May 20, 2019

Colorado Court of Appeals: District Court May Not Consider Documents Outside Bare Allegations of Complaint when Ruling on C.R.C.P. 12(b)(5) Motion

The Colorado Court of Appeals issued its opinion in Prospect Development Co., Inc. v. Holland & Knight, LLP on Thursday, July 26, 2018.

C.R.C.P. 12(b)(5)—Matters Outside the Bare Allegations of the Complaint—C.R.C.P. 12(b)(5)—Statute of Limitations—Affirmative Defense.

Prospect Development Company, Inc. (Prospect) owned and sold undeveloped lots near Crested Butte. It relied on Holland & Knight, LLP (H&K) to prepare federally mandated property reports for prospective buyers. These reports stated that Prospect was responsible for the costs of constructing roads, sewage systems, and other infrastructure. They also stated that individual lot purchasers would not be responsible for these costs. The reports neglected to disclose that the special district in which the lots were located would purchase the infrastructure from Prospect using property tax revenue from the lots, effectively passing the cost of the infrastructure on to the lot owners.

In 2010, several lot owners complained they were not notified before they purchased that they would ultimately pay for the cost of infrastructure through property taxes. H&K assured Prospect that the reports complied with applicable law. Nevertheless, Prospect entered into a tolling agreement with the lot owners in 2010, agreeing to stay the running of any limitations period applicable to claims the lots owners might have against Prospect. In 2011, H&K withdrew from representing Prospect. In 2013, the lot owners sued Prospect based on its failure to make the required disclosures, and Prospect settled with them in 2015. Also in 2015, Prospect entered into a tolling agreement with H&K to toll claims that Prospect might have against H&K. Prospect sued H&K in 2016, alleging professional negligence. H&K did not answer the complaint but moved to dismiss under C.R.C.P. 12(b)(5), arguing that the statute of limitations barred the claims. H&K attached several exhibits from the underlying litigation between the lot owners and Prospect to support its assertion that the claims had accrued in 2011. Prospect opposed the motion and argued the trial court should disregard the exhibits, or, alternatively, if it did consider the exhibits, it should convert the motion to one for summary judgment and allow Prospect to present its own evidence. The district court granted the motion to dismiss, ruling the claims were time barred.

On appeal, Prospect argued that the district court erred by considering matters outside of the complaint in granting the C.R.C.P. 12(b)(5) motion. A defense based on a statute of limitations is an affirmative defense. H&K’s motion was based on a statutes of limitations defense. Thus, in ruling on H&K’s motion, the district court was not allowed to consider matters outside the bare allegations of the complaint. Here, the district court erred in considering two documents from the underlying litigation that were not part of the bare allegations of the complaint. If the district court wished to consider these documents, it was required to convert H&K’s motion to one for summary judgment. This error was not harmless because when viewed in the light most favorable to Prospect, the complaint’s allegations, and those in two documents that the complaint referred to, established that Prospect’s claims were timely.

The order was reversed and the case was remanded.

Summary provided courtesy of Colorado Lawyer.

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