The economic loss rule no longer bars civil theft – a Colorado Supreme Court game changer in business litigation

The Colorado Supreme Court recently ruled the economic loss rule does not bar recovery for
damages on a civil theft claim in Bermel v. BlueRadios, Inc., 2019 CO 31. Chris Bermel, a former
employee of BlueRadios, Inc., forwarded company emails with proprietary information to his
personal email account, which breached various contracts he entered into with the company.
Bermel brought suit claiming lost earnings and the company counterclaimed based on breach
of contract and civil theft alleging the forwarding of emails was an unlawful taking of the
BlueRadios’ property.

Bermal knowingly forwarded thousands of emails and attachments from his business email
account to his personal email account that contained confidential and proprietary information,
including trade secrets, in violation of an agreement not to remove company materials from the
business premises and a confidentiality agreement. At trial, Bermel requested directed verdict
claiming BlueRadios’ civil theft claim was barred by the economic loss rule. The district court
held the economic loss rule could not bar a statutory cause of action and denied the motion.
BlueRadios prevailed at trial and Bermel appealed.

The Colorado Court of Appeals affirmed the district court’s holding and reasoned that the
economic loss rule is a “judge-made” rule intended to “maintain the boundary between the law
of contracts and torts.” Civil theft on the other hand is a “legislatively created cause of action.”
2019 CO 19 at ¶ 12. Thus, a judicially created rule cannot preclude a statutory claim, otherwise
such reasoning would run afoul of the separation of powers between the judicial and legislative
branches of government. Id.

Colorado’s economic loss rule bars a party from recovering pure economic losses suffered from
the breach of a contractual duty under tort claims unless an independent duty of care exists.
Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo, 2000). In BlueRadios, the
Colorado Supreme Court determined the economic loss rule does not bar recovery under a
statutory cause of action, specifically the civil theft statute where the theft also constitutes a
breach of the parties’ contract. 2019 CO 19 at ¶ 15.

Bermel argued the parties’ contracts provided redress for the forwarding of company emails, so
the economic loss rule should bar BlueRadios from asserting claims based in tort for the same
damages recoverable under the contract. 2019 CO 19 at ¶ 16. BlueRadios argued the economic
loss rule bars recovery for tort claims such as negligence and negligent misrepresentation, but
that civil theft is a statutory claim not sounding in tort, is independent of a contractual duty
under the parties’ agreement. BlueRadios argued a judicially created rule cannot bar a statutory
cause of action. Id. at ¶ 27.

The Colorado Supreme Court agreed and held “it would be particularly inappropriate to apply
the economic loss rule to bar statutorily imposed liability for intentionally wrongful conduct.”
Id. at ¶ 18. The legislature enacted the civil theft statute as a punitive measure to deter the
conduct. Id. at ¶ 35. The Colorado Supreme Court reasoned that the civil theft statute was
enacted and applied long before the common law economic loss rule. Id. at ¶ 38. Further, the
Court did not desire to abrogate a clear legislative act by reason of judicial policy because it
would offend the separation of powers, and there was no allegation the statute was
unconstitutional so there was no basis in law to limit the remedy the statute provides. Id. at ¶
37, 41. Finally, the Court reasoned the civil theft statute expressly makes available redress for
purely economic losses and thus cannot be barred by the economic loss rule. Id. at ¶ 42.

The reach of this new court decision was questioned in the dissent by Justices Gabriel and Hart
who expressed concern that future contract claims will be asserted as civil theft claims. Id. at ¶
44. Colorado practitioners may want to analyze each breach of contract case to see if the facts
of their case are similar to BlueRadios. Adding a civil theft claim will allow for treble damages
and attorney fees which may contribute to the value of each case.

It is not required to add 500 other unit owners in Owner v. HOA suit

In Accetta v. Brooks Towers Residences Condominium Association, Inc., — P.3d —, 2019 CO 11 (Colo. 2019), the Colorado Supreme Court determined that a single unit owner was not required to join all other unit owners of a condominium building in pursuing claims against the condominium association for dues allegedly improperly assessed. Mr. Accetta, a unit owner within the Brooks Tower Condominiums consisting of 566 residential units, 13 commercial units, and 297 garage units filed suit against the Brooks Tower Condominium Owners’ Association alleging his unit was being charged a disproportionate share of Association dues under a provision of the Brooks Tower Condominium Declaration that violates the Colorado Common Interest Ownership Act (CCIOA). The Association moved the court to dismiss Mr. Accetta’s claims arguing Mr. Accetta failed to join all of the other unit owners of Brooks Tower whose interests would be affected by Mr. Accetta’s requested relief.

The district court held that the nearly 500 other Brooks Tower unit owners were required to be joined in the lawsuit. The Colorado Supreme Court held that joinder of parties is not required when the interests of the absent parties were aligned with those of any present party to the case. ¶ 20. The court found (1) the interests of the absent Brooks Tower unit owners were adequately represented by the Association; (2) Colorado law permits the Association to represent the interests of its members; and (3) the Association is defending Mr. Accetta’s claims which would align with absent unit owners who wanted to preserve the status quo. ¶ 24-26.

The Colorado Supreme Court reasoned that a requirement to add over 500 parties to a case could complicate and otherwise prohibit access to justice in pursuit of Mr. Accetta’s claims effectively making his claims cost prohibitive. The court also reasoned that such a holding could affect condominium litigation throughout the state and was an issue of first impression. ¶ 12.

The legal rights and remedies of unit owners in condominium associations and the associations themselves are complex and numerous. Should you have questions about a condominium unit you own or conflicts with an association you belong, contact the attorneys at Johnson Law today to discuss the unique facts of your case.

When is it reasonably necessary to have a third-party present during attorney-client communications? The Colorado Supreme Court weighs in.

When is it reasonably necessary to have a third-party present during attorney-client communications? A new Colorado Supreme Court decision further defined the attorney-client privilege in In re Fox v. Alfini, 432 P.3d 596 (Colo. 2018). The Colorado Supreme Court held that the presence of a third party during an attorney-client communication will destroy the attorney-client privilege unless the third party’s presence was reasonably necessary to the communication. ¶ 29.

Ms. Fox was a 36-year old woman who experienced a stroke after visiting a chiropractor’s office. Thereafter, Ms. Fox and her parents sought out and obtained legal advice regarding a case against the chiropractic’s office. The initial consultation was recorded with the attorney, Ms. Fox, and her parents present. During a deposition in the legal malpractice case, the defendants discovered the initial attorney-client consultation between was audio recorded.

The defendants requested disclosure of the recording arguing the presence of Ms. Fox’s parents destroyed the attorney-client privilege of confidential communications. Ms. Fox’s attorney argued the presence of Ms. Fox’s parents was necessary to assist Ms. Fox in understanding the complex legal issues she was discussing with the attorney and to assist Ms. Fox in remembering and making well-reasoned decisions regarding her legal rights and remedies.

The district court ruled Ms. Fox did not have a diminished capacity at the time she met with the attorney such that the presence of her parents during the consultation was necessary. Thus, the district court held the attorney-client privilege did not protect the audio recording of the initial consultation.

The Colorado Supreme Court upheld the trial court’s decision citing that the trial court did not abuse its discretion in ordering the audio recording be disclosed. In support of its decision, the Colorado Supreme Court held a party’s presence is reasonably necessary when the party’s presence is necessary to facilitate an attorney-client communication or make the conference possible, such as communicating about a traumatic event or facilitating communication in a different language. ¶¶ 21-27.

The attorney-client privilege is a privilege that protects communications between the attorney and client by keeping such communication confidential. However, there are exceptions to the when the privilege applies. One exception is that the attorney-client privilege is waived when a third party is present during the communication. The court’s decision in Fox provides clarification on when a third-party is reasonably necessary to facilitate communication between a client and attorney such that the attorney-client privilege would remain intact.

Justice Hood specially concurred stating another privilege, the work-product privilege, would be applicable to protect the audio recording from disclosure. ¶ 46. The work-product privilege protects tangible things prepared in anticipation of litigation by or for another party and are discoverable only upon a showing the party seeking the information has a substantial need for the materials that they are unable to obtain otherwise without undue hardship. ¶ 42. Due to the particular rulings and nature of the Fox decision, the work-product privilege did not apply in this case, but may be helpful in other situations with similar legal issues.

Chad W. Johnson selected as a 2019 Super Lawyers Rising Star in Colorado Construction Litigation

Johnson Law is proud to announce that its founding member, Chad W. Johnson, has been recognized as a 2019 Colorado Super Lawyers Rising Star in construction litigation. Each year, no more than 2.5 percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. Super Lawyers uses a multifaceted selection process, including nominations, independent research, and peer evaluations. For more information about Super Lawyers, visit SuperLawyers.com.

Chad W. Johnson

Rated by Super Lawyers

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New $25,000.00 Colorado County Court Jurisdiction Limit

The Colorado state legislature enacted Senate Bill 18-056, which is new legislation increasing the monetary cap on damages claimed in county court cases from $15,000 to $25,000. This change will be effective for cases filed on or after January 1, 2019. The legislation also changes the court’s filing fees, which are now based on levels established by the amount of damages being claimed. For example, a claim less than $1,000 is subject to a filing fee of $85; a claim of $1,000 or more but less than $15,000 is subject to a filing fee of $105; and a claim of $15,000 or more but less than $25,000 is subject to a filing fee of $135. These examples are for claims brought by a plaintiff. The legislation also changes the filing fees in responding to claims and asserting counterclaims, cross-claims, or third-party claims.

The increase in monetary value of damages for county court cases will likely allow more claimants to access the judicial system while avoiding the expensive and formal rules associated with cases brought in district court. The $25,000 threshold means that individuals who are seeking to recover damages of $25,000 or less can file in county court. This amount is exclusive of costs and attorney fees. If a claim for breach of contract is alleged and the contract includes an attorney fees provision, the attorney fees are not calculated in the total amount of the claim for jurisdictional purposes. The new $25,000 threshold also applies to lien foreclosure and forcible entry, forcible detainer, or unlawful detainer cases where the monthly rental value of the property does not exceed $25,000.

One major advantage of filing a case in county court versus district court is that cases are more likely to reach trial or resolution quicker than in district court. Further, pretrial procedure is less onerous in county court. For example, discovery such as written discovery, depositions, and expert disclosures, can be a costly phase of the case. See Johnson Law’s prior blog post “What is Litigation?” posted March 26, 2018 for a more detailed discussion on discovery and the phases of a case. Unlike in district court where a party is entitled to presumptive limits on discovery, in county court a party must request the court order discovery.

This legislation improves access to the judicial system and helps many parties seeking to recover damages without incurring costly legal fees associated with district court. If you have a legal question, please contact your qualified and specialized Colorado Construction Defect Lawyers at Johnson Law today to discuss your case.

Residential Property Under CDARA

Colorado homeowners benefit from a provision to the Colorado Construction Defect ActionReform Act (“CDARA”) called the Homeowner Protection Act of 2007 (“HPA”). TheHPA renders contractual provisions that limit or waive CDARA’s rights andremedies void as against public policy when construction defect claims arise ata residential property.

In Broomfield Senior Living Owner, LLC v. R.G. Brinkmann, 413 P.3d 219 (Colo. App. 2017), the Colorado Court of Appeals interpreted CDARA’s definition of residential property. The case involved construction of a senior living community. The construction contract included warranty provisions that required the owner to promptly notify the contractor of any defects or else the owner waived the right to require correction or make a claim for breach of warranty. The contract also defined when claims accrued for defective work that contradicted CDARA’s statute of limitations by shortening the time to bring claims.

The building’s owner brought construction defect claims against the contractor. The contractor moved for summary judgment alleging the owner’s claims were barred by the contractual provisions limiting the time claims for construction defect could be brought. The court granted summary judgment and the owner appealed.

The building’s owner claimed the HPA voided the contractual provisions limiting the time it had to bring construction defect claims against the contractor. The contractor argued the HPA did not apply because the building was a commercial entity, not a residential property. In using the cannons of statutory interpretation, the court applied the plain meaning of residence to mean a structure where people live. The court also relied on the fact the facility was zoned for multi-family residential use. The court went further by applying property tax law that defined residential real property as all residential dwelling units and related land excluding motels and hotels. The court concluded that residential property under CDARA means the improvement on a parcel that is used as a dwelling or for living. The building at issue was used to house senior residents and, therefore, was a residential property and the HPA applied.

Because the Homeowner Protection Act applied, it voided the construction contract’s provisions limiting accrual of the owner’s construction defect claims. Instead, the court ruled CDARA’s statute of limitations period applied and the owner’s claims accrued upon discovery of the physical manifestations of a defect.

Broomfield Senior Living expanded the types of properties protected under the Homeowner Protection Act. Even though the building was operated commercially, it was a building where seniors lived and therefore was a residential property under CDARA. Properties operating commercially but used for residential purposes, like mobile home parks, in-patient treatment facilities, and apartment buildings, may benefit from the Homeowner Protection Act by applying the court’s reasoning in Broomfield Senior Living.

As experienced construction defect lawyers, the attorneys at Johnson Law regularly litigate the scope of the homeowner protection act. Call the attorneys at Johnson Law for a consultation on your construction defect case.

Mechanic’s Lien Trust Fund Statute – Franklin Drilling v. Lawrence Construction

Colorado law requires contractors to hold funds in trust for the payment of subcontractors, laborers, or material suppliers who have furnished services connected to a construction project or who may have a lien against the property. C.R.S. § 38-22-127(1). This Mechanic’s Lien Trust Fund statute requires contractors to maintain separate accounting for each project and violations of the statute amount to civil theft pursuant to C.R.S. § 18-4-401. For example, when a contractor receives funds for work at Construction Project Y and uses those funds to pay subcontractors on Construction Project Z, the contractor has violated the trust fund statute. Treble damages and attorney fees may be awarded for violations of the trust fund statute.

Substantially similar to the Mechanic’s Lien Trust Fund statute, the Colorado Court of Appeals recently analyzed the Public Works Trust Fund statute that applies to government funds received on public works projects. C.R.S. § 38-26-109. The issue in Franklin Drilling v. Lawrence Construction, 2018COA59, was when does a violation of the trust fund statute result in civil theft liability? Id. at ¶ 16. The court held that exhausting funds paid to a contractor prior to payment of a subcontractor constitutes a violation of the Public Works Trust Fund statute and may constitute civil theft. Id. ¶ 29.

Specifically, the court reasoned that a “res” (or an identifiable thing) is created when payment is made to the contractor that must be held in trust for the subcontractors. Id. at ¶ 26. A violation of the trust fund statute may be established by evidence the “res” was exhausted prior to payment to subcontractors. Id. The concept of payment constituting a “res” that is to be held in trust is necessary for the operation of the trust fund statute, otherwise the statute is frustrated and rendered ineffective to meet its legislative purpose. Id. at ¶ 28.

In residential or commercial construction projects where an owner pays a contractor for a construction project and the contractor fails to pay the subcontractors, a violation of the Mechanic’s Lien Trust Fund statute may be triggered. Applying the court’s reasoning in Franklin, when a contractor knowingly uses the “res” for other purposes instead of holding the funds in trust for payment to subcontractors, this evidences a violation of the Mechanic’s Lien Trust Fund statute and the requisite mental state for civil theft. Support for a claim of a trust fund violation requires evidence that the “res” is exhausted or depleted prior to issuance of subcontractor payments.

When a construction project goes bad it not only includes construction defects that fall under the Colorado Construction Defect Action Reform Act (“CDARA”), it may also involve violations of the Mechanic’s Lien Trust Fund statute. The Franklin case provides guidance to practitioners in establishing claims for trust fund violation. Thus, practitioners should consider including claims for violations of the Mechanic’s Lien Trust Fund statute when payments are made to the contractor, but subcontractors or materialmen are threatening to lien the project or claiming nonpayment. Furthermore, practitioners should seek discovery into the contractor’s bank accounts to uncover how deposits made for one project, or the “res,” were held in trust for that construction project.

If you have any questions, please contact Johnson Law’s team of attorneys for a free consultation regarding construction defect claims under the CDARA, mechanic’s lien claims, and mechanic’s lien trust fund claims.

Are Developers successfully avoiding construction defect liability?

Anyone driving around downtown Denver can see the multiple cranes dotting the skyline. Construction is booming in Colorado as people are moving to this beautiful state. Rents are increasing and opportunities to purchase starter homes are dwindling. As luxury apartments continue being developed throughout the metro area, some argue there is a shortage of affordable options of single-family homes and townhomes for young professionals and families.

One common question many people have is: Are developers building apartments to only later sell those apartments as condos in an effort to avoid Colorado’s Construction Defect Action Reform Act (“CDARA”)?

On its face this may appear to be a legitimate business approach to avoiding construction defect litigation, but such approach presents many complex issues that have yet to be determined.

The Statute of Limitations requires a homeowner to bring claims against a construction professional within two years of the physical manifestations of a construction defect. Colorado’s Statute of Repose establishes that construction defect claims cannot be brought more than six years after substantial completion of the improvement. One exception is if the construction defect is discovered in the fifth or sixth year, the State of Repose is extended by two years from the date of discovery.

In theory, a Developer can build residential units and hold on to them until the State of Repose runs, which would effectively time-bar any claims for deficient construction. Once the Statute of Repose expires, some may argue the Developer can then sell the units without the liability of potential construction defect claims by future homeowners.

However, a Developer must take careful consideration with this approach. Does the project have adequate funds available for repairing and replacing various building components such as windows, doors, and other common elements? Has the Developer set aside any funds during the first six years for general maintenance and capital improvements once a homeowners’ association is formed and takes over? How would a rental apartment turned into an owner-occupied condominium affect market prices in both rental and real estate markets?

How does retaining ownership to avoid construction defect claims compare with the prohibition of using the State of Limitations as a defense by a person who is in possession and control of the improvement that causes damage to property? What disclosures will the Developer need to make to future homeowners for repairs that were made to the building, unit, or common elements during the Developer’s ownership?

These questions and others present difficult issues to consider for Developers who seek to avoid liability under the CDARA. The easiest and best way to avoid construction defect litigation is to build a good product and address any problems early and completely.

If you have questions about your home, please call the lawyers at Johnson Law for a consultation on the facts specific to your case.

 

Johnson Law to Present at the 12th Annual Colorado Alternative Dispute Resolution Conference on November 2, 2018

Johnson Law is proud to announce that attorney Tessa R. DeVault has joined the faculty of the 12th Annual Colorado ADR Conference. Tessa will present on recent reported cases from across the U.S. that exemplify a trend where mediation becomes the source of additional litigation instead of a form of alternative dispute resolution. As more courts require mediation at some point during litigation, this presentation explores those cases where the mediation and/or following settlements furthered instead of settled the dispute between the parties. The presentation
identifies pitfalls to avoid and offers practical advice to both mediators and litigators in achieving successful mediations.

The Colorado ADR Conference is an annual gathering of attorneys and non-attorneys discussing current changes and developments in alternative dispute resolution. The conference is a live
seminar held on November 2, 2018 located at the Renaissance Hotel, 3801 Quebec Street, Denver, CO 80207 in the Stapleton neighborhood.

To register or find out more about the Colorado Bar Association CLE – 12th Annual Colorado ADR Conference please click here or contact Tessa DeVault at 303.586.4829 or Tessa@chadjohnsonlaw.com.

Johnson Law is seeking to add another attorney to the team

Attorney 

We are a busy boutique law office focusing on construction defect law, general construction law, and real estate nondisclosure seeking a full-time attorney for its Denver or Louisville office.

Responsibilities include:

  • Draft pleadings, discovery, dispositive motions and trial preparation
  • Client coordination from intake through trial
  • Defend and take depositions
  • 1st chair smaller cases and second chair larger cases

Requirements:

  • Strong attention to detail
  • Admission to Colorado bar
  • 4+ years litigation experience
  • Significant past deposition experience
  • Some past trial experience
  • Experience in the substantive law of construction defect, general construction, and/or real estate nondisclosure
  • Our office strives to be paperless, uses Mac OS, Clio, and other cloud technology, so familiarity with technology is crucial

We might be a good fit if you are someone who:

  • Is energetic and a self-starter, has great organization skills and superior customer service
  • Is comfortable working both independently and in a team
  • Has time management skills to organize, multi-task, prioritize assignments and complete tasks under pressure due to workload volume and changing demands
  • Has great attention to detail

What we offer:

  • A flexible work schedule with ability to telecommute
  • A health care benefits plan
  • A retirement plan with matching contributions
  • A comfortable, collaborative, and friendly work environment
  • A salary commensurate with your experience
  • The ability to earn bonuses beyond your salary

We are committed to giving every client outstanding customer service, exceeding their expectations by being helpful, friendly, and having a positive attitude. If you share our commitment then we want to hear from you. Qualified candidates should respond with their resume and cover letter with salary requirements to apply@chadjohnsonlaw.com.