HKS Architects v. MSM Enterprises , 2021 UT App 70 ( 2021 )

2021 UT App 70THE UTAH COURT OF APPEALS
HKS ARCHITECTS INC.,
Appellant,
v.
MSM ENTERPRISES LTD, REAL ESTATE DEVELOPMENT ADVISORS
LLC, R. SCOTT MCQUARRIE, HOWARD BASHFORD, RONDO
FEHLBERG, AND TIMOTHY FORSTROM,
Appellees.
Opinion
No. 20200043-CA
Filed July 1, 2021
Fourth District Court, Provo Department
The Honorable Kraig Powell
No. 190400965
Craig C. Coburn and Steven H. Bergman,
Attorneys for Appellant
Jared D. Scott, Attorney for Appellees
JUDGE GREGORY K. ORME and authored this Opinion, in which
JUDGES MICHELE M. CHRISTIANSEN FORSTER and DIANA HAGEN
concurred.
ORME, Judge:
¶1 HKS Architects Inc. (HKS) challenges the district court’s
dismissal of its complaint against MSM Enterprises, LTD (MSM),
Real Estate Development Advisors, LLC (REDA), R. Scott
McQuarrie, Howard Bashford, Rondo Fehlberg, and Timothy
Forstrom (collectively, Appellees) for failure to state a claim
upon which relief may be granted. We affirm.
HKS Architects v. MSM Enterprises
BACKGROUND1
¶2 In February 2015, Bashford organized 12x12 NW LLC
(12x12) “as a single purpose, single member, manager-managed,
Utah limited liability company for the avowed purpose of
developing property in Utah County.” MSM was 12x12’s sole
member. That same month, 12x12 purchased a plot of land in
Utah County on which it planned to construct an office building.
The purchase price of over $1,579,000 was above market value
and was financed by three promissory notes payable to
Sundance Debt Partners, LLC; Jive Communications, Inc. (Jive);
and Matthew Peterson, a Jive principal. Other than this highly
leveraged property, 12x12 had no other assets. It had no cash,
bank accounts, employees, or business license.
¶3 On March 2, 2015, REDA,2 acting “as agents on behalf of
[12x12],” issued a request for qualifications (the RFQ) seeking
design and construction management services for the project.
The RFQ stated that “[t]he structure is preleased to” Jive, “a
growing high-tech company.” HKS responded to the RFQ and
submitted proposals in April and May 2015, which 12x12
accepted. McQuarrie, the manager of MSM,3 signed the
1. The facts of this case are taken from HKS’s complaint, which
“we accept . . . as true” in reviewing a motion to dismiss for
failure to state a claim. Erickson v. Canyons School Dist., 2020 UT
App 91, ¶ 6, 467 P.3d 917 (quotation simplified).
2. Bashford, Fehlberg, Forstrom, and McQuarrie were all
members of REDA.
3. McQuarrie was technically the manager of MSM Ventures, the
general partner of MSM Enterprises, but for ease of reference, we
simply refer to MSM Ventures and MSM Enterprises collectively
as MSM.
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acceptance form but crossed out the words “By [REDA]” and
replaced them with “By 12x12 NW LLC, Manager, R. Scott
McQuarrie.”
¶4 On June 15, 2015, HKS and 12x12 contracted for HKS to
provide design and construction management services. That
same day, “a Project ‘kick-off’ meeting” was held. HKS
representatives met with representatives from construction,
engineer, and real estate companies, along with Bashford,
Fehlberg, McQuarrie, and Forstrom. “At this meeting, 12x12
disclosed that Jive, who had supposedly ‘pre-leased’ the
building, had not, in fact, signed a lease [and] that negotiations
were on-going.”
¶5 On June 23, Bashford informed HKS that Jive would be
signing a lease on the building “within days.” On July 7,
Bashford emailed HKS stating that they were working on getting
money from 12x12’s preconstruction funds and requested that
HKS forward them an invoice for $39,500, which represented ten
percent of HKS’s contracted fees. By July 31, HKS, which had yet
to be paid, emailed McQuarrie inquiring about the late payment.
McQuarrie responded, “[W]e did fix our [line of credit] issues.
Checks will be issued at the beginning of next week.” On August
3, a check for $39,500 was issued to HKS from the account of BTS
Investments, Inc. (BTS).4
¶6 On August 5, HKS invoiced REDA and 12x12 in the
amount of $124,216.63 for work it performed between July 1 and
July 31. Still having not been paid on this invoice, HKS
performed further work in September 2015 on the project at
12x12’s request, relying on promises of payment from REDA and
4. BTS is a Utah corporation that McQuarrie, as its sole
shareholder, “used as a clearinghouse to pay debts incurred by
his various and multiple business entities.”
20200043-CA 3 2021 UT App 70HKS Architects v. MSM Enterprises
12x12 and on their assurances that a signed pre-lease for the
building would “soon” be in place. At the end of September,
“BTS . . . paid REDA $30,000 for unspecified services furnished
for the Project”—a payment that was not disclosed to HKS,
which had still not been paid.
¶7 In October 2015, Bashford informed HKS that Jive had
equity in the project and claimed that problems with Jive were
the reason payment to HKS had been delayed. Between
November 2015 and January 2016, HKS continued to do work on
the project without getting paid and issued three more invoices
to REDA and 12x12, submitting the last invoice on January 19,
2016.
¶8 Finally, on March 10, 2016, Jive signed a lease for the
property. But on May 31, 12x12 failed to file its annual report
with the State, causing its registration as a Utah limited liability
company to expire—a fact not disclosed to HKS. In September of
that year, Bashford and McQuarrie continued to promise
payment to HKS for its services, now totaling $164,000, of which
only $39,500 had been paid. McQuarrie emailed HKS, stating,
“I’m sorry that you’ve had to await payment for the remainder
of what I owe. Please remain confident that you’ll receive
compensation for the efforts you’ve made.”
¶9 No further payment ever came, and HKS sued 12x12 on
January 13, 2017 (the prior suit). While the prior suit was
pending, REDA’s registration as a Utah limited liability
company expired in February 2017. In its complaint in the prior
suit, HKS alleged that 12x12 breached their contract and was
unjustly enriched by HKS’s unpaid services, and that 12x12 still
owed nearly $144,000 for services HKS provided. HKS further
claimed more than $50,000 in lost profits, interest, other costs,
and attorney fees. In May, after initial disclosures were filed and
discovery begun, counsel for 12x12 withdrew and successor
counsel did not appear on 12x12’s behalf. In July, HKS moved
20200043-CA 4 2021 UT App 70HKS Architects v. MSM Enterprises
for summary judgment. 12x12 did not respond, resulting in a
judgment of nearly $200,000 in HKS’s favor.
¶10 Between August 2017 and March 2019, HKS
unsuccessfully sought to collect on the judgment, eventually
leading to issuance of a supplemental proceedings bench
warrant for McQuarrie as 12x12’s manager. On August 28, 2018,
McQuarrie appeared as required, and in the ensuing hearing
HKS learned the following facts: when REDA and 12x12 issued
the RFQ for the project, 12x12 had approximately $1.5 million in
assets and $1.5 million in liabilities; 12x12 had never filed a tax
return; 12x12 had no capital to fund its operations, did not have
any financial reserves to cover potential liabilities, and had no
money to pay HKS for its services, instead relying on anticipated
funds from a construction loan that never materialized; 12x12
never applied for a construction loan; McQuarrie, Bashford,
Fehlberg, and Forstrom owned and operated REDA, which
represented 12x12 in all its meetings with various stakeholders
on the project; 12x12 controlled a bank account under the name
of BTS, which BTS used to pay a total of $132,000 to REDA for
work REDA performed on the project.
¶11 In March 2019, HKS moved to amend its pleading in the
prior suit to add Appellees as defendants, claiming a breach of
implied contract and fraudulent concealment. Appellees
opposed the motion under rules 59 and 60 of the Utah Rules of
Civil Procedure, arguing that they could not be added to the
prior suit because HKS missed the deadline for seeking to alter
or amend the judgment. In response, HKS withdrew its motion.
¶12 On June 13, 2019, HKS filed the complaint at issue in this
case, asserting three causes of action. Its first claim was one for
fraud, alleging that Appellees falsely represented that the office
building was pre-leased to Jive, a “growing high-tech company”;
a signed lease from Jive would be available soon; 12x12 had
acquired preconstruction funds enabling it to pay HKS for its
20200043-CA 5 2021 UT App 70HKS Architects v. MSM Enterprises
services; and 12x12 had a line of credit from which it could pay
HKS. Its second claim was for breach of a contract implied in
law, which was asserted only against REDA.5 As part of this
claim, HKS alleged that REDA requested the work HKS
performed and that by performing the work, HKS conferred a
value of approximately $142,000 on REDA. HKS’s final claim
was for fraudulent concealment, in which it alleged that
Appellees failed to disclose that 12x12 paid more than market
value for the property; 12x12 was a shell entity; 12x12 never filed
a tax return; 12x12 lacked a business license; 12x12 had no cash
reserves, no bank account, and no capital; the property had been
over-leveraged, leaving it with no equity; 12x12 was not the sole
owner of the property; there was no tenant who had pre-leased
the building; 12x12’s sole asset was the over-leveraged property;
12x12 planned to pay HKS by using a construction loan that it
had yet to obtain; BTS would be the entity making payments to
HKS, not 12x12; in September 2015, 12x12 paid REDA $30,000
through BTS; McQuarrie, Bashford, Fehlberg, and Forstrom were
members and managers of REDA; and 12x12 “had no financing
for the project” in the form of a preconstruction loan or line of
credit.
¶13 In response, Appellees moved for dismissal of the
complaint pursuant to rule 12(b)(6) of the Utah Rules of Civil
Procedure, asserting that HKS had failed to state a claim upon
which relief could be granted. Specifically, Appellees argued
that “the statute of limitation bar[red HKS’s] fraud claims
5. As part of its second claim, HKS also alleged that a contract
implied in fact existed between it and REDA. But on appeal,
HKS does not challenge the district court’s dismissal of its claim
on this basis and challenges only the court’s ruling dismissing its
second claim on the ground that no contract implied in law
existed.
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because the alleged misrepresentations and omissions at issue
occurred well outside the three year statute of limitations.”6 See
Utah Code Ann. § 78B-2-305(3) (LexisNexis 2018). Both sides
asked the district court to take judicial notice of the record in the
prior suit, which it did.7
6. Appellees also asserted that claim preclusion and the
economic loss doctrine barred HKS’s complaint. Given our
affirmance of the district court’s order on other grounds, we
have no occasion to consider these alternative rationales
Appellees relied on below and reassert on appeal.
7. Ordinarily, district courts may not consider anything outside
the complaint when ruling on a defendant’s 12(b)(6) motion
without first converting it to a motion for summary judgment.
See Utah R. Civ. P. 12(b)(6) (stating that if “matters outside the
pleading are presented to and not excluded by the court, the
motion shall be treated as one for summary judgment”). See also
Lind v. Lynch, 665 P.2d 1276, 1278 (Utah 1983) (“Even where a
motion is erroneously characterized as a motion to dismiss, if
matters outside the pleadings are presented and not excluded,
the motion is properly treated as one for summary judgment.”).
But, while “a court generally must convert a motion to dismiss to
one for summary judgment when the court considers matters
outside the pleadings, a court need not do so if it takes judicial
notice of its own files and records, as well as facts which are a
matter of public record.” Rose v. Utah State Bar, 471 F. App’x 818,
820 (10th Cir. 2012) (quotation simplified). See also United States
ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 208 (1st
Cir. 2016) (stating that “within the Rule 12(b)(6) framework, a
court may consider matters of public record and facts susceptible
to judicial notice” without converting the motion to one for
summary judgment). Thus, the district court in this case
properly took judicial notice of the filings in the prior case and
(continued…)
20200043-CA 7 2021 UT App 70HKS Architects v. MSM Enterprises
¶14 The court granted Appellees’ motion to dismiss.
Regarding HKS’s first claim, for fraud, the court stated that
the specific facts which [HKS] alleges [Appellees]
fraudulently represented . . . are: (1) that the
building was pre-leased; (2) that 12x12 had
available pre-construction funds and a line of
credit which could be used to pay for [HKS’s]
services; (3) that a signed lease would be available
soon; and (4) that 12x12 would pay [HKS] for its
services.
The court explained that,
according to the Complaint, [HKS] learned on June
15, 2015 that the building was not pre-leased. This
date is more than three years before the filing of
this case, and this claim is therefore barred by the
statute of limitations.
As to alleged misrepresentation number 2,
. . . the Court concludes that [HKS] was given
actual or constructive knowledge that this
statement was false on or before March 19, 2016,
which was 60 days after [HKS] sent the last in a
series of invoices to 12x12, none of which were
paid. This failure to pay, after repeated demands
by [HKS] and corresponding promises to pay by
12x12, reasonably put [HKS] on notice that 12x12
had no funds to pay [HKS]. Even if there were
other conceivable reasons to explain 12x12’s failure
(…continued)
relied on that information in its ruling without converting
Appellees’ motion to one for summary judgment.
20200043-CA 8 2021 UT App 70HKS Architects v. MSM Enterprises
to pay by March 19, 2016, such failure to pay still
put [HKS] on notice that something was not right,
which should have led [HKS] to inquire about the
problem and thereby discover 12x12’s lack of
funds. Because March 19, 2016 is more than three
years before the Complaint was filed in this case,
this claim is barred by the statute of limitations and
accordingly is dismissed with prejudice.
As to alleged misrepresentation 3 . . . and
misrepresentation 4, . . . the Court concludes that
these statements are not representations
concerning a presently existing material fact, but
instead concern future events, and therefore do not
constitute valid grounds for a claim of fraud.
¶15 The court then rejected HKS’s second claim—for breach of
contract implied in law, also known as unjust enrichment—
raised only against REDA. It ruled that “even if REDA did
somehow receive a benefit from [HKS’s] services, and
appreciated that benefit, it would not be unjust for REDA to
retain that benefit because [HKS’s] only legitimate expectation in
exchange for providing the services under the Contract with
12x12 was to be compensated by 12x12” and thus, “under any
state of facts that could be proved in support of [HKS’s] claim,
REDA has not been unjustly enriched by [HKS’s] actions.”
¶16 Regarding HKS’s third and final claim, for fraudulent
concealment, the district court ruled that under Utah Code
section 78B-2-305(3), the three-year statute of limitations barred
the claim because
[HKS] could, and should, have investigated and
learned the corporate structure, ownership,
history, and financial wherewithal of 12x12.
Similarly, [HKS] could, and should, have easily
20200043-CA 9 2021 UT App 70HKS Architects v. MSM Enterprises
learned of the publicly recorded encumbrances on
the Property, its market value, how much 12x12
paid for it, and whether it had other owners. [HKS]
also could, and should, have easily learned the
identity of the owners of REDA by merely asking,
if it wished to know that information.
The only nondisclosed facts set forth [by
HKS] which [HKS] could not have easily
discovered itself by diligent inquiry are [that no
tenant had pre-leased the building; that HKS
would be paid by BTS, not by 12x12; and that BTS
paid REDA $30,000 on September 24, 2015.] But
according to the Complaint, [the] fact . . . that no
tenant had pre-leased the building and . . . that
[HKS] would be paid by BTS, not by 12x12, . . .
were actually discovered by [HKS], thus giving
[HKS] actual, rather than constructive, knowledge,
on June 15 and August 3, 2015, respectively. Both
of these are more than three years before the
Complaint was filed in this case.
As to [the] fact . . . that BTS paid REDA
$30,000.00 on September 24, 2015, the Court
concludes that [Appellees] had no legal duty to
disclose this fact to [HKS], and that this fact
therefore fails to state a valid claim for fraudulent
nondisclosure.
The court dismissed the complaint with prejudice. HKS appeals.
ISSUE AND STANDARD OF REVIEW
¶17 HKS asserts that the district court erred in granting
Appellees’ motion to dismiss for failure to state a claim upon
which relief can be granted. “The propriety of a trial court’s
20200043-CA 10 2021 UT App 70HKS Architects v. MSM Enterprises
decision to grant or deny a motion to dismiss under rule 12(b)(6)
of the Utah Rules of Civil Procedure is a question of law that we
review for correctness.” Erickson v. Canyons School Dist., 2020 UT
App 91, ¶ 6, 467 P.3d 917 (quotation simplified). “Dismissal of a
complaint is proper only if it is clear from the allegations that the
plaintiff would not be entitled to relief under the set of facts
alleged or under any facts it could prove to support its claim.”
Id. (quotation simplified). “Accordingly, on review we accept all
facts alleged as true, and indulge all reasonable inferences in
favor of the plaintiff.” Id. (quotation simplified).
ANALYSIS
¶18 We begin our analysis with a brief overview of the
applicable rules of the Utah Rules of Civil Procedure. We also
explain the framework of the statute of limitations that the
district court applied to dismiss part of HKS’s first claim and the
entirety of its third claim. We then evaluate each of HKS’s claims
against this legal backdrop.
¶19 Although a stricter standard applies to fraud claims, as
explained in paragraph 24, “rule 8(a) of the Utah Rules of Civil
Procedure sets a liberal standard for complaints, requiring only
that a complaint ‘contain a short and plain: (1) statement of the
claim showing that the party is entitled to relief; and (2) demand
for judgment for specified relief.’” America West Bank Members,
LC v. State of Utah, 2014 UT 49, ¶ 13, 342 P.3d 224 (quoting Utah
R. Civ. P. 8(a)). After a complaint has been filed, a defendant
may move under rule 12(b)(6) of the Utah Rules of Civil
Procedure to have the complaint “dismiss[ed] for failure of the
pleading to state a claim upon which relief can be granted.” Utah
R. Civ. P. 12(b)(6). “A dismissal is a severe measure and should
be granted by the trial court only if it is clear that a party is not
entitled to relief under any state of facts which could be proved
20200043-CA 11 2021 UT App 70HKS Architects v. MSM Enterprises
in support of its claim.” America West, 2014 UT 49, ¶ 13
(quotation simplified).
¶20 Additionally, the general rule is “that affirmative
defenses, which often raise issues outside of the complaint, are
not generally appropriately raised in a motion to dismiss under
rule 12(b)(6).” Tucker v. State Farm Mutual Auto. Ins., 2002 UT 54,
¶ 7, 53 P.3d 947. But in some cases, “the existence of the
affirmative defense may appear within the complaint itself,” id.
¶ 8, or in other documents of which the district court took
judicial notice, see Rose v. Utah State Bar, 471 F. App’x 818, 820
(10th Cir. 2012) (holding that a district court may, in the context
of a rule 12(b)(6) motion, “take[] judicial notice of its own files
and records, as well as facts which are a matter of public
record”) (quotation simplified). “For example, a complaint
showing that the statute of limitations has run on the claim is the
most common situation in which the affirmative defense appears
on the face of the pleading. The inclusion of dates in the
complaint indicating that the action is untimely renders it subject
to dismissal for failure to state a claim.” Tucker, 2002 UT 54, ¶ 8
(quotation simplified). Thus, “a defendant may raise a statute of
limitations defense in a motion to dismiss” so long as “a
plaintiff’s complaint describes events which establish when a
statute of limitations begins to run” and “explicitly set[s] forth
the relevant date on which those events occurred.” Id. ¶ 11. See
also Bivens v. Salt Lake City Corp., 2017 UT 67, ¶ 54 n.6, 416 P.3d
338.
¶21 Here, based on the facts in HKS’s complaint, including
mention of specific relevant dates, Appellees were able to rely on
the statute of limitations in their rule 12(b)(6) motion with
respect to HKS’s fraud and fraudulent concealment claims
because “the affirmative defense appear[ed] on the face of the
pleading,” given that the complaint described events that
established when the statute of limitations began to run, thus
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“render[ing] it subject to dismissal for failure to state a claim.”
See Tucker, 2002 UT 54, ¶¶ 8, 11 (quotation simplified).
¶22 The applicable statute of limitations for HKS’s first and
third claims is found in Utah Code section 78B-2-305. It states
that “for relief on the ground of fraud or mistake,” plaintiffs
must bring an action within three years from the time they
“discover[ed] . . . the facts constituting the fraud or mistake.”
Utah Code Ann. § 78B-2-305(3) (LexisNexis 2018). This
legislative approach, whereby the statute of limitations does not
start to run until the plaintiff discovers the facts constituting the
fraud or mistake, is called the “statutory discovery rule.” Russell
Packard Dev., Inc. v. Carson, 2005 UT 14, ¶ 21, 108 P.3d 741. Under
the statutory discovery rule, “the statute of limitations would
begin running from the date a plaintiff either discovered or
should have discovered his or her claim.” Id. ¶ 23 (emphasis
added). Plaintiffs are considered to have discovered their cause
of action when they have “actual knowledge of the fraud or by
reasonable diligence and inquiry should know, the relevant facts
of the fraud.” Colosimo v. Roman Catholic Bishop of Salt Lake City,
2007 UT 25, ¶ 17, 156 P.3d 806 (quotation simplified). Our
Supreme Court has emphasized the importance of diligence in
this regard:
A party who has opportunity of knowing the facts
constituting the alleged fraud cannot be inactive
and afterwards allege a want of knowledge and . . .
is required to make inquiry if his findings would
prompt further investigation. In other words, if a
party has knowledge of some underlying facts,
then that party must reasonably investigate
potential causes of action because the limitations
period will run.
Id. (quotation simplified). But if “a plaintiff alleges that a
defendant took affirmative steps to conceal the plaintiff’s cause
20200043-CA 13 2021 UT App 70HKS Architects v. MSM Enterprises
of action, . . . the plaintiff can avoid the full operation of the
discovery rule by making a prima facie showing of fraudulent
concealment and then demonstrating that given the defendant’s
actions, a reasonable plaintiff would not have discovered the
claim earlier.” Berenda v. Langford, 914 P.2d 45, 51 (Utah 1996).
¶23 With this analytic framework in mind, we now turn to
HKS’s claims. At the outset, we deal with HKS’s first and third
claims for fraud and fraudulent concealment respectively, as
they share the same statute-of-limitations arguments. We
conclude by addressing HKS’s second claim for contract implied
in law.
I. Fraud
¶24 HKS asserts that the district court erred in dismissing its
claim for fraud on the grounds that it was barred by the
three-year statute of limitations.
A claim of fraud requires the plaintiff to allege
(1) that a representation was made (2) concerning a
presently existing material fact (3) which was false
and (4) which the representor either knew to be
false or made recklessly, knowing that there was
insufficient knowledge upon which to base such a
representation, (5) for the purpose of inducing the
other party to act upon it and (6) that the other
party, acting reasonably and in ignorance of its
falsity, (7) did in fact rely upon it (8) and was
induced to act (9) to that party’s injury and
damage.
Robinson v. Robinson, 2016 UT App 33, ¶ 21, 368 P.3d 105. In an
effort to pursue a remedy for non-payment, typically just a
matter of contract law, HKS has striven mightily to convert what
is essentially a contract claim into a fraud claim in hopes of
20200043-CA 14 2021 UT App 70HKS Architects v. MSM Enterprises
securing recovery from others—it having become clear that
12x12 is judgment proof. In doing so, HKS was required to state
a claim consistent with the multiple requirements for fraud. See
id. And by the terms of rule 9(c) of the Utah Rules of Civil
Procedure, such a claim is not subject to the usual liberal notice
pleading requirement, but rather, “the circumstances
constituting fraud” must be pleaded “with particularity.” See
Utah R. Civ. P. 9(c).
¶25 In its fraud claim, HKS alleged four instances8 in which
Appellees fraudulently represented information to it, namely,
8. In setting forth its fraud claim in its complaint, HKS alleged,
beyond these four facts, that when Appellees issued the RFQ,
they did so “knowing[ly],” “but did not disclose,” among other
things, “that when 12x12 purchased the Property it paid more
than the market appraised value for the Property, that 12x12 was
not the sole owner of the Property and had needed the financial
contributions of other persons and entities to purchase the
Property[,]. . . [and that] 12x12 had no other assets, no income,
no cash, no investors, no equity, no bank accounts, [and] no
employees.” The district court did not consider these further
allegations in discussing HKS’s fraud claim, and on appeal, HKS
asserts that the court erred in not considering these other “false
and misleading statements” made by Appellees. These other
contentions in HKS’s complaint, however, were not “statements”
made by Appellees but simply facts Appellees knew and did not
disclose to HKS. Indeed, HKS acknowledges as much when it
claims on appeal that Appellees “failed to disclose” this
information. When parties fail to disclose information, they are
necessarily not making statements and thus are not
misrepresenting anything but are, at most, concealing
something. Ultimately, the failure to disclose information is
separate and distinct from making fraudulent representations
and implicates a different cause of action. Compare Robinson v.
(continued…)
20200043-CA 15 2021 UT App 70HKS Architects v. MSM Enterprises
(1) that the building had been pre-leased, (2) that 12x12 had
preconstruction funds and a line of credit to pay for HKS’s
services, (3) that a signed lease would be available soon, and
(4) that 12x12 would pay for HKS’s services. HKS asserted in its
complaint that each of these representations, on its own, was
sufficient to meet all nine of the elements for a claim of fraud. See
id. We address each of these representations in turn.
A. Pre-Lease
¶26 The first contention underlying HKS’s fraud complaint is
that Appellees misrepresented that the proposed building had
been pre-leased. The facts readily apparent from the complaint
are that on March 2, 2015, REDA, on behalf of 12x12, issued the
RFQ stating that the proposed building had already been
pre-leased to a “growing high-tech company” when, in fact, no
company had pre-leased the building. But on June 15, 2015, at
the “Project kick-off meeting,” HKS was informed that no
company had pre-leased the proposed building and that
negotiations were still ongoing. Thus, on June 15, 2015, HKS
“discover[ed] . . . the facts constituting the fraud or mistake,” see
Utah Code Ann. § 78B-2-305(3) (LexisNexis 2018), i.e., it
(…continued)
Robinson, 2016 UT App 33, ¶ 21, 368 P.3d 105 (stating that “[a]
claim of fraud requires the plaintiff to allege . . . that a
representation was made”), with Anderson v. Kriser, 2011 UT 66,
¶ 22, 266 P.3d 819 (stating that to prove a claim for fraudulent
concealment, “a plaintiff must prove . . . that (1) the defendant
had a legal duty to communicate information, (2) the defendant
knew of the information he failed to disclose, and (3) the
nondisclosed information was material”) (emphasis added)
(quotation otherwise simplified). Thus, the court did not err in
limiting its analysis to the four instances discussed in more detail
below, and we limit our analysis accordingly.
20200043-CA 16 2021 UT App 70HKS Architects v. MSM Enterprises
discovered that Appellees’ statement that the building had been
pre-leased was false. HKS therefore had three years from that
date to bring its claim of fraud on the basis of this
misrepresentation, see id., but it did not do so until June 13,
2019—nearly a year after the statute of limitations had expired.
Consequently, HKS failed to state a claim upon which relief
could be granted with respect to this misrepresentation, see Utah
R. Civ. P. 12(b)(6), and the district court did not err in dismissing
the fraud claim based on the three-year statute of limitations.
B. Preconstruction Funds and Line of Credit
¶27 HKS’s next allegation in support of its fraud claim was
that Appellees misrepresented that 12x12 had preconstruction
funds and a line of credit to pay for HKS’s services when, in fact,
it did not. Over the life of the project, HKS sent five invoices to
12x12 between July 2015 and January 2016, totaling over
$160,000, but received only one payment in the amount of
$39,500 in August 2015 from BTS, not 12x12. On August 5, 2015,
HKS sent an invoice for the bulk of the amounts due, over
$120,000, which 12x12 never paid, and on January 19, 2016, it
sent its final invoice.
¶28 Based on these facts, the district court concluded “that
[HKS] was given actual or constructive knowledge” that
Appellees’ statement that Appellees had preconstruction funds
or a line of credit “was false on or before March 19, 2016, which
was 60 days after [HKS] sent” its final invoice. The court
reasoned as follows:
This failure to pay, after repeated demands by
[HKS] and corresponding promises to pay by
12x12, reasonably put [HKS] on notice that 12x12
had no funds to pay [HKS]. Even if there were
other conceivable reasons to explain 12x12’s failure
to pay by March 19, 2016, such failure to pay still
20200043-CA 17 2021 UT App 70HKS Architects v. MSM Enterprises
put [HKS] on notice that something was not right,
which should have led [HKS] to inquire[9] about the
problem and thereby discover 12x12’s lack of
funds.
9. HKS asserts that the district court ruled that “HKS was on
notice of facts sufficient to trigger a duty to inquire, and that
duty of inquiry included asking the very Defendants committing
fraud to disclose their lack of financing.” This is not what the
court did. It ruled that these facts put HKS on notice that
something was amiss and that it should have “inquired” into the
problem. The court was not faulting HKS for not directly asking
Appellees whether they were committing fraud but rather for
not doing any investigation into the line of credit and payment
issues when there were red flags suggesting something was
amiss. The only point at which the court indicated that HKS
should have asked Appellees anything is when it stated that if
HKS wanted to know the “identity of the owners of REDA,” it
could have done so “merely [by] asking [Appellees].” We do not
view the district court’s analysis as problematic, as the court is
referring to typical business information that likely would have
been willingly provided, and had it not been, then HKS would
have been further alerted to something being amiss and
prompted to investigate further. We need not pursue a detailed
analysis regarding what avenues of inquiry HKS should have
pursued, as it did nothing whatsoever in this regard. But in any
event, it seems perfectly reasonable to expect that a vendor who
has not been paid as promised, but who has been repeatedly
assured that payment will be forthcoming from a loan, will
inquire as to the status of the loan application process and ask
for copies of applications and the like, and for the name of the
loan officer with whom the borrower is dealing—and to then
draw an appropriate inference if such straightforward
information is not readily produced.
20200043-CA 18 2021 UT App 70HKS Architects v. MSM Enterprises
¶29 HKS claims that the payment that came from BTS “was
designed to hide the fact that there was no financing or line of
credit at all.”10 HKS also claims that Appellees misled HKS and
“conceal[ed] the absence of a line [of credit]” by “admitt[ing]
certain misleading statements such as the lack of pre-leasing
when HKS was retained, while continuing to assert access to a
line of credit was imminent after Jive signed a lease in March
2016.” Thus, HKS asserts that Appellees “took affirmative steps
to conceal [HKS’s] cause of action,” allowing HKS to “avoid the
full operation of the discovery rule” because it has shown that
“given the defendant’s actions, a reasonable plaintiff would not
have discovered the claim earlier.” See Berenda v. Langford, 914
P.2d 45, 51 (Utah 1996).
¶30 But Appellees’ actions were not such that “a reasonable
plaintiff would not have discovered . . . earlier” that Appellees
misrepresented the existence of a line of credit and
preconstruction financing.” See id. While HKS certainly asked
Appellees about the payments multiple times and was frustrated
in its attempts to gain information from 12x12 in the prior suit
due to 12x12’s obstructive behavior, this does not negate the red
flags that were, or at least should have been, apparent to HKS at
the time. Those red flags, clear from the face of the complaint,
began at the outset of HKS’s involvement with Appellees when
HKS received its one and only payment from a then-unknown
third party, BTS, and not from 12x12, HKS’s customer, which
supposedly had ample funding via a line of credit and a
preconstruction loan. If 12x12 truly had those funding sources in
place, then receiving payment from BTS should have put HKS
10. We do not follow this logic. The fact that the payment would
come from another entity tends to confirm that 12x12 did not
have funding of its own, whether via a line of credit or
otherwise.
20200043-CA 19 2021 UT App 70HKS Architects v. MSM Enterprises
on notice of a potential problem, as this entity was completely
unknown to HKS at that time.11 Next, HKS continually received
hollow promises, starting in July 2015 and continuing until its
last invoice in January 2016, that payments would come. And
they never did. After submitting its largest invoice for over
$120,000 in August 2015, HKS still had not received payment by
March 2016, nearly six months later. This is hardly the behavior
of an adequately funded entity. HKS also submitted other
invoices after this for work it provided and still received no
payments from 12x12. The fact that the very first payment HKS
received came under questionable circumstances, which was
followed by months of unpaid invoices and hollow promises,
put HKS on notice at least by March 19, 201612—60 days after the
11. This fact alone would not necessarily have put HKS on notice
of a potential problem. If this was all that occurred and
payments had then continued to come in on time from BTS, no
red flags would have arisen. But after HKS received its first and
only payment from this previously undisclosed company and
then never received another payment from 12x12 or BTS after
repeated unpaid invoices and repeated unfulfilled promises for
imminent payment, HKS clearly was on notice of potential
issues with 12x12’s ability to pay, which should have prompted
inquiry.
12. HKS claims that it “did not learn of the falsity of these
misrepresentations regarding financing or a line of credit until
sometime in July or August 2018” and that “[t]his allegation,
which is to be accepted as true . . . warrants application of the
discovery rule.” While “we accept all facts alleged [in HKS’s
complaint] as true,” we only “indulge all reasonable inferences in
favor of the plaintiff.” See Erickson v. Canyons School Dist., 2020
UT App 91, ¶ 6, 467 P.3d 917 (emphasis added) (quotation
otherwise simplified). And the facts of the complaint show that
HKS could have known, or actually did know, of the falsity of
(continued…)
20200043-CA 20 2021 UT App 70HKS Architects v. MSM Enterprises
last invoice was sent, and almost six months after its largest
invoice was sent—that something was amiss. Thus, HKS should
have inquired more diligently into the problem, which would
have led to its discovery that Appellees did not have a
construction loan or line of credit in place. See supra note 9. Thus,
HKS cannot rely on Appellees’ behavior to toll the statute of
limitations. See Russell Packard Dev., Inc. v. Carson, 2005 UT 14,
¶ 23, 108 P.3d 741 (noting that under the statutory discovery
rule, “the statute of limitations would begin running from the
date a plaintiff either discovered or should have discovered his or
her claim”) (emphasis added); Berenda, 914 P.2d at 51. And the
district court did not err in determining, based on these facts,
that “[HKS] was given actual or constructive knowledge” that
Appellees’ statements were false more than three years prior to
HKS filing its suit in the present case, thereby barring its claim
under the statute of limitations and rendering HKS’s claim one
on which relief could not be granted.
C. Signed Lease and Payment to HKS
¶31 The final two misrepresentations identified in the
complaint were that a signed lease would soon be available and
that Appellees promised to pay HKS. The district court ruled
that these statements did not “concern[] a presently existing
material fact, but instead concern future events, and therefore do
not constitute valid grounds for a claim of fraud.”
¶32 We decline to reverse the court’s ruling on these
misrepresentations because HKS did not challenge this ruling in
its opening brief on appeal. See Allen v. Friel, 2008 UT 56, ¶ 7, 194
(…continued)
these statements by at least March 19, 2016, and thus it is not
reasonable to infer, as HKS suggests, that it did not know this
information until July or August 2018.
20200043-CA 21 2021 UT App 70HKS Architects v. MSM Enterprises
P.3d 903 (“[A]n appellant must allege the lower court committed
an error that the appellate court should correct. If an appellant
does not challenge a final order of the lower court on appeal,
that decision will be placed beyond the reach of further review.
If an appellant fails to allege specific errors of the lower court,
the appellate court will not seek out errors in the lower court’s
decision.”) (quotation simplified). HKS attempts to grapple with
this issue in its reply brief, but “issues raised by an appellant in
the reply brief that were not presented in the opening brief are
considered waived and will not be considered.” Kendall v. Olsen,
2017 UT 38, ¶ 13, 424 P.3d 12 (quotation simplified).
¶33 In sum, the district court did not err in dismissing HKS’s
fraud complaint as barred by the statute of limitations with
regard to HKS’s allegations that Appellees misrepresented that
the building was pre-leased and that 12x12 had preconstruction
funds and a line of credit to pay for HKS’s services. HKS knew
or should have known this information more than three years
before bringing the current action but failed to take any action
within that time frame. We also affirm the court’s ruling in
dismissing HKS’s fraud complaint with regard to HKS’s
allegation that Appellees misrepresented that a signed lease
would be available soon and that they would pay HKS, because
on appeal HKS has not properly challenged the court’s ruling
regarding these facts.
II. Fraudulent Concealment
¶34 HKS asserts that the district court erred in dismissing its
claim for fraudulent concealment on the ground that the statute
of limitations barred the claim. To prevail on a claim for
fraudulent concealment, also known as fraudulent
nondisclosure, “a plaintiff must prove by clear and convincing
evidence that (1) the defendant had a legal duty to communicate
information, (2) the defendant knew of the information he failed
to disclose, and (3) the nondisclosed information was material.”
20200043-CA 22 2021 UT App 70HKS Architects v. MSM Enterprises
Anderson v. Kriser, 2011 UT 66, ¶ 22, 266 P.3d 819 (quotation
simplified). Of course, in the context of a dismissal premised on
statute of limitations grounds, our focus is not on the ultimate
viability of the claim. Rather, our focus, like the district court’s, is
on those facts that should have prompted the kind of inquiry
that is contemplated under the statutory discovery rule. See
Russell Packard Dev., Inc. v. Carson, 2005 UT 14, ¶ 23, 108 P.3d 741(stating that under the statutory discovery rule, “the statute of
limitations would begin running from the date a plaintiff either
discovered or should have discovered his or her claim”) (emphasis
added).
¶35 HKS’s complaint recited fourteen facts showing
Appellees’ fraudulent concealment that we recite again for ease
of discussion: (1) 12x12 paid more than market value for the
property; (2) 12x12 was a shell entity; (3) 12x12 never filed a tax
return; (4) 12x12 lacked a business license; (5) 12x12 had no cash
reserves, no bank account, and no capital; (6) the property had
been over-leveraged, leaving it with no equity; (7) 12x12 was not
the sole owner of the property; (8) there was no tenant who had
pre-leased the building; (9) 12x12’s sole asset was the
over-leveraged property; (10) 12x12 planned to pay HKS from a
construction loan that it had yet to obtain; (11) BTS, not 12x12,
would be the entity making payments to HKS; (12) in September
2015, 12x12 paid REDA $30,000 through BTS; (13) McQuarrie,
Bashford, Fehlberg, and Forstrom were members and managers
of REDA; and (14) 12x12 “had no financing for the project” in the
form of a preconstruction loan or line of credit.
¶36 The relevant timeline here is that HKS submitted its
proposal in response to the RFQ on April 8, 2015, and entered
into a contract with 12x12 on June 15, 2015. HKS then provided
12x12 with services between June 2015 and January 19, 2016,
when it sent its last invoice to 12x12. Thus, HKS was actively
involved with 12x12 and, relatedly, with Appellees, from April
2015 until January 2016, but it was only paid a small portion of
20200043-CA 23 2021 UT App 70HKS Architects v. MSM Enterprises
its fees, with continued promises of full payment. Regarding
facts 1–7, 9, and 13, it is clear that HKS “should have discovered
[its] claim” regarding those facts during this timeframe. See id.These are facts that a sophisticated corporate entity such as HKS
would want to know regardless of any red flags, and which it
should have discovered as early as January 2016, once it went
more than five months without payment of its largest invoice of
over $120,000 sent to 12x12 in August 2015. And at the latest,
HKS should have discovered these facts by April 2016, nearly
three months after HKS sent its last invoice to 12x12, bringing
the total unpaid amount to over $140,000. On this point, we
agree with the district court that HKS “could, and should, have
investigated and learned the corporate structure, ownership,
history, and financial wherewithal of 12x12”13 and “could, and
should, have easily learned of the publicly recorded
encumbrances on the Property, its market value, how much
12x12 paid for it, and whether it had other owners.” HKS also
could have learned the identity of the managers and members of
13. Specifically regarding fact 5, while this information would
not necessarily have been readily available to HKS—and while
mere non-payment on its own is not necessarily indicative of
misleading information in regard to cash reserves and bank
accounts—on the heels of all that had occurred in this case, with
no proof of loans, misrepresentation about the building being
pre-leased, repeated reassurances after months of non-payment,
and the one payment coming from a third party, HKS was on
notice of the advisability of conducting further inquiry into
12x12’s finances. This inquiry could have been undertaken
simply by asking 12x12 for bank account and other records to
verify its solvency and for information about the status of its
construction loan. And if 12x12 balked at this reasonable request,
HKS would be on notice of the likelihood of fraudulent
concealment.
20200043-CA 24 2021 UT App 70HKS Architects v. MSM Enterprises
REDA simply by inquiring of REDA. If REDA had balked at
providing this straightforward information, HKS’s growing
concern would only have been heightened. And in the event
REDA declined to disclose this information, then HKS could
have readily obtained it via public records. Thus, HKS is
considered to have “discovered” its cause of action in relation to
these facts by no later than April 2016 because it had “actual
knowledge of the [concealed information] or by reasonable
diligence and inquiry should [have] know[n], the relevant facts
of the fraud perpetrated against [it].” See Colosimo v. Roman
Catholic Bishop of Salt Lake City, 2007 UT 25, ¶ 17, 156 P.3d 806(quotation simplified). Therefore, the statute of limitations
barred its claim when HKS brought it more than three years later
on June 13, 2019.
¶37 HKS asserts that it “exercised reasonable diligence in the
face of active concealment” of these facts by Appellees. But as
previously discussed, see supra notes 9, 13, we do not agree that
HKS exercised reasonable diligence even in light of Appellees’
behavior. Beyond the facts that could have been discovered via a
public records search that Appellees could not have effectively
concealed—like the absence of a recorded trust deed securing a
construction loan—HKS failed to make reasonable inquiries of
Appellees for other information or to take further action in the
face of obvious red flags. Thus, when HKS ran into payment
problems early on and came to know in July 2015 that Appellees
had misrepresented in the RFQ that a company had pre-leased
the building, reasonable diligence would dictate that HKS
undertake these simple investigations and inquiries to determine
12x12’s bonafides.
¶38 Regarding facts 8 and 11, we need not determine whether
HKS was diligent and should have known this information
because HKS had actual knowledge of both facts more than three
years before bringing its claim. As we have already determined,
see supra ¶ 26, HKS knew on June 15, 2015, that the building had
20200043-CA 25 2021 UT App 70HKS Architects v. MSM Enterprises
not been pre-leased and therefore had until June 15, 2018, to
bring its claim of fraudulent concealment on the basis of this fact,
but it chose not to do so. The same is true for fact 11. BTS paid
HKS on August 3, 2015, thus giving HKS actual knowledge that
BTS, and not 12x12, would be paying HKS. HKS then had until
August 3, 2018, to bring a claim alleging this concealment, but it
failed to do so. Therefore, the district court properly dismissed
HKS’s fraudulent concealment claim, insofar as it was based on
facts 8 and 11, as barred by the statute of limitations due to HKS
having actual knowledge that came more than three years before
it filed its claim in the present case on June 13, 2019. See Utah
Code Ann. § 78B-2-305(3) (LexisNexis 2018).
¶39 Regarding fact 12, we decline to reverse the district
court’s ruling because HKS does not challenge the court’s actual
reasoning for dismissing its claim insofar as it turns on that fact.
The court observed that, even accepting that Appellees
concealed BTS’s payment to REDA for $30,000, HKS failed to
state a claim upon which relief could be granted because
Appellees “had no legal duty to disclose this fact to [HKS],”
which is the first prong of the fraudulent concealment test. See
Anderson v. Kriser, 2011 UT 66, ¶ 22, 266 P.3d 819. HKS has not
grappled with this reasoning, and thus we decline to reverse the
court’s ruling with respect to fact 12. See Kendall v. Olsen, 2017
UT 38, ¶ 12, 424 P.3d 12; Allen v. Friel, 2008 UT 56, ¶ 7, 194 P.3d
903.
¶40 Concerning fact 14, HKS asserts that “there are no facts
alleged in the Complaint, or reasonably inferred from those
allegations, that would demonstrate that HKS could have
learned of [Appellees’] concealment of the facts that 12x12 had
no pre-construction financing [and] had no line of credit . . .
before the truth came out in July and August 2018.” For the
reasons set forth above, see supra ¶¶ 27–30, we disagree and hold
that HKS’s fraudulent concealment claim premised on this fact
was either known or should have been known to HKS more than
20200043-CA 26 2021 UT App 70HKS Architects v. MSM Enterprises
three years prior to filing its claim in the present case. It thus has
failed to state a claim upon which relief can be granted.14
III. Contract Implied in Law
¶41 HKS asserts that the district court erred in ruling that
under any of the stated facts in the complaint, HKS could not
prove that a contract implied in law existed between it and
REDA. A claim for contract implied in law, “also termed
quasi-contract[] or unjust enrichment,” implicates “a doctrine
under which the law will imply a promise to pay for goods or
services when there is neither an actual nor an implied contract
between the parties.” Jones v. Mackey Price Thompson & Ostler,
2015 UT 60, ¶ 44, 355 P.3d 1000 (quotation simplified). This claim
“require[s] the plaintiff to establish that the defendant
(1) received a benefit, (2) appreciated or had knowledge of this
benefit, and (3) retained the benefit under circumstances that
would make it unjust for the defendant to do so.” Id. ¶ 45
14. While the district court did not include fact 14 in its analysis
regarding HKS’s fraudulent concealment claim, the court did
undertake a thorough analysis of what HKS should have known
and did know regarding this same information in its analysis of
HKS’s fraud claim, in the context of Appellees’ claimed
misrepresentations about the line of credit and preconstruction
financing. While fraudulent concealment deals with information
a defendant did not disclose and fraud deals with false
information a defendant did disclose, the district court’s analysis
of what HKS should have known regarding the truth about
12x12’s line of credit and preconstruction financing holds true
for both claims. Thus, the court’s analysis regarding HKS’s fraud
claim, insofar as premised on this fact, can readily be applied
here because the context remains the same for both, i.e., whether
HKS knew or should have known if 12x12 truly had a line of
credit or preconstruction financing.
20200043-CA 27 2021 UT App 70HKS Architects v. MSM Enterprises
(quotation simplified). It “does not require a meeting of the
minds.” Id. ¶ 44.
¶42 Under the first prong, to show that a contract implied in
law existed or that REDA was unjustly enriched, HKS was
required “to establish that [REDA] received a benefit” from
HKS. See id. ¶ 45. On appeal, HKS has not shown how REDA
benefited from work HKS performed. HKS simply states that it
“provided architectural services to 12x12” and “that money
which should have been paid to HKS for those services was
instead paid to REDA.” With this bare assertion, HKS does not
adequately explain how its action in providing architectural
services to 12x12 benefited REDA, which was also providing
services to 12x12 on the project, nor why money paid to REDA
should instead have been paid to HKS. Essentially, HKS’s
argument on this point is that when a company hires two
companies to do work on a project and pays one but not the
other, the unpaid company may bring a claim against the
company that was paid.15 But HKS has not directed us to any
case law that supports this proposition, nor do we know of any.
In fact, HKS “fails to support [its unjust enrichment] argument
with citations to any legal authority” regarding how REDA
retained a benefit from the services HKS provided to 12x12, and
“[a]ccordingly, with respect to this argument, [HKS] has failed to
carry [its] burden of persuasion on appeal.” See State v. Hawkins,
2016 UT App 9, ¶ 47, 366 P.3d 884. Thus, HKS has not satisfied
the first element for a contract implied in law and thus has not
stated a claim upon which relief could be granted. Accordingly,
15. We acknowledge that 12x12 and REDA were friendly
companies with overlapping principals, but the fact remains that
REDA was a separate entity from 12x12, and simply because the
two companies shared principals does not mean HKS had a
superior claim to the payments made by 12x12 to REDA.
20200043-CA 28 2021 UT App 70HKS Architects v. MSM Enterprises
we need not consider whether its allegations with respect to the
other prongs for an unjust enrichment claim were also flawed.
Therefore, the district court properly dismissed this claim.
CONCLUSION
¶43 The district court did not err in dismissing HKS’s three
causes of action, pursuant to rule 12(b)(6) of the Utah Rules of
Civil Procedure, for failure to state a claim upon which relief
could be granted. The dismissal with prejudice is affirmed.
20200043-CA 29 2021 UT App 70