Federal District Court Grants Summary Judgment to Consultant in Malpractice Action

Earlier this year, a federal district court denied a motion to dismiss filed by a consultant in Hawaii Motorsports Investments v Clayton Group Services. Because the decision involved a motion to dismiss, the court was not ruling on the merits of the case but simply if the plaintiff had alleged sufficient facts to proceed with the case.

Recently, the defendant filed a motion for summary judgment and this time, the court ruled in favor of the defendant, holding that the consultant was not liable to the purchaser of the property.  Since this parties had the opportunity to conduct discovery since the motion to dismiss, the recent opinion also contains some additional interesting facts that not only shed light on this case but provide some helpful lessons.

In this case, Hawaii Motorsports Center Limited Partners ("HMC") had leased the Hawaii Raceway Park from the Campbell Estate since 1988. HMC decided to purchase the site in 2005 for $13MM and then flip the property by way of an assignment of rights to Irongate Wilshire, LLC ("Irongate") for approximately $20 million. Irongate then retained the defendant to perform a phase 1 which identified several environmental conditions. The consultant orally advised Irongate that the remediation costs could range from $200,000 to $4 million. Irongate was concerned that the contamination could impact its ability to develop the site into individual lots. On October 25, 2005, Irongate disclosed the results of the phase 1 and the remediation estimate to one of the principals of HMC

Around the same time, Campbell advised HMC that for tax reasons, HMC could not simply assign the property but had to have an ownership interest. As a result, on October 26th, HMC and Irongate signed a letter of intent to form a joint venture to purchase the property whereby an Irongate special purpose entity would contribute $13,200,000 in the form of a letter of credit in favor of Campbell. In return for Irongate's payments, HMC would assign its interest in the property to the joint venture. Instead of receiving $7 million, HMC would receive four payments of $250K.

On October 31st, the defendant sent an email to Irongate providing its cost estimate. The defendant indicated that the $200K remediation cost was the “Likely Scenario” with  $1 to 2 Million as the “Bad Case” and $4 Million as the “Extreme Worst Case” scenario.

The joint venture arrangement was finalized on November 1st whereby Hawaii Raceway Investors, LLC  The defendant emailed a copy of its phase 1 to Irongate on November 4th and a proposal for a Phase II on November 16th. The phase 2 proposal indicated that the defendant would "perform this project under previously negotiated terms and condition by and between [BV] and HMC Irongate Hawaii Raceway Investors LLC. The reference to JV entity was in error since the previously negotiated terms and conditions had been agreed in September 2005, before the joint venture was formed.  

Irongate forwarded the phase 2 proposal to HMC on November 22nd who retained its own consultant to evaluate the proposal. HMC’s consultant concluded that the majority of recommendations were inaccurate, stating, "Having failed to complete the minimum level of research required during Phase 1, [the defendant] should have recommended further record reviews and interviews  [instead of recommending] a Phase II ESA." He said that remediation cost estimate of $200,000 to $4 million was "entirely lacking in credibility or reliability and should be considered a guess.

HMC filed a lawsuit against the consultant, claiming the firm was professional negligence,  negligent misrepresentations, tortious interference with HMC's prospective business advantage as well as slander of title. Although the consultant was retained by Irongate and the report was addressed to the buyer, the plaintiff asserted that the consultant knew the parties would use its report to negotiate the terms of their agreement. In its ruling on the motion to dismiss, the court found that the plaintiff/seller had alleged sufficient facts indicating it was an intended beneficiary of the report and that it was foreseeable that it would be damaged if the report was inaccurate. The court also found that although the report expressly provided that only Irongate could rely on the report, said it was unclear from the record created at that time if the plaintiff knew of the limitation or had reason to know if could not rely on the report.

The defendant sought summary judgment on all counts. On the professional negligence claim, HMC argued that the defendant owed a duty arising from the "special relationship" between an environmental consultant and a party that may have seen the environmental report prepared by the environmental consultant. The court said the factors in had to consider in determining if a duty included if there was a special relationship existed between the parties, if the harm was foreseeable, the degree of certainty that the injured party suffered injury, the closeness of the connection between the defendants' conduct and the injury suffered, the moral blame attached to the defendants, the policy of preventing harm, the extent of the burden to the defendants and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved.

The court found that HMC had not established any facts to support a special relationship between it and the defendant. The court said there had not been any no contract between HMC and the defendant, that HMC was not an intended third-party beneficiary of the contract between the defendant and Irongate, and that there was simply no evidence that the defendant intended the report, information in it, or its estimates as to remediation to be given to HMC.

Likewise, the court found that HMC had not established any facts showing the harm foreseeable. The court noted that after HMC obtained the right to buy the Campbell Estate's property, HMC had many months to find financing and hire a consultant to prepare an environmental assessment. Moreover, since HMC was the lessee on the property for nearly 20 years, the court said HMC had ample opportunity to discover the condition of the property. Under those circumstances, the court held that HMC had no reason to be affected by inaccurate information about environmental conditions on the property, and that the defendant could not have foreseen any such impact on HMC.

As to the degree of certainty that HMC suffered harm and the closeness of the conduct and the injury suffered, the court concluded that it was, at best, unclear whether HMC suffered any injury because of the defendant’s allegedly faulty information. While HMC claimed it was injured because Irongate reduced the price it was willing to pay for the property, the court noted that Irongate initially offered to pay HMC $7 million for the property under the express condition that Irongate could withdraw from that offer at any time. Additionally, the court said, change in price flowed from the change in the structure of the deal to a as a joint venture.

Regarding the moral blame and policy factors, the court said there was no evidence that the defendant’s actions were immoral or blameworthy, or that imposing a duty would prevent any harm. In contrast, the court said that HMC could have easily countered any adverse report by hiring its own environmental consultant. Indeed, the court suggested that if HMC lacked independent knowledge of the status of the property it had occupied for so long, it would have prudent to commission its own report.

Finally, with respect to the consequences to the community of imposing a duty to exercise care and any resulting liability for the risk involved, this court concluded that imposing such a duty would create additional burdens for the community. The court said that if a consultant could he held liable to a third party that the consultant never intended to benefit, then  that consultant will surely increase the cost of any assessment to cover the risk and the likely cost of greater insurance

On the claim for negligent misrepresentation, the court began its analysis by noting that Hawaii courts have  limited the scope of liability for negligent misrepresentation to person that a defendant intended to benefit or knew the recipient intended to transmitted the information to another person. On the first factor, the court said there was simply no evidence that the defendant intended to benefit HMC. The court said there was  no evidence that the defendant ever intended to transmit its report directly to HMC since the defendant gave its report to Irongate only after Irongate and HMC had decided to form a joint venture and had agreed on the reduced price. There is also no evidence that HMC saw BV's draft summary of the report, dated November 3, 2005, before the formation of the joint venture or that HMC ever saw the report prior to the formation of the JV.

Turning to whether the defendant could be liable to HMC based on any knowledge that Irongate intended to supply the results of the phase 1 and the cost estimates to HMC, the court noted that during the time Irongate was negotiating with HMC and finalizing the acquisition, the defendant did contact HMC to conduct a site inspection of the property and likely anticipated that its conclusions would be transmitted to HMC. However, the court found there was no evidence that the defendant knew or had reason to expect that Irongate or anyone else intended to benefit HMC by sharing the report or the cost estimates with HMC.  

Even if there were evidence creating a factual question if the defendant knew that Irongate would transmit information to HMC for HMC's benefit, the court said HMC could not prevail on its negligent misrepresentation because there is no evidence that HMC reasonably relied on any such information since HMC’s own testimony was that its officials thought all along that the conclusions were false or inaccurate. To the extent HMC asserted that it relied on defendant’s, the court went on, such reliance was unreasonable. Moreover, the court said, HMC knew about   the environmental condition of the property or could have hired its own consultant. Finally, the court found there was no evidence that HMC relied on BV's environmental findings and estimates before agreeing to form a joint venture with Irongate. Instead, HMC agreed to the joint venture because it could potentially profit from the deal, and because it had to finalize its deal to preserve the option of buying the property from Campbell Estate.