November 15, 2018

Colorado Court of Appeals: Collection Agency’s Bold and All-Caps Statement Would Be Confusing to Least Sophisticated Consumer

The Colorado Court of Appeals issued its opinion in Garrett v. Credit Bureau of Carbon County on Thursday, October 18, 2018.

Debt CollectionColorado Fair Debt Collection Practices ActLeast Sophisticated Consumer.

Credit Bureau of Carbon County (Credit Bureau) is an agency that collects or attempts to collect debts owed, due, or asserted to be owed or due to another. It sent Garrett two collection notices demanding payment on a consumer debt. Garrett sued Credit Bureau, asserting that the language of its communications overshadowed and contradicted the statutory requirements of the Colorado Fair Debt Collection Practices Act (the Act). The district court concluded that Credit Bureau’s notices had not violated the Act and denied Garrett’s motion for judgment on the pleadings, granted Credit Bureau’s motion for summary judgment, and dismissed the case.

On appeal, Garrett contended that the district court wrongly concluded that Credit Bureau did not violate the Act because the format and content of Credit Bureau’s notices overshadowed or contradicted the statutorily required disclosures. The Act requires debt collectors to provide a debt validation notice describing the debt. It prohibits debt collectors from using false, deceptive, or misleading representations when collecting a debt. Overshadowing occurs when a collection letter contains the requisite validation notice, but that information is obscured or diminished by the letter’s presentation or format. Contradiction occurs when language accompanying the validation notice is inconsistent with the substance of the rights and duties that the statute imposes. In Flood v. Mercantile Adjustment Bureau, LLC, 176 P.3d 769 (Colo. 2008), the Supreme Court adopted the “least sophisticated consumer” test to determine whether a collection agency’s notice was confusing with respect to the statutorily required disclosures. Here, Credit Bureau’s use of the bold and capitalized phrase “WE CANNOT HELP YOU UNLESS YOU CALL” in the second notice would confuse the least sophisticated consumer because it was capable of being reasonably interpreted as changing the manner in which the consumer was required by law to dispute the debt or its amount. As a matter of law, the notice was deceptive or misleading in violation of the Act.

The judgment was reversed and the case was remanded for the district court to enter judgment for Garrett and award her statutory damages, costs, and a reasonable amount of attorney fees incurred on appeal.

Summary provided courtesy of Colorado Lawyer.

Tenth Circuit: Age of Rental Car Driver Inconclusive to Support Tort Claims Against Rental Company

The Tenth Circuit Court of Appeals issued its opinion in Amparan v. Lake Powell Car Rental Companies on February 13, 2018.

Edmundo and Kimberly L. Amparan appeal from the district court’s grant of summary judgment in favor of Lake Powell Car Rental Companies on the Amparans’ claims for negligent entrustment and loss of consortium. The claims arose from a vehicle accident involving a motorcycle operated by Mr. Amparan and a Ford Mustang rented by Lake Powell to Denizcan Karadeniz and operated by Mevlut Berkay Demir. Because the Amparans failed to come forward with evidence from which the jury could find an essential element of their claim for negligent entrustment, the appeals court affirmed.

On July 14, 2014, a group of Turkish nationals, including Mr. Karadeniz, visited Lake Powell to rent two vehicles. Mr. Karadeniz produced a valid Turkish driver’s license and a valid credit card. Mert Tacir, another member of the group, produced a valid Turkish driver’s license. The owner and operator of Lake Powell, Paul Williams, asked the remaining individuals in the group if they possessed valid driver’s licenses. Mr. Demir responded that he possessed a valid driver’s license. At the time of the rental, all three individuals were 21 years old. Although Mr. Williams recognized that Mr. Karadeniz and Mr. Tacir were under the age of 25, he nonetheless agreed to rent to rent a Dodge Caravan and a Ford Mustang to Mr. Karadeniz and to permit Mr. Tacir as an additional authorized driver for the Ford Mustang. None of the other members of the group, including Mr. Demir, completed an “Additional Driver Application/Agreement.” However, Mr. Demir testified that he understood Mr. Williams’ inquiry into whether he possessed a driver’s license as a signaling that he had Lake Powell’s implicit permission to operate the vehicles. Because a reasonable jury could adopt Mr. Demir’s understanding, the Tenth Circuit proceeded under the assumption that Lake Powell implicitly entrusted the rental vehicles to Mr. Demir. Evidence in the record supports the conclusion that Mr. Williams’ decision to rent two vehicles to an individual under the age of 25 and to permit an additional driver under the age of 25 violates internal policies propagated by Lake Powell’s licensor, Avis Rent A Car Systems, LLC.

During the course of the rental, Mr. Demir operated the Ford Mustang. Mr. Demir, unfamiliar with the traffic rules governing left turns at intersections, turned left on a solid green light without yielding to oncoming traffic. Mr. Amparan, traveling in the oncoming direction, unsuccessfully attempted to swerve to avoid hitting the turning vehicle operated by Mr. Demir and the two vehicles collided. As a result of the collision, Mr. Amparan alleges he suffered multiple broken bones, a punctured lung, and various other injuries.

The Amparans filed complaint in New Mexico state court, naming Mr. Demir, Mr. Karadeniz, and Avis as defendants. Avis removed the action to federal court, where, after an initial round of discovery, the district court granted the Amparans leave to amend their complaint to add Lake Powell as a defendant. The amended complaint raised claims against Lake Powell for negligent entrustment, loss of consortium, and negligent supervision and training. Lake Powell moved for summary judgment, arguing, in part, that even if it implicitly entrusted the Mustang to Mr. Demir, it neither knew nor should have known that Mr. Demir was likely to operate the vehicle in such a manner as to create an unreasonable risk of harm to others. In response to Lake Powell’s motion for summary judgment, the Amparans filed a notice of testifying expert on both the risk posed by young drivers and standards of care in the car rental industry. The Amparans also contested Lake Powell’s motion for summary judgment, arguing in part that Lake Powell’s violation of internal policies regarding renting to, or approving as additional drivers, individuals under age 25 constituted sufficient evidence to permit the finding that Lake Powell knew or should have known that Mr. Demir was likely to operate the Ford Mustang in such a manner as to create an unreasonable risk of harm to others.

The district court indicated it would not consider factual assertions in the Amparans’ response to summary judgment that did not comply with District of New Mexico Local Rule of Civil Procedure 56.1(b) and Federal Rule of Civil Procedure 56(c)(1)(A). The district court denied Lake Powell’s motion to strike as moot. The district court deemed the motions to strike moot based on its conclusion that the Amparans’ evidence regarding Lake Powell’s alleged violation of internal policies was insufficient, on its own, to permit a reasonable jury to conclude that Lake Powell knew or should have known that Mr. Demir was likely to operate the Mustang in such a manner as to create an unreasonable risk of harm to others. The district court concluded that the disputes of fact with respect to whether Lake Powell entrusted the Mustang to Mr. Demir and whether Lake Powell violated any internal policies were not material because resolution of the disputes in favor of the Amparans did not alter the summary judgment decision.

On appeal, the Amparans argued that the district court failed to perform a proper analysis, in that a New Mexico court would view evidence of a violation of internal policies, which are also allegedly industry standards, sufficient to advance a claim for negligent entrustment. Alternatively, the Amparans urged the Tenth Circuit to address the merits of Lake Powell’s motions to strike. The Tenth Circuit affirmed the district court’s grant of summary judgment in favor of Lake Powell on the Amparans’ claims for negligent entrustment and loss of consortium.

In an effort to overcome the extensive body of case law supporting the conclusion that the New Mexico Supreme Court would reject the proposition that evidence of a car rental company’s violation of internal policies is sufficient to establish the third element of a claim for negligent entrustment even where the entrustee possesses a valid driver’s license, the Amparans argued that their expert witness would testify on car rental industry standards regarding rentals to individuals under age 25. But the fact that evidence of a violation of an internal policy is probative on the question of negligence does not establish that the evidence is sufficient to make out a prima facie case of negligence. It cannot be said that the driver’s young age, on its own, makes it likely that the driver will cause an accident, will operate the vehicle in an incompetent manner, or will operate the vehicle in such a manner as to create an unreasonable risk of harm to others. For, if such were true, no individual in New Mexico could grant a person under the age of 25 permission to drive a vehicle without facing liability for negligent entrustment based solely on the entrustee’s youthful age.

Accordingly, the Tenth Circuit held that the New Mexico Supreme Court would conclude that evidence of a car rental company’s violation of internal policies on the minimum age of renters and drivers is, on its own, insufficient to establish the third element of a claim for negligent entrustment of a motor vehicle. Thus, the Amparans failed to advance sufficient evidence to make out a prima facie case of negligent entrustment.

The Tenth Circuit affirmed the district court’s grant of summary judgment in favor of Lake Powell on the Amparans’ claims for negligent entrustment and loss of consortium.

Colorado Supreme Court: Tort Cannot Be Transaction Giving Rise to Obligation to Pay Money, Therefore Not Debt Per Fair Debt Collection Practices Act

The Colorado Supreme Court issued its opinion in Ybarra v. Greenberg & Sada, P.C. on Monday, October 15, 2018.

Finance, Banking, and Credit—Insurance—Statutory Interpretation—Torts.

Ybarra petitioned for review of the court of appeals’ judgment affirming the dismissal of her Colorado Fair Debt Collection Practices Act action against Greenberg & Sada, P.C. The district court dismissed for failure to state a claim, finding that damages arising from a subrogated tort claim do not qualify as a debt within the contemplation of the Act. The court of appeals agreed, reasoning that the undefined term “transaction” in the Act’s definition of “debt,” required some kind of business dealing, as distinguished from the commission of a tort; and to the extent an insurance contract providing for the subrogation of the rights of an insured constitutes a transaction in and of itself, that transaction is not one obligating the debtor to pay money, as required by the Act.

The supreme court held that because a tort does not obligate the tortfeasor to pay damages, a tort cannot be a transaction giving rise to an obligation to pay money, and is therefore not a debt within contemplation of the Act; and because an insurance contract providing for the subrogation of the rights of a damaged insured is not a transaction giving rise to an obligation of the tortfeasor to pay money, it also cannot constitute a transaction creating a debt within contemplation of the Act.

Accordingly, the court of appeals’ judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: City Improperly Imposed Use Tax on Purchases from Wholesalers that were Later Sold at Retail

The Colorado Court of Appeals issued its opinion in Big Sur Waterbeds, Inc. v. City of Lakewood on Thursday, October 4, 2018.

Sales and Use TaxDisplayed Furniture—Primary Purpose of Purchase.

The City of Lakewood (Lakewood) imposes use tax on tangible personal property purchased at retail and used in the city. The use tax does not apply to wholesale purchases (i.e., purchases for resale to others). Big Sur Waterbeds, Inc., Denver Mattress Co., LLC, and Sofa Mart, LLC (collectively, plaintiffs) purchase furniture tax-free from wholesalers worldwide and resell it in stores, including in Lakewood. At each Lakewood store, plaintiffs provide a showroom where they display furniture for customers to peruse and try out. Plaintiffs also maintain warehouses where they store the bulk of their inventory. Plaintiffs ultimately sell all the furniture, including the displayed furniture, and fill customer orders from either the warehouses or the showrooms. Plaintiffs’ customers pay Lakewood’s sales tax on each purchase.

Lakewood assessed use tax on plaintiffs’ purchases of displayed furniture from 2012 to 2015, on the theory that plaintiffs purchased the displayed furniture at retail for their own use in advertising their products. Plaintiffs challenged the assessments in the district court, which entered judgment in their favor.

On appeal, Lakewood contended that while plaintiffs’ inventory purchases were initially treated as exempt wholesale purchases, when a portion of this wholesale inventory was withdrawn for use as demonstration and promotion tools, the transactions were properly recharacterized as taxable retail transactions. Lakewood relied on its Initial Use Regulation and regulation 3.01.300(1)(b), pertaining to initial use of property, which focus on the primary purpose of the purchase. The court of appeals employed the “primary purpose” test from A.B. Hirschfeld Press, Inc. v. City and County of Denver, 806 P.2d 917, 918–26 (Colo. 1991), and determined that the totality of plaintiffs’ conduct indicates that they purchased the displayed furniture primarily for resale in an unaltered condition and basically unused. Because plaintiffs purchased the displayed furniture primarily for resale, not for their own use or consumption, the Initial Use Regulation does not apply. Similarly, regulation 3.01.300(1)(b), which pertains to tax-free purchases for resale that are later removed from inventory for the purchaser’s own use, does not apply because the displayed furniture was always available for resale and eventually sold. Therefore, Lakewood’s use tax does not apply to the retailers’ purchases and minor use of the furniture for display.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Satisfaction of Statutory Criteria Qualifies Acquiring Employer as “Successor” for Unemployment Purposes

The Colorado Court of Appeals issued its opinion in Dos Almas LLC v. Industrial Claim Appeals Office on Thursday, September 20, 2018.

Unemployment Tax—C.R.S. § 8-76-104(1)(a)Successor Employer.

Dos Almas LLC began operating a restaurant after it acquired nearly all of the assets of WooPig LLC, which had operated a different restaurant at the same location. After the acquisition, Dos Almas applied for an unemployment compensation insurance account and a determination of employer liability by submitting a form along with a copy of the asset purchase agreement to the Department of Labor and Employment (Department).

A deputy ruled that Dos Almas was a successor employer to WooPig for unemployment compensation tax rate liability purposes because it met the requirements of C.R.S. § 8-76-104(1)(a) due to the acquisition. Dos Almas appealed more than eight months after the applicable 21-day time limit. Nevertheless, a hearing officer ruled that good cause was shown for the delay, and following a hearing the officer found that Dos Almas was not a successor entity to WooPig under the statutory criteria largely because it did not retain the employees as part of the asset sale. A panel of the Industrial Claims Appeal Office (the Panel) reversed. The Panel upheld the factual findings, but based on Dos Almas having acquired 90% of WooPig’s physical and intangible assets, ruled that it had acquired substantially all of WooPig’s assets and thereby met the statutory criteria to be considered a successor employer for unemployment compensation tax rate liability purposes.

On appeal, Dos Almas contended that the Panel erred in ruling that it is a successor to WooPig for unemployment tax rate liability purposes. The hearing officer’s factual findings support the conclusion that Dos Almas is a successor employer to WooPig for unemployment compensation tax rate liability purposes under the applicable statutory criteria in C.R.S. § 8-76-104(1)(a). Further, the lack of employee retention in the asset purchase transaction is irrelevant to the successor issues in this case. The Panel did not err.

The order was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Phrase “Arising Under” in Arbitration Clause Should Be Interpreted Broadly

The Colorado Court of Appeals issued its opinion in Digital Landscape Inc. v. Media Kings LLC on Thursday, September 20, 2018.

Arbitration Clause “Arising Under”Broad DefinitionAttorney Fees.

Media Kings LLC (Media) entered into a contract to provide marketing services to Transcendent Marketing, LLC (Transcendent). Media then contracted with Digital Landscape Inc. (Digital) to provide advertising services to Transcendent. The contract between Media and Digital had an arbitration clause providing that any disputes arising under the agreement would be resolved by binding arbitration. Per the contract, Media agreed to pay Digital a portion of its earnings from Transcendent in exchange for Digital’s work on the project. Media failed to pay Digital, and Transcendent proposed that Digital take over the project. Digital’s principal officer agreed, but had one of his other companies take over the work. Thus, Media was effectively cut out of its agreement with Transcendent.

Digital sued Media for breach of contract, and as relevant here, Media filed a counterclaim alleging that Digital had breached the implied covenant of good faith and fair dealing. The district court ordered the parties to arbitrate the dispute. The arbitrator awarded Digital $68,197.41. While discussing the counterclaim, the arbitrator also referred to it as addressing a breach of Digital’s duty of loyalty to Media. The arbitrator decided that Digital still owed a duty of loyalty to Media that it had breached, and she awarded Media damages on the counterclaim. Lastly, finding that there was no prevailing party, she declined to award either party attorney fees. The district court confirmed the order.

On appeal, Digital contended that the arbitrator lacked jurisdiction to consider whether Digital had breached a duty of loyalty to Media because this claim did not “arise under” the arbitration clause. The court of appeals analyzed the phrase “arising under” and concluded that it was sufficiently broad to include the duty-of-loyalty counterclaim. Further, the arbitration clause was unrestricted.

Digital further contended that the arbitrator improperly converted the counterclaim alleging breach of implied covenant of good faith and fair dealing to a different one, breach of loyalty, which Media had not raised. It alleged that the ruling on this different claim was unfair and the award to Media was therefore void. The court found as an initial matter that the arbitrator did not intend to rule on a facially different counterclaim. But even assuming that she had, the different claim was within the issues that the parties had agreed to submit. The arbitrator did not exceed her powers because the substituted counterclaim “arose under” the contract between Digital and Media. Further, the evidence and arguments were encompassed in the breach-of-the-duty-of-good-faith-and-fair-dealing claim. The district court did not err when it confirmed the arbitrator’s award.

Finally, Digital argued that the arbitrator exceeded her authority by refusing to award attorney fees because neither party had prevailed. The court concluded there was clearly no prevailing party, so the arbitrator did not have to award attorney fees.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Herrick K. Lidstone, Jr., Esq. Receives Cathy Stricklin Krendl Business Lawyer Lifetime Achievement Award

Cathy Stricklin Krendl and Todd Olinger present Herrick Lidstone with “The Cathy Stricklin Krendl Business Lawyer Lifetime Achievement Award.”

The Business Law Section of the Colorado Bar Association recognizes that many of its members and other lawyers actively participate in the process of improving the business laws of the State of Colorado by working together to draft business legislation, help other lawyers understand and practice business law, and promote high standards of professionalism for and mutual respect among Colorado lawyers who practice business law. The Section recognizes that these lawyers have devoted many uncompensated hours and much thought participating in this process and believes that this participation, which has consistently been without regard to personal or client interests, has resulted in the improvement of Colorado business law and its practice by Colorado business lawyers.

The Section believes that it is appropriate to recognize some of the many Colorado lawyers who have participated in this process and has created an award known as “The Cathy Stricklin Krendl Business Lawyer Lifetime Achievement Award.” This award is given from time to time to persons selected by the Executive Council of the Section.

The Executive Council considers, among such other attributes as it may determine, the recipient’s intellectual and professional excellence in the practice of or scholarship on Colorado business law; the recipient’s generosity of spirit as reflected in the recipient’s participation in and contribution to the advancement of Colorado business law; the recipient’s efforts to enhance the general quality of business law practice by Colorado lawyers; and the recipient’s devotion to the principles of legal professionalism, all manifested consistently over years of endeavor.

On June 20, 2018, the Executive Council of the CBA Business Law Section considered several excellent nominations for the award and voted to recognize Herrick K. Lidstone, Jr. for his many years of furthering the development of practical, comprehensive and well-drafted business related legislation, for writing about and teaching Colorado business law and for his devotion to enduring principles of professionalism in his legal career.

Herrick K. Lidstone, Jr. was presented with the award at the 2018 Business Law Institute on September 12, 2018 in Denver.

Colorado Supreme Court: Innocent Investor to Ponzi Scheme Lacks Any Right to Return on Investment

The Colorado Supreme Court issued its opinion in Lewis v. Taylor on Monday, September 17, 2018.

Uniform Fraudulent Transfer Act—Ponzi Schemes—Reasonably Equivalent Value.

The supreme court held that under the Colorado Uniform Fraudulent Transfer Act (CUFTA), an innocent investor who profits from his investment in an equity-type Ponzi scheme, lacking any right to a return on investment, does not provide reasonably equivalent value based simply on the time value of his investment. Here, an investor unwittingly invested in a Ponzi scheme. Before the scheme’s collapse, he withdrew his entire investment, plus a profit. A court-appointed receiver sued to claw back the investor’s profits under CUFTA, C.R.S. § 38-8-105(1)(a), which provides that a “transfer made . . . by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.” The investor raised an affirmative defense, C.R.S. § 38-8-109(1), contending that he could keep his profit because he “took in good faith and for a reasonably equivalent value.” Because the time value of money is not a source of “value” under CUFTA and equity investors have no guarantee of any return on their investments, the court concluded that the investor did not provide “reasonably equivalent value” in exchange for his profit. Accordingly, the court reversed the court of appeals’ judgment.

Summary provided courtesy of Colorado Lawyer.

Colorado Supreme Court: Social Host Must Have Actual Knowledge that Specific Guest Underage to be Held Liable for Injuries

The Colorado Supreme Court issued its opinion in Przekurat v. Torres on Monday, September 10, 2018.

Statutory Construction—Colorado Dram Shop Act.

The supreme court affirmed the judgment of the court of appeals. The court held that, under the plain language of C.R.S. § 12-47-801(4)(a), a social host who provides a place to drink alcohol must have actual knowledge that a specific guest is underage to be held liable for any damage or injury caused by that underage guest.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Hospital Lien Statute Only Applies to Lien Violations Existing at the Time a Complaint is Filed

The Colorado Court of Appeals issued its opinion in Marchant v. Boulder Community Health, Inc. on Thursday, August 23, 2018.

Hospital Lien Statute—Statutory Penalties—Summary Judgment.

Marchant’s daughter was struck by an automobile and received medical treatment from Boulder Community Health, Inc. (BCH) for which she was billed $27,681.10. Cardon Outreach, LLC (Cardon), as agent for BCH, filed a statutory lien in that amount “upon the net amount payable . . . as damages on account of such injuries,” without first billing the daughter’s insurance company. BCH subsequently made an insurance adjustment to reduce the bill and billed the insurer, which paid $6,999.36, leaving a balance of $777.74. Cardon amended the lien to that amount. Marchant paid the balance, and the lien was released. Later, Marchant, as guardian of her daughter, filed an amended complaint alleging violation of the hospital lien statute, C.R.S. § 38-27-101, regarding her right to seek damages of twice the amount of the hospital lien filed.

The parties filed cross-motions for determination of a question of law, and the trial court ruled that C.R.S. § 38-27-101(7) only provides standing for a lawsuit if the plaintiff is subject to an improper lien at the time the legal action is filed. The trial court granted defendants’ motion for summary judgment.

On appeal, plaintiff contended that the trial court misinterpreted the hospital lien statute. The parties agreed that when the lien was filed it violated the hospital lien statute. However, the lien did not violate the statute at the time the lawsuit was commenced. The statute clearly applies only to liens that violate the statute at the time a complaint is filed. Thus, the statute does not allow plaintiff to seek damages.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

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.

Tenth Circuit: Excess Insurer Should Have Provided Coverage for Claims Against Insured’s Own Work Product

The Tenth Circuit Court of Appeals issued its opinion in Black & Veatch Corp. v. Aspen Insurance (UK) LTD; Lloyd’s Syndicate 2003 on February 13, 2018.

This case is an insurance coverage dispute between Black & Veatch Corporation (B&V) and Aspen Insurance (UK) Ltd. and Lloyd’s Syndicate 2003 (collectively, Aspen). The issue is whether Aspen must reimburse B&V for the costs B&V incurred due to damaged equipment that its subcontractor constructed at power plants in Ohio and Indiana. The district court held that Aspen need not pay B&V’s claim under its commercial general liability insurance policy because B&V’s expenses arose from property damages that were not covered “occurrences” under the Policy. Because the only damages involved were to B&V’s own work product arising from its subcontractor’s faulty workmanship, the court concluded that the Policy did not provide coverage and granted Aspen’s motion for partial summary judgment.

B&V appealed. Because the Tenth Circuit predicted that the New York Court of Appeals would decide that the damages here constitute an “occurrence” under the Policy, it vacated the district court’s summary judgment decision and remanded for further consideration in light of this opinion.

B&V is a global engineering, consulting, and construction company. A portion of its work involves engineering, procurement, and construction contracts (EPC contracts). In 2005, B&V entered into an EPC contracts with American Electric Power Service Corporation to engineer, procure, and construct several jet bubbling reactors (JBRs), which eliminate contaminates from the exhaust emitted by coal-fired power plants. For at least seven of these JBRs, B&V subcontracted the engineering and construction of the internal components to Midwest Towers, Inc. (MTI). Deficiencies in the components procured by MTI and constructed by MTI’s subcontractors caused internal components of the JBRs to deform, crack, and sometimes collapse. After work on three of the JBRs was completed, and while construction of four others was ongoing, AEP alerted B&V to the property damage arising from MTI’s negligent construction. AEP and B&V entered into settlement agreements resolving their disputes relating to the JBRs at issue here. Under the agreements, B&V was obligated to pay more than $225 million in costs associated with repairing and replacing the internal components of the seven JBRs.

B&V had obtained several insurance policies to cover its work on these JBRs. Zurich American Insurance Company provided the primary layer of coverage for up to $4 million for damage to completed work. Under the CGL policy at issue here, Aspen provided the first layer of coverage for claims exceeding the Zurich policy’s limits. The policy limits coverage to up to $25 million per occurrence and $25 million aggregate. Following the basic insuring agreement, the Policy then scales back coverage through several exclusions, two of which are relevant here. The first, known as the “Your Work” exclusion, or “Exclusion F,” excludes coverage for property damage to B&V’s own completed work. The “Your Work” exclusion is subject to an exception that restores some coverage. The second exclusion, known as “Endorsement 4,” excludes coverage for property damage to the “particular part of real property” that B&V or its subcontractors were working on when the damage occurred. This exclusion pertains only to ongoing, rather than completed, work. In other words, the policy does not cover property damage to B&V’s own completed work unless the damage arises from faulty construction performed by a subcontractor. The court of appeals referred to this as the “subcontractor exception.”

B&V submitted claims to its liability insurers for a portion of the $225 million it cost to repair and replace the defective components. After B&V recovered $3.5 million from Zurich, its primary insurer, it sought excess recovery from Aspen. Aspen denied coverage. B&V sued Aspen in federal district court for breach of contract and declaratory judgment as to B&V’s rights under the policy. B&V sought coverage for approximately $72 million, a portion of the total loss. On cross-motions for partial summary judgment on the coverage issue, the court sided with Aspen, holding that damage arising from construction defects was not an “occurrence” under the policy unless the damage occurred to something other than B&V’s own work product.

The threshold question was whether the New York Court of Appeals would hold that the policy’s basic insuring agreement covered the property damage to the JBRs as an “occurrence.” The Tenth Circuit concluded that the damages constituted an “occurrence” under the policy because they were accidental and harmed a third party’s property.

The Tenth Circuit Court of Appeals began by addressing whether, under New York contract law, B&V sought payment from Aspen for a covered “occurrence” — the first step necessary for obtaining coverage under a CGL insurance policy. An occurrence triggers coverage. The damages at issue here satisfy the Policy’s accidental requirement.

The Policy covers costs arising from property damage. When AEP claimed damages against B&V, the separation of insureds clause rendered AEP a third party with respect to its claims for property damage against B&V. The principle risk B&V faced as an EPC contractor, and thus a main reason for obtaining CGL insurance, was the potential for claims alleging damages made by the property owner, AEP. Thus, the property damage to the JBRs constituted an “occurrence” under the policy. Furthermore, concluding otherwise would violate the New York Court of Appeal’s rule against surplusage. In other words, Aspen’s interpretation of “occurrence” as excluding the damages at issue here would render several Policy provisions meaningless in violation of New York contract interpretation rules.

Under the Policy, the damages at issue here were caused by a coverage-triggering “occurrence.” First, the damages were accidental and resulted in harm to a third-party’s property, thus meeting the policy’s definition of an “occurrence.” Second, the district court’s interpretation would violate New York’s rule against surplusage by rendering the “subcontractor exception” meaningless. Third, the changes ISO has made to standard-form CGL policies demonstrate that the policies can cover the damages at issue here. Fourth, the overwhelming trend among state supreme courts has been to recognize such damages as “occurrences.” Fifth, New York intermediate appellate decisions are distinguishable, outdated, or otherwise inapplicable. For the foregoing reasons, the Tenth Circuit vacated the district court’s summary judgment decision and remanded for reconsideration in light of this opinion.