Fifth Side Lodging v. Rise Construction Services

Background

Fifth Side Lodging, LLC is a special-purpose entity — a company formed solely to develop one project — created to build a dual-brand Fairfield Inn and Townplace Suites hotel in Edina, Minnesota. It is affiliated with Hawkeye Hotels, a multi-state hospitality development firm. Fifth Side is owned by Balvant Patel and his wife, Anju Patel. Counterclaim defendants Jayshal Bhakta, Ravikumar Patel, and Parth Patel are Hawkeye executives.

Rise Construction Services, LLC is a commercial contractor specializing in modular construction — a building method using prefabricated units assembled off-site. Christian Lawrence is Rise's owner and CEO.

Negotiations began in May 2019, paused during the COVID-19 pandemic, and resumed in 2021. Rise submitted multiple bids exceeding Fifth Side's $25 million budget. On March 16, 2023, Lawrence offered to complete the project for $25.1 million. Fifth Side accepted. Internal Rise documents show Rise projected a $1.6 million deficit on the project but accepted the deal to expand its modular portfolio, backed by owner financing.

The parties signed a construction contract (the Agreement) on June 1, 2023. Because a $31 million construction loan from Minnwest Bank had not yet closed, Fifth Side agreed to make $2.4 million in downpayments. Bhakta and the Patels signed personal guarantees making each jointly and severally liable (each independently responsible for the full amount) under the Agreement. The Agreement also contained an 'Owner's Financial Assurances' provision (§ 5.0.2) allowing Rise to request, and obligating Fifth Side to provide, 'reasonable evidence' of financial capability to meet all obligations. Failure to provide such evidence could trigger a default declaration under § 5.0.6, giving Fifth Side 14 days to cure, with termination permitted if uncured.

The loan closing was delayed when Minnwest required a secondary guarantee from Sunrise Bank, which in turn required a new environmental report. On July 24, 2023, Rise formally invoked § 5.0.2. Fifth Side responded with information about the ongoing loan process, a June 2023 bank statement from Balvant Patel showing approximately $6.08 million in cash, a letter from Minnwest's loan officer stating the loan was on track, and a letter from Hawkeye claiming over $27 million in recurring free cash flow and $37 million in 'upcoming positive liquidity events.' Rise declared default on August 2, 2023, demanding that Fifth Side deposit all amounts due under the Agreement into escrow. Fifth Side asked whether a lender commitment letter and a firm closing date would suffice; Rise said no. Rise terminated the Agreement on August 18, 2023.

Claims and Counterclaims

Fifth Side sued Rise and Lawrence for: (1) breach of contract (wrongful termination); (2) breach of the implied covenant of good faith and fair dealing; and (3) fraudulent inducement (Rise lied about its ability and intention to complete the project to secure downpayments). Fifth Side dropped a civil theft claim earlier. Rise counterclaimed for breach of contract (Fifth Side's failure to provide adequate financial assurances) and sought to enforce the personal guarantees against Bhakta and the Patels.

Summary Judgment Standard

Summary judgment — a ruling without trial — is appropriate when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Federal Rule of Civil Procedure 56(a). A fact is material if it could affect the outcome; a dispute is genuine if a reasonable jury could decide either way. Courts view the evidence in the light most favorable to the non-moving party.

Ruling I: Breach of Contract and Declaratory Judgment (Both Motions Denied)

The threshold legal question was which contract provision controlled: § 5.0.6 (specific termination-for-default provision) or § 15 (general dispute resolution provision requiring continued performance during disputes). The court held that § 5.0.6, as the more specific provision, governs, following the established rule that specific contractual terms control over general ones.

On the merits, the key question is whether Fifth Side provided 'reasonable evidence' of financial capability under § 5.0.2. The Agreement does not define 'reasonable evidence.' The court looked to Restatement (Second) of Contracts § 251(e) for guidance, which instructs courts to consider the relationship between the parties, prior dealings, the reputation of the party whose performance is questioned, the nature of the grounds for insecurity, and the time available for providing assurance.

Both parties presented expert testimony on this question — Rise's expert Lawrence and Fifth Side's expert Brandt offered conflicting opinions. Because this is a fact-intensive inquiry with genuine disputes of material fact, the court denied both parties' motions. The related question of whether Rise may enforce the personal guarantees against Bhakta and the Patels also cannot be resolved until the jury decides the underlying contract dispute. Similarly, the question of damages — including a referenced $2 million termination fee — remains for the jury.

Ruling II: Breach of Implied Duty of Good Faith and Fair Dealing (Rise's Motion Granted)

Minnesota law implies a covenant of good faith and fair dealing in every contract, prohibiting a party from unjustifiably hindering the other's performance. A breach requires a showing of bad faith — refusing to fulfill a duty based on an ulterior motive. A party does not act in bad faith merely by exercising its legal and contractual rights.

The court ruled that Fifth Side's good faith and fair dealing claim was based on the exact same conduct as its breach-of-contract claim (Rise's requests under the financial assurances provision). Under Minnesota law and decisions from this district, a good faith and fair dealing claim that merely duplicates a breach-of-contract claim must be dismissed. The court also rejected Fifth Side's argument that Rise's escrow demand showed bad faith, finding that the demand appeared to be an attempt to resolve a standoff rather than evidence of an ulterior motive. The court granted Rise's motion on this claim.

Ruling III: Fraudulent Inducement (Rise's Motion Granted)

To prove fraudulent inducement under Minnesota law, Fifth Side must show: (1) Rise made a false representation of a past or existing material fact capable of being known; (2) Rise knew the representation was false or did not know whether it was true; (3) Rise intended Fifth Side to rely on it; (4) Fifth Side did rely on it; and (5) Fifth Side suffered financial damage as a result. A promise about future conduct can constitute fraud if the promisor had no intention of performing when the promise was made.

Fifth Side argued that Rise knew it lacked the financial ability to complete the project and concealed that fact, and alternatively that Rise entered the contract only to collect front-end downpayments before terminating. The court found neither theory supported by the record. While Rise was prepared to lose money on the deal, there was no evidence it was unable to perform or had misrepresented its financial condition. The internal Rise document discussing termination as an option was created after Rise declared default — after contract execution — and was therefore irrelevant to what Rise intended when it signed the Agreement. The court granted Rise's motion on this claim.

Ruling IV: Motion to Exclude Expert Testimony and Post-Termination Evidence (Granted in Part, Denied in Part)

Rise moved to exclude the expert testimony of Ben D. Nolan, III, whom Fifth Side offered to opine that (1) Fifth Side had the financial ability to fund the project, and (2) Fifth Side met its obligation under the Owner's Financial Assurances provision. Rise also sought to exclude post-termination documents that Nolan relied upon.

Under Federal Rule of Evidence 702, expert testimony must assist the trier of fact (the jury), be based on sufficient facts and data, and reflect reliable principles reliably applied. The proponent bears the burden of showing admissibility by a preponderance of the evidence.

The court agreed with Rise that Nolan's opinion on Fifth Side's actual financial ability to fund the project was irrelevant to the contract dispute. The legal question for the jury is not whether Fifth Side actually could have funded the project, but whether the documents Fifth Side provided to Rise before termination constituted 'reasonable evidence' as required by the contract. Evidence of Fifth Side's financial condition that was never provided to Rise — including post-termination documents — cannot inform that question.

Accordingly, the court barred Nolan from testifying about Fifth Side's actual financial ability to complete the project and from relying on post-termination documents. Post-termination financial evidence is inadmissible entirely. However, Nolan may testify about whether the documents Fifth Side actually provided to Rise before termination were sufficient, in his expert opinion, to satisfy the Owner's Financial Assurances provision.