844 F. Supp. 832 (1994) | Cited 0 times | D. Maine | February 23, 1994

GENE CARTER, Chief Judge


This civil action arises out of a failed real estate construction project. The original Plaintiffs, and now Counterclaim Defendants, Aliberti, LaRochelle & Hodson Engineering, Inc. and Aliberti, LaRochelle & Hodson Construction Management, Inc. filed this action on the theories of mechanics lien, breach of contract, and quantum meruit. The Federal Deposit Insurance Corporation ("FDIC") 1" counterclaimed for negligent misrepresentation and negligence against Engineering and Construction Management. The FDIC also complained against Third-Party Defendant Donald LaRochelle on the same theories. The original claims filed by Plaintiffs Aliberti, LaRochelle & Hodson Engineering, Inc. and Aliberti, LaRochelle & Hodson Construction Management, Inc. have been dismissed with prejudice. See Docket No. 73. Thus, the only issues remaining involve the counterclaims and third-party claims.

The case was tried without a jury. Based on the testimony at trial and the exhibits submitted in evidence, the Court makes the following findings of fact and conclusions of law.


In the spring of 1988, First Meridian Group ("the Developer") was making plans to build a 180 unit condominium/motel project in Old Orchard Beach, Maine. The Developer contracted with two entities for the construction of the Rainbow/Seabreeze project: Aliberti, LaRochelle & Hodson Engineering ("Engineering"), and Aliberti, LaRochelle & Hodson Construction Management ("Construction Management"). 2" Paul Beaudette was the principal representative of Construction Management. Beaudette was vice president of Construction Management and the project manager on this project. Tr. Vol. I at 329, 429. Ernest A. Ray also represented Construction Management. 3" Donald LaRochelle represented Engineering on this project. 4" Tr. Vol. II at 5. John Aliberti, president of Engineering, was also involved in the project on behalf of Engineering.

Edward McCormick, senior vice president of New Heritage Bank ("the Bank"), was first approached by the Developers about financing the Rainbow/Seabreeze project in August or September of 1988. Tr. Vol. I at 18. The first meeting between the Bank and the Developer, represented by Thomas Laudani and Chris LeSaffre, took place sometime in September 1988. Tr. Vol. I at 20. The project the Developers first described to the Bank required financing in the neighborhood of $ 10 million. Tr. Vol. I at 20. McCormick told the Developers that the project cost far exceeded the lending limits of the Bank. Tr. Vol. I at 20.

In subsequent meetings, the Developers proposed the possibility of streamlining the project temporarily to accommodate the Bank's lending limits. Tr. Vol. I at 22, 25. By late October, the Developers presented the Bank with a revised plan to downsize the project to 45 condominium/motel units at a cost of approximately $ 900,000. Tr. Vol. I at 22-23. The idea was not to eliminate permanently the other part of the project, but to undertake the construction in phases in order to permit financing within the lending limits of the Bank. Tr. Vol. I at 22.

In early November, the Developer presented the Bank with a reduced budget of $ 918,000 which was to cover the cost of construction for the first 45 units of the project, or "Phase I." Tr. Vol. I at 23, 28. The Bank's financing was to purchase the property and complete construction of three buildings each consisting of fifteen condominium/motel units. Tr. Vol. I at 28; Ex. 44. The Developer wanted to have Phase I of the project operating and economically self-sustaining by the summer so that unit rentals could generate sufficient income to cover the debt service on the loan. Tr. Vol. I at 23, 26.

The Bank was interested in financing this phase of the project and it began the process of what McCormick described as due diligence -- where the bank investigates the economics of the project and calculates the loan-to-value ratio in order to determine the feasibility of the project. Tr. Vol. I at 34. As part of this investigation, the Bank looked at the personal financial statements of the individual Developers and assessed the projections for the average rental income which could be generated from the completion of Phase I, in the event that subsequent financing was delayed. Tr. Vol. I at 34-35. The Bank also reviewed the contracts between the Developer and Construction Management and Engineering. Tr. Vol. I at 153-54, 157.

Next, the Bank hired Ron Russo, an experienced lender's inspector, in order to verify the construction information. Tr. Vol. I at 46, 52, 236, 404. The Bank relied a great deal on Russo for the technical aspects of the construction project. Tr. Vol. I at 129. After looking at the Means Estimating Handbook, a construction industry reference book, Russo concluded that motels across the country could be built in the price range proposed by the Developer. Ex. 166; Tr. Vol. I at 238, 240. This conclusion was reinforced by research of construction costs for projects that Russo had been involved in previously. Tr. Vol. I at 240.

The Bank and Russo planned to meet with the Developer and the construction professionals. Tr. Vol. I at 53. The Bank needed Russo at the meeting because of his construction expertise to talk to the construction professionals as well as to review the budget and costs. Tr. Vol. I at 57-58, 242. The Developer informed Construction Management and Engineering about the meeting. Tr. Vol. I at 460. Beaudette told the Developer that Construction Management would be prepared to answer any questions the Bank had about the project. Tr. Vol. I at 445.

In the meantime, the Bank's loan committee issued a commitment letter to the Developers with a number of conditions attached to it. Ex. 44. Although the loan committee voted to approve the loan, final approval was based on compliance with the contingencies outlined in the commitment letter. Tr. Vol. I at 137. Appended to the commitment letter was a budget provided by the Developer with line item costs and the total project budget of $ 918,000 (therein and hereinafter "schedule B budget"). Ex. 44 schedule B. The commitment letter, dated December 14, 1988, was picked up by the Developer from the Bank. Engineering and Construction Management also received a copy of the commitment letter from the Bank. Tr. Vol. I at 55, 456; Tr. Vol. II at 21. After reviewing the schedule B budget, Construction Management notified the Developer that the budget contained insufficient money for each line item, and that there were line items missing such as the elevator, Construction Management fees, general costs, and winter conditions. The Developers told Construction Management that this was just an interim budget and not to worry about the missing budget items. Tr. Vol. I at 95, 461; Exs. 137, 141.

The meeting requested by the Bank was scheduled for the afternoon of December 20, 1988, at the offices of the Developer in Saco, Maine. Tr. Vol. I at 56. Earlier that day a project meeting was held between Beaudette, LaRochelle, and the Developers. Tr. Vol. I at 466-67. Financing was discussed at this meeting, Tr. Vol. I at 467, and the issue of the insufficiency of the budget came up again. 5" Tr. Vol. I at 462. The Developer again explained they were "not to worry about it"; that this was an interim budget, and that the full financing package would encompass all the costs. Tr. Vol. I at 461.

When McCormick and Russo arrived, the Developer and the construction people were still in the project meeting. Tr. Vol. I at 57. Shortly thereafter, the meeting with the Bank got under way. Present at the afternoon meeting were McCormick, Russo, LaRochelle, Beaudette, and representatives of the Developer. Tr. Vol. I at 58, 225-26. The Developer led off the meeting, stating that the purpose of the meeting was to make sure that everything in the commitment letter was covered to the Bank's satisfaction. Tr. Vol. I at 226-27, 373. The Developer then gave an overview of what the project entailed. Tr. Vol. I at 404, 471. McCormick told everyone, at the outset, that he had to verify the cost estimates and the time frame of the project. 6" Tr. Vol. I at 228-29, 373. He then described the Bank's understanding of the project -- the downsized phase of the project, the cost of the project, the permits necessary for construction, and certain site work and underground work. Tr. Vol. I at 59-60. Russo explained his role in the project as monitoring the progress of construction for the Bank. Tr. Vol. I at 62, 83.

During the meeting, information came out that dramatically changed McCormick's understanding of how the project was to be managed. Tr. Vol. I at 63. The Developers explained that they could not comply with the commitment letter's requirement for a bonded general contractor, because of the nature of the construction process. Tr. Vol. I at 63, 65, 75, 229, 471-72. They explained that this was a fast track project, using a construction manager. Tr. Vol. I at 66; Tr. Vol. II at 17. McCormick's prior experience was with construction contracts involving a fixed price and bonding. Tr. Vol. I at 24. The Developer explained that under construction management, it is not necessary to have a complete set of detailed drawings before construction starts, unlike projects managed by a general contractor who needs a full set of drawings in order to put the job out to bid. Tr. Vol. I at 250.

Overall, the construction management process was presented to the Bank as an advantageous way to run the project because of its flexibility in terms of both time and cost. Tr. Vol. I at 64-66, 230, 483. Construction Management and Engineering presented themselves as a team capable of controlling the project costs. Tr. Vol. I at 64, 252. The advantages of this system were represented to be that the construction professionals could do the designs on schedule so that materials could be ordered in a timely manner. Tr. Vol. I at 249. Construction Management's responsibilities were to put information out to bid and to manage the ongoing work. Tr. Vol. I at 252. If Construction Management had a hard time getting bids within an acceptable range, then they would ask Engineering to redesign that part of the project. Tr. Vol. I at 252. Engineering's responsibilities included controlling costs by redesigning part of the project to compensate in one area for overruns in other areas of the budget. Tr. Vol. I at 250-52.

Everyone at the meeting had a copy of the schedule B budget, Tr. Vol. I at 62, 253. The budget consisted of twenty-four items denoting the "hard costs" of construction. Tr. Vol. I at 29. Ex. 44, schedule B. Hard costs included those items of construction directly related to acquiring materials and equipment and installing them on site. Tr. Vol. II at 60. In other words, hard costs were the actual costs of completing the structures. Construction Management fees and costs associated with extra work due to winter conditions fell into the definition of "soft costs." Tr. Vol. I at 29, 477-78. The Developer announced that the soft costs would be taken care of by their organization and that, therefore, those costs were not included in the budget. 7" Tr. Vol. I at 31, 69-70, 255, 372, 478. Russo reviewed the schedule B budget line items as well as the total project cost estimate and received assurances that the numbers were accurate. Tr. Vol. I at 79-80, 230-32, 253-56, 408-409.

Russo also discussed the requisition process with the construction professionals. Tr. Vol. I at 473. After Construction Management and Engineering submitted a requisition, Russo would provide commentary on that requisition and the Bank would pay as advised. Tr. Vol. I at 85, 268. Russo requested that Construction Management and Engineering use the American Institute of Architects (hereinafter "AIA") forms for the requistions. Tr. Vol. I at 261-62, 473. Beaudette told Russo that he would use a computer-generated requisition form similar to the AIA form. Tr. Vol. I at 474. At the meeting, Construction Management and Engineering were told that if the project costs changed, then the change in cost should be noted on the requisition form. Tr. Vol. I at 264-65.

Before the meeting concluded, Russo and McCormick discussed the project out of earshot of the other participants. Russo told McCormick that in his opinion, "there [was] some risk," Tr. Vol. I at 259, and that costs could go as high as $ 1.1 million for a job of this type. Tr. Vol. I at 259-260, 406. Therefore, McCormick knew that the $ 918,000 was not a guaranteed figure. Tr. Vol. I at 108. However, Russo and McCormick received assurances from the Developer, Beaudette, and Larochelle on the accuracy and feasibility of the budget. Tr. Vol. I at 67-69, 77. McCormick thought there might be concern about who was required to pay the soft costs. As a result, McCormick reiterated that the $ 918,000 budget did not include any monies for soft costs. Tr. Vol. I at 69.

After the December 20 meeting, McCormick reported back to the loan committee and discussed changes in the loan -- the fact that it would not be bonded and that bidding on individual construction items had not been completed. Tr. Vol. I at 107-108. The Bank waived the condition of a bonded general contractor as well as other conditions of the commitment letter that could not be complied with because of the construction management nature of the project. Tr. Vol. I at 78, 120.

The loan closed on January 6, 1989. Tr. Vol. I at 81, 83. The promissory note manifested a commitment to lend up to $ 1,700,000 to the Developer. Ex. 63; Tr. Vol. I at 130. After the loan was closed, the Bank began making advances pursuant to the requisitions. The requisitions were signed by representatives of both Construction Management and Engineering, including LaRochelle. Tr. Vol. I at 83-86, 264; Ex. 84. The signatures on the requisitions attested to the accuracy of the document, Tr. Vol. I at 265, and that the signatories still had confidence in the $ 918,000 total project budget. Tr. Vol. II at 73-74, 77. When a requisition was received, Russo would inspect the site to determine if the requisition represented completed work authorized by the budget. If it did, Russo would recommend in his inspection report that the Bank pay the amount requested. Tr. Vol. I at 83-84.

After the first month, Russo became concerned that the project was in trouble, but the requisitions continued to display the $ 918,000 number attested to by the signatures of representatives of Construction Management and Engineering. Tr. Vol. I at 84, 271-72. Shortly thereafter, Russo recommended that the Bank make no further payments. After visiting the site on March 3, 1989, Russo wrote a project inspection report to the Bank, stating that "although requisition #4 does represent work completed, I can not [sic] approve any further requisitions until AL&H has completed the bid process and construction cost for project become fixed." Ex. 113. Within a week, a meeting took place at which Construction Management presented Russo with a revised budget that it had developed with a total project cost of approximately $ 1,700,000. Ex. 115; Tr. Vol. I at 276, 492. Many of the line items from this budget had not appeared on the schedule B budget. Tr. Vol. I at 283; Ex. 115. After a series of unsuccessful meetings between representatives of the Bank, the Developer, Construction Management, and Engineering, work on the project was suspended. 8" Ex. 117, 123; Tr. Vol. I at 402-403. Sometime in March, the Bank and the Developer agreed to stop the project. Ex. 132; Tr. Vol. I at 89, 98.

The Developers were unable to get the project underway thereafter and had drawn $ 1,251,762.38 from the $ 1,700,000 in available loan money. Tr. Vol. I at 105; Ex. 77. The property was advertised for sale and sold at a foreclosure auction on January 25, 1990. Tr. Vol. I at 178-79, 223. The Bank purchased the property on its bid of $ 951,000. Tr. Vol. I at 99-102.



The Court understands the FDIC's claim of negligent misrepresentation to be based in four general categories: (1) statements that the project could be completed for approximately $ 918,000; (2) failure to disclose knowledge of missing line items on schedule B; (3) failure to disclose knowledge that some of the line items from schedule B were insufficient based on previous cost estimates; and (4) false statements of the total project cost on the requisitions. 9"

1. The Legal Standard Under Maine Law

In Chapman v. Rideout, 568 A.2d 829 (Me. 1990), the Law Court adopted section 552 of the Restatement (Second) of Torts. Section 552 provides:

One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

Restatement (Second) of Torts § 552(1) (1977).

First, it is clear that both Construction Management and Engineering had a pecuniary interest in having the Bank extend the construction loan to the Developer. Testimony at trial established that Construction Management became concerned about the financing after the Casco Bank financing fell through in October 1988. 10" Tr. Vol. I at 446. Construction Management agreed to continue to work on the project in hopes that the Developer would obtain financing. Tr. Vol. I at 446. In early December, the Developer told Construction Management and Engineering that the scope of the project was to be reduced to three buildings. Tr. Vol. I at 447. By this time, Construction Management and Engineering were concerned that their fees were not going to be paid. Tr. Vol. I at 447, 453-54. By early December 1988, Construction Management and Engineering were owed approximately $ 76,000. Tr. Vol. I at 454. Engineering and Construction Management threatened to resign from the project because of the Developer's delinquent payments. Tr. Vol. I at 76, 314; Ex. 40 (letter from Aliberti to the Developers dated December 6, 1988, states that both AL&H entities are suspending work until they are paid the $ 76,000 owed by the Developer). Without the financing from the Bank, Engineering and Construction Management risked nonpayment of their overdue fees.

2. Misrepresentations at the December 20 Meeting

The FDIC contends that at the December 20 meeting, representatives of both Engineering and Construction Management made statements regarding the viability of the total project which they knew to be false. Moreover, they failed to disclose that they knew some hard costs of construction were missing from the budget and that the budget presented to the Bank was inadequate based on their own estimates. Defendants counter that they gave the Bank only "opinions" about cost estimates which are not actionable under the law of negligent misrepresentation.

The evidence at trial established that the schedule B budget originated with the Developers. Nevertheless, on December 14, after receiving a copy of the Bank's commitment letter, both Engineering and Construction Management recognized that line items were missing and that a number of line items were insufficient as stated. Tr. Vol. I at 456-58. Beaudette testified that after he discovered the errors in the schedule B budget, he showed it to Ray and Aliberti. They agreed with Beaudette's assessment that there were line items missing and that the value engineering figures that they had produced were not contained in schedule B. Tr. Vol. I at 458-59. Although Beaudette testified that, at the time, he did not know the budget contained insufficient money for each line item, 11" Tr. Vol. I at 459, Construction Management admitted that it alerted the Developer before the December 20 meeting that the budget contained insufficient money for each line item, and that there were line items missing. Ex. 176, ques. 173, 174. Moreover, at trial Beaudette reviewed a letter prepared by Aliberti on or about May 12, 1989, which included his handwritten changes. Beaudette testified that the letter accurately stated that Engineering and Construction Management had alerted the Developers when they received the commitment letter that there was insufficient money for each line item and that there were line items missing altogether. 12" Tr. Vol. I at 504-506; Ex. 141. Therefore, the evidence clearly established that both Engineering and Construction Management knew some hard costs of construction were missing from the budget and that the budget presented to the Bank was inadequate based on their own estimates.

This conclusion is reinforced by evidence that on December 20, just prior to the meeting with the Bank, Beaudette, in LaRochelle's presence, again brought up the insufficiency of the budget. Tr. Vol. I at 462-63, 502. Construction Management and Engineering were fully aware of the insufficiency of the budget well in advance of the December 20 meeting. Both Construction Management and Engineering were involved in estimating costs of various aspects of the project before the December 20 meeting. 13" Tr. Vol. I at 22-23, 323. This conclusion is consistent with their duties under their contracts with the Developer. 14" Ex. 6, 22; Tr. Vol. I at 291, 299-301; Tr. Vol. II at 148. Moreover, one of the Developers testified that Construction Management was involved in establishing specific line items on schedule B. Ex. 187; Tr. Vol. III at 55-56. Engineering provided estimates for at least the steel components of the project. Tr. Vol. III 127.

The fact that there were items missing from the budget was later borne out by the comparison of the schedule B budget with the revised construction budget projecting the cost to be approximately $ 1,700,000 (hereinafter "March 10 budget"). The line items in the March 10 budget are broken down into finer detail than the line items in schedule B. Ex. 159. In other words, most line items in the March 10 budget are subsumed within the more generalized categories of the schedule B budget. n15 Tr. Vol. I at 420; Tr. Vol. II at 60-61. Testimony at trial established that it was reasonable for Russo to assume that some of the numbers broken down into two or three categories in the later budget were encompassed in one figure on schedule B. Tr. Vol. I at 494-96; Tr. Vol. II at 60-61. The Court concludes, then, that it was reasonable for the Bank to assume that the additional items in the March 10 budget were included in the schedule B budget. n15 LINE ITEM SCHEDULE B BUDGET MARCH 10 BUDGET Schedule B budgetMarch 10 budgetSitework $ 107,500Sitework $ 125,500Site Winter Conditions 19,000Steel 150,000Steel 187,577Stairs and Rails 30,000Concrete 37,500Concrete 32,976Concrete Flatwork 5,000Masonry 8,500Sewer Connect 55,800Sewer Connect 55,800Framing 137,500Framing Labor 95,000Materials/Doors 140,000Siding Labor 25,000Windows 44,000Windows 65,700Plumbing 27,500Finish Plumbing 16,000Plumbing u/g 16,426Plumbing a/g 110,000HVAC 46,500Sprinkler 23,250Sprinkler 30,500Electric 22,500Finish Electric 19,000Electric 142,000Insulation 17,500Insulation 13,000Drywall 45,000Interior Paint 20,000Drywall & Interior Paint 105,500Alarm System 36,000Finish Carpentry 18,500Finish Carpentry 20,000Exterior Paint 15,000Exterior Paint 25,000Kitchen Cabinets 27,500Kitchen Cabinets & Millwork 94,048Appliances 15,000Roofing 20,000Roofing 45,000Mansard Roofing 40,000Vinyl Flooring 2,500Carpet (labor) 6,000Carpet (materials) 14,000Flooring 31,848Landscaping 30,000Landscaping 60,000Bath Accessories 4,000Demolition 21,880Elevator 12,950Testing and Inspection 3,750General Conditions 104,000TOTAL $ 918,050 $ 1,705,955

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