James River Ins. Co. v. Rapid Funding Llc

• Decision Date: 29 August 2011
• Docket Number: No. 10–1145.,10–1145.
• Citation: 658 F.3d 1207
• Parties: JAMES RIVER INSURANCE COMPANY, an Ohio corporation, Plaintiff–Appellant,v.RAPID FUNDING, LLC, a Colorado limited liability company, Defendant–Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

658 F.3d 1207

JAMES RIVER INSURANCE COMPANY, an Ohio corporation, Plaintiff–Appellant,

v.RAPID FUNDING, LLC, a Colorado limited liability company, Defendant–Appellee.

No. 10–1145.

United States Court of Appeals, Tenth Circuit.

Aug. 29, 2011.

Andrew M. Low (Richard P. Holme and Kyle W. Brenton, with him on the briefs), Davis Graham & Stubbs LLP, Denver, CO, appearing for Appellant/Cross–Appellee.Diane Vaksdal Smith (Michael S. Burg, David K. TeSelle, and Thomas W. Henderson, with her on the brief), Burg Simpson Eldredge Hersh & Jardine, P.C., Englewood, CO, appearing for Appellee/Cross–Appellant.Before TYMKOVICH, BRORBY, and MATHESON, Circuit Judges.

ORDER

This matter is before the court on the Petition For Limited Rehearing filed on behalf of James River Insurance Company, as well as the Petition For Rehearing En Banc filed on behalf of Rapid Funding, LLC. We address both requests in this order.

The Petition For Limited Rehearing was reviewed by the panel members. Upon consideration, that request is denied. The panel also reviewed the Petition For Rehearing En Banc in the first instance. Upon consideration, the implicit request for panel rehearing contained in that petition will be granted in part and denied in part. Specifically, we grant limited rehearing with respect to that portion of the petition which notes the panel addressed the dismissed cross-appeal in error. We will amend our original decision to omit those references. The amended version is attached to this order. The Clerk is directed to file the amended decision nunc pro tunc to the original filing date. The remainder of the petition is denied in full.

The Petition For Rehearing En Banc was also transmitted to all the judges of the court who are in regular active service. As no member of the panel nor any other judge in active service requested that the court be polled, the en banc request is denied.

MATHESON, Circuit Judge.

I. INTRODUCTION

This case arose from a fire that destroyed a dilapidated Michigan apartment building. The owner of the building, Rapid Funding, LLC, a Colorado limited liability company, submitted a claim to its insurer, James River Insurance Company, an Ohio corporation, for the full $3 million of insurance coverage the policy carried. James River denied the claim because it determined that the building's pre-fire value was less than zero. Rapid Funding brought a diversity action against James River in Colorado federal district court for breach of contract and insurance bad faith and won $3 million in compensatory damages and $2.35 million in punitive damages.

James River argues on appeal that the damages verdict was based on valuation testimony that the district court should have excluded under Federal Rule of Evidence 701. James River seeks a new trial on damages or remittitur of the damages verdict. Rapid Funding counters that Colorado law, not the Federal Rules, should govern this issue and that the testimony was admissible under Colorado law. Rapid Funding adds that, even if the testimony were erroneously admitted, the error was harmless because other evidence supports the jury's damages verdict.

We hold that the valuation testimony was erroneously admitted, that the Federal Rules of Evidence apply, and that the error was not harmless. We therefore REVERSE and REMAND for a new trial limited to the issue of damages.

II. BACKGROUND

A. Facts

Amsterdam Gardens, a complex of apartment buildings in Wyoming, Michigan, was constructed in 1969. The complex was divided into the North Building and the South Building, which were roughly equivalent in value.

The City of Wyoming condemned Amsterdam Gardens for building code violations in 2003. The next year Robert Rice and Robert Niebauer bought the complex for $2.6 million. To finance the deal, they borrowed $2.08 million in a mortgage loan from Rapid Funding, payable in one year. Mr. Rice sold his interest in the property to Mr. Niebauer, but remained jointly and severally liable for the debt to Rapid Funding.

Mr. Niebauer defaulted on the loan, and Rapid Funding filed for foreclosure. Because Rapid Funding intended to purchase the complex at the foreclosure sale, it sought insurance for the property from James River.

On October 12, 2006, James River issued a $3 million policy effective immediately. The coverage allowed Rapid Funding to make a claim for either the property's replacement cost or its actual cash value. The actual cash value option allowed Rapid Funding to recover the value of the property without rebuilding it.

Meanwhile, Rapid Funding also retained Jeffrey Genzink, an appraiser, to value the property. Mr. Genzink told Rapid Funding the land was worth an estimated $1.12 million. He could not, however, estimate the value of the buildings because he could not find sales of comparable buildings and did not know if the buildings had lost structural integrity.

Rapid Funding purchased Amsterdam Gardens at the sheriff's foreclosure sale for $1.8 million. The company then put the complex up for sale and received offers between $1.0 and $1.2 million. Rapid Funding later agreed to sell the complex back to Mr. Rice for $1.8 million and to forgive his $650,000 debt to Rapid Funding.

On January 24, 2007, before the sale to Mr. Rice was completed, an arson fire burned the North Building to the ground. The City of Wyoming ordered Rapid Funding to demolish the remainder of the North Building. Rapid Funding demolished the North Building, and James River paid for the demolition. The City of Wyoming also ordered Rapid Funding to rehabilitate the South Building into compliance with the building code or to destroy it. Rapid Funding demolished the South Building.

Andrew Miller, Rapid Funding's principal, hired a construction company, Anderson Group International, to estimate the replacement cost of the North Building. The Anderson Group report concluded that it would cost approximately $7.145 million to replace the North Building. In March and May 2007, Rapid Funding, through Mr. Miller, submitted two Proofs of Loss to James River. They both claimed the North Building had an actual cash value of $4.489 million before the fire. According to Mr. Miller, this figure was based on applying a 40% depreciation factor to the Anderson Group's estimate of the replacement cost.

On May 30, 2007, James River denied the claim after concluding the North Building had no value.

B. Procedural History

One day later, James River filed suit in Colorado federal district court and asked for a declaratory judgment that it owed nothing on Rapid Funding's actual cash value claim. Rapid Funding counterclaimed for breach of insurance contract and breach of the covenant of good faith and fair dealing.

1. Pretrial Motions

James River filed a motion in limine under Federal Rule of Evidence 702 to exclude testimony that Andrew Miller planned to offer on the value of the North Building. The district court held an evidentiary hearing to determine if Mr. Miller's testimony was admissible under Rule 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). See James River Ins. Co. v. Rapid Funding, LLC, No. 07–cv01146–CMA–BNB, 2009 WL 481688 (D.Colo. Feb. 24, 2009).

The district court found, over James River's objection, that Mr. Miller was qualified to offer opinion testimony on the value of property given his experience in real estate. See id. at *5–7. The court added that, although additional qualifications beyond that experience were not required, Mr. Miller was especially well-suited to value property that his company owned and that he had inspected. Id. But the court decided not to admit Mr. Miller's valuation testimony under Rule 702 and Daubert because it was not based on sufficient facts or data, was not the product of reliable principles and methods, and the method he did use was not reliably applied in this case. Id. at *7–12.

At the hearing, Mr. Miller explained he intended to testify that the North Building had an actual cash value of $4.489 million. Id. at *2. He based his valuation on the $7.145 million replacement cost estimate from the Anderson Group and a 40% depreciation factor. Id. at *8. To calculate the 40% depreciation rate, Mr. Miller “divided the amount of money it would cost to rehabilitate each unit in the North Building before the fire to like new condition, $20,000, by the amount it would cost to completely replace each unit,” which he stated was $50,000. Id.

The district court said that the $50,000 per unit rehabilitated value had very little foundation. Id. The court also explained, “when asked how he arrived at the $20,000 pre-fire rehabilitation estimate, Mr. Miller stated that he has ‘a feeling’ about how much it would cost to rehabilitate each unit to like new condition.” Id. The court concluded, “ Daubert and Rule 702 require more than a ‘feeling.’ ” Id.

The court also examined the reliability factors articulated by the Supreme Court in Daubert, which include:

(1) whether the method is susceptible to testing and has been subject to such testing; (2) whether the method has been subjected to peer review; (3) whether there is a known or potential error rate associated with the methodology used; and (4) whether the relevant community of experts has accepted the expert's theory.

Id. at *10 (paraphrasing Daubert, 509 U.S. at 593–94, 113 S.Ct. 2786). The court found the factors counseled against admitting Mr. Miller's testimony. Id. at * 12.

James River later filed a motion in limine for an order “excluding evidence and arguments relying on, referencing, or in support of Andrew Miller's opinion regarding valuation.” ROA, Vol. 2 at 403. At a hearing before the district court, Rapid Funding stated that it intended to offer Mr. Miller's valuation as lay opinion testimony under Rule 701. Rapid Funding argued that Mr. Miller had a right to explain how he arrived at the Proofs of Loss. The district court characterized Rapid...