March 21, 2019

Colorado Supreme Court: Economic Loss Rule Does Not Bar Tort Claims Arising Before Execution of Contract

The Colorado Supreme Court issued its opinion in Van Rees v. Unleaded Software, Inc. on Monday, June 27, 2016.

Economic Loss Doctrine—Conversion and Civil Theft—Public Impact or Interest—Private or Internal Transactions.

After Unleaded Software, Inc. failed to deliver contracted-for websites and services, Van Rees brought suit, alleging various tort theories, civil theft, three breach of contract claims, and a violation of the Colorado Consumer Protection Act (CCPA). The trial court dismissed all but the contract claims, and the court of appeals affirmed, holding that the economic loss rule barred the tort and civil theft claims and that Van Rees failed to allege a significant public impact under the CCPA.

The supreme court affirmed in part and reversed in part. The economic loss rule applies only if there is no independent tort duty. Here, where Van Rees alleged Unleaded induced him into entering a contractual relationship when it knew it would not be able to perform the promised services, there is an independent tort duty, and the court therefore reversed as to Van Rees’s tort claims. The court did not reach the question of the economic loss rule as it relates to civil theft and instead affirmed the dismissal of that claim because Van Rees failed to adequately allege the knowing deprivation of a thing of value. Finally, the court affirmed the dismissal of the CCPA claim for failure to allege a significant public impact.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Economic Loss Rule Bars Tort Claims Against Mortgage Lender

The Colorado Court of Appeals issued its opinion in Miller v. Bank of New York Mellon on Thursday, June 16, 2016.

Dual Tracking—Failure to State a Claim for Relief—Economic Loss Rule—Implied Duty of Good Faith and Fair Dealing—Intentional Infliction of Emotional Distress—Fraud—Negligence.

The Millers obtained a note and deed of trust in 2004 to purchase a house, and the loan was transferred several times. They began missing payments in 2007 and filed for bankruptcy and received discharges in 2009. Bank of America, N.A. (BANA) then told the Millers to vacate their house, but they stayed and eventually entered into negotiations with BANA regarding a loan modification. In February 2012, Bank of New York Mellon (BNY Mellon) moved for an order authorizing the public trustee to proceed with a foreclosure sale, pursuant to C.R.C.P. 120. While this Rule 120 action was pending, the Millers filed a complaint against five financial institutions (collectively, the Banks) to quiet title to the house in their favor. The Millers alleged that the Banks improperly subjected them to dual tracking (a process under which banks pursue foreclosure on a home while negotiating a loan modification) in violation of the consent judgment that resulted from the National Mortgage Settlement, which generally prohibits dual tracking. The district court dismissed for failure to state a claim for relief. The court in the Rule 120 action authorized the sale in July 2012, but the Millers kept negotiating a loan modification with BANA. In 2013, BANA and the Millers agreed to a loan modification, the Millers began making payments, and BNY Mellon dismissed the Rule 120 action. In October 2014, the Millers amended their complaint, asserting claims for breach of the implied duty of good faith and fair dealing, intentional infliction of emotional distress, fraud, and negligence. The Banks moved to dismiss, and the court granted the motion.

On appeal, the Millers argued that the court erred in determining that the economic loss rule barred their tort claims. The economic loss rule provides that “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.” Here, the consent judgment in a federal case challenging dual tracking did not create a private cause of action for third parties and there was no special relationship between the parties that established an independent duty.

The Millers also argued that the court erred in dismissing their contract claim, because they had a reasonable expectation that the Banks would not engage in dual tracking and would modify their loan. Although there is an implied duty of good faith and fair dealing in every contract, there was no reasonable expectation on the part of the Millers that their loan would be modified or that the Banks would refrain from dual tracking. Neither allegation has any basis in their contractual agreement.

The judgment was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Colorado Supreme Court: Entity that was Non-Existent when Contractual Duty Created Still May Be Subject to Interrelated Contracts Doctrine

The Colorado Supreme Court issued its opinion in S K Peightal Engineers, Ltd. v. Mid Valley Real Estate Solutions V, LLC on Monday, February 9, 2015.

Economic Loss Rule—Interrelated Contracts Doctrine.

In this civil case, the Supreme Court considered: (1) whether entities that did not exist at the time the relevant contracts were completed can still be subject to the economic loss rule through the interrelated contracts doctrine; and (2) whether commercial entities situated similarly to respondent, which was a third-party beneficiary to a contract that interrelated to the contract by which the home at issue was built, are among the class of plaintiffs entitled to the protections of the independent tort duty to act without negligence owed by construction professionals to subsequent homeowners when constructing residential homes. The Court held that (1) the fact that an entity was nonexistent at the time the relevant contracts were completed does not alter the analysis under the interrelated contracts doctrine; and (2) the independent duty at issue does not apply here because, as a third-party beneficiary of a commercially negotiated contract that interrelates to the contract under which the home was built, respondent cannot properly be considered a subsequent homeowner. The judgment was reversed and the case was remanded to the court of appeals to return to the trial court for further proceedings consistent with this opinion.

Summary and full case available here, courtesy of The Colorado Lawyer.

Frederick Skillern: Real Estate Case Law — Contracts, Purchase and Sale, Transactions (2)

Editor’s note: This is Part 5 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.

frederick-b-skillern

By Frederick Skillern

Van Rees, Sr. v. Unleaded Software, Inc.
Colorado Court of Appeals, December 5, 2013
2013 COA 164

Economic loss rule; contract for design of website; no tort claim because no independent duty.

Although this is not a real estate case, I note it simply as an example of how the economic loss rule is spreading to preclude a wide array of fraud claims arising out of contractual relations. In this case, the court deals with the scope and applicability of Colorado’s economic loss rule in the context of an agreement for the design and maintenance of a website. Under the economic loss rule, no independent duty exists for tort claims of fraud, fraudulent concealment, constructive fraud, or negligent misrepresentation when the alleged misrepresentations and false statements are about the ability to perform contractual duties. The court affirms the trial court’s dismissal of the fraud, negligent misrepresentation, negligence, Colorado Consumer Protection Act, and civil theft claims. The breach of contract claim has it all.

 

Hickerson v. Vessels
Colorado Supreme Court, January 13, 2014
2014 CO 2.

Collections; statute of limitations; C.R.S. § 13-80-103.5 (1) (a) (six-year statute); partial payment doctrine; laches.

This case takes up the collection efforts of the holder of a $386,000 promissory note given in 1989 to the Vessels Oil Company. The note was due in ten years. Shortly after 1999, the maker started making payments on the note, and that continued for a couple of years. After payments stopped, Vessels sued to collect the entire balance. Under existing common law, which the court refers to as the partial payment doctrine, the running of the six-year statute of limitations begins anew whenever payments are made voluntarily, as the debt is recognized and acknowledged. The trial court held that the debtor should be protected under the circumstances of this case by the equitable defense of laches. The court of appeals reversed, but the Supreme Court reinstates the trial court’s ruling.

Four statutes refer to the partial payment scenario. See C.R.S. §§ 13-80-113 to 116. The court refers to these as examples of the common-law rule, and not a replacement of the rule.

In a fairly bold stroke in support of the exercise of equitable powers, the court holds that the separation of powers doctrine does not bar application of the equitable defense of laches to a debt collection action filed within the original or restarted six-year statute of limitations period. Laches does not conflict with the plain meaning of the relevant statute of limitations, nor does it conflict with the partial payment doctrine, which is a creature of Colorado common law. Since early statehood, Colorado case law has recognized the application of equitable remedies to legal claims. Accordingly, the Court reverses the judgment of the court of appeals and remands the case for consideration of issues it did not reach, to wit – does the record support a defense of laches. Maybe not.

“The essential element of laches is unconscionable delay in enforcing a right under the circumstances, usually involving a prejudice to the one against whom the claim is asserted.” The elements of laches are: (1) full knowledge of the facts; (2) unreasonable delay in the assertion of available remedy; and (3) intervening reliance by and prejudice to another. Laches requires “such unreasonable delay in the assertion of and attempted securing of equitable rights as to constitute in equity and good conscience a bar to recovery.”

The court remands the case to the court of appeals for review of whether the elements of laches are satisfied by evidence in the record. And father time marches on.

Frederick B. Skillern, Esq., is a director and shareholder with Montgomery Little & Soran, P.C., practicing in real estate and related litigation and appeals. He serves as an expert witness in cases dealing with real estate, professional responsibility and attorney fees, and acts as a mediator and arbitrator in real estate cases. Before joining Montgomery Little in 2003, Fred was in private practice in Denver for 6 years with Carpenter & Klatskin and for 10 years with Isaacson Rosenbaum. He served as a district judge for Colorado’s Eighteenth Judicial District from 2000 through 2002. Fred is a graduate of Dartmouth College, and received his law degree at the University of Colorado in 1976, in another day and time in which the legal job market was simply awful.

Colorado Court of Appeals: Home Sellers Had Independent Duty to Disclose Home’s Defects So Economic Loss Rule Inapplicable

The Colorado Court of Appeals issued its opinion in In re Estate of Gattis on Thursday, November 7, 2013.

Residential Sales Contract—Nondisclosure—Economic Loss Rule.

Defendants (collectively, sellers) appealed the judgment entered following a bench trial in favor of Carol S. Gattis on her nondisclosure claim. The Court of Appeals affirmed the judgment.

An entity controlled by sellers purchased the residence for purposes of repair and resale. Before the purchase, the entity obtained engineering reports that included extensive discussion of structural problems resulting from expansive soils and ways to remedy those problems. Advance Structural Repair, another entity that sellers controlled, oversaw the repair work. When the repairs were completed, sellers obtained title to the residence and sold it to Gattis using a standard-form real estate contract to which they made no changes (contract). The contract included a “Seller’s Property Disclosure” (SPD) wherein sellers denied any knowledge of structural problems or issues with expansive soils.

Sellers argued that the trial court erred when it denied their defense based on the economic loss rule. Specifically, sellers argued that the economic loss rule bars a nondisclosure tort claim against the seller of a home built on expansive soils that caused damage to the home after the sale. Under the economic loss rule, “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”

The Court declined to apply the economic loss rule in this case for two reasons. First, apart from any contractual obligation, home sellers owe home buyers an independent duty to disclose latent defects of which they are aware. Second, disclosure provisions in the Form Contract at issue do not subsume the independent duty so as to trigger the economic loss rule. Although sellers were not required by the SPD to disclose their involvement with the entity that had performed repairs, they do not dispute, as the trial court found, that this fact was material and should have been disclosed. Gattis could have prevailed on this nondisclosure without relying on the SPD.

Summary and full case available here.

Colorado Court of Appeals: Compensation of Fact Witness Does Not Per Se Require Exclusion of Witness’s Testimony; Rather, Trial Court Should Determine if Witness Should Be Excluded as Sanction

The Colorado Court of Appeals issued its opinion in Just in Case Business Lighthouse LLC v. Murray on Thursday, July 18, 2013.

Fraudulent Misrepresentation—Business Sale—Nonparty at Fault—CRE 1006—Summary Witness—Economic Loss Rule.

This case involved alleged fraud in the negotiated termination of agreements concerning a commission payable for facilitating the sale of a business. Defendant Patrick Murray appealed the judgment entered on a jury verdict against him on the fraudulent misrepresentation and concealment claim of plaintiff, Just In Case Business Lighthouse, LLC, which is solely owned and operated by Joseph Mahoney. The judgment was vacated and the case was remanded.

On appeal, defendant argued that the trial court erred in allowing Preston Sumner, whom plaintiff hired and agreed to compensate on a contingent basis, to testify as a fact witness. Plaintiff hired Sumner, a longtime acquaintance of Mahoney, as an advisor to develop its case. Over the course of four years, Sumner spent between 500 and 1,000 hours examining business records and preparing summaries. Sumner’s agreement with plaintiff provided that he would receive 10% of any judgment or settlement obtained herein. Contingent compensation of a fact witness requires the trial court to determine whether the witness should be stricken as a sanction. Here, because the trial court misstated the law on contingent compensation of witnesses and did not rule on the propriety of a sanction, the case was remanded to address this issue.

Defendant also argued that the trial court erred in allowing Sumner to testify as a summary witness because he had no personal knowledge of the facts. However, Sumner only testified as to evidence that had already been admitted by the court, and his testimony assisted the jury in understanding the facts. Therefore, the court’s ruling to allow such testimony was not manifestly arbitrary, unreasonable, or unfair.

Defendant argued that the trial court erred in admitting exhibits prepared by Sumner, contending they were inadmissible under CRE 1006 because they were based on evidence already admitted during the trial and were unduly prejudicial. CRE 1006 allows for the admission of such summaries when the documents underlying the summary are voluminous. Here, more than 200 exhibits were admitted during the eight-day trial. Moreover, the underlying documents were admitted as evidenceand CRE 1006 does

not “require the fact finder to accept the information present on the summary charts as true.”Accordingly, the trial court did not abuse its discretion in admitting Sumner’s summary exhibits.

Defendant further contended that the trial court erred when it denied its motion for directed verdict because the evidence was insufficient to establish fraud. A letter of intent for the sale of a business was signed before defendant had a conversation with plaintiff about buying him out of the deal, and defendant failed to disclose this fact to plaintiff. Thus, the jury could have concluded that defendant fraudulently concealed facts material to the sale.

Defendant also contended that a directed verdict should have been entered because the economic loss rule bars plaintiff’s fraud claim. Defendant raised the economic loss rule in his motion for summary judgment, which was denied. Because defendant did not raise it when moving for a directed verdict, at any other time during the trial, or in a post-trial motion, he did not preserve this issue and the trial court did not err in denying the directed verdict motion.

Defendant contended that the trial court erred in declining to instruct the jury that Pearl Development Companywas a nonparty at fault. A defendant is not entitled to a nonparty-at-fault designation where the party’s fault is only vicarious. Accordingly, the trial court properly declined to instruct the jury on Pearl as a nonparty at fault.

Summary and full case available here.

Colorado Court of Appeals: Contractual Provisions Barred Tort Claims Under Economic Loss Rule

The Colorado Court of Appeals issued its opinion in Engemen Enterprises, LLC v. Tolin Mechanical Systems Co. on Thursday, March 14, 2013.

Economic Loss Rule—Summary Judgment.

Plaintiff Engeman Enterprises, LLC appealed the trial court’s entry of summary judgment in favor of defendant Tolin Mechanical Systems Company. The judgment was affirmed.

Plaintiff operates a cold storage facility that is cooled by an ammonia-charged cooling system. Defendant designs, installs, maintains, and repairs cooling systems. On June 27, 2008, high oil temperatures compromised plaintiff’s cooling system. Defendant inspected the system and recommended adding ammonia to lower the temperature. While defendant began this work,plaintiff’s representatives signed a Service Report and a Refrigeration Report, which stated defendant would perform its work in a “prudent and workmanlike manner” and disclaimed defendant’s liability beyond repairing issues caused by defective workmanship.

Instead of transferring ammonia from a tank into the cooling system, defendant’s employee mistakenly caused ammonia from the cooling system to flow out into the tank. The tank overfilled and exploded, permeating the facility with ammonia and resulting in cleanup costs, repair costs, and lost profits totaling hundreds of thousands of dollars.

Plaintiff alleged claims for negligence, vicarious liability, and negligent supervision, but not breach of contract. Defendant moved for summary judgment, and the district court concluded that the parties were bound by the contracts and the duty of care agreed to therein. Consequently, the court entered summary judgment on plaintiff’s tort claims because they were barred by the economic loss rule. In addition, the trial court found that the willful and wanton conduct of defendant did not affect the application of the economic loss rule, because plaintiff did not assert a claim for willful and wanton breach of contract. Summary judgment was entered in favor of defendant on all of plaintiff’s claims.

On appeal, plaintiff argued its tort claims were not barred by the economic loss rule because: (1) defendant owed it an independent duty of care to safely handle ammonia; (2) the damage that its facility sustained was physical harm to property and not “economic loss”; (3) defendant owed it an independent duty of care to supervise and train the employees handling ammonia; (4) the economic loss rule should not apply to service contracts; and (5) defendant’s allegedly willful and wanton tortuous conduct precludes application of the economic loss rule. The Court of Appeals rejected all these arguments.

A party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law. The Court stated that the inquiry is to be focused on the “duty” issue.

The Court first found that contrary to plaintiff’s argument, defendant did not owe plaintiff an independent duty of care beyond its contractual duty to safely handle the ammonia. The Court came to this conclusion after analyzing three factors, (1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.

The Court found that the damages that could have been recovered under a tort claim of negligence and a breach of contract claim were identical. The limitation of liability clause did not alter the Court’s analysis because it could apply equally to contract and tort actions. If plaintiff had alleged willful and wanton breach of contract, it might have defeated the limitation of liability clause. Most important in finding the application of the economic loss rule appropriate was the fact of the limitation of liability clause was contractually agreed to by the parties. This demonstrated that the parties could have had a remedy in contract for such damages if they had not chosen to limit it.

Thus, the first factor weighed in favor of finding no independent duty of care. The Court found that because there was a duty of reasonable care in handling a hazardous substance, the second factor weighed in favor of finding an independent duty of care. The Court found the third factor weighed against finding an independent duty of care, because the common law duty of care was the same as the contractual duty and, contrary to plaintiff’s argument, there was no higher tort duty imposed on the handling of a hazardous substance. In essence, the highest standard of care in handling ammonia is precisely the type of care a reasonable person would exercise. In sum, the Court found that defendant owed plaintiff a common law duty of care in negligence, that the duty did not differ from the duty defendant owed plaintiff under the contract, and a breach of that duty would allow the same recovery under both tort and contract law.

Plaintiff argued that the economic loss rule was inapplicable because the damage was to plaintiff’s property. Because the Court had concluded there was no independent duty here, it made no difference whether the damages sought were for property damage.

Plaintiff contended that its claim for negligent supervision was not barred by the economic loss rule because defendant’s common law duty to properly supervise its employees is separate from its contractual obligations to plaintiff. Again, the Court found no difference between the duty of reasonable care defendant owed plaintiff under the contract and defendant’s common law duty of reasonable care to prevent an unreasonable risk of harm to plaintiff from its employees’ conduct.

Plaintiff requested that the Court abolish the economic loss rule as it pertains to service contracts. The Court refused to depart from binding Colorado precedent to the contrary.

Finally, the Court rejected plaintiff’s argument that the economic loss rule should not bar recovery in tort when a defendant commits willful and wanton conduct. Because proof of such conduct is sufficient to defeat a limitation-of-liability clause in both contract and tort, the Court saw no reason that it should prevent application of the economic loss rule. The judgment was affirmed.

Summary and full case available here.