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Denourie & Yost Homes, LLC v. Frost

Supreme Court of Nebraska

September 26, 2014

DENOURIE & YOST HOMES, LLC, A NEBRASKA LIMITED LIABILITY COMPANY, APPELLANT,
v.
JOE FROST AND AMY FROST, HUSBAND AND WIFE, AND SECURITY STATE BANK, DOING BUSINESS AS DUNDEE BANK, A NEBRASKA CORPORATION, APPELLEES

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Appeal from the District Court for Douglas County: Gary B. Randall, Judge.

Jerrold L. Strasheim for appellant.

Christopher J. Tjaden, Michael J. Whaley, and Adam J. Wachal, of Gross & Welch, P.C., L.L.O., for appellee Security State Bank.

Kristopher J. Covi, of McGrath, North, Mullin & Kratz, P.C., L.L.O., for appellees Joe Frost and Amy Frost.

HEAVICAN, C.J., WRIGHT, CONNOLLY, MCCORMACK, MILLER-LERMAN, and CASSEL, JJ. STEPHAN, J., not participating.

OPINION

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[289 Neb. 139] Connolly, J.

I. SUMMARY

deNourie & Yost Homes, LLC (D& Y), contracted with Joe Frost (Frost) and Amy Frost to finish construction on a house the Frosts had started with another builder but had discontinued 1 1/2 years earlier. The Frosts defaulted on progress payments after D& Y started work. D& Y eventually sued the Frosts and Security State Bank, doing business as Dundee Bank (the bank). It claimed, in part, that at different times, the defendants falsely represented or concealed material information about whether the Frosts could pay for the work.

In D& Y's operative complaint, it alleged five claims against the Frosts and the bank: (1) breach of contract against the Frosts; (2) fraud, concealment, and nondisclosure against the Frosts for representing that they could pay for D& Y's work when they were insolvent and could not perform their obligations under the contract; (3) civil conspiracy against Frost and the bank for falsely creating the appearance, after D& Y had stopped work, that the Frosts were solvent, to induce D& Y to resume work; (4) equitable estoppel against the bank, as guarantor; and (5) promissory estoppel against the bank to enforce its promise to pay funds directly to D& Y for its services.

The district court sustained the defendants' motions for summary judgment on the fraud and conspiracy claims. In April 2012, before the bench trial began on the remaining claims, the Frosts confessed judgment on D& Y's breach of contract claim. And after the bench trial, the court ruled for the defendants on D& Y's equitable and promissory estoppel claims. D& Y assigns error to all the court's rulings.

We will explain our holdings with some specificity in the following pages, but briefly stated, we hold as follows:

o The court erred in granting summary judgment to the Frosts on D& Y's fraud claim because genuine issues of material [289 Neb. 140] fact existed whether the Frosts had intentionally made false or misleading representations that they could pay for D& Y's work.

o The court erred in granting summary judgment to the bank on D& Y's civil conspiracy claim because the complaint was sufficient to put the bank on notice that the claim rested on the bank's alleged conspiracy to commit fraud.

o The court erred in granting summary judgment to the Frosts on D& Y's civil conspiracy claim because its ruling rested on its incorrect judgment that D& Y's fraud claim failed as a matter of law and because it failed to consider that D& Y alleged two separate instances of fraudulent conduct.

o In the bench trial, the court did not err in finding that D& Y had failed to prove by clear and convincing evidence that the bank promised to finance D& Y's construction contract and to pay these funds directly to D& Y.

But the court's factual findings in the bench trial do not preclude D& Y's proof of the same facts for its fraud claims because a preponderance standard of proof governs those claims, instead of the clear and convincing standard that applied to the claims in the bench trial. We affirm in part and reverse in part the judgment and remand the cause to the court to conduct

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further proceedings consistent with this opinion.

II. BACKGROUND

1. Historical Facts

In September 2004, the Frosts obtained two loans for a new home: a $133,000 loan to purchase a lot and a $712,500 construction loan. The construction stopped in December 2005. The bank was not the lender for either loan. But in 2007, the bank made several business loans to the Frosts. The Frosts used these loans to acquire and renovate houses, which they then sold or rented.

In April 2007, the Frosts contracted with D& Y to complete their house. The previous builder had completed the exterior of the house, but not the interior. Jon deNourie and Shane Yost are the principals of D& Y. The " Recitals" section of the contract stated that the original construction had stopped in December 2005 " due to builder default." The contract made [289 Neb. 141] the Frosts the general contractor. They were to pay D& Y for materials and labor and directly pay subcontractors. D& Y was the project manager. It would obtain subcontractors and approve their invoices for payment by the Frosts and also furnish materials. D& Y would bill the Frosts for outstanding invoices. The Frosts agreed to pay $51,280 to D& Y for management services. The parties estimated construction costs to be $274,350. The contract also required the Frosts to make monthly progress payments during construction.

Yost testified in his deposition that before D& Y signed the contract, Frost told him that he had sued the previous builder but that they had settled the case and there were no liens against the property. Yost also testified Frost told him that $200,000 from the original construction loan was available for the work and that he could easily obtain an additional $75,000. The contract's recitals stated that the Frosts had " made arrangements for financing" to complete construction of the house.

But in his deposition, Yost said that sometime in 2008, after the Frosts defaulted on D& Y's contract, he learned that the first builder had sued the Frosts and that there were liens against the property. The record from the bench trial showed that the first builder had filed a lien against the property in April 2005 because the Frosts had defaulted on their payments. The builder had sought a $315,567.52 judgment and a decree of foreclosure. Yost said that D& Y would not have contracted to do the work if it had known that the previous builder had sued the Frosts. Yost stated that because of Frost's representations, D& Y did not perform independent research on the property.

After D& Y sent the first bill to the Frosts in May 2007, they defaulted. They did not pay the entire bill, and they wrote a check with insufficient funds to a subcontractor. After that, D& Y required the Frosts to pay the money they owed directly to D& Y so it could pay its subcontractors. By August 1, the Frosts were substantially behind in payments. On August 20, Frost told deNourie and Yost that he had not obtained financing from his construction lender but that he was meeting with the president of the bank to obtain funding. [289 Neb. 142] In early October, D& Y stopped work because the Frosts had failed to pay the amount owed or to provide a commitment letter from a lender.

At some point, D& Y informed Frost that it intended to file a lien. After that, the parties attempted to negotiate. At a November 1, 2007, meeting, Frost told deNourie and Yost that the bank would be

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providing funding for the construction. Frost told Yost that although he still had $200,000 left from the construction loan, he had to get the loan extended to make a draw against it. On November 14, Frost told D& Y that he had received an extension for the construction loan and wrote checks to D& Y for about $34,000. D& Y refused to resume work because the Frosts owed considerably more.

On November 27, 2007, Amy Frost asked Yost, via e-mail, to stop e-mailing her about the money the Frosts owed. She stated that she had only $800 in her checking account, that the Frosts had drained their retirement savings, that they owed $60,000 to a lawyer, and that she was worried whether they could pay their mortgage payments and subcontractors. On November 30, D& Y filed a construction lien against the property for $208,896.41. The Frosts had paid a little over $108,000 toward the total contract price.

On December 10, 2007, Jeff Royal, the president of the bank, sent the following e-mail to Frost, which Frost then forwarded to Yost on December 11:

Per our conversation - please provide this e-mail to your builder, [D& Y], that you have funds available to complete the renovation of your property . . . .
If anyone from [D& Y] needs any additional information on this e-mail please have them call me directly . . . .

deNourie believed that this e-mail showed the funds would come from the bank because Royal could not have been referring to funding from any other lender. From his experience with construction loans, deNourie believed that Royal could not have made this statement without knowing the payments that had been made and the amount of money needed to complete the project. According to Yost, he called Royal on December 11, 2007, and said that D& Y was considering foreclosure and would continue the work only if the bank would [289 Neb. 143] pay the amount of its lien directly to D& Y. Yost said that during this call and later calls, Royal assured him that the bank would provide the funding and a letter detailing the terms. Yost testified that on December 11, at Royal's request, he sent an e-mail to Royal to confirm their conversation:

As per our discussion, the intent of the requested letter is to document the exact funds necessary to ...

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