May 23, 2018

Colorado Court of Appeals: Noncompetition Clause Unenforceable Against Dissenting Shareholder Doctor

The Colorado Court of Appeals issued its opinion in Crocker v. Greater Colorado Anesthesia, P.C. on Thursday, March 8, 2018.

Shareholder Employment Agreement—Merger—Dissenters’ Rights—Covenant Not to Compete—Judicial AppraisalLiquidated Damages.

Crocker, an anesthesiologist, was a shareholder in Metro Denver Anesthesia from 2001 until 2013, when that entity merged with Greater Colorado Anesthesia, P.C. (old GCA), now known as Greater Colorado Anesthesia, Inc. (new GCA). In conjunction with the merger, Crocker purchased one share of old GCA stock for $100. In April 2013 he signed a shareholder employment agreement (the Agreement), which contained a provision for liquidated damages to be paid to old GCA in the event that the former employee violated the “Damages Upon Competition” section within two years immediately following termination of the Agreement.

In 2014, old GCA began entertaining a merger with U.S. Anesthesia Partners (USAP) under which USAP would buy out GCA shares for a lump sum of cash plus USAP common stock. To receive that payment, shareholders of old GCA would be required to execute a new employment agreement reflecting a 21.3% reduction in pay and a five-year employment commitment. Old GCA would form an interim company (GCA Merger Sub, Inc.), file amended and restated articles of incorporation, and convert the company into a C-corporation, new GCA.

Crocker voted against the action and provided notice under C.R.S. § 7-113-202 that he would demand payment for his share of old GCA if the merger were approved, in exercise of his dissenter’s rights.

The merger was approved in 2015. Each approving shareholder would receive $626,000 in cash; $224,000 in USAP common stock, to fully vest in five years; and a signing/retention bonus. Old GCA sent Crocker $100 for his share. He refused it and later demanded $1,030,996.

Crocker communicated that he did not understand how the merger would affect his employment status and offered to work under a temporary contract, but GCA did not offer one. He did not return to work, but took a temporary position and then signed an employment agreement with Guardian Anesthesia Services and began providing services at a hospital within the noncompete area of the Agreement.

As relevant to this appeal, the district court held a trial to address (1) new CGA’s claim for damages resulting from Crocker’s alleged breach of the Agreement’s noncompete terms, and (2) new CGA’s request for a judicial appraisal of the fair value of Crocker’s 1.1% share of old GCA. The district court found that Crocker was no longer bound by the Agreement and the covenant not to compete could not be enforced against him. It also found that the fair value of Crocker’s share of old GCA was $56,044 plus interest.

On appeal, GCA argued that the district court erred in finding the noncompete provision unenforceable. The court of appeals stated, as a threshold matter, that generally a noncompete provision will survive a merger and the right to enforce the provision will vest in the surviving entity. But the court held that new GCA could not enforce the noncompete provision against Crocker because it is unreasonable to enforce the provision against a dissenting shareholder forced out of employment by the action of a merger. Here, it was undisputed that an anesthesiologist must reside within 30 minutes of where he works, and as a practical matter, enforcing the noncompete provision would have required Crocker to move or to pay GCA damages to continue to practice. Enforcement would thus further penalize Crocker’s exercise of his right to dissent rather than protect him from the conduct of the majority. Under these circumstances, the noncompete is unreasonable and imposes a hardship on Crocker. It is thus not enforceable against him as of the date the merger was finalized.

Further, C.R.S. § 8-2-113(3) directs that a damages term in a noncompete provision such as the one here is enforceable only if the amount is reasonably related to the injury suffered. Under the Agreement’s liquidated damages provision, Crocker would have to pay $207,755 in damages for the alleged violation of the noncompete provision. The district court determined, with record support, that the injury suffered by old GCA because of Crocker’s departure was zero. Here, there was no reasonable relationship between the actual injury suffered and the damages calculated per the formula, and the noncompete was not enforceable against Crocker.

Crocker cross-appealed the district court’s valuation of his share of old GCA, contending that the court erred in valuing his share by excluding evidence of the price USAP paid for old GCA. The district court did not refuse to consider the deal price, but properly rejected it because it found the price to be an unreliable starting point from which to determine fair value.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Arbitration Clause in Health Insurance Contract Displaced by C.R.S. § 10-3-1116

The Colorado Court of Appeals issued its opinion in Meardon v. Freedom Life Insurance Co. of America on Thursday, March 8, 2018.

Health Insurance Policy—Mandatory Arbitration—Conformity Clause—Federal Arbitration Act—C.R.S. § 10-3-1116(3)—McCarran-Ferguson Act—Federal Supremacy—Preemption—Reverse Preemption.

Defendants Freedom Life Insurance Company of America and Robert J. Pavese (collectively, Freedom Life) denied health insurance benefits claimed by plaintiff  Meardon under a health insurance policy (policy) issued to her by Freedom Life. The policy contained a mandatory arbitration clause to resolve disputes. The policy also contained a “conformity clause” stating that a policy provision that conflicts with the laws of the policyholder’s state is amended to conform to the minimum requirements of such laws. Freedom Life moved to compel arbitration and to dismiss the case, relying on the mandatory arbitration clause. The trial court denied the motion, relying on C.R.S. § 10-3-1116(3), which allows denied claims to be contested in court before a jury.

On appeal, Freedom Life contended that (1) C.R.S. § 10-3-1116(3) cannot be applied because it is preempted by the Federal Arbitration Act (FAA); (2) even if the FAA does not preempt the statute, the arbitration clause remains in effect for those claims that fall outside the statute; and (3) Meardon must arbitrate her claims to “exhaust her administrative remedies” under C.R.S. § 10-3-1116(3). The plain words of the statute conflict with the mandatory arbitration clause. This conflict triggered the policy’s conformity clause, the application of which invalidated the arbitration clause for those claims covered by C.R.S. § 10-3-1116(3). Further, the FAA does not preempt C.R.S. § 10-3-1116(3) because the McCarran-Ferguson Act preempts the FAA under the doctrine of reverse-preemption.

Freedom Life alternatively contended that only those claims covered by C.R.S. § 10-3-116(3) are exempted from the arbitration clause and the remaining claims must be arbitrated. Because the parties did not seek a ruling from the trial court on this specific issue, the court of appeals was unable to determine which claims are subject to the arbitration clause.

The court’s order denying arbitration of those claims covered by C.R.S. § 10-3-1116(3) was affirmed. The case was remanded for the trial court to determine which claims are covered by C.R.S. § 10-3- 1116(3) and which are subject to the policy’s arbitration clause.

Summary provided courtesy of Colorado Lawyer.

Tenth Circuit: Workers’ Compensation Case Reversed Because Interpretation of Policy was Arbitrary and Capricious

The Tenth Circuit Court of Appeals issued its opinion in Owings v. United of Omaha Life Insurance Co. on Tuesday, October 17, 2017.

The plaintiff in this case, Owings, suffered a disabling injury while on the job and was afforded long-term disability benefits by the defendant, United of Omaha Life Insurance Company (United). Owings disagreed with the amount and beginning date of his disability benefits and filed suit. The district court granted summary judgment in favor of United, and Owings appealed.

Owings injured his back at work on July 1, 2013 while moving a surgical chair and cabinet, which left Owings unable to lift, bend, stoop, carry, push, and pull, resulting in Owings experiencing long-term back pain and spasms. The same day of his injury, Owings met with Bratton, the Director of Human Resources at United, who informed Owings that his title would be changed and his salary reduced, effective immediately. Owings went home and did not work for the company thereafter. Owings then applied for short-term disability benefits with United. As part of his application, Owings described the incident and the date it occurred, as well as statements from his employer and treating physician, Dr. McClintick. Dr. McClintick listed the “Date symptoms first appeared” as July 1, 2013, also noting that Owings had been continuously disabled and unable to work from the same date. Bratton, however, completed and signed an “Employer’s Statement” form for United, where she stated that Owings disability resulted from a previous injury and his last day of work was July 2, 2013.

Owings applied for long-term disability and was approved, although the letter stated that Owings became disabled on July 3, 2013. Owings, through his attorney, sent a letter to United asking for the date of disability to be changed to July 1, 2013. In response, United asked for copies of all of Owings’ time sheets. Bratton emailed Union twice with conflicting dates on Owings’ last day, but ultimately concluded that Owings left work at some time on July 2, 2013. Relying on this information, United denied the request to adjust Owings’ disability date, explaining that July 3 was the first day Owings was unable to work, since his employer verified he had worked July 2. United would only pay Owings the discounted salary set forth by Britton on July 1st. Owings subsequently filed suit.

Owings’ complaint is governed by the Employee Retirement Income Security Act (ERISA). A benefits decision under an ERISA-governed plan is generally left to the discretion of the administrator in determining the terms of the plan and of determining eligibility. In this case, the policy afforded United the discretion and final authority to construe and interpret the policy. The Tenth Circuit then examined whether the benefits decision at issue was arbitrary and capricious, limiting the review to determining whether the interpretation of the plan was reasonable and made in good faith.

Owings asserted that United abused its discretion in interpreting the term “disability” when calculating the amount of his monthly long-term disability benefit under the policy. Owings argued that the policy defined disability by reference to the inability to perform at least one of the material duties of his regular occupation, whereas United omitted the phrase “at least one of” to modify the policy to include each and every job duty.

The Tenth Circuit found United’s definition of disability to be inconsistent with the plain language of the policy, which requires only that the injury prevent the employee from being able to perform one material duty of occupation. The Tenth Circuit therefore found United’s definition of disability arbitrary and capricious.

The next issue was that United prohibited an employee from being declared disabled on the last day that he or she worked. United argues that Owings performed his job with no impairment for at least part of the day on July 1, so the earliest possible date disability could begin was on July 2. The Tenth Circuit found that United’s explanation could not be inferred from the policy’s definitional section. Nothing in the policy supported United’s conclusion that an employee cannot become immediately disabled after working for part of the day.

A third issue was whether United erred in relying exclusively on the statements from Bratton. The Tenth Circuit found that the record established, without question, that United rejected Owings’ initial request to adjust his disability date, as well as his subsequent administrative appeal, due to Bratton’s statements. The Tenth Circuit held that United erred in blindly relying on Bratton’s statements, as the determination should not have been based on whether Owings worked on a particular day, but rather on which day he sustained his injury.

The Tenth Circuit found that it was undisputed that Owings became injured on July 1. Owings’ treating physician identified July 1 as the date Owings was first unable to work. The only work Owings did on July 2 consisted of using the company cell phone; he did not physically go to the workplace. For these reasons, the Tenth Circuit concluded that United acted arbitrarily and capriciously in interpreting and applying the policy language. Under plain and ordinary meaning of the policy language, Owings became disabled on July 1, 2013. The proper remedy was to reverse the district court’s grant of summary judgment in favor of United.

The Tenth Circuit Court of Appeals REVERSED and REMANDED with directions to enter summary judgment in favor of Owings.

Tenth Circuit: Colorado RTD Manager Found Guilty of Bribery

Tenth Circuit Court of Appeals issued its opinion in United States v. Hardin on Wednesday, October 25, 2017.

Defendant Hardin was the senior manager for the Regional Transportation District (RTD) in Colorado. Part of Hardin’s job responsibilities included setting goals on projects for small business participation and ensuring compliance of small business participation on various projects. Ward was the owner of a busing company as well as a manufacturing representative for Build Your Dream, a manufacturer of automobiles and rechargeable batteries. Ward represents Build Your Dream to sell their merchandise in Denver.

Ward’s busing company contracted with RTD as a service provider for Access-a-Ride, a program that provides local bus transportation in Denver for people with disabilities. From that point on, Ward paid Defendant monthly bribes in exchange for Defendant’s help to secure a contract with RTD, as RTD was preparing to solicit bids for the purchase of shuttle buses. Ward would meet with Defendant every month and pay Defendant to help Ward win the contract. Further, Defendant gave Ward information on potential competitors to allow Ward to tailor his proposal to RTD.

Unbeknownst to Defendant, Ward had previously pleaded guilty to tax evasion and, to receive a reduced sentence, relayed Defendant’s original bribe request to the Federal Bureau of Investigation. Ward then became the FBI’s confidential informant to investigate Defendant for bribery. The meetings and conversations between Ward and Defendant were all recorded.

Defendant was charged with four counts of committing bribery involving a program that receives federal funds. The jury found Defendant guilty of three counts relating to the proposed shuttle bus contract. Defendant appealed, arguing that, by dismissing one count, it could not be shown that he had solicited the requisite $5,000 threshold that is set by the federal-program bribery statute. The Tenth Circuit found that the $5,000 pertains to the subject matter of the bribe and Ward paid for Defendant’s help with respect to the lucrative shuttle bus purchase contract. The Tenth Circuit was persuaded that the statute was sufficiently definite to give Defendant fair notice of the criminality of his conduct.

The Tenth Circuit Court of Appeals AFFIRMED Defendant’s conviction and sentence.

Tenth Circuit: Chicken Farmer Prejudiced by District Court’s Judgment on Basis Not Raised by Either Party

The Tenth Circuit Court of Appeals issued its opinion in Oldham v. O.K. Farms, Inc. on Monday, September 25, 2017.

Plaintiff, Earl Oldham, had entered into a contract with O.K. Farms (O.K.), which contract is at issue in this case. Under the contract, O.K. would provide Oldham with chickens to raise, the chickens would remain O.K.’s property, and Oldham would be paid for providing their care. Although the contract had a three-year duration, O.K. retained the right to terminate the contract for certain specified reasons, including breach of any term or condition of the contract, abandonment or neglect of a flock, and failure to care for or causing damage to O.K.’s equipment or property.

Early one morning, Oldham discovered one of his three chicken houses had flooded and contacted O.K. requesting help. Oldham then briefly left the farm to open his tire shop, and when he returned, he was informed by an O.K. field technician that it was his problem, not O.K.’s, and Oldham would have to deal with it. Oldham began complaining at the lack of help provided by O.K. and requested they come and get all of the chickens.

An O.K. crew arrived at Oldham’s farm, removed the live chickens, and brought them to a nearby farm to be raised by a different farmer. Oldham was paid for the work he had done raising the chickens to that point, reduced by the cost of catching and moving the chickens. O.K. subsequently sent Oldham a letter, providing him with a ninety-day notice of contract termination. O.K. provided its reasoning behind termination of the contract: (1) Oldham breached the terms and conditions of the contract by failing to adequately provide for the animal welfare of the chickens in his care; (2) Oldham abandoned and neglected the flock to open his tire shop when the chickens were encountering a threat to their welfare; and (3) the flooding in the henhouse damaged O.K.’s property, the chickens.

In response to these allegations, Oldham contended the flooding was the result of an act of God, not neglect. As for the abandonment argument, Oldham argued that he did not abandon the chickens by leaving for fifteen to twenty minutes while an O.K. field technician was at the scene telephoning his supervisor to determine what they should do about the situation.

This appeal follows the district court’s granting of summary judgment in favor of O.K. on the premise that Oldham abandoned the flock when he requested O.K. come pick up all of the chickens, not just the ones in the flooded henhouse.

After carefully reviewing the summary judgment record and the parties’ arguments, the court determined that the district court granted judgment on a basis that was not raised by O.K. or briefed by either party. The only argument regarding abandonment that O.K. raised in its brief was the argument that Oldham abandoned the flock by leaving to open his tire shop. O.K. never raised any argument that Oldham abandoned his flock by telling O.K. to come get all of the birds.

The rules of civil procedure permit a district court to grant summary judgment on grounds not raised by a party, but only after giving notice and a reasonable time to respond. The district court gave no notice that it intended to grant summary judgment on a basis that was not raised by O.K., nor did the district court give Oldham any time to respond to this decision, much less reasonable time to consider the new theory and develop the arguments to dispute it. The court found that Oldham was prejudiced by this lack of notice and opportunity to respond.

In order to establish the requisite prejudice, the losing party must identify what additional arguments he could have made or evidence he could have produced or relied on to undermine the district court’s ruling. In this case, Oldham evidenced that he was motivated by concern for all of the other chickens’ welfare in telling O.K. to pick up all of the chickens, as there was more rain forecasted and he did not want another henhouse to be flooded. This concern for the chicken’s welfare might have been relevant to the district court’s holding that Oldham legally abandoned the chickens. The court found that this information was enough to show prejudice.

The Tenth Circuit Court of Appeals REVERSED and REMANDED for further proceedings.

Colorado Court of Appeals: Surety Erroneously Required to Return Part of Bond

The Colorado Court of Appeals issued its opinion in People v. Fallis on Thursday, October 19, 2017.

Bond—Refund—C.R.S. §16-4-110(1)(d).

Defendant was charged with and arrested for allegedly murdering his wife. The district court set a $500,000 bond. Defendant posted bond through Perna by paying a $25,000 premium. Thereafter, defendant cooperated with all court orders and appeared at all hearings. Fourteen months later, just before defendant’s trial was to begin, Perna moved to surrender defendant back into the custody of the court. The court granted the motion. Defendant spent several days in jail while his family secured a second bond and paid another $25,000 premium to a different surety to secure defendant’s release. Defendant was ultimately acquitted. Defendant moved for return of the premium he had paid to Perna, which the court partially granted, ordering Perna to return $11,031.25 to defendant.

On appeal, Perna contended that the district court erred by ordering that he refund a portion of the bond premium to defendant. Under C.R.S. § 16-4-110(1)(d), a court may order return of all or part of the premium defendant paid to prevent unjust enrichment only if the surrender occurred before the defendant’s initial appearance. Here, Perna surrendered defendant to the court 14 months after the court process began, well after defendant’s initial appearance. Accordingly, the court was without the authority to order Perna to refund all or part of defendant’s premium.

The order was vacated.

Summary provided courtesy of Colorado Lawyer.

Colorado Supreme Court: Engagement Agreement Authorized Award of Post-Settlement Collection Costs

The Colorado Supreme Court issued its opinion in Laleh v. Johnson on Monday, October 2, 2017.

Contracts—Fees and Costs.

The supreme court reviewed the court of appeals’ opinion affirming a trial court’s order requiring a pair of litigants to pay a court-appointed accounting expert’s post-settlement collection costs. The trial court appointed the expert to help resolve the litigants’ complex accounting claims, and the litigants signed an engagement agreement with the expert setting forth the scope of his services and payment. After the expert commenced work, the litigants settled the case and the trial court dismissed the suit. The expert then informed the trial court that the litigants refused to pay both his outstanding fees and his costs incurred post-settlement in attempting to collect the outstanding fees. Relying on a provision in the engagement agreement stating that the litigants were responsible for payment of “all fees and expenses” to the expert, the trial court held that the expert was entitled to the post-settlement costs he incurred while trying to collect his outstanding fees. The court of appeals disagreed with the trial court’s interpretation of the engagement agreement, holding that the agreement was silent as to the expert’s post-settlement collection costs, but it nevertheless affirmed the trial court’s award of the expert’s post-settlement collection costs on the ground that the trial court had inherent authority to require the litigants to pay such costs. The court held that a separate provision of the engagement agreement not previously considered by the trial court or the court of appeals authorized the trial court’s award of the disputed post-settlement collection costs. The court therefore affirmed the award of these costs to the expert, albeit on different grounds.

Summary provided courtesy of Colorado Lawyer.

Colorado Supreme Court: Damages Clause Not Void Where Non-offending Party Offered Choice of Actual or Liquidated Damages

The Colorado Supreme Court issued its opinion in Ravenstar, LLC v. One Ski Hill Place, LLC on Monday, September 11, 2017.

Freedom of Contract—Liquidated Damages Clauses—Contractual Damages.

In this case, the Colorado Supreme Court considered whether a liquidated damages clause in a contract is invalid because the contract gives the non-breaching party the option to choose between liquidated damages and actual damages. The court concluded that such an option does not invalidate the clause. Instead, parties are free to contract for a damages provision that allows a non-breaching party to elect between liquidated damages and actual damages. However, such an option must be exclusive, meaning a party who elects to pursue one of the available remedies may not pursue the alternative remedy set forth in the contract. Therefore, under the facts of this case, the liquidated damages clause in the contracts at issue is enforceable. Accordingly, the supreme court affirmed the judgment of the court of appeals.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: District Court Properly Denied Attorney Fees to Non-prevailing Party

The Colorado Court of Appeals issued its opinion in Klein v. Tiburon Development, LLC on Thursday, August 10, 2017.

Attorney Fees—Fee-Shifting Provision—Contract—Violation of Public Policy—Substantial Justification.

Following remand, the district court denied the Kleins’ request for attorney fees and costs pursuant to a line of credit agreement (LOC) between them and Tiburon Development LLC (Tiburon). The district court granted Tiburon’s and Sell’s (a member of Tiburon) motions for attorney fees and costs.

On appeal, the Kleins contended that the district court erroneously denied their request for attorney fees pursuant to the fee-shifting provision of the LOC. However, enforcing  and awarding the Kleins their attorney fees and costs pursuant to the LOC would violate public policy because the Kleins lost the predominant and only contested part of the LOC claim, and they had only nominal success on the secondary and uncontested issue of entitlement to interest on the LOC. It would have been an abuse of discretion to conclude that the Kleins were the prevailing party on the LOC claim. Further, the Kleins were sanctioned for their conduct during the litigation and ordered to pay all of Tiburon’s attorney fees.

The Kleins next contended that the district court erred in awarding Sell the attorney fees he incurred in seeking an award of fees because Sell failed to carry his burden to prove that the Kleins’ defense to his fees motion lacked substantial justification, and the district court never found that the Kleins’ defense was frivolous. An award of fees incurred in seeking fees under C.R.S. § 13-17-102 must be supported by a determination in the record that the sanctioned party’s defense to the fees motion lacked substantial justification. Because the record in this case does not support that finding, the district court erred in including in its fee award the fees Sell incurred in pursuing his motion for fees.

The Kleins further contended that the district court’s award of fees to Sell unreasonably included fees Sell incurred to respond to the Kleins’ C.R.C.P. 59 motion, which they asserted was not relevant to their claims against Sell. It was not an abuse of discretion for the district court to award Sell the attorney fees he incurred to respond to the Kleins’ C.R.C.P. 59 motion, and the decision was supported by findings in the record.

The judgments denying an award of attorney fees and costs to the Kleins and awarding Sell the attorney fees he incurred to respond to the Kleins’ C.R.C.P. 59 motion were affirmed. The judgment was reversed insofar as the court awarded Sell the attorney fees he incurred in seeking fees against the Kleins, and the case was remanded for the district court to subtract the amount of such fees from the award.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Petition to Vacate Appraisal Award Properly Denied

The Colorado Court of Appeals issued its opinion in Owners Insurance Co. v. Dakota Station II Condominium Association, Inc. on Thursday, July 27, 2017.

Appraisal Award in Insurance Dispute—Impartial Appraiser Standard.

Owners Insurance Company (Owners) issued a property damage policy to Dakota Station II Condominium Association, Inc. (Dakota). Wind and hail storms damaged buildings in the residential community owned by Dakota. The losses were combined into a single insurance claim, but there was a dispute about the total amount of damages. The parties invoked the insurance policy’s appraisal provision. Each party selected an appraiser. They submitted proposed awards of different amounts and then nominated a neutral umpire as provided in the insurance policy. The final award of about $3 million was a mix of four damage estimates from Owners’ appraiser, Burns, and two estimates form Dakota’s appraiser, Haber. Burns refused to sign the final determination of costs. Haber and the umpire agreed and signed the award, and Owners paid Dakota.

Dakota then sued Owners in federal court for breach of contract and unreasonable delay in paying insurance benefits. During discovery, Owners learned several facts about Haber that it alleged demonstrated she was not an impartial appraiser. Owners filed a petition to vacate the appraisal award under C.R.S. § 13-22-223. Following a hearing, the trial court denied the petition.

On appeal, Owners argued that the trial court erred by not analyzing the insurance policy’s appraisal dispute provision, as well as the conduct and hiring of Haber, under the Colorado Uniform Arbitration Act’s (CUAA) standards for a neutral arbitrator in C.R.S. § 13-22-211(2). The Colorado Court of Appeals found no error because the policy did not incorporate CUAA’s standards and the parties’ stipulation that CUAA applied did not specifically state whether the appraisers were to be held to the statutory standard.

Owners then argued that Haber was not an “impartial appraiser” under the insurance policy. This term was not defined in the policy and has not been construed by a Colorado appellate court. The trial court interpreted it as an appraiser who applies appraisal principles with fairness, good faith, and lack of bias. The court agreed that this was the correct reading of the policy provision and its intent. The trial court’s application of this standard was supported by the record.

The judgment was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Tenth Circuit: Summary Judgment Not Appropriate when Questions of Fact Remain over Contract Dispute

The Tenth Circuit Court of Appeals published its opinion in Obermeyer Hydro Accessories, Inc. v. CSI Calendaring, Inc. on Thursday, March 30, 2017.

Obermeyer Hydro Accessories, Inc. purchased fabric sheets used for water control structures from CSI Calendering, Inc. beginning in 2010. The parties’ dispute arose from a January 2013 quote for the product. The quote was a 50% increase from the parties’ earlier transactions. The parties agree that they had a contract, but they disagree on when it was formed. The district court granted summary judgment to CSI and Obermeyer appealed.

Obermeyer contends that the contract was formed before the January quote. “CSI contends that the contract was not formed until the January quote and that even if the parties had a prior contract, the contract was modified (1) by the quote or (2) by Obermeyer” making numerous payments invoiced at the price from the January quote. The Tenth Circuit held that a jury could find that a contract was formed before the January quote, and questions of fact remain as to the whether the contract was modified by the January quote or Obermeyer’s subsequent payments. Therefore, summary judgment was not appropriate.

The Tenth Circuit reviewed the grant of summary judgment de novo. The court applied Texas law as the governing law of the agreement, as agreed to by the parties. The Tenth Circuit applied the six elements under Texas law “needed to form a valid and binding contract.” The court reviewed the circumstances of what the parties said and did objectively to determine whether there was a meeting of the minds. Because “there was no evidence that CSI had ever suggested before January 11 that timing of invoices would affect the price,” a jury could reasonably find that the price was offered and accepted before the January quote.

The court then addressed CSI’s arguments that even if the contract was formed before the January quote that it was modified, and therefore CSI is entitled to summary judgment. “Modification requires mutual consent, which is ordinarily a question of fact for the jury.” The party asserting modification has the burden to prove modification by establishing notice of the change and acceptance. The other party must have knowledge of the nature of the change. Further, “Texas law requires that modification of a contract for the sale of goods must be made in objective and subjective good faith.”

CSI did not meet its burden. CSI did not explicitly state that it was changing the price, nor did it explain to Obermeyer its reason for the modification as required to establish objective good faith. CSI asserted that the change in price was made clear in the January quote by the use of the term turnkey. However, “CSI never explained to Obermeyer how it was using the term turnkey and the term had never before been used in their dealings.” Additionally, Obermeyer could have made natural assumptions not indicative of a massive change in pricing. Here, the court stated that “the specifics of the purported change smack of fast dealing.” And that, “on this record a jury could reasonably reject CSI’s explanation.”

The court determined that the question of modification by performance was also a question for the jury. Under the UCC performance requires that the other party have “knowledge of the nature of the performance.” CSI argued both that Obermeyer should-have-known, and the doctrine of negligent assent to support modification. Here, questions remain as to whether Obermeyer’s payments reflected its understanding of the change in price, which is a question for the jury.

Finally, CSI contended that commercial transactions would suffer from uncertainty in a decision against it. The court responded, “commerce is not enhanced if buyers and sellers must always treat each other as adversaries, auditing every transaction as it occurs to be sure the other party is not cheating. If the jury finds that Obermeyer had been misled by an unscrupulous supplier on which it had relied in good fact, we do not think that the world of commerce will suffer.”

The court REVERSED the summary judgment and REMANDED for further proceedings.

Colorado Court of Appeals: Set-Off to Other Liable Parties Should be Applied to Jury Verdict before Contractual Limitation

The Colorado Court of Appeals issued its opinion in Taylor Morrison of Colorado, Inc. v. Terracon Consultants, Inc. on Thursday, May 18, 2017.

Contract—Limitation on Liability—Setoff—Jury Award—Statutory Costs—Prejudgment Interest—Post-Judgment Interest—Expert Testimony—Willful and Wanton—Settlement Statute—Costs.

Taylor Morrison of Colorado, Inc. (Taylor) was the developer of a residential subdivision. Taylor contracted with Terracon Consultants, Inc. (Terracon) to provide geotechnical engineering and construction materials testing services for the development of the subdivision. Taylor and Terracon agreed to cap Terracon’s total aggregate liability to Taylor at $550,000 (Limitation) for any and all damages or expenses arising out of its services or the contract. After homeowners notified Taylor about drywall cracks in their houses, Taylor investigated the complaints and then sued Terracon and other contractors for damages relating to those defects. After trial, the jury awarded Taylor $9,586,056 in damages, but also found that Terracon’s conduct was not willful and wanton. The court concluded that the Limitation includes costs and prejudgment interest and applied it to reduce the jury’s $9,586,056 damages award to $550,000. It also deducted the $592,500 settlement received from the other liable parties to arrive at zero dollars. The court found that neither party prevailed for purposes of awarding statutory interest and further concluded that neither Terracon’s deposit of $550,000 into the court registry nor its email to Taylor addressing a mutual dismissal constituted a statutory offer of settlement that would have allowed Terracon a costs and fees award.

On appeal, Taylor contended that the trial court erroneously deducted the setoff from the Limitation instead of deducting it from the jury damages verdict. The correct approach is to first apply the setoff against the jury verdict and then apply the contractual limitation against this reduced amount. Thus, Terracon’s liability according to the Limitation should have been a final judgment of $550,000 for Taylor.

Taylor next contended that the trial court erred when it concluded that the Limitation, by its terms, includes statutory costs and prejudgment interest. The pertinent contract language states that the Limitation applies to “any and all” expenses “including attorney and expert fees.” Thus, the Limitation’s language covers costs associated with interpreting and enforcing the contract.

Taylor further argued that the trial court erred in ruling that the Limitation does not include prejudgment interest within its cap on liability. The Limitation caps Terracon’s liability for “any and all injuries, damages, claims, losses, or expenses.” (Emphasis in original.) Because prejudgment interest is a form of damages, the Limitation also covers prejudgment interest. Taylor also asserted that post-judgment interest is not covered by the Limitation. The Court of Appeals agreed because post-judgment interest is not an element of compensatory damages.

Taylor next argued that the trial court’s exclusion of expert testimony concerning willful and wanton conduct was reversible error. Here, the court allowed the experts to testify about the factual conduct and opine on Terracon’s performance using characterizations within their expertise, but prevented testimony about legal concepts outside their expertise and whether a legal standard was met.

Terracon argued on cross-appeal that the trial court erred by not awarding it costs under Colorado’s settlement statute. Terracon’s deposit of $550,000 into the court registry pursuant to C.R.C.P. 67(a) was not a settlement offer because Taylor did not have the option to reject it. The statute requires both an offer and a rejection; thus the statute was not triggered, and Terracon is not entitled to costs. Further, Terracon’s email did not comply with C.R.S. § 13-17-202 because this alleged “settlement offer” contained nonmonetary conditions that extended the offer beyond the claims at issue. Therefore, there was no error in denying costs to Terracon.

The judgment was reversed as to the final award and the case was remanded with instructions. The judgment and orders were affirmed in all other respects.

Summary provided courtesy of The Colorado Lawyer.