August 17, 2017

Colorado Court of Appeals: Attorney’s Prelitigation Statements Must Be Made in Good Faith to Qualify as Privileged

The Colorado Court of Appeals issued its opinion in Begley v. Ireson on Thursday, January 12, 2017.

Belinda Begley and Robert Hirsch, and their joint revocable trust (collectively, plaintiffs), purchased a property in Denver with the intent of demolishing the existing house and building a new house. Their architect’s plans were approved by the City & County of Denver, and plaintiffs contracted with a builder to begin demolition in anticipation of construction. The builder demolished the old house and began the shoring work for the new house. The neighbors, Ireson and Hoeckele, along with their attorney, Gibbs (collectively, defendants), made several threatening statements to the builder, which caused him to cease work and breach his contract with plaintiffs.

Plaintiffs filed a complaint against defendants, alleging intentional interference with a contract and intentional interference with prospective contractual relations. Several days later, defendants filed suit against plaintiffs, and moved to dismiss plaintiffs’ complaint under C.R.C.P. 12(b)(5) for failure to state a claim, arguing that their allegedly tortious statements were made in anticipation of litigation and were therefore protected. The district court apparently took judicial notice of defendants’ suit and granted their C.R.C.P. 12(b)(5) motion. Plaintiffs appealed.

The Colorado Court of Appeals first noted that motions to dismiss under C.R.C.P. 12(b)(5) are viewed with disfavor. The district court had ruled that the plaintiffs’ complaint failed to state a claim because there was no allegation that the statements by Hoeckele, Ireson, and Gibbs caused the builder to breach his contract. The court of appeals found this was error. The complaint alleged with specificity several incidents in which Ireson, Hoeckele, and Gibbs interfered with the construction contract, and the court held that nothing more was required to survive the motion to dismiss. The court reversed the district court’s grant of defendants’ motion.

The district court next ruled that because Gibbs’ statements and communications to the builder were made while he was representing Ireson and Hoeckele and were “in anticipation and in furtherance of litigation,” they were absolutely privileged against the torts that plaintiffs alleged. The court of appeals again found that this ruling was in error. The court analyzed several state appellate court decisions, as well as section 586 of the Restatement (Second) of Torts, and determined that prelitigation statements must be made in good faith to be privileged. Because the district court made no finding as to whether Gibbs’ statements were made in good faith, the court of appeals reversed and remanded.

The court of appeals reversed the district court’s rulings and remanded for further proceedings.

Tenth Circuit: Delay in Tendering Insurance Benefits Found Unreasonable

The Tenth Circuit Court of Appeals issued its opinion in Peden v. State Farm Mutual Automobile Insurance Co. on Tuesday, November 15, 2016.

Wendy Peden was among a group of friends drinking and celebrating the birthday of Terrell Graf’s fiancee. Mr. Graf gathered the friends into the van he had purchased for his fiancee, drove away, and crashed. Ms. Peden suffered serious injuries. She obtained $240,000 in insurance benefits, but claimed more in underinsured motorist benefits. State Farm initially denied the claim, but ultimately paid her $350,000, the maximum amount available. Ms. Peden sued State Farm for bad faith under Colorado common law and statutory law.

Ms. Peden argued in her claim for uninsured/underinsured motorist benefits that she had seven forms of injury totaling from $647,484.76 to $1,115,504.76. Ms. Peden sought benefits from a State Farm policy carried by Mr. Graf’s fiancee and also from her own State Farm policy. State Farm denied the claim, stating that the $240,000 she had received had fairly compensated her. When Ms. Peden brought suit against State Farm, it investigated further and ultimately paid her the maximum amount allowable under the policies. Ms. Peden continued to claim that State Farm had unreasonably delayed payment of benefits. State Farm moved for summary judgment, arguing that the handling of the claim was reasonable as a matter of law. Ms. Peden moved for partial summary judgment on her statutory bad faith claim. The district court granted State Farm’s motion, and Ms. Peden appealed.

The Tenth Circuit found that under Colorado law, all insurance contracts contain an implied duty of good faith and fair dealing, and that there is both a common law and statutory duty to handle claims in good faith. For an uninsured motorist claim involving a breach of the common law duty, the insured must prove that the insurer acted unreasonably under the circumstances and knowingly or recklessly disregarded the validity of the insured’s claim. A statutory claim includes a requirement that the insurer cannot “unreasonably delay or deny payment of a claim.” The Tenth Circuit examined industry standards and determined that State Farm had a duty to investigate the claim as diligently to prove its merit as it would to deny benefits, and had a duty to find all facts to try to understand the claimant’s medical condition. The Tenth Circuit found that in this case, State Farm had discredited Ms. Peden’s claim because she went for a ride with a drunk driver. Ms. Peden argued that she did not know Mr. Graf was drunk and she did not think he was going to drive the vehicle—she believed they were only getting in the van to take a group picture. State Farm did not interview Ms. Peden or otherwise investigate her story. The Tenth Circuit found that by failing to interview Ms. Peden, State Farm breached its duty.

The Tenth Circuit also found that State Farm unreasonably failed to investigate the total amount of damages before denying Ms. Peden’s claim. State Farm did not include any payment for future noneconomic damages, prejudgment interest, or wage loss in its initial valuation of the claim, and its tender of damages was between 24 and 42 percent of the amounts claimed by Ms. Peden. The Tenth Circuit found that a reasonable fact-finder could infer that State Farm failed to adequately investigate the damages that would have been available to Ms. Peden if she had sued Mr. Graf. The Tenth Circuit noted that State Farm could have consulted with a physician, asked Ms. Peden to submit to a physical examination, or interviewed her, and it did none of these things. The Tenth Circuit held that a fact-finder could question the reasonableness of this investigation.

The Tenth Circuit reversed the district court’s grant of summary judgment to State Farm. The Tenth Circuit vacated the district court’s denial of Ms. Peden’s partial summary judgment motion as moot, since it was no longer moot. The Tenth Circuit remanded to the district court for further findings.

Colorado Court of Appeals: Restitution Does Not Create a Debtor-Creditor Relationship with Victim

The Colorado Court of Appeals issued its opinion in People v. Foos on Thursday, September 22, 2016.

Bankruptcy—Discharge ofRestitution Order—Bad Faith.

In 2012, the U.S. Bankruptcy Court discharged Foos’s debts against the three victims in this case. Prior to his bankruptcy proceedings, Foos owed money to these victims. In 2013, Foos was charged with two counts of felony theft and one count of defrauding a secured creditor. Foos resolved these charges by pleading guilty to the charge of defrauding a secured creditor in exchange for dismissal of the other two counts. He stipulated to a deferred judgment and sentence with a requirement for full restitution.

On appeal, Foos argued that it was error to order him to pay restitution because he discharged his debts in bankruptcy before the charges were filed against him. C.R.S. § 18-1.3-603(4)(d) precludes the discharge of restitution orders in bankruptcy, and restitution serves a different purpose than bankruptcy. Accordingly, the district court did not err in ordering Foos to pay restitution.

Foos also argued that he was prosecuted in bad faith. The court of appeals noted that although the original prosecutor had a “cozy relationship” with Foos’s creditors, she was replaced with a special prosecutor who had no personal connection to the case and who made an independent decision to move forward with the prosecution. Moreover, Foos waived his right to challenge the validity of the charges by pleading guilty.

Finally, Foos argued that he was ordered to pay restitution to a listed victim in a theft count that was dismissed as part of the plea agreement. Colorado case law is clear that, for purposes of restitution, a victim does not have to be one of the named victims of a conviction.

The order was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Tenth Circuit: Fair Debatability Does Not Preclude Claim for Insurance Bad Faith

The Tenth Circuit Court of Appeals issued its opinion in Home Loan Investment Co. v. St. Paul Mercury Insurance Co. on Tuesday, July 5, 2016.

Ms. Rosemarie Glas owned a property in Grand Junction called White Hall with a mortgage through Home Loan Investment Co. When she stopped making payments on the loan, Home Loan accepted a deed in lieu of foreclosure from Ms. Glas in order to allow her to sell White Hall. Ms. Glas also informed Home Loan that she was unable to pay certain utilities and the insurance on the property. Home Loan contacted St. Paul to obtain insurance for the property, and completed a form from St. Paul by checking the option that it was the mortgagee in possession of the property. Later, there was a fire, and White Hall was almost completely destroyed. Home Loan submitted a claim to St. Paul for the value of the property, but St. Paul denied the claim, determining that Home Loan did not qualify as a mortgagee in possession and there was no foreclosure proceeding underway so there was no coverage.

Home Loan filed suit in Colorado state court, alleging claims for common law breach of contract and statutory bad faith pursuant to C.R.S. §§ 10-3-1115 and -1116. St. Paul removed the action to federal court, citing diversity jurisdiction. Prior to trial, St. Paul moved for summary judgment, but the district court denied the motion. At trial, St. Paul argued that Home Loan had never had “possession” or “care, custody, or control” sufficient to trigger coverage under the policy. St. Paul also argued that because its position was “fairly debatable,” it could not have acted unreasonably for purposes of the bad faith statutes. St. Paul renewed its motion for summary judgment and moved for judgment as a matter of law (JMOL) after Home Loan rested. The district court denied the motions. The jury returned a verdict for Home Loan on the common law breach of contract and statutory bad faith claims. St. Paul again moved for JMOL under F.R.C.P. 50(b), or, alternatively, a new trial under F.R.C.P. 59(a). The district court denied both motions, and St. Paul appealed to the Tenth Circuit on the statutory bad faith claim.

St. Paul raised three issues on appeal: (1) the district court erred in denying its motion for JMOL because its denial was reasonable as a matter of law, and the district court erroneously instructed the jury on assessing the standard for reasonableness; (2) C.R.S. §§ 10-3-1115 and -1116 only provide remedies for unreasonable claims handling activities, not underwriting practices; and (3) the district court erred in calculating the amount of damages under C.R.S. § 10-3-1116 because it awarded the covered benefit plus twice that amount as damages, for a total of three times the covered benefit. The Tenth Circuit examined and rejected each contention in turn.

The Tenth Circuit first addressed St. Paul’s argument that because its denial was “fairly debatable,” it was not unreasonable as a matter of law. Home Loan responded that fair debatability is only one factor in the overall reasonableness analysis. The Tenth Circuit noted that the question had not been addressed by the Colorado Supreme Court, but different panels of the Colorado Court of Appeals had answered the question differently. The Tenth Circuit remarked, though, that the Colorado Court of Appeals had expressly rejected the position advanced by St. Paul. The Tenth Circuit held that the district court did not err in denying St. Paul’s motion for JMOL on those grounds.

St. Paul next argued that C.R.S. §§ 10-3-1115 and -1116 only provide a remedy for claims-handling activities, not underwriting activities. The Tenth Circuit evaluated the statutes and found nothing to support St. Paul’s position. The Tenth Circuit instead held that the Colorado legislature intended to capture all aspects of the insurance relationship and provide a remedy for bad faith, regardless of whether the bad faith arose out of claims handling or underwriting.

Finally, St. Paul argue the district court erred in awarding three times the covered benefit. The Tenth Circuit again disagreed, reading the statute to provide for an award of the covered benefit plus two times that amount as a penalty.

The Tenth Circuit next addressed the argument raised by the dissent. The dissent would have granted JMOL because the evidence at trial did not support a finding that St. Paul acted unreasonably in denying Home Loan’s claim. The majority panel concluded that St. Paul neither forwarded a sufficiency of the evidence challenge before the district court nor argued sufficiency before the Tenth Circuit on appeal, and therefore the argument was waived. Although St. Paul advanced a Rule 50(a) argument at the close of Home Loan’s evidence, it argued a different issue on the hearing for its motion. Following the trial, St. Paul moved for JMOL under Rule 50(b), but the Tenth Circuit majority panel again found that the focus of St. Paul’s motion was not sufficiency of the evidence but rather the scope of the bad faith claim. Therefore, St. Paul’s sufficiency of the evidence challenge was not properly preserved.

The Tenth Circuit affirmed the district court. Judge Bacharach dissented.

Tenth Circuit: Managers Acted in Bad Faith by Painting Grim Financial Picture to Valuation Firms

The Tenth Circuit Court of Appeals issued its opinion in Leone v. Owsley on Wednesday, November 25, 2015.

Charles Leone was a principal of Madison Street Partners, LLP (MSP). In 2012, he resigned his position, and fellow principals Stephen Owsley and Drew Hayworth (Managers) elected to buy Leone’s interest in MSP. The Operating Agreement required the purchase price to be set at fair market value, and the Managers received two independent valuations from St. Charles Capital, LLC, and INTRINSIC. Although it was not used in calculating the offer to Leone, in 2009 Duff & Phelps had valued MSP at between $50 and 65 million. The Managers reluctantly gave the Duff & Phelps report to St. Charles and INTRINSIC, but urged them to ignore it, arguing it was not relevant. The Managers characterized MSP as having poor performance and did not give the valuation firms MSP’s newsletters or other relevant information.

St. Charles valued MSP with a total 2011 revenue of $5.892 million and total net income of $2.21 million. MSPs internal profit and loss statement listed total 2011 revenue as $7.289 million and net income of $3.398 income. INTRINSIC prepared a less detailed report without an opinion as to MSP’s value. Based on the two reports, the Managers offered Leone a purchase price of $135,850. Leone rejected the offer and retained his own expert to value his interest. Leone’s expert calculated his interest as of August 2012 at $1.5 million. Around the same time, Owsley sent his father an email expressing an interest in buying out Leone, remarking that MSP was stable.

In November 2012, Leone brought suit against the managers in the U.S. District Court for the District of Colorado, alleging that they had breached Article 10, Section 10.2(d) of the Operating Agreement by failing to act in good faith in valuing his interest in MSP. Leone also argued the Managers breached the implied covenant of good faith by unreasonably attempting to force him to sell his interest for a price far below fair market value. Managers claimed Leone’s claims were barred because of their “good faith reliance on the advice of one or more third parties.” They moved for summary judgment, and the district court granted their motion. The district court ruled that the valuation firms were qualified to provide expert reports and there was no evidence Managers relied blindly on the reports. As to Leone’s claim that the Managers improperly influenced the valuation firms in order to receive more favorable numbers, the district court found that he had failed to raise a dispute of material fact about the procedural integrity of the valuation.

On appeal, Leone argued that the district court erred in its interpretation of Delaware law by (1) conflating express and implied contractual obligations of good faith, (2) holding that bad faith requires a tortious state of mind, and (3) refusing to consider the substantive unreasonableness of the offered purchase price. He also argued that the district court erred in granting summary judgment because he raised genuine issues of material fact. The Tenth Circuit first evaluated Leone’s argument that the district court erred in conflating express and implied bad faith. The Tenth Circuit noted that under either standard, a good faith evaluation of the ownership interests would require the Managers to refrain from taking action that would result in a lower valuation.

The Tenth Circuit next addressed Leone’s contention that the district court erred in finding that a tortious state of mind is required for bad faith. Analyzing the district court’s opinion as a whole, the Tenth Circuit found it properly stated the Delaware requirements for bad faith. The Tenth Circuit next addressed Leone’s argument that Delaware’s safe harbor provision does not immunize the Managers because they acted in bad faith by wrongfully influencing the valuation firms and relying on valuation figures that were clearly erroneous. The district court concluded it should refrain from considering the substantive accuracy of the valuation reports absence a finding of wrongdoing, then held that no reasonable juror could find that the Managers did anything that affected the procedural integrity of the valuation. The Tenth Circuit disagreed with the district court’s conclusion, noting that when taken in the light most favorable to Leone, a reasonable jury could conclude that the Managers did not rely in good faith on the valuation firms.

Addressing Leone’s claim that the district court erred in granting summary judgment, the Tenth Circuit agreed. Considering the evidence in the light most favorable to Leone, the Tenth Circuit found the district court erred in rejecting that an inference of bad faith could be drawn by the Managers’ actions. The Tenth Circuit noted that a reasonable jury could find that the Managers engaged in conscious wrongdoing based on inaccurate statements to the valuation firms. The Tenth Circuit noted that a reasonable jury could disagree with the district court’s conclusion that the Managers’ false statements did not materially influence the valuation firms’ reports.

The Tenth Circuit reversed the district court’s grant of summary judgment and remanded for further proceedings.

Tenth Circuit: Attorney Fee Award Appropriate as Sanction for Bad Faith Conduct

The Tenth Circuit Court of Appeals issued its opinion in Farmer v. Banco Popular of North America on Tuesday, June 30, 2015.

George Farmer, a licensed Colorado attorney, was personal representative of his father’s estate. Banco Popular demanded that Farmer pay off the entire amount of a $150,000 HELOC his late father obtained on his home. Eventually, Banco and Farmer reached a settlement agreement, where Banco would pay Farmer $30,000 and forgive some of the loan principal and Farmer would pay Banco  $137,380.94 in satisfaction of the HELOC. However, Farmer never signed the settlement agreement, and continued to vexatiously litigate terms of the agreement. Eventually, the dispute reached the Tenth Circuit, and the Circuit ordered the enforcement of the district court’s order for the parties to pay according to the terms of the settlement agreement. The Tenth Circuit admonished Farmer and directed the district court that it could exercise its authority in imposing punitive sanctions for further delays caused by Farmer.

When Banco returned to the district court to enforce the order, Farmer paid the $137,380.94, and Banco renewed its motion for attorney fees and costs under 28 U.S.C. § 1927. The district court awarded $41,461.76 in attorney fees and $11,617.77 in costs to Banco, excluding fees and costs related to Farmer’s first appeal, and Farmer appealed the district court’s order.

The Tenth Circuit first dismissed Farmer’s frivolous argument that the district court lacked subject matter jurisdiction over the matter following remand. Farmer’s first appeal was interlocutory, and the district court’s attorney fee judgment was a punitive sanction issued prior to final judgment. The district court thus retained jurisdiction over the matter on remand.

Farmer next argued that Banco waived its right to attorney fees in the settlement agreement. The Tenth Circuit, noting it doubted the parties anticipated the “tortuous” litigation that would follow, found the attorney fee and cost award was a punitive sanction and the court’s inherent power to fashion punitive sanctions for bad faith conduct was inherent and could not be waived by agreement of the parties. Reviewing the award itself for abuse of discretion, the Tenth Circuit found none. The tone and substance of Farmer’s motions suggested a deep disrespect for the court and its authority. Farmer’s conduct vexatiously multiplied the proceedings, implying bad faith. The Tenth Circuit found ample record justification for the punitive sanctions. Farmer requested the Tenth Circuit remand the matter to the district court for a detailed list of bad faith conduct pursuant to § 1927, but the Tenth Circuit declined to do so, finding that the district court’s sanctions were issued pursuant to its inherent authority and it need not list each instance of bad faith conduct.

The Tenth Circuit made slight reductions to the fee and cost award due to some of the fees and costs being performed for the appeal. The Circuit issued a final mandate that Farmer pay $40,246.76 in attorney fees and $10,577.77 in costs to Banco, and noted Banco could use any and all lawful means to ensure collection. The Tenth Circuit warned that “further prolongation of th[e] appeal” would result in the Tenth Circuit imposing its own sanctions on Farmer.