of that reliance. See, e.g., Iowa Civil Jury Instruction ("ICJI") 800.1 (listing essentials for recovery for negligent misrepresentation and citing, inter alia, Restatement (Second) of Torts, § 552 (1977)); ICJI 810.1 (listing essentials for recovery for fraudulent misrepresentation and citing, inter alia, Restatement (Second) of Torts, § 557 (1977)); Lee County Mental Health Ctr. v. Lee County Bd. of Supervisors, 2000 WL 1288873, *5 (Iowa Ct.App. 2000) (listing elements for recovery in fraud actions generally, including claims for negligent or fraudulent misrepresentation and fraudulent concealment); Cornell v. Wunschel, 408 N.W.2d 369, 374 (Iowa 1987) (holding that plaintiff must show each essential element in fraud action by "preponderance of clear, satisfactory and convincing evidence"); Lockard v. Carson, 287 N.W.2d 871, 874 (Iowa 1980) (explaining that purpose of higher standard in fraud action is "to give deference to the presumption of fair dealing"). Plaintiffs argue that these elements were not established until mid-to-late 1995 when Plaintiffs closed a substantial lending transaction and signed the final Treatment Agreement. Plaintiffs contend that only from that point forward were their actions undertaken in reliance on the misrepresentations because prior to that they believed they could walk away without out-of-pocket loss. Thus, per Plaintiffs, the cause of action for each of the claims did not arise until 1995 regardless of the fact that the alleged misrepresentations themselves occurred in 1992 and 1993. Under this theory, since Plaintiffs moved to add Fox Engineering as a defendant in 1999, they would be well within the five year statute of limitations period.
Although there is a recognized exception to the five year statute of limitations for fraud actions brought at law "where the defendant has been guilty of some act of affirmative `fraudulent concealment,'" Grove v. Principal Mutual Life Ins. Co., 14 F. Supp.2d 1101, 1108 (S.D.Iowa 1998) (citations omitted), Plaintiffs, in their supplemental brief, expressly disavow reliance on the fraudulent concealment exception. See Plaintiffs' Suppl. Memo. of Law, doc. no. 132, at p. 11 ("These [cases cited by Fox Engineering] are among many cases holding the statute of limitations is not tolled by the discovery rule but is by fraudulent concealment. Plaintiffs rely on neither. Rather, they rely on the fact the cause of action did not accrue until they closed their financing or the treatment agreement was signed. Both dates are well within the five-year statute."). Accordingly, the Court will assume that no exceptions to § 614.1(4) are applicable.
The Court notes that in addition to the elements essential to all fraud actions, Plaintiffs' claim of fraudulent concealment requires proof of a duty to communicate the concealed material fact or an affirmative act of concealment. See Rieff v. Evans, 2001 WL 578222, *10 (Iowa 2001). While the Court has serious doubt as to whether Plaintiffs could show the former, it is assumed for purposes of this motion only that the July 1994 letter and draft treatment agreement — with its allegedly intentionally ambiguous and misleading language — establishes the latter. See Lee County Mental Health Ctr., 2000 WL 1288873, at *4 (reversing directed verdict against plaintiff where plaintiff alleged that if contract was modified it was done "surreptitiously and with the specific intent to mislead [plaintiff] into believing the contract had not been changed"). Thus, the affirmative concealment element was established more than five years prior to Fox Engineering being named as Defendant in this action. Accordingly, as with the misrepresentation claims, the only elements at issue for purposes of determining the statute of limitations are reliance and damage, and the Court's discussion of those elements shall apply equally to all three claims.
The Court agrees with Plaintiffs' statement of the law — that the statute of limitations is triggered only when all of the elements of the cause action are, or should be known, to a plaintiff. See, e.g., Bob McKinness Excavating Grading, Inc. v. Morton Bldgs., Inc., 507 N.W.2d 405, 408 (Iowa 1993) ("[A] limitations period . . . begins to run when the cause of action accrues. It is well settled that no cause of action accrues under Iowa law until the wrongful act produces loss or damage to the claimant.") (citations omitted). None of the cases cited by Fox Engineering contradict this principle. See, e.g., Grove v. Principal Mutual Life Ins. Co., 14 F. Supp.2d 1101 (S.D.Iowa 1998); McGrath v. Dougherty, 275 N.W.2d 466, 470 (Iowa 1937); Cole v. Hartford Accident Indemnity Co., 46 N.W.2d 811, 817 (Iowa 1951). Rather, those cases involve the more typical misrepresentation scenario — e.g., statements by an insurance agent which induce purchase of a policy — in which all of the elements are established in relative short order. In contrast, this case involves a mutually protracted negotiation period and it is neither unreasonable nor unlikely that one or more elements necessary to perpetration of the alleged fraud would not be established until significantly later than other elements. Thus, the critical inquiry in this case is whether Plaintiffs relied on, and injury was caused by, the alleged misrepresentations prior to December, 1994, thus precluding them from asserting liability against Fox Engineering over five years later, or whether, as Plaintiffs assert, no reliance or damage occurred until mid-to-late 1995.
1. Reliance:
After thoroughly reviewing the record in this case and granting all justifiable inferences to Plaintiffs, the Court concludes that uncontroverted evidence shows that Plaintiffs took significant actions in reliance on the alleged misrepresentations from 1992 onward. The affidavit by Glenn Anderson, Plaintiffs' current Chief Financial Officer, details some of those actions:
[¶] 2. Between July of 1993, and April of 1995, Fibred Properties Limited Partnership engaged in various start-up activities, including, but not limited to the following: making the final decision on the location of the fibre extraction facility, obtaining legal title to the Iowa Falls property from its General Partner, Fibre Formulations, Incorporated, obtaining the financing necessary to construct the fibre extraction facility and purchase the fibre extraction equipment, preparation of the lease agreements with its Tenants, and obtaining bids from subcontractors and equipment manufacturers. In accordance with IRS regulations, the April, 1995 date on which Fibred Properties Limited Partnership began the business of commercial leasing was listed on page 1 of its federal income tax return. (Form 1065). Per those same regulations, the start-up costs of Fibred Properties Limited Partnership (pre-April 1995 activities) were capitalized and amortized for income tax purposes.
[¶] 5. The construction of the Iowa Falls facilities took place in two separate and distinct phases. Phase One, which commenced in January of 1993, involved clearing the land and erecting a multipurpose commercial building on it. This phase was done in conjunction with the City of Iowa Falls extending utilities and a road to the site. If Fibred Properties decided not to go forward with the second phase of the project, it was believed that the land and commercial building could be sold for a small profit. Phase Two of the construction was contingent upon receiving the requisite assurances that the City of Iowa Falls could provide the necessary water and sewer services, Fibred Properties being able to borrow approximately $8,000,000.00 through a [sic] industrial revenue bond to finance Phase Two, and bids for the construction of Phase Two not exceeding budget projections. The second phase of the development involved ordering and installing approximately $6,000,000.00 worth of specialized fibre extraction equipment, and making substantial renovations to the multipurpose commercial building to support the operations of a fibre extraction facility. Phase Two of the development commenced in April of 1995 with the closing of the industrial revenue bond financing and was completed in October or November of 1995 when the Tenant took possession of the property and began paying rent.
[¶] 7. Prior to its loan closing in April of 1995, Fibred Properties Limited Partnership borrowed funds from Fibred, Inc. for the acquisition of the Iowa Falls site, the Phase One construction, and the start-up activities leading up to and including the loan closing in April of 1995. Shortly after the loan closing, Fibred Properties Limited Partnership repaid Fibred, Inc. for those advances, from the proceeds of the industrial revenue bond financing.
Anderson Affidavit, Plaintiff's Exh. JJ.
Mr. Anderson's affidavit plainly illustrates the extent to which Plaintiffs moved forward with construction of the Iowa Falls facility prior to the April 1995 financing approval or execution of the final Treatment Agreement in May 1995. Plaintiffs' response to this evidence is two-fold. First, Plaintiffs contend that any pre-1995, or Phase One, actions which might be deemed reliance were undertaken by Fibred, Inc., a separate entity not named as a party to this suit. Plaintiffs argue that actions taken by Fibred, Inc. cannot be charged against them for purposes of establishing when the causes of action at issue accrued. Alternatively, Plaintiffs argue that none of the actions comprising Phase One of the project were taken in reliance on the 1992 and 1993 representations because Plaintiffs believed that were they to decide not to go forward with the project they could sell the land and commercial building developed during Phase One for a small profit. Plaintiffs assert, in essence, that it was not until Phase Two when they obligated themselves to purchase equipment to adapt the building for fibre extraction purposes that their actions were made in reliance on Fox Engineering's representations.
The Court finds both arguments unsupported by the record. There appears no question but that the various Fibred entities were closely related with substantial overlap among board members, officers and executives, and that all were significantly involved in the Iowa Falls project. As the general partner of Fibred Properties, Fibre Formulations was privy to all of the actions undertaken by or on behalf of that entity during Phase One of the project — even if, "in accordance with IRS regulations," Fibred Properties technically "began the business of commercial leasing" only in April 1995. Further, actions by Fibred Properties between July of 1993 and April of 1995 are expressly detailed in Mr. Anderson's affidavit, including, inter alia: obtaining legal title to the Iowa Falls property from its General Partner, Fibre Formulations; obtaining the financing for Phase One construction; preparation of lease agreements; and obtaining bids from subcontractors. In light of this uncontroverted evidence, the fact that some or all of those transactions may, on paper, have been "officially" undertaken by Fibred, Inc., or Fibred-Iowa, Inc., is not, in this Court's view, particularly relevant. Although such technical separation of entities may be extremely important for some purposes — such as bankruptcy matters — the Court finds it a distinction without a difference for purposes of the statute of limitations issue. Thus, however the relationship between Plaintiffs and other Fibred entities is characterized — e.g., successors in interest or third party beneficiaries — the Court deems the actions of Fibred, Inc. and Fibred-Iowa, Inc. to be synonymous with those of Plaintiffs for purposes of the statute of limitations issue.
Lewis Ort is the founder of Ort's, Inc. and Fibred-Inc. He was the Chief Executive Officer of Fibre Formulations until an illness in the 1990s. He remains a shareholder and director of that entity and a limited partner in Fibred Properties. Karen Sullivan replaced her father as CEO of Fibre Formulations. She is also CEO of Fibred-Maryland and a limited partner in Fibred Properties. During its existence, Ms. Sullivan was also President of Fibred-Iowa. Margaret Lee Ort is a shareholder and director of Fibre Formulations and Fibred-Maryland. She previously served as director of administration for Fibred-Iowa and was a limited partner in Fibred Properties. See Pl.'s Facts, at p. 7.
As to Plaintiffs' alternative argument — that the pre-Phase Two actions were taken independent of, and without reliance on, the alleged misrepresentations — the Court finds that Plaintiffs have failed to raise a triable issue on this point. Under Iowa law, it is not necessary that the representation be the only reason for the plaintiff's action; it is enough if the representation was a "substantial factor" in bringing about the action. See, e.g., ICJI 800.8 and 810.8 (citing, inter alia, Restatement (Second) of Torts, § 537, Comments a (discussing reliance in fact) and b, and §§ 540 and 541 (1977)). See also Sedco Int'l S.A. v. Cory, 683 F.2d 1201, 1206-07 (8th Cir. 1982) (explaining, in Iowa-based fraud action, that the "representation does not have to be the sole cause of damage; it is enough if it had a material influence on plaintiff's conduct or was a substantial factor in bringing about his or her action"). This "substantial factor" principle is elaborated upon in Comment b of § 546:
For a misrepresentation to be a cause in fact of the pecuniary loss that results from the plaintiff's action or inaction, the plaintiff must have relied upon the misrepresentation in incurring the loss. It is not, however, necessary that his reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct. It is not even necessary that he would not have acted or refrained from acting as he did unless he had relied on the misrepresentation. It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision. Thus it is immaterial that he is influenced by other considerations . . . if he is also substantially influenced by the misrepresentation in question.
Restatement (Second) of Torts, § 546, Comment b.
Applying the Restatement to the case at bar, the only conclusion to be drawn is that Plaintiffs' Phase One actions were made in reliance on Fox Engineering's representations regarding waste treatment capabilities. Regardless of other considerations, there can be no doubt that the potential for operation of a fibre extraction plant was a substantial factor in Plaintiffs' decision to go forward with Phase One. That financial risks were somewhat mitigated by the potential for sale prior to Phase Two does not negate the inescapable conclusion that the desire for a fibre extraction plant — which depended on certain waste water treatment capabilities and contractual terms — played a substantial role in all pre-1995 decisions and activities.
2. Damage:
The Court now turns to Plaintiffs' related argument that because they believed they could sell the commercial building at a profit at the completion of Phase One, they suffered no damage — and thus no claim arose — until the commencement of Phase Two in April 1995. Plaintiffs are correct that under Iowa law a cause of action accrues only when the wrongful act produces loss or damage to the claimant. Bob McKiness Excavating Grading, 507 N.W.2d at 408. The Court agrees with Fox Engineering, however, that Plaintiffs err when they state that the wrongful act cannot "produce" damage until and unless out-of-pocket loss is ascertainable.
Iowa recognizes two measures of damages for fraud cases: (1) benefit of the bargain plus consequential damages and (2) out of pocket expenses. Midwest Home Distributor, Inc. v. Domco Indus. Ltd., 585 N.W.2d 735, 739 (Iowa 1998) (citation omitted); Cornell, 408 N.W.2d at 380. See also Fox Engineering Exh. 18, Pl.'s Answer to Interrogatory No. 17 (confirming that Plaintiffs are seeking both out of pocket expenditures and benefit of the bargain damages). As discussed at length in Domco, each measure of damages has a different purpose and the absence of out-of-pocket loss will not preclude an actionable fraud claim. See id. at 739-42. As Domco explains: "[w]hen the plaintiff has no out-of-pocket losses, the benefit-of-the-bargain rule must apply, otherwise:
The purpose underlying the benefit-of-the-bargain rule is to put the defrauded party in the same financial position as if the fraudulent representations had in fact been true. Domco, 585 N.W.2d at 739. The out-of-pocket-expense rule is an alternative measure of damages applicable when the benefit-of-the-bargain rule will not make the defrauded party whole. Id.
the defrauding defendant has successfully accomplished his fraud and is still immune from an action in deceit. . . . This is not justice between the parties. The admonitory function of the law requires that the defendant not escape liability and justifies allowing the plaintiff the benefit of the bargain.
Id. at 739 (quoting Restatement (Second) of Torts § 549 cmt. i, at 115 (1977)).
As a result of this rule:
a defrauding defendant will not be heard to say that its intentional misrepresentations were not the cause of any damages to the plaintiff because the plaintiff was not out anything. The public policy as stated in the above quotation from the Restatement will allow a factfinder to find a causal connection between the misrepresentation and injury by holding the defendant to what it has represented to the plaintiff. For this reason, the benefit-of-the-bargain rule and the causation analysis are inextricably intertwined.Id. (citation omitted).
In reaching its conclusion, the Domco court examined and expressly rejected case law from other jurisdictions that require out-of-pocket loss before an action will lie and adhered to earlier pronouncements that under Iowa law an action for fraud may lie even where the defrauded party has benefitted to some extent. See id. (clarifying that "[i]n the context of fraud, the purpose of `benefit of the bargain' damages is to compensate a defrauded party for amounts that would have been received if the situation had been as the defrauding party represented").
The principles underlying the Iowa Supreme Court's discussion of damages in Domco apply equally to the statute of limitations issue before this Court. If the absence of out-of-pocket loss is not dispositive of whether a fraud action exists, that measure cannot be dispositive of when a fraud action accrues. This Court thus holds that for purposes of determining the accrual of the causes of action in this case, the alleged misrepresentations produced damage as soon as Plaintiffs acted — to their potential detriment — in substantial reliance on them. See Domco, 585 N.W.2d at 739 (noting that "the benefit-of-the-bargain rule and the causation analysis are inextricably intertwined"). As previously discussed, the record is replete with evidence showing that Plaintiffs undertook such actions and incurred potential loss from 1992 onward. Thus, the Court rejects Plaintiffs' argument that damages were not incurred until April 1995.
Because the causes of action against Fox Engineering accrued prior to December, 1994, Plaintiffs' claims against that defendant are barred by the five year statute of limitations. Accordingly, Fox Engineering's motion for summary judgment shall be granted in full.
Because, in this case, the statute of limitations defense disposes of all claims against Fox Engineering, the Court need not address Fox Engineering's alternative substantive argument that Plaintiffs cannot show justifiable reliance on the alleged misrepresentations, an essential element of all three claims.
B. City of Iowa Falls' motion for summary judgment
Plaintiffs assert four claims against Iowa Falls: negligent misrepresentation, fraudulent misrepresentation, fraudulent concealment and breach of contract. While it is sometimes difficult to parse the parties' arguments between the fraud and breach of contract claims, the Court will, to the extent possible, treat them separately.
As a preliminary matter, however, the Court will address two additional issues raised by Iowa Falls which embrace all of Plaintiffs' claims — waiver and the parol evidence rule. With regard to the former, Iowa Falls argues that by entering into the Administrative Consent Order in November, 1996, Plaintiffs waived their right to litigate issues resolved by the decree, thus barring all claims raised in this suit. Although Iowa Falls is correct that consent orders can act as an estoppel or waiver, see, e.g., Mahers v. Hedgepeth, 32 F.3d 1273, 1274-75 (8th Cir. 1994), this principle rests on the assumption that the litigating parties were on adverse sides of the consent negotiations. See id. at 1275 (noting that "a consent decree differs from most contracts in that it reflects a compromise between hostile litigants, a fact that is often relevant in construing its terms . . ."). Thus, "the resultant decree embodies as much . . . as the respective parties have the bargaining power and skill to achieve," id., and it is not inequitable to hold the parties to their negotiations. In this case, however, Plaintiffs persuasively argue that they and the City were not adversaries in the proceedings culminating in the consent order but rather were working together to seek temporary relief from discharge limits imposed by the IDNR. See, e.g., City Exh. 22, IDNR Admin. Consent Order; City Exh. 21, Joint letter from City and Fibred-Iowa, Inc. to the IDNR; Pl. Exh. Y, Anderson depo., at 157-58 (discussing "negotiations that Fibred-Iowa, Inc. and the City of Iowa Falls was [sic] jointly working on, on one side with the Iowa Department of Natural Resources, on the other side trying to frame the parameters for the Administrative Consent Order"). Because there is at least a genuine issue as to whether application of the estoppel principle would be appropriate in this instance, the Court declines to resolve the City's motion on those grounds.
The Court also declines to apply the parol evidence rule to the case at bar. Plaintiffs' resistance to Iowa Falls' motion rests largely on their assertion that the signed final Treatment Agreement was procured by fraud and thus cannot vitiate earlier representations by Defendant which form the basis of the fraud and breach of contract claims. Under Iowa law, parol evidence is admissible to show fraud in the inducement or procurement of a contract. Schnabel v. Vaughn, 140 N.W.2d 168, 170 (Iowa 1966) ("`The parol evidence rule is one of substantive law, in the absence of fraud, accident, mistake or ambiguity parol evidence is not admissible to contradict, vary or enlarge the terms of a written contract.'") (quoting Gordon v. Witthauer, 138 N.W.2d 918 (Iowa 1945)); Rance v. Gaddis, 284 N.W. 468, 474-75 (1939); Engles v. Ungles, 273 N.W. 879, 882 (1937). Accordingly, parol evidence is admissible in this case to substantiate Plaintiffs' claims that a pre-existing contract existed based on terms in the 1992 and 1993 documents and/or that Defendant purposely prevented Plaintiffs from ascertaining the City's actual waste treatment capabilities and contractual intentions.
1. Fraud
Plaintiffs' fraud claims against Iowa Falls rest on the premise that the City intentionally or negligently misrepresented its waste treatment abilities and contractual intentions in order to induce Plaintiffs to commit to construction of a fibre extraction plant within the City and that Plaintiffs justifiably relied on those representations to their detriment. The representations at issue are those made in the September 1992 memo and the August 1993 draft Treatment Agreement, both of which represent that the City could handle wastewater from Fibred with BOD and TSS of 300 ppm-mg/l, and the latter of which suggests that the City would be willing to enter into a Treatment Agreement to that effect. Thus Plaintiffs allege two distinct misrepresentations: (1) that the City had the capability to handle wastewater with BOD and TSS of 300 ppm-mg/l and (2) that the City would enter into a Treatment Agreement with Fibred to accept wastewater with those levels.
As an essential element of each of the fraud claims asserted, Plaintiffs must prove that they justifiably relied on the challenged representations. See, e.g., In Re Marriage of Cutler, 588 N.W.2d 425, 430 (Iowa 1999) (listing essential elements for proving fraud). In support of its motion for summary judgment, Iowa Falls advances a host of reasons why, as a matter of law, no such justifiable reliance can be shown in this case. Those reasons include: (1) that individuals speaking or acting for the City cannot bind the City with regard to matters which must ultimately be approved by City Council vote; (2) that Plaintiffs were aware that all pre-final discussions and Treatment Agreements were drafts subject to change; (3) that the July 11, 1994 draft Treatment Agreement put Plaintiffs on notice that the BOD and TSS levels were significantly lower than those indicated in 1992 and 1993; and (4) that Plaintiffs signed the final Treatment Agreement which references Form 31 without reading and/or inquiring about the discharge limits on that form which they knew would be part of their agreement. Plaintiffs argue, in response, that under the unique facts of this case, reliance on the 1992 and 1993 representations was justified and no subsequent actions by Defendants reasonably disabused Plaintiffs of their understanding regarding the relevant agreement terms.
After thoroughly reviewing the record and granting all justifiable inferences in Plaintiffs' favor, the Court concludes that Plaintiffs have failed to demonstrate a triable issue as to their justifiable reliance on the 1992 and 1993 representations. This conclusion rests primarily, and alternatively, on two grounds: the absence of official City action on the draft treatment agreements and Plaintiffs' lack of reasonable inquiry prior to signing the final agreement.
This conclusion applies to both the representation that the City would enter into a Treatment Agreement with discharge levels of 300 ppm-mg/l and the related representation that the City could handle wastewater discharge at those levels. Although the factual findings relevant to both asserted bases for relief are substantially identical, the Court's substantive discussion will focus on the former, after which, to the extent necessary, the Court will address Plaintiffs' arguments on the latter.
(a) Plaintiffs cannot justifiably rely on "pre-official" City representations:
Iowa Falls first argues that under City of McGregor v. Janett, 546 N.W.2d 616 (Iowa 1996), Plaintiffs cannot prove justifiable reliance as a matter of law because the claimed reliance "rests on what amounts to no more than informal, nonbinding predictions of future council action." Id. at 620. In Janett, the Iowa Supreme Court narrowly construed the extent to which a municipality could be held liable for the torts — including misrepresentations — of its officers and employees acting in the scope of their employment:
The power of a city is vested in its city council. Iowa Code § 364.2(1). A city council exercises power "only by the passage of a motion, a resolution, an amendment, or an ordinance." Id. § 364.3(1). This court has long held that acts by individual members of a public body, even when concurred in by the majority, cannot bind the municipality unless officially sanctioned in accordance with the statute. Lemke v. Mueller, 166 N.W.2d 860, 864 (Iowa 1969); Greusel v. O'Brien County, 273 N.W. 853, 854 (1937); Emmet County v. Dally, 248 N.W. 366, 367 (1933); Modern Steel Structural Co. v. Van Buren County, 102 N.W. 536, 539 (1905). Moreover, citizens dealing with city officers must, at their peril, understand the limits upon a city's power. Marco Dev. Corp. v. City of Cedar Falls, 473 N.W.2d 41, 43 (Iowa 1991); Johnson County Sav. Bank v. City of Creston, 237 N.W. 507, 508 (1931). Because the validity of dealings with a municipality can be measured by reference to public documents and proceedings, the doctrine of ultra vires has enjoyed stricter application in the public, as opposed to the private corporate realm. See generally 56 Am. Jur. 2d Municipal Corporations §§ 503-04 (1988).
Id. at 620.
The principles elucidated in Janett have been reiterated and strengthened in subsequent cases. In Riley v. City of Hartley, 565 N.W.2d 344, 346 (Iowa 1997), the Iowa supreme court held that a lessee could not assert an estoppel argument against the city's revocation of his lease even where the lease had been signed by the mayor and city clerk and the lessee had complied with all terms of the lease for over seven years. See id. at 347-48. The court found that despite the fact that the rental arrangement was formed and conducted with the full knowledge and consent of the city council, the failure to strictly adhere to statutory requirements left the plaintiff without grounds for judicial relief. See id. One authority, quoted at some length in Riley, explained this seemingly harsh rule as follows:
If a statute or charter says that certain contracts . . . must be made by ordinance, or that they must be in writing, or the like, there is a reason for it based on the idea of protecting the taxpayers, and inhabitants, and these provisions are mandatory. If the contract is entered into or executed in a different manner, the mere fact that the municipality has received benefits does not make the municipality liable, either on the theory of ratification, estoppel or implied contract.
Id. at 348 (quoting 10 McQuillin § 29.26, at 366). The court recognized the apparent unfairness of allowing a city to escape its liability on the basis of its own failure to follow statutory mandates, but ultimately concluded that "the public has an interest in the disposition of the city's property and the public's rights cannot be waived by the council's improper exercise of city powers." Id. See also Quality Refrigerated Servs., Inc. v. City of Spencer, 586 N.W.2d 202 (Iowa 1998) (holding city's knowledge and encouragement of landowner's substantial expenditures to alter building for meat processing purposes cannot be justifiably relied upon in contesting denial of zoning application); Alfredo v. Iowa Racing Gaming Comm'n, 555 N.W.2d 827, 834 (Iowa 1996) (holding knowledge and approval of plaintiff's actions by commission staff cannot substitute for formal approval of commission, where such approval was required by state and regulations)
Applying Janett and its progeny to the case at bar, Iowa Falls contends that the July 1992 and September 1993 documents at issue could not be justifiably relied upon since any waste treatment agreement and discharge permit could be approved only through formal City Council vote. Thus, the memo and draft treatment agreement reflect only the assertions and speculation of Mr. Wolfe as to what future action the City may or was likely to take. Under Janett, such "acts by individual members of a public body, even when concurred in by the majority, cannot bind the municipality unless officially sanctioned in accordance with the statute," id. (citations omitted), and Plaintiffs relied on any pre-official representations at their own peril. See id.
Plaintiffs offer several responses to the City's Janett argument. First, Plaintiffs argue that this case is factually distinguishable from Janett so that its seemingly broad restriction against reliance on pre-official acts does not apply. To this end, Plaintiffs contend that reliance on representations by Mr. Wolfe was justifiable because the City had delegated negotiation of the final Treatment Agreement to Mr. Wolfe so that formal approval of any agreement recommended by him would be merely pro forma. Plaintiffs also argue that, in this case, official approval of the final Treatment Agreement was merely another step in a series of ongoing, related City Council approvals necessary to begin operation of the fibre extraction plant. The City had already approved requisite zoning changes, authorized street widening and approved the issuance of substantial industrial revenue bonds to finance the plant's construction, all in anticipation of Plaintiffs' entry into the community. Thus, Plaintiffs contend, unlike the speculative future action in Janett, the prospect that Iowa Falls would approve the Treatment Agreement as negotiated by Mr. Wolfe was a virtual certainty as evidenced by its approval and participation in significant preliminary aspects of the project.
Plaintiffs' first argument fails as they have pointed to nothing in the record which would support their contention that the City had delegated, or even could delegate, authority to approve, as opposed to merely negotiate, a final agreement between the parties. Plaintiffs second argument — that previous official actions by the City justify reliance on anticipated future City actions — is intuitively appealing but, ultimately, without support in the case law. As illustrated by Riley, even extensive participation and performance by a city will not justify reliance if statutory requirements are overlooked. And in Quality Refrigerated Services, 586 N.W.2d 202 (hereinafter, " QRS") — decided one year after Riley — the Iowa Supreme Court again strictly applied Janett. In QRS, a landowner brought suit after denial of his rezoning application following the city's enactment of comprehensive amendments to the zoning ordinance. The plaintiff argued that he was entitled to relief based on a savings clause in the ordinance which excepted from the new zoning rules those properties wherein "actual construction was lawfully begun prior to the effective date" of the ordinance. See id. at 206. It was uncontested that, prior to enactment of the zoning amendments, the plaintiff had spent $650,000 to renovate his premises for meat processing purposes. See id. at 207. He had not, however, obtained the building permit required under city ordinance prior to starting the construction. See id. Thus, the city took the position that the "actual construction" undertaken by the plaintiff was not lawfully begun and thus not entitled to the zoning exception. See id. In response, the plaintiff argued that the failure to obtain a permit was excused, pointing to "the City's knowledge that [the plaintiff] planned to renovate the facility to house a meat processor and the City's encouragement of [the plaintiff's] efforts to obtain such a tenant." Id. Relying on Janett, the court rejected the plaintiff's argument:
[The plaintiff] does not cite to, nor have we found, any case holding that a property owner's failure to obtain a required building permit is excused by such conduct on the part of the municipality. In fact, this court "has long held that acts by individual members of a public body, even when concurred in by the majority, cannot bind the municipality unless officially sanctioned in accordance with the statute." [ Janett, 546 N.W.2d at 620]; accord Alfredo v. Iowa Racing Gaming Comm'n, 555 N.W.2d 827, 834 (Iowa 1996) (holding knowledge and approval of plaintiff's actions by commission staff cannot substitute for formal approval of commission, where such approval was required by state and regulations).
QRS, 586 N.W.2d at 207. The court concluded that the plaintiff's "development of its property for meat processing purposes, although done in good faith, violated the city ordinance and was, therefore, illegal." Id.
While there are factual distinctions between the above-discussed cases and the case at bar — most notably that it is unclear whether the "encouragement" provided by the city in those cases was of the same tangible quality as Plaintiffs point to in the instant case — these distinctions do not undermine the clarity of the Iowa Supreme Court's continued strict adherence to, and arguable extension of, the principle underlying Janett. Riley and QRS reaffirm that, under Janett, reliance on city actions short of official vote is done at one's peril — the extent to which the project has proceeded, or the amount of expense incurred, is irrelevant to the justifiable reliance analysis. To construe the case law otherwise would invite endless disagreement and litigation over whether and to what extent a City's actions were unjustifiably relied upon "pre-official conduct" versus justifiably relied upon "preliminary steps." It is precisely this type of line drawing that Janett's bright-line "no reliance rule" was intended to preclude. Moreover, in the instant case, there is no indication in the record, nor assertion by Plaintiffs, that any of the preliminary actions were made with an express guarantee regarding approval of specific discharge levels nor that at the point at which those actions were taken the City believed the negotiation phase had ended. Thus, a finding of justifiable reliance under the circumstances alleged herein would potentially hamstring municipalities. Cities would be hesitant to approve any arguably "preliminary acts" for fear that they would be concurrently binding themselves to take future action on which decisions had not yet been made, or perhaps even contemplated. Accordingly, the Court holds that Plaintiffs could not, as a matter of law, justifiably rely on representations in the 1992 and 1993 documents prepared by Mr. Wolfe where the subject matter of those documents could not be implemented without formal vote by the Iowa Falls City Council.
While not raised in the case at bar, it is of interest to note that the Iowa Supreme Court, in QRS, left open at least the potential for some sort of estoppel argument under the circumstances at issue therein. See QRS, 586 N.W.2d at 207 n. 1 ("We note QRS has not raised on appeal its claim of estoppel against the City, an argument rejected by the trial court.").
A letter written by Mr. Anderson, as advising attorney, to Plaintiffs, prior to Plaintiffs' execution of the financing agreement in April 1995 further supports the conclusion that approval of related "preliminary acts" could not be justifiably relied upon as to future City actions. See Pl.'s Exh. N: April 5, 1995 letter from Glenn Anderson to Karen Sullivan, President of Fibred, Inc. In that letter, Mr. Anderson explicitly noted and cautioned against the significant risks incumbent in signing the financing agreement prior to execution of the Treatment Agreement and discharge permit:
[Point] 4. Wastewater Permit. The application for a wastewater permit was submitted approximately 1 year ago but you have yet to receive the final permit. The lagoon system is [sic] Iowa is substantially smaller than in Maryland and only provides for a few weeks storage capacity, therefore the success of the Iowa venture depends upon the City's ability to accept the wastewater treatment and disposal. Is there any doubt that the City will timely issue a permit at the requested levels?
[Point] 5. Wastewater Limits. In your permit application, you request wastewater limits in accordance with the City wastewater ordinance. These limits for BOD and TSS are slightly different than the limits the City represented it could handle in its memo and draft permit. Are these differences material? In you application, you request non-biodegradable TKN levels of 50 ppm. There is no mention of TKN limits in the City's memo or draft permit, although the 50 ppm appears to come from the City Ordinance. Has the City agreed to count only the non-biodegradable portions? If not, is this a deal breaker?
The letter advised Plaintiffs to "give serious consideration" to these and other risks " prior to the loan closing." Thus, Mr. Anderson implicitly recognizes the Janett principle — that execution of the financing agreement does not guarantee any specific future action by the City regarding wastewater issues.
(b) Plaintiffs cannot rely on their own negligence in overlooking reasonably discoverable information:
The Court is equally persuaded that, under the facts of this case, Plaintiffs' execution of the final Treatment Agreement in 1995 precludes any assertion of justifiable reliance on representations contained in the 1992 and 1993 documents. Under Iowa law, a party is generally bound by the documents he signs even where he has not expressly accepted all the contract provisions or is even aware of them. Joseph L. Wilmette Co. v. Rosenman Bros., 258 N.W.2d 317, 323 (Iowa 1977). "[I]f a party to a contract is able to read (the contract), has the opportunity to do so, and fails to read the contract he cannot thereafter be heard to say that he was ignorant of its terms and conditions for the purpose of relieving himself from its obligations." Id. (quoting Preston v. Howell, 257 N.W. 415, 418 (Iowa 1934). In Wilmette, at issue was whether a party was bound by arbitration provisions on a signed order confirmation where those provisions were printed on the reverse side of the document and were not brought specifically to the party's attention prior to signature. The Wilmette court found significant that the beginning paragraph on the face of the document conspicuously stated that "the order is subject to the general conditions of sales shown on the reverse side. It was not in small type or in an inconspicuous place on the instrument." Id. at 323. The court concluded that:
a reasonable man, on reading the face of the confirmation documents, and particularly the first sentence thereof referring to the provisions on the reverse side would have looked at the back of the instrument before signing and accepting the contract. . . . Since one of the provisions on the reverse of the documents provided for arbitration, we deem it further obvious that a reasonable man in signing the documents had notice of the arbitration provisions and could expect to be bound to arbitrate under the terms of the arbitration provisions.
Id. at 323-24. See also Arthur Philip Export Corp. v. Leathertone, Inc., 87 N.Y.S.2d 667 (N.Y.App.Div. 1949) ("A party should not be bound by clauses printed on the reverse side of a document unless it be established that such matter was properly called to its attention and that it assented to the provisions there stated."), quoted with approval in Wilmette, 258 N.W.2d at 322.
Here, it is incontrovertible that the final Treatment Agreement explicitly and conspicuously notified Plaintiffs of the existence and import of Form 31 in relation to the contractual obligations of the parties. Form 31 is expressly referenced no less than seven times in the three-page document, including point number 2 on the first page which obligates Plaintiffs to "[d]ischarge pretreated wastewater that does not exceed the flows and mass limits listed for Item 8 — Compatible Waste in Exhibit I . . ." Like the court in Wilmette, this Court is constrained to the view that a reasonable person, on reading the final Treatment Agreement — with its multiple references to Form 31-Exhibit I — would have understood that by signing the document he or she was assenting to the terms of Form 31 incorporated by reference into the Agreement.
Plaintiffs argue that this conclusion does not follow where, as here, Plaintiffs were prevented from discovering the misrepresentations because of Defendant's fraudulent actions. Specifically, Plaintiffs contend that they did not discover that the discharge levels had been significantly modified prior to signing because Plaintiffs "hid" the levels in the "forthcoming" Form 31 and refused to send that form with the final agreement. In support of their argument, Plaintiffs point to a number of cases for the proposition that fraud in the procurement of a signature on a contract vitiates the same. See, e.g., Gouge v. McNamara, 586 N.W.2d 710, 714 (Iowa Ct.App. 1998) ("A person is bound by contract signed but not read unless the signing party was dissuaded from reading it by some trick or artifice practiced by the opposite party.") (citing Schlosser v. Van Dusseldorp, 101 N.W.2d 715, 719 (Iowa 1960); Advance Elevator Co. v. Four States Supply, 572 N.W.2d 186 (Iowa Ct. App. 1997); Rance v. Gaddis, 284 N.W. 468 (Iowa 1939); Engle v. Ungles, 273 N.W. 879 (1937).
While Plaintiffs' statement of the law is correct, it is also incomplete. As the City points out, where a party negligently signs an instrument, he or she may be bound by the terms of that instrument regardless of any fraud that came prior to the signing. As explained by the Iowa Supreme Court in Engles, a case cited by both parties:
While the general rule is that fraud in procuring the signature to a written instrument vitiates the same, it is also true that there is an exception to this rule, where the signer of the written instrument is guilty of negligence in the execution thereof." State Sav. Bank v. Deal, 200 Iowa, 490, 203 N.W. 293. In McCormack v. Molburg, 43 Iowa, 561, 562, the court said: "The defendant does not state that plaintiffs used any artifice to prevent him from reading the contract, nor does he state that he was unacquainted with the English language, or that he could not read. In fact no excuse whatever is given, except that he signed the contract relying on the representation of plaintiffs as to its contents. This is inexcusable neglect, and the defendant must suffer the consequences of his own folly."
Engles, 273 N.W. at 882. Although the court has since clarified that the standard applicable to a party asserting fraud in the procurement is a subjective one — "what the Complaining party reasonably could be expected to do," Lockard, 287 N.W.2d at 878 — it concomitantly reaffirmed that "the recipient of a fraudulent representation is `required to use his senses, and cannot recover if he blindly relies on a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.'" Id. (quoting Restatement (Second) of Torts, § 541, Comment a (1971)) (other citations omitted).
Applying this principle to the case at bar, there appears no doubt that Plaintiffs were either negligent in failing to inquire as to the contents of Form 31 back in July 1994 despite explicit reference to it and knowledge of its binding nature or they were negligent in signing the final Treatment Agreement absent the form without, at the least, explicit assurance that the discharge levels were the 300 ppm-mg/l that they desired. As noted above, both the 1994 draft and the subsequent final agreement explicitly referenced "Form 31-Exhibit I" in seven separate places. And the July 1994 cover letter is almost completely devoted to discussion of the Form, including reference to Item 8 "on the attached Page 2 of the IDNR Form 31 . . ."
Plaintiffs argue that under Engles a fact question remains as to whether Iowa Falls' repeated reassurances that Form 31 would be forthcoming and that "this is the way business was done in Iowa" were such that Plaintiffs were prevented from discovering the discharge level information prior to signature. The Court is of the firm opinion that such informal and unspecific reassurances are not the type of artifice which was of concern in Engles. Engles involved a dispute over a release procured by an insurance agent while the plaintiff was in critical condition, in and out of consciousness and in extreme pain shortly following a car accident. The court concluded that under the egregious facts of the case it was for a jury to decide whether the plaintiff "was not in physical or mental condition, nor able, to exercise the same degree of care and caution and discretion expected of an ordinary person of like education, acting under ordinary circumstances, possessing normal physical health and a normal mental state." Engles, 273 N.W. at 882. In contrast, the instant case involves two sophisticated entities dealing at arms-length. There is no evidence that Defendant's conduct throughout negotiations was anything other than that expected in the ordinary course of business. Negotiations were commenced. Drafts were exchanged which referenced other documents. Plaintiffs made no specific inquiries as to the discharge levels at any stage of the process subsequent to the initial memo. While Plaintiffs assert that this evidences their ignorance — and Defendant's concealment — of any changes, from Defendant's perspective their silence more likely indicated acquiescence and agreement with each successive draft. The existence of Form 31 and its binding impact on discharge levels was fully known to Plaintiffs throughout the negotiations. While they assert here that prior to signing they inquired as to the absence of Form 31, at no time do they assert that they also asked for, or procured, an assurance — oral or otherwise — that the BOD and TSS discharge levels would be the 300 ppm-mg/l they anticipated. Thus there was nothing to indicate to Defendant that Plaintiffs were ignorant as to the meaning of the July 1994 language regarding the discharge levels or objected to the levels actually indicated in Form 31 itself, of which Defendants were of the unabused impression that Plaintiffs had, at some point at least, received a draft copy. See Gouge, 586 N.W.2d at 714 (finding no actionable fraud where "[t]here was no showing of one party sneaking a new term into a document, knowing the other party would not revisit and discover that section or term of the document").
While Plaintiffs assert a known inequity between the parties as to waste treatment matters, the Court has seen nothing to indicate that the inequity was so great or the parties so situated in relation to each other as to obligate the City to spell out what Plaintiffs' own expert admits was reasonably identified and discoverable information at numerous stages in the negotiation process. Nor is there any basis from which to conclude that Plaintiffs did not have access to competent, knowledgeable engineers whom they could have consulted had they so chosen. For the same reasons, Plaintiffs' assertions that they were not represented by counsel in the transaction are similarly unavailing.
Plaintiffs' only evidence of artifice is Ms. Sullivan's and Ms. Ort's testimony as to reassurances they were given that Form 31 would be forthcoming and that "this is the way business was done in Iowa." However, both admit that these representations came from Mr. Davey who had presumably received similar assurances from Mr. Wolfe. Neither Ms. Sullivan nor Ms. Ort spoke directly with City representatives regarding the matter. This appears to be precisely the type of alleged trickery that was rejected in McCormack — here, as there, Plaintiffs decided to sign the contract relying on the representations of Iowa Falls as to its contents. See Engles, 273 N.W. at 882 (discussing McCormack). And significantly, unlike McCormack, in this case there is no allegation that Plaintiffs represented specific false information at the time of Plaintiff's execution of the final agreement. Even were the Court to conclude that signing an agreement without reading the documents referenced therein was excusable neglect, that conclusion would not extend to the facts here where, aside from not reading the actual Form 31 prior to signature, Plaintiffs did not even require assurance as to the exact discharge levels that would be contained in that document. As this Court reads the record, there is no allegation by Plaintiffs that they inquired as to the contents of the missing form — only its absence.
In sum, the Court finds no evidence of excusable neglect on Plaintiffs' part and thus execution of the 1995 final Treatment Agreement cannot be ignored in the justifiable reliance analysis. See Gouge, 586 N.W.2d at 714-15 ("Because we find [defendant's] behavior, under these circumstances, does not arise to fraud or inequitable conduct, . . . [t]he general rules of contract law decide this case. A party is charged with notice of the terms and conditions of a contract if the party is able or has had the opportunity to read the agreement and is bound by a document the party signs even though the party has not expressly accepted all of the contract provisions and is not aware of them."). If Plaintiffs could ever justifiably rely upon the 1992 memo and 1993 draft agreement, about which the Court has serious doubts, continued reliance became unjustifiable when subsequent information was reasonably identified and discoverable — as it was here at the time of Plaintiffs' execution of the final Treatment Agreement. See Lockard, 287 N.W.2d at 876 ("It is the buyer's knowledge at the time of consummation that is usually determinative of the reliance issue."). Accordingly, Iowa Falls is entitled to summary judgment on Plaintiffs' fraud claims.
The Court's discussion heretofore has focused on the City's alleged misrepresentation that it would enter into a treatment agreement with BOD and TSS discharge levels of 300 ppm-mg/l. The findings underlying the Court's conclusion that reliance on such representations was not justifiable mandate a similar conclusion with regard to the City's alleged misrepresentation that it could handle wastewater at those levels. As the Court understands Plaintiffs' argument, they contend that they would not have taken any steps toward construction and/or operation of a plant in Iowa Falls had they known that the City could not handle the type and levels of wastewater inherent in the fibre extraction process.
However, as the record makes clear, to the extent misrepresentations were made, they were made relatively early in Plaintiffs' exploration of, and inquiry into, the possibility of locating a fibre extraction plant in Iowa Falls. Plaintiffs knew that discussions and correspondence on all matters were nonbinding, subject to negotiation and revision, and ultimately contingent on official approval by formal vote of the City Council. The Court does not find, under the facts of this case, that reliance on assertions arguably made at such a preliminary stage can serve as the basis for justifiable reliance where the process for determining and mutually agreeing to specific discharge terms was known to all parties from the beginning. Further, Plaintiffs' execution of the final Treatment Agreement seriously undermines any assertion of reliance on earlier inconsistent representations. As discussed in the Court's opinion, Plaintiffs' have failed to demonstrate a triable issue as to fraud in the inducement or procurement regarding execution of the final Treatment Agreement. Absent any evidence of taint or undue advantage, the Court agrees with Defendant that what is ultimately relevant to disposition of this case is not whether the City misrepresented its ability to handle waste at the 300 ppm-mg/l level but rather whether the City misrepresented its ability to handle waste at the levels agreed to in the executed final Agreement. Plaintiffs have offered no evidence regarding the latter and, accordingly, their fraud claims cannot be maintained.
2. Breach of Contract
In its breach of contract claim, Plaintiffs alleged that the "City's representations coupled with plaintiffs reliance, performance and action thereon created an express and/or implied contract obligating or requiring defendant City to accept 250,000 gallons per day of pretreated industrial wastewater from plaintiff Fibred Properties containing concentrations not exceeding 300 ppm BOD and 300 ppm TSS" and that the City breached this express or implied contract. See Amended and Substituted Complaint, at ¶¶ 57 and 58. Thus, at issue is not an alleged breach of the 1995 signed Treatment Agreement; rather, Plaintiffs' claim rests entirely on representations allegedly made by the City before execution of the final Treatment Agreement and discharge permit. Iowa Falls argues that there was no such additional express or implied contract as a matter of law.
The elements needed to show a breach of an express contract are well-established. "In a breach of contract claim, the complaining party must prove: (1) the existence of a contract; (2) the terms and conditions of the contract; (3) that it has performed all the terms and conditions required under the contract; (4) the defendant's breach of the contract in some particular way; and (5) that plaintiff has suffered damages as a result of the breach." Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224 (Iowa 1998). In addition to those elements, the complaining party must demonstrate that both parties had capacity and authority to enter into the contract. Magnusson Agency v. Public Entity Nat'l Company-Midwest, 560 N.W.2d 20, 26-27 (Iowa 1997). Iowa Falls argues that Plaintiffs cannot demonstrate that the parties had capacity and authority to contract, that a contract existed, or that terms and conditions of the alleged contract can be sufficiently ascertained.
Plaintiffs argue that the terms of the express contract were set forth in the September 2, 1992 memo and the August 1993 draft Treatment Agreement so as to bind the City to accept a maximum of 250,000 gallons per day of waste containing concentration levels of BOD and TSS at 300 ppm-mg/l. Plaintiffs contend that the existence of the contract is evidenced by the partial performance of both parties whereby Plaintiffs purchased the Iowa Falls site, constructed a building, designed the wastewater pretreatment facility and obtained substantial financing, while Iowa Falls approved rezoning, street and utility installation and issuance of industrial revenue bonds.
Plaintiffs also assert that terms were set forth in "oral discussions." However, Plaintiffs' briefs offer no evidence or testimony as to the specific substance or timing of these oral discussions. Accordingly, the Court will look only to the 1992 and 1993 documents on this issue. See Fed.R.Civ.P. 56(e) ("When a motion for summary judgment is made and supported . . ., the adverse party's response . . . must set forth specific facts showing that there is a genuine issue for trial.").
The Court agrees with Iowa Falls that the facts alleged by Plaintiffs do not raise a genuine issue of material fact as to the existence of an express contract prior to the 1995 signed final Treatment Agreement. The Court is not persuaded that the 1992 and 1993 documents — acknowledged by both parties as drafts subject to negotiation and revision — demonstrate mutual intent to form a contract and the draft character of those documents seriously undermines any credible contention that the terms and conditions contained therein should be considered sufficiently ascertainable as to define such a contract. As to capacity to contract, while it is clear that the City had authority to enter into a contract concerning waste treatment issues it is equally clear after Janett that any such contract required a formal vote by the City Council. As discussed in relation to Plaintiffs' fraud claims, Plaintiffs have offered no Iowa case law which would obviate the rule in Janett where the City engages in arguably related steps which fall short of a formal vote on the matter at issue. Further, it is even less likely that any such rule would ever apply to a contract purportedly based on draft documents expressly recognized as such. Thus, the City's official votes on rezoning, street improvement and financing could not bind it to concurrently or prospectively approve a waste treatment agreement or specific discharge levels. While, from Plaintiffs' perspective, the latter may have been contingent on the former, Janett makes clear that parties dealing with a City rely on the converse proposition at their own peril.
Plaintiffs' assertion of an implied contract equally fails. As Iowa Falls correctly points out, under Iowa law, "[t]here may be a contract implied in law on a point not covered by an express contract, but no such implied contract on a point fully covered by an express agreement." LaFontaine v. Developers and Builders, Inc., 156 N.W.2d 651, 656 (Iowa 1968). "[W]here there is an express contract covering the subject matter, the law will not imply a quasi or constructive contract." Id. Here, the 1995 signed Treatment Agreement expressly addressed all issues about wastewater discharge that Plaintiffs allege were part of the contract implied at law. Plaintiffs argue, however, that because the final Treatment Agreement was signed by Fibred-Iowa, Inc. — as opposed to the named Plaintiffs — their suit is not barred by the above-stated rule. For the reasons previously discussed in relation to Fox Engineering's statute of limitations defense, the Court is not inclined, under the facts of this case, to allow Plaintiffs to selectively associate and disassociate from related corporate entities for purposes of the various claims asserted herein — particularly where, as here, the claim at issue rests primarily on principles of equity rather than law.
IV. Conclusion
In sum, the Court concludes that both Fox Engineering and Iowa Falls are entitled to summary judgment in full. While Plaintiffs' arguments in resistance were vigorously and skillfully presented, the record evidences no genuine issues of material fact which would warrant denial of Defendants' motions in this case. There appears no getting around Plaintiffs' failure to monitor its participation in — and signature on — an agreement which, on its face, alerted Plaintiffs to the existence of binding obligations specified in another document. There is nothing in the record to support Plaintiffs' argument that the failure to discover contractual terms was the result of Defendants' fraud as opposed to their own negligence. In short, while the Court is not without sympathy for Plaintiffs' plight, the record evidences nothing that would permit the Court, in law or equity, to rework the parties' agreement as executed.
ORDER
For the reasons discussed herein, it is ordered:
The motions for summary judgment brought by Fox Engineering Associates, Inc. and City of Iowa Falls are GRANTED.
Done and so ordered.