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Evergreen Engineering, Inc v. Green Energy Team LLC

July 31, 2012


The opinion of the court was delivered by: Leslie E. Kobayashi United States District Judge


Before the Court is Defendant/Counterclaim Plaintiff Green Energy Team LLC's ("GET") Motion for Partial Summary Judgment on (a) Count I (Breach of Contract) of Plaintiff Evergreen Engineering, Inc.'s First Amended Complaint and (b) Count III (Breach of Contract) of Green Energy Team LLC's Counterclaim ("Motion"), filed on February 29, 2012. [Dkt. no. 51.] Plaintiff/Counterclaim Defendant Evergreen Engineering, Inc. ("Evergreen") filed its memorandum in opposition on April 23, 2012, and GET filed its reply on May 9, 2012. [Dkt. nos. 60, 66.] This matter came on for hearing on June 25, 2012. Appearing on behalf of GET was Thomas E. Bush, Esq., and appearing on behalf of Evergreen were Mark T. Shklov, Esq., and Bennet J. Chin, Esq. After careful consideration of the Motion, supporting and opposing memoranda, and the arguments of counsel, GET's Motion is HEREBY GRANTED IN PART AND DENIED IN PART for the reasons set forth below.


I. Factual Background

In 2006, GET was formed in the State of Hawai'i as a single-member LLC for the purpose of owning and operating a biomass-to-energy plant ("BTE plant") on the Island of Kauai. [Concise Statement of Material Facts in Support of GET's Motion, filed 2/29/12 (dkt. no. 52) ("Def.'s CSOF"), Decl. of Eric Knutzen ("Knutzen Decl.") at ¶ 3.] GET retained Emery Otruba, an engineer at Steam Plant Systems, Inc. ("SPS"), allegedly to do front-end engineering and conceptual design of a BTE plant with a turbine generator that would be fueled by locally produced wood waste products. [Def.'s CSOF, Decl. of Brandon M. Segal ("Segal Decl."), Exh. A (excerpts of 1/9/12 Depo. of Emery Mark Otruba ("Otruba Depo.")) at 34-35; Exh. F.] Otruba and SPS allegedly recommended the use of a gasification/boiler system developed by Chiptec Corporation ("Chiptec"). [Otruba Depo. at 48-50; Def.'s CSOF, Segal Decl., Exh. G at § 1.1.]

In March 2007, the Kauai Island Utility Cooperative ("KIUC") and GET executed a Power Purchase Agreement ("PPA") to build a BTE plant based on the Chiptec wood gasification system. [Def.'s CSOF, Knutzen Decl., Exh. P.] The PPA contained certain "milestone dates," and provided that the failure to meet those dates could result in "delay damages" of thousands of dollars per day. [Id. at § 12.4(A).]

Otruba, who had since begun working for Evergreen, and John Solvason, a founding principal of Evergreen, allegedly lobbied GET to hire Evergreen to serve as the managing project engineer for the implementation of the BTE plant project. [Otruba Depo. at 57.] On or around December 16, 2007, Evergreen and GET entered into an agreement which consisted of the Amended Design Proposal and Attachment "A," including General Conditions for Professional Services (collectively, the "Agreement"). [Def.'s CSOF, Segal Decl., Exh. L (Agreement).] GET claims that the relevant provision is the "performance guarantee" provision:

Overall plant performance guarantee will be achieved via guarantees by suppliers of individual equipment and the undertakings of the Contractor and certain project investors as well as by the undertaking of Evergreen in this Agreement. Equipment performance guarantees will be written into the specifications for each piece of major equipment with financial penalties for performance shortfalls. Factory performance test combined with on site performance testing will verify that equipment is achieving desired performance. A highly qualified design team is being proposed for this project with the necessary experience to design and support your project during construction. The design will be performed in our Eugene, OR office. Evergreen will work together with your Construction Manager, Contractor and Owner's Representative to ensure that your project is designed and built to the high standards you require in order to achieve your continual goals. [Id. at 2.]

In June 2008, the State of Hawai'i Department of Health issued GET a Covered Source Air Permit that contemplated the use of two Chiptec biomass gasifier/boiler systems and was premised on expected usage of 201 tons of fuel per day. [Def.'s CSOF, Knutzen Decl. at ¶ 10; Exh. Q.] In an agreement between GET and Chiptec, Chiptec guaranteed that GET would not have to use more than 201 tons per day of Albizia and Eucalyptus wood feedstock fuel to operate the BTE plant. [Def.'s CSOF, Segal Decl., Exh. E at 2.] The parties dispute whether and to what extent Evergreen and GET knew that Chiptec's calculations were incorrect.

In 2009, a review by one of GET's lenders revealed an error in the fuel tonnage calculations for the BTE plant. In actuality, 240 tons of fuel per day were needed to operate the gasifier system at the required efficiency level. [Def.'s CSOF, Knutzen Decl. at ¶ 15; Otruba Depo. at 128.] The error allegedly affected GET's calculations regarding: (1) feed stock volume; (2) pro forma financials; (3) economic viability; (4) financing possibilities; and (5) various entitlements such as the covered source air permit. [Def.'s CSOF, Knutzen Decl. at ¶ 16; Segal Decl., Exh. B (excerpts of 1/10/12 Depo. of John Solvason ("Solvason Depo.")) at 133-34.] GET alleges that, in order to operate the BTE plant in accordance with the air permit, it would have to operate fewer hours or at a lower output than intended under the PPA. GET had to seek an amendment of the air permit, which has delayed the start date beyond the milestone deadline set forth in the PPA. [Def.'s CSOF, Knutzen Decl. at ¶ 17.] GET claims that it was forced to change its business plan and abandon the gasification turbine system, which resulted in the loss of the benefits of the payments it made to Evergreen and other vendors. [Id. at ¶ 18.]

By the terms of the Agreement, GET was to pay Evergreen's fee of $2,539,342.00 and any reimbursement associated with the scope of services. [Agreement at 19.] Evergreen alleges that GET made the first four payments to Evergreen totaling $344,384.49. [Evergreen's Responsive Concise Statement, filed 4/23/12 (dkt. no. 61) ("Pltf.'s CSOF"), Decl. of John Solvason ("Solvason Decl."), Exh. HH at 1-4.] Between June 2008 and April 2009, Evergreen sent GET six invoices totaling $139,663.81, but GET only paid $17,979.62. [Id. at 5-10; Pltf.'s CSOF, Solvason Decl. at ¶ 82.] Evergreen also states that it billed GET $98,892.73 for additional services outside the scope of the Agreement. [Pltf.'s CSOF, Solvason Decl., Exh. HH at 11-12.]

Evergreen's First Amended Complaint asserts four causes of action: Breach of Contract (Count I); Further Breach of Contract/Breach of Good Faith and Fair Dealing (Count II);

Quantum Meruit/Unjust Enrichment (Count III); and Assumpsit/Account Stated (Count IV). The present Motion seeks summary judgment as to Count I only.

On December 21, 2010, GET filed its First Amended Counterclaim against Evergreen, Solvason and Otruba. [Dkt. no. 22-1.] It asserts five causes of action: Professional Malpractice and Negligence (Count I); Negligence Per Se (Count

II); Breach of Contract (Count III); Breach of Express/Implied Warranty (Count IV); and Unjust Enrichment (Count V). The present Motion seeks summary judgment as to Count III only.

II. GET's Motion

In its Motion, GET argues that, because Evergreen knew "from day one" that the calculations for fuel consumption were incorrect and the BTE plant would not work as designed, yet did not inform GET of these failings, Evergreen breached the Agreement, and GET is excused from any performance under the Agreement. [Mem. in Supp. of Motion at 1-2.]

A. The Agreement Between GET and Evergreen

GET first argues that the Agreement created a binding contract between the parties. [Id. at 15 (citing Solvason Depo. at 38-39).] GET contends that Evergreen "understood and agreed that the overall plant performance would be independently guaranteed by the undertaking of Evergreen and that Evergreen would ensure that the power plant would work as GET specified."

[Id. at 15-16 (citing Def.'s CSOF, Segal Decl., Exh. K at 2; Agreement at 2-13, 19; Otruba Depo. at 76-77; Solvason Depo. at 37-38).]

B. Evergreen's Breach of the Agreement

GET next argues that, because an architect or engineer must produce an exact result, "the failure to produce the specific result forms the basis of a breach of contract action." [Id. at 16 (citing Tamarac Dev. Co., Inc. v. Delamater, Freund & Assocs., P.A., 675 P.2d 361, 365 (Kan. 1984); Emond v. Tyler Bldg. & Constr. Co., Inc., 438 So.2d 681, 684-85 (La. Ct. App. 1983)).] It argues that Evergreen guaranteed a specific result: "the overall plant performance that would abide by GET's fuel requirements." [Id.] Because Evergreen knew that the Chiptec gasifier system would not work, [id. at 17 (citing Solvason Depo. at 44, 85-86, 92; Otruba Depo. at 84, 103, 143-44),] failed to advise GET of such, and advised GET to obtain a "worthless" performance guarantee from Chiptec, GET contends that Evergreen materially breached its obligations under the Agreement [id. (citing Arkansas Rice Growers Co-op. Ass'n v. Alchemy Indus., Inc., 797 F.2d 565, 566-70 (8th Cir. 1986))].

C. GET's Damages from Evergreen's Breach of the Agreement

GET argues that it suffered significant damages as a result of Evergreen's breach of the Agreement, as the erroneous calculations forced GET to seek an amendment of the air permit, delayed the start of construction, and required GET to radically change its business plan and abandon the gasification/turbine system. [Id. at 18 (citing Def.'s CSOF, Knutzen Decl. at ¶¶ 16-17).] GET claims that it lost the benefit of millions of dollars it paid to Evergreen and other vendors, such as the $130,451 deposit to a vendor for a turbine designed to work with the Chiptec gasification system. [Id. at 18-19 (citing Def.'s CSOF, Knutzen Decl. at ¶¶ 18-19).]

D. GET's Non-Breach of the Agreement

Finally, GET contends that, contrary Evergreen's allegations in Count I of the First Amended Complaint, it did not breach the Agreement because its performance was excused by Evergreen's material breach of the Agreement. [Id. at 19-20 (quoting Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 196 (Tex. 2004); 17A Am. Jur. 2d Contracts § 685 (1991)).]

II. Evergreen's Memorandum in Opposition

A. Applicable Burden of Persuasion

Evergreen first argues that GET fails to meet its burden of persuasion because it did not submit expert testimony to establish the requisite standard of care applicable to Evergreen's performance. [Mem. in Opp. at 7-8.] In reference to GET's proposition that a professional engineer's failure to produce specific results is the basis of a breach of contract, Evergreen argues that the Agreement was "not for a 'turnkey' power plant with a contracted-for level of performance," and liability is not dependant upon whether the "exact results" were obtained. [Id. at 8-9 (citing Frank M. Dorsey & Sons, Inc. v. Frishman, 291 F. Supp. 794 (D.D.C. 1968)).]

Evergreen argues that GET's Motion is not merely based in contract, but also involves tort liability: "[p]rofessional negligence not involving personal injury is often a hybrid of tort and contract." [Id. at 11 (citing Higa v. Mirikitani, 55 Haw. 167, 517 P.2d 1 (1973)).] According to Evergreen, because GET argues that Evergreen's performance as a professional engineer fell short of the Agreement's requirements, but does not offer any expert testimony on the standard of care, GET fails to meet its burden of production. [Id. at 11-12.]

B. Breach of Contract

Evergreen next argues that it did not breach the Agreement. It first contends that the Agreement does not contain a guarantee or warranty of others' work. [Id. at 13.] Under the Agreement's "project approach," the parties agreed that "Evergreen will work directly for GET to prepare a Detailed Design package for bidding to contractors, assist in contractor selection, assist GET with purchasing of long lead major equipment, and provide Design Support during construction." [Agreement at 2.]

1. No Guarantee of Chiptec's Performance

Evergreen argues that, contrary to GET's position that the "guarantee" provided by the Agreement imposed on Evergreen an "independent responsibility for guaranteeing the performance" of the BTE plant, [Mem. in Opp. at 13 (quoting Mem. in Supp. of Motion at 7),] the "guarantee" language is merely a "description of the types of guarantees that will be obtained" [id. at 14 (emphases in original)]. It argues that there were three types of guarantees in the Agreement: "[1] guarantees by suppliers of individual equipment and [2] the undertakings of the Contractor and certain project investors as well as by [3] the undertaking of Evergreen in this Agreement." [Id. (brackets ...

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