Eighth Circuit Contracts Cases 2011 (Part 1)

U.S. 8th Circuit Contract Cases

The Weitz Co. v. MH Washington, LLC

MacKenzie House, LLC, the developer of the 46th and Washington Townhomes in Kansas City, Missouri, hired The Weitz Company as general contractor. The project was fraught with difficulties, and Weitz sued MacKenzie, MH Washington, LLC (an entity of which MacKenzie was the managing member), and Summit Steel Fabricators, Inc. (a subcontractor hired by Weitz at the behest of MacKenzie) for breach of contract.

The jury returned verdicts for Weitz against MacKenzie, MH Washington, and Summit Steel, and also found for MacKenzie and MH Washington on their breach of contract counterclaims against Weitz.

Contract Drafting and Performance Problems Support Piercing the Corporate Veil Argument

MacKenzie apparently formed MH Washington as a vehicle to own and operate the townhouse project and intended its own role to be that of the managing member of MH Washington and not a party to the construction contract. Although the court found that MH Washington had breached the contract, MacKenzie would not normally be liable for the breach because it was not a party. MacKenzie was careless about treating MH Washington as a separate entity from itself, however, and the court allowed the corporate veil to be pierced.

From the start, MacKenzie blurred the distinction between itself and MH Washington. The project was built pursuant to a prime contract consisting of two American Institute of Architects forms. One of the documents was signed by Don MacKenzie as the president of MH Washington, the “owner,” but the other states that MacKenzie was the “owner” of the project.

MacKenzie added to the confusion by acting as if it were the party to the construction contract instead of MH Washington. In addition to several other factors tending to show that the “corporate veil” of MH Washington should be pierced and MacKenzie held liable as a party to the contract, the Eighth Circuit noted a few contract performance issues:

  • Directions to Weitz concerning the project were printed on MacKenzie’s letterhead and referred to “the original agreement made between MacKenzie House, LLC and The Weitz Company.”
  • Routine correspondence about the project was on MacKenzie letterhead and referred to MacKenzie as an “owner.”
  • MacKenzie was the entity that terminated the contract with Weitz, via a letter signed by Don MacKenzie as President and CEO of MacKenzie.

In all of these instances, MacKenzie should have been acting in its capacity as the managing member of MH Washington, but it was purporting to act on its own behalf. MacKenzie acted like a party to the contract, and the court held it liable for MH Washington’s breach.

Contract Miscellany

In addition to the corporate veil issue, the Eighth Circuit also discussed a few other contract principles:

  • Contract interpretation is a jury question when the court determines that the contract is ambiguous and that there exists a genuine factual dispute regarding the intent of the parties.
  • To recover for breach of contract, a party must show its own substantial compliance with the contract.
  • A party cannot prevent a party from performing on the contract and then sue for failing to perform.

Lefaivre v. KV Pharmaceutical Co.

KV Pharmaceutical and its affiliates (KV), which manufacture and distribute a hypertension medication called Metoprolol Succinate ER, entered into a consent decree with the FDA on March 6, 2009. KV stipulated that it had sold drugs that were adulterated within the meaning of the Federal Food, Drug, and Cosmetic Act (FDCA) because it had not used proper quality control procedures, and that it had sold drugs that were misbranded. As part of the consent decree, KV agreed to recall the drugs from retail stores, but the decree did not require KV to issue a recall notice to individual purchasers of the drug.

Lefaivre, a consumer of the adulterated medication, brought an action against KV, individually and on behalf of all others similarly situated, alleging a breach of the implied warranty of merchantability and violations of the Missouri Merchantability Practices Act. Lefaivre argued that he had a private right of action because KV sold drugs that were adulterated under the FDCA.

Lower Court’s Ruling

Ruling on KV’s motion to dismiss, the United States District Court for the Eastern District of Missouri held in its unpublished opinion, “Because plaintiff Lefaivre’s state law claims are based entirely on violations of FDCA regulations, and because enforcement of the FDCA is solely the province of the federal government, the claims are preempted and the plaintiff has failed to state a cause of action.”

Appeal to the Eighth Circuit

Whether the FDCA preempted state law causes of action was key to the Eighth Circuit’s decision on appeal. Finding no express preemption in the FDCA itself, the court considered whether Lafaivre’s claims were impliedly preempted. Citing its own precedent, the court stated,

Implied preemption exists where a federal statutory or regulatory scheme is so pervasive in scope that it occupies the field, leaving no room for state action—this is termed field preemption. Implied preemption also occurs where state law has not been completely displaced but is superseded to the extent that it conflicts with federal law—this is known as conflict preemption.

The court quoted at length from the Supreme Court’s opinion in Wyeth v. Levine and found that field preemption did not apply. The court also found that conflict preemption did not apply.

The Eighth Circuit reversed and remanded the case to the district court. The lower court’s discussion about the breach of warranty claims will have to wait for another day.

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