A recent Utah Court of Appeals opinion, HKS Architects, Inc. v. MSM Enterprises Ltd. 2021 UT App. 70, puts contractors and designers on notice that they need to pay attention to receivables and excuses for non-payment. The Court held that a long history of missed promises, failures to pay, payments from strangers, and inconsistent stories put HKS on constructive and inquiry notice of facts that should have led to fraud claims being made earlier than they were. The result is that when HKS finally brought claims against the alleged bad actors, more than three years had gone by since HKS should have known about the fraud claims, or at least should have inquired, and thus the claims were time-barred. In the end, HKS got nothing.

In the summer of 2015, HKS Architects responded to an RFQ to design a building on land owned by an entity named 12x12 NW LLC (“12x12”). 12x12 was a single asset LLC owned by MSM Enterprises Ltd., who had borrowed $1,579,000 from three different entities to purchase the land for more than it was worth. 12x12 had no other assets, no cash, bank accounts, employees, or business license. Then another entity, Real Estate Development Advisors, LLC (“REDA”), solicited a design quote from HSK Architects but signed the acceptance of the RFQ in the name of 12x12, rather than REDA. HKS attended a project kick-off meeting at which it was disclosed that the building had not been pre-leased, as had earlier been represented. Subsequent to that, HKS was told that a lease would be signed on the building “within days”. It was not. Two months after issuing its first invoice for ten percent of the contract amount, HKS was paid by another stranger to the transactions, BTS Investments, Inc. (“BTS”). What followed in the ensuing months and years was another $140,000 in billings and work by HKS, and a stream of unfulfilled promises of payment through the rest of 2015.

All through 2016, repeated and unfulfilled promises of payment were made to HKS for its design work. Although the last invoice was sent on January 19, 2016, HKS waited until January 2017 to file suit. 12x12 was the only defendant, and after its initial counsel withdrew from the case, HKS moved for summary judgment and, because the motion was unopposed, got a judgment of nearly $200,000 in its favor. Between August 2017 and March 2019, HKS unsuccessfully sought to collect on the judgment. During supplemental collection proceedings, HKS learned that 12x12 had no assets, had never filed a tax return, had no capital to fund its operations, had no financial reserves, and no money to pay HKS for its services. 12x12 had never applied for a construction loan. Principals of MSM had apparently co-mingled funds and exchanged monies among themselves. In March 2019, HKS moved to amend its pleading in the prior suit to add the principals and entities that had been involved, but the court denied the amendment as untimely, coming a year and a half after judgment had been entered. In June 2019, HKS filed a new complaint alleging fraud and unjust enrichment. The trial court granted a motion to dismiss the new complaint because the statute of limitations had run as to the fraud and fraudulent concealment claims, and because the written agreement with the owner of the property precluded an unjust enrichment claim against a third party that may have received “some” benefit from HKS’s work. In July 2021, the Utah Court of Appeals affirmed the trial court’s grant of the motion to dismiss.

The lesson for contractors and designers who begin work on a project, but soon start receiving signals or red flags as to who they are dealing with and whether they are going to get paid, is that they need to exercise diligence in learning the true facts and act on those facts before going down a long road of failed payments. The Court of Appeals found that more than three years before finally filing suit, HKS was on constructive and inquiry notice of the fraud claims. “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 was barred from bringing its claims because it was considered to have “discovered” its cause of action 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].” Contractors and designers may understandably be patient with owners who may have some struggles, but this case shows there is a limit beyond which a contractor or designer will be prejudiced for ignoring signs and delaying enforcement of rights.