U.S. District Court in Ohio Rejects Claims Against Lenders Based on Theory That They Induced Contractor to Continue to Perform by Representing and Promising That It Would Be Paid

GEM Industrial, Inc. v. Sun Trust Bank
2010 U.S. Dist. LEXIS 31042 (N.D. Ohio Mar. 31, 2010)

The United States District Court for the Northern District of Ohio denied a contractor’s claims against a project’s lenders, where the contractor’s claims were based on the lender’s representations that the contractor would be paid.

GEM Industrial was the mechanical contractor for the construction of an ethanol production plant owned by GOE Lima, LLC. Due to budget overruns and cash flow problems, GOE fell behind on monthly payments to GEM. Eventually, GOE requested that GEM enter into a formal payment deferral. Before agreeing to the deferral, GEM asked to meet with representatives of the project’s debt and equity investors, SunTrust Bank and Paladin Homeland Security Fund, LP and Paladin Capital Group, LLC to confirm that sources of funding were available to pay construction costs. GEM asserts that, during its calls with SunTrust and Paladin, representatives for both entities promised and assured GEM that it would be paid for both its already completed work and its work going forward on the plant. After its calls with SunTrust and Paladin, GEM agreed to the payment deferral and continued to perform its mechanical work at the plant.

The project continued to experience cash flow problems. Although GEM was eventually paid by GOE for work performed before GEM’s calls with SunTrust and Paladin, GEM did not receive payment for work performed after those calls. GEM sent payment demands to GOE, SunTrust and Paladin and eventually issued a stop work notice, halting its performance on the plant. GOE filed for bankruptcy shortly thereafter.

GEM eventually filed an action in the United States District Court for the Northern District of Ohio to recover $2.2 million for its work on the plant, asserting claims for breach of contract, promissory estoppel and negligent misrepresentation against SunTrust and Paladin. The defendants moved for summary judgment, seeking to dismiss all of GEM’s claims.

The Court first addressed GEM’s breach of contract claims. GEM argued that it entered into oral contracts, or alternatively, implied-in-fact contracts with SunTrust and Paladin, based on the representations made by SunTrust and Paladin during its calls, and that SunTrust and Paladin breached the contracts by refusing to pay GEM for work performed at the ethanol plant. SunTrust and Paladin disputed that they entered into enforceable contracts with GEM, arguing that the parties never agreed to the essential terms of a contract.

The Court held that even construing the record in a light most favorable to GEM, the evidence was too vague to support the existence of an enforceable oral contract. The Court reasoned that the parties had not agreed to the essential contract terms such as price, duration, or timing of the payments, which is required in order for there to be an oral contract. The broad assertions by GEM of affirmatives promises made by SunTrust and Paladin were too indeterminate. For example, the Court pointed to the fact that even if the terms of the GOE contract were incorporated as the essential terms of the contract between GEM and the lenders, there was no way to determine which party (GOE, SunTrust, or Paladin) was responsible for paying GEM in the first instance. Further, it was unclear how many contracts there were as between all of the parties. Such uncertainty about the identity of the parties to the contract and their relative obligations was fatal to GEM’s contract claim.

The Court also found that GEM’s assertion that an implied-in-fact contract was formed suffered from the same difficulty as the oral contract claim: namely, that the alleged contract (or contracts) did not clearly delegate responsibility for payment among SunTrust, Paladin and GOE. Further, the Court reasoned that the conduct and declarations of the parties, which is important in determining whether an implied-in-fact contract was formed, did not support GEM’s assertions. To the contrary, the conduct of the parties pointed in the opposite direction. GEM continued to send invoices to GOE for its work, and never sent any invoices or requested any payments from SunTrust or Paladin until GOE failed to pay.

The Court next considered GEM’s claims for promissory estoppel and negligent misrepresentation. With respect to GEM’s promissory estoppel claim, the Court held that there was no clear and ambiguous promise. As to GEM’s negligent misrepresentation claim, GEM could not meet the false information element, which requires a representation as to past or existing facts, not promises or representations relating to future actions or conduct. As the Court pointed out, GEM’s allegations of negligent misrepresentation focused on a promise of future conduct (that it would pay GEM in the future for its work going forward), rather than a false statement of existing fact. Accordingly, the Court dismissed all of GEM’s claims against SunTrust and Paladin.

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