Opinion
NO. 2014-CA-001974-MR
02-24-2017
COMMONWEALTH OF KENTUCKY, FINANCE AND ADMINISTRATION CABINET APPELLANT v. PINNACLE, INC.; THE FEDERAL MATERIALS CO., INC; GREAT AMERICAN INSURANCE COMPANY, INC.; PENROD LUMBER COMPANY, INC. A/K/A/ PENROD FENCE & LUMBER COMPANY, INC. APPELLEE
BRIEF FOR APPELLANT: Patrick W. McGee Frankfort, Kentucky BRIEF FOR APPELLEE: PINNACLE, INC. AND GREAT AMERICAN INSURANCE COMPANY Robert E. Maclin III Lexington, Kentucky THE FEDERAL MATERIALS COMPANY, INC. Edmund Scott Sauer Nashville, Tennessee PENROD LUMBER COMPANY, INC. A/K/A PENROD FENCE & LUMBER COMPANY, INC. Licha H. Farah Jr. Lexington, Kentucky
NOT TO BE PUBLISHED APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE THOMAS D. WINGATE, JUDGE
ACTION NO. 07-CI-01931 OPINION
VACATING AND REMANDING AND ORDER DENYING MOTION TO DISMISS APPEAL
** ** ** ** **
BEFORE: COMBS, J. LAMBERT AND VANMETER, JUDGES. COMBS, JUDGE: Commonwealth of Kentucky, Finance and Administration Cabinet (the Cabinet), appeals from a partial summary judgment of the Franklin Circuit Court that prohibits the Cabinet from pursuing its civil action for damages against Pinnacle, Inc., (Pinnacle), for its alleged breach of contract. The Cabinet also appeals from the trial court's dismissal with prejudice of a separate claim. Pinnacle filed a motion to dismiss the appeal, which was passed by the motions panel of this Court to this panel for consideration on the merits. We deny Pinnacle's motion to dismiss the appeal. We vacate the summary judgment and order dismissing, and we remand for further proceedings.
Judge Laurance B. VanMeter concurred in this opinion prior to being elected to the Kentucky Supreme Court. Release of this opinion was delayed by administrative handling.
In December 2001, the Cabinet entered into a contract with Pinnacle for the construction of a free-standing, forty-four (44)-bed segregation unit at the Western Kentucky Correction Complex in Caldwell County. The total amount of the original construction contract was $3,256,635.00.
Pinnacle entered into a subcontract with The Federal Materials Company, LLC, (Federal), to supply concrete for the project. Federal purchased course aggregate, a raw material and component part of concrete, from a limestone quarry owned by Hanson Aggregates Midwest, Inc., (Hanson), which later transferred ownership of the quarry to Rogers Group, Inc., (Rogers).
The Department of Corrections began to occupy the segregation unit in April 2004. Eighteen months later, personnel discovered structural defects at the facility consisting of the premature deterioration and failure of the installed concrete.
Around the time that the Cabinet began to investigate the causes of the concrete failure at the correctional facility, a proposed class action was filed in Caldwell Circuit Court on behalf of any and all owners of property affected by allegedly defective concrete supplied to the region by Federal. The Caldwell Circuit Court class action was removed to the United States District Court for the Western District of Kentucky, which denied the plaintiffs' motion for class certification. See Adams v. Fed. Materials Co., No. 5:05-CV-90-R, 2006 WL 3772065 (W.D. Ky. Dec. 19, 2006).
After class certification was denied in Adams, approximately 350 separate civil actions related to the defective concrete were filed in Lyon, Caldwell, Hopkins, Crittenden, and Franklin Counties. Among these actions was a complaint filed by the Cabinet against Pinnacle in Franklin Circuit Court in November 2007.
In its complaint, the Cabinet alleged that Pinnacle had breached the parties' contract and had breached its duty of care to the Cabinet. Although it lacked the necessary privity of contract, the Cabinet subsequently amended its complaint to include breach of express and implied warranty claims against Federal and Rogers. It also joined in the action Pinnacle's performance and payment bond surety, Great American Insurance Agency. The damages resulting from the allegedly defective concrete used at the correctional facility have been estimated by the Cabinet's consulting experts as ranging between $2.1 million (diminution in fair market value) and $4.4 million (cost to repair). This civil action is the basis of the appeal now before us.
The litigation proceeded through discovery. One of the complaints in Lyon Circuit Court, Sutton v. The Federal Materials Co., was amended to seek class-wide relief for the owners of property who utilized concrete supplied by Federal. In 2009, the Lyon Circuit Court certified a settlement class and preliminarily approved the terms of a proposed class settlement of claims against Federal and Rogers arising from the alleged alkali-carbonate reactivity (ACR) of the concrete -- the cause of its premature failure. It was estimated that claimants owning structures other than single family residential housing would each be paid $30,000.00 under the terms of the settlement agreement.
The Cabinet, as the owner of the correctional facility in Caldwell County, was named as a settlement class member in the order of the Lyon court granting preliminary approval of the settlement. The order required the parties to publish a summary of the class notice in several local newspapers (including Caldwell County), to mail notice of the settlement to the prison, and to provide the prison with an opportunity to opt out of the class. The order also required Federal and Rogers to move the various courts involved to stay all litigation brought by any settlement class member pending entry of the final order and judgment of the Lyon Circuit Court. Neither Federal nor Rogers filed a motion to stay the Franklin Circuit Court proceedings, however.
Four months later, in August 2009, the final judgment of the Lyon Circuit Court concerning the class settlement was entered. The judgment determined that notice to the class members -- including notice to the prison -- had been properly executed and that it comported with the requirements of due process. It entered another order -- "the first bar order" -- which generally prohibited class members from filing any additional actions related to any ACR-based allegation that the concrete supplied by Federal was defective. However, since no motion for a stay of the Cabinet's litigation in Franklin Circuit Court had ever been filed, the Cabinet continued its litigation against Pinnacle, Federal, and Rogers.
However, in December 2009, the Cabinet filed a notice in Franklin Circuit Court regarding the existence of the collateral proceedings in Lyon Circuit Court. In the notice, the Cabinet explained that in response to a discovery request by the Cabinet, Federal and Rogers had filed motions in Lyon Circuit Court contending that the Cabinet's failure to opt out of the class settlement precluded it from now pursuing its ACR-based claims against them. In memoranda, Federal and Rogers acknowledged to the Lyon Circuit Court that their dismissal from the Franklin Circuit Court action would not impact the claims asserted by the Cabinet against Pinnacle, the Cabinet's general contractor, since the settlement negotiated in Lyon Circuit Court had not addressed property owners' contract claims against their general contractors. Pinnacle did not respond to the notice filed in Franklin Circuit Court. Nor did it intervene in the Lyon Circuit Court action to protect its potential claims against Federal and Rogers.
In response to the motions, the Lyon Circuit Court entered another order in April 2010 -- "the second bar order" -- which specifically prohibited the Cabinet from proceeding with its ACR-based claims against Rogers and Federal. The Lyon Circuit Court ruled that the Cabinet had been a member of the class addressed by the class settlement and that the prison had received adequate notice of the settlement proceedings. The court concluded that as a member of the settlement class, the Cabinet's claims against Rogers and Federal were finally resolved by the class action settlement -- regardless of whether it had participated in the distribution of the settlement funds. Thus, the Cabinet was enjoined from pursuing its tort claims against Federal and Rogers. The Lyon Circuit Court specifically determined that the Cabinet was not barred from pursuing its claims in the Franklin Circuit Court action against parties other than Federal and Rogers. The claims against Rogers were dismissed with prejudice by the Franklin Circuit Court on June 6, 2011.
After entry of the Lyon Circuit Court's second bar order, Pinnacle argued in the Franklin Circuit Court action that the Cabinet's failure to participate in the class settlement had effectively extinguished the potential indemnity and contribution claims of Pinnacle against its subcontractor, Federal. However, Pinnacle had not asserted those claims against Federal in the Franklin Circuit Court action. Pinnacle also contended that the Cabinet's failure to mitigate its losses by participating in the class settlement precluded entry of an award in favor of the Cabinet against Pinnacle in the Franklin Circuit Court action.
In response, the Cabinet argued that tort claims against Federal Materials and Rogers were barred by the economic loss doctrine; that Pinnacle was not entitled to any apportionment of fault to either of these parties; and that not participating in the class action settlement proceedings did not constitute a failure to mitigate damages.
Next, Pinnacle filed a motion in Franklin Circuit Court for leave to file a cross-claim against Federal. Pinnacle argued that Federal had provided concrete for the prison project that eventually displayed certain cracking that is characteristic of damage caused both by ACR and by Alkali Silicate Reactivity (ASR). Pinnacle disclosed that its own expert had confirmed the presence of ASR damage inside the Cabinet's correctional facility within slabs on grade and ASR damage below grade in foundations or footings. Pinnacle asserted that Federal's acts or omissions exposed Pinnacle to potential liability to the Cabinet. Pinnacle contended that the proceedings in the Lyon Circuit Court had not extinguished Pinnacle's right to assert cross-claims against Federal for breach of contract and for common law indemnity for numerous reasons: (1) because the terms of the settlement pertained only to claims for ACR damage but not to claims for ASR damage; (2) because Pinnacle had never been made a party to the proceedings in the Lyon Circuit Court; (3) because Pinnacle had never released any claims against Federal; and (4) because Pinnacle had never received any proceeds from the settlement. Pinnacle also sought leave to file a third-party complaint against Penrod Lumber Company, Inc., (Penrod), the fencing subcontractor that had installed cast-in-place concrete footers for the correctional facility's perimeter fence that had since shown signs of ACR damage. Leave was granted, the cross-claims were filed, and both Federal and Penrod filed answers.
In an order entered July 19, 2012, the Franklin Circuit Court determined that the Cabinet had been a member of the settlement class in the Lyon Circuit Court proceedings and that it was obligated either to object to the proposed settlement or to opt in (and submit a claim to participate in the distribution of the settlement funds) or to opt out (thereby preserving its right to pursue any legally viable claims against Federal and/or Rogers). The court determined that the Cabinet's failure to respond in any manner not only jeopardized its own right to compensation as a result of the settlement but also denied Pinnacle protection against exposure to potential liability for the Cabinet's damages by its failure to mitigate them. The court concluded that the Cabinet, "by having breached its duty to mitigate damages from the ACR damages, is foreclosed from pursuing Pinnacle to the same extent it is foreclosed from pursing [Federal] and Rogers. This is a complete and total bar against the [Cabinet] in seeking damages as a result of claims for ACR deterioration damage."
On September 14, 2012, the Cabinet filed a petition for a writ of prohibition before this Court which would have prevented the Lyon Circuit Court from enforcing against it the two bar orders that were entered in the class settlement proceedings. By order entered June 13, 2013, we denied the petition. The Cabinet appealed our order to the Kentucky Supreme Court. The Kentucky Supreme Court affirmed our decision in its opinion entered March 20, 2014.
On October 2, 2014, Pinnacle filed a motion for summary judgment with respect to the Cabinet's remaining claims. Pinnacle now argued that the Cabinet could not show that Pinnacle had breached its contract for the construction of the prison, nor could it establish the existence of any damages attributable solely to the ASR-based claims. Penrod and Federal filed similar motions. Several days later, the Cabinet filed a motion to voluntarily dismiss the ASR-based claims without prejudice.
By order entered on November 20, 2014, the Franklin Circuit Court dismissed the matter in its entirety (including dismissal of the ASR based claims with prejudice), designating the judgment as final and appealable as there appeared no just case for delay. This timely appeal followed.
On appeal, the Cabinet argues that the trial court erred by concluding that its action against Pinnacle must fail. The Cabinet contends that it did not fail to mitigate its damages. In the alternative, the Cabinet argues that the Lyon Circuit Court order cannot be interpreted to have any preclusive effect with respect to its action against Pinnacle because the Commonwealth did not consent to its inclusion in the settlement class and that any attempt to exercise jurisdiction over it without its affirmative consent violates its rights as a sovereign entity. Additionally, the Cabinet contends that the Franklin Circuit Court erred by dismissing its ASR-based claims with prejudice rather than allowing the Cabinet to dismiss them voluntarily without prejudice.
Before addressing the merits of the appeal, we must first dispose of the motion to dismiss filed in this court by Pinnacle on January 30, 2015. Pinnacle contends that the issues raised on appeal have been finally adjudicated adversely to the Cabinet in other proceedings and that consideration of the issues in this forum is precluded by principles of collateral estoppel and by the law-of-the-case doctrine. We disagree.
We do agree that the Cabinet is wholly precluded from advancing any further legal contest with respect to the enforceability of the bar orders of the Lyon Circuit Court. In light of the procedural posture of the case, the Cabinet is indeed enjoined from pursuing its ACR-based claims against Federal and Rogers. However, the issues raised by the Cabinet on appeal primarily concern the potential preclusive effect of the Lyon Circuit Court's bar orders with respect to the litigation that the Cabinet commenced against Pinnacle -- an entity not a party to the class settlement proceeding. The Lyon Circuit Court's second bar order did not purport to address this issue directly other than to note specifically that the Cabinet was not barred form pursing its claims against non-parties -- arguably, Pinnacle. Neither did this Court nor the Supreme Court of Kentucky address the issue with respect to the Cabinet's petition for a writ of prohibition. Instead, as to that motion, we confined our analysis to whether the Cabinet had established the considerable prerequisites for the extraordinary remedy that it sought.
We concluded merely that the Cabinet had not shown that it lacked an adequate remedy on appeal. That analysis is not tantamount to a decision or even a commentary on the merits of any potential appeal available to the Cabinet. Furthermore, the Franklin Circuit Court is the only court to have addressed the alleged failure of the Cabinet to mitigate its damages by not participating in the settlement proceedings before the Lyon Circuit Court. The Cabinet is certainly entitled to pursue an appeal on these issues. Consequently, the motion to dismiss the appeal is hereby denied.
On appeal, the Cabinet contends that Franklin Circuit Court erred in concluding that the Cabinet's failure to mitigate its damages by not participating in the settlement proceedings was a fatal bar to further litigation. We agree.
In its summary judgment, the Franklin Circuit Court concluded that as a member of the settlement class in the Lyon Circuit Court proceedings, the Cabinet was obligated either: to object to the proposed settlement; to opt in and submit a claim to participate in the distribution of the settlement funds; or to opt out, thereby preserving its right to pursue any legally viable claims against Federal and/or Rogers. The court determined that the Cabinet's failure to respond in any manner had prejudiced the indemnity rights of Pinnacle and barred the Cabinet from seeking damages from Pinnacle as a matter of law. We believe that the court erred in so concluding.
The Cabinet's non-participation in the class settlement negotiated in the Lyon Circuit Court had no impact on the rights and responsibilities of Pinnacle. The bar orders of the Lyon Circuit Court did not extinguish any potential indemnity claim, and the Cabinet's alleged injuries were not magnified by its non-participation in the Lyon Circuit Court's class settlement -- both as a matter of fact and of law.
The bar orders of the Lyon Circuit Court did not extinguish any potential indemnity claim since the language of the bar order did not purport to address or to limit the rights of Pinnacle against Federal and/or Rogers. Instead, the parties released under the terms of the class settlement, including Federal and Rogers, were specifically released not only from the claims of the settlement class members, but they were also "discharged and released from any and all claims of subrogation, contribution or indemnity against one another . . . based upon, relating to, or arising out of the Settled Claims . . . that may hereafter be brought by any party to this action or by any other person or entity." Pinnacle was not the owner of an affected structure that had incorporated the defective concrete; therefore, it could not have been a claimant or a releasing party under the terms of the class settlement. As to the Cabinet, the Lyon Circuit Court specifically ruled in its second bar order as follows: "[t]he Finance Cabinet is not barred from pursuing its claims in the Franklin Circuit Court against parties other than Federal Materials and Rogers Group." (Emphasis added.) Just as significantly, perhaps, we note that Pinnacle never asserted a cross-claim against Federal for indemnity related to the ACR damage in the Franklin Circuit Court proceedings.
The value of the Cabinet's alleged injuries was not affected by its non-participation in the Lyon Circuit Court's class settlement so as to prejudice Pinnacle's interests. Under Kentucky law, "[m]itigation of damages is necessary to make sure that the injured party does not receive a windfall." Cherry v. Augustus, 245 S.W.3d 766, 777 (Ky. App. 2006). Furthermore, "[d]amages may be mitigated only in proportion to the aggravation of injuries by the injured person's improper conduct." Carney v. Scott, 325 S.W.2d 343, 347(Ky. 1959). The "wrongdoer always has the burden of proving that some of the consequences of the injuries inflicted by him might have been avoided through proper efforts and the exercise of ordinary care by the injured person." Id. at 345.
The Cabinet's failure to opt out of the settlement had no impact on its ability to pursue claims against Federal and Rogers because the Cabinet could not have pursued contract claims against Federal and Rogers. Its contract was with Pinnacle, the general contractor. The operation of our economic loss rule precluded the Cabinet's recovery against Federal and Rogers in tort for repair costs, lost profits, and any other items that equated to traditional contract damages.
In Giddings & Lewis v. Indus. Risk, 348 W.W.3d 729 (Ky. 2011), Kentucky adopted the already federally announced economic loss rule. Arising in the context of a products liability case, the economic loss rule dictates that the parties' contract is the only remedy or vehicle by which damages of an economic nature (as distinguished from personal injury) may be recovered. This is so even though the losses might arguably have been subject to litigation in tort, products liability, or strict liability. The Giddings court discussed the ramifications of the rule in the following language:
This rule recognizes that economic losses, in essence, deprive the purchaser of the benefit of his bargain and that such losses are best addressed by the parties' contract and relevant provisions of Article 2 of the Uniform Commercial Code .... Thus, costs for repair or replacement of the product itself, lost profits and similar economic losses cannot be recovered pursuant to negligence or strict liability theories but are recoverable only under the parties' contract, including any express or implied warranties. Losses for injuries to people and to "other property," in these commercial transactions, remain subject to the traditional product liability theories .... The economic loss rule marks the border between tort and contract law. (Citations omitted.) (Emphasis added.)Id. at 738.
Thus, pursuant to our economic loss rule, Federal and Rogers were not liable to the Cabinet. Consequently, the purported loss of these claims did not exacerbate any damages that the Cabinet might recover from Pinnacle with whom it had privity of contract.
Additionally, we note the fact that the Cabinet is an agency of a sovereign state. We are persuaded that the court erroneously assigned a preclusive effect arising from the class settlement to this case separately initiated by the Commonwealth against a non-party simply because the Cabinet failed to opt in or out of the previous class settlement.
Sovereign immunity is a "bedrock component" of our American system of government, and it indisputably places limitations on the power of the judiciary. Beshear v. Haydon Bridge Co. Inc., 416 S.W.3d 280 (Ky. 2013). Sovereign immunity limits the power of the judiciary to foreclose the Cabinet's litigation against Pinnacle under the circumstances presented in this case. To do so would impermissibly restrict the Commonwealth's preeminent right to represent its own interests and to protect the public coffers. The provisions of KRS 15.020 require the Attorney General to attend to all litigation in which the Commonwealth has an interest. Assigning preclusive effect in this litigation to the settlement in which the Cabinet was -- at best -- an absent class member would clearly undermine his exclusive authority and the right of the Commonwealth to direct litigation. On this basis as well, we conclude that the trial court erred by denying the Cabinet its right to pursue Pinnacle for its damages.
Kentucky Revised Statutes.
Finally, we address the contention of the Cabinet that the Franklin Circuit Court erred by dismissing its ASR-based claims with prejudice rather than permitting the Cabinet to dismiss those claims of its own accord and without prejudice. We agree that the court erred on this issue.
The evidence of record indicates that the Cabinet might eventually be able to establish a breach of contract and the existence of micro-cracking within the concrete installed at the facility directly attributable to the ASR defect inherent in the concrete. However, the evidence indicates that an ASR-related failure of the concrete occurs slowly over more time than is presently involved. As a result, the Cabinet admitted that it could not presently demonstrate that there was significant structural stress and damage causally related to the ASR problem. As a consequence, the Cabinet sought to dismiss those claims without prejudice until an alleged failure attributable to ASR might become manifest. However, the Franklin Circuit Court dismissed the claims on the merits with prejudice.
In Louisville Label, Inc., v. Hildesheim, 843 S.W.2d 321 (Ky. 1992), the Supreme Court of Kentucky observed that a plaintiff's request for a voluntary dismissal essentially is a plea for equitable relief. Under appropriate circumstances, the trial court may deny the requested relief, but it may not transform a voluntary dismissal into a dismissal upon the merits; i.e., with prejudice. Id. at 325. In this case, the Franklin Circuit Court opined (and indeed perhaps properly in light of its broad discretion) that the motion should be denied. Nonetheless, the court ordered the dismissal of the claim with prejudice instead and denied the Cabinet's motion for leave to voluntarily dismiss as moot. We conclude that this alternative form of adjudication is not permitted under the provisions of CR 41.01(2).
Kentucky Rules of Civil Procedure. --------
In summary, we vacate the summary judgment and the order dismissing with prejudice the ASR-related claim. We remand for additional proceedings on these issues.
ORDER
We deny the pending motion to dismiss this appeal.
ALL CONCUR Entered: February 24, 2017
/s/_________
Judge, Court of Appeals BRIEF FOR APPELLANT: Patrick W. McGee
Frankfort, Kentucky BRIEF FOR APPELLEE: PINNACLE, INC. AND GREAT
AMERICAN INSURANCE
COMPANY
Robert E. Maclin III
Lexington, Kentucky THE FEDERAL MATERIALS
COMPANY, INC.
Edmund Scott Sauer
Nashville, Tennessee PENROD LUMBER COMPANY,
INC. A/K/A PENROD FENCE &
LUMBER COMPANY, INC.
Licha H. Farah Jr.
Lexington, Kentucky