Boulders at Escalante LLC v. Otten Johnson Robinson Neff & Ragonetti PC

• Decision Date: 18 June 2015
• Docket Number: Court of Appeals No. 14CA0900
• Citation: 412 P.3d 751
• Parties: BOULDERS AT ESCALANTE LLC, a Colorado limited liability company, Plaintiff–Appellee, v. OTTEN JOHNSON ROBINSON NEFF AND RAGONETTI PC, a Colorado professional corporation, Defendant–Appellant.
• Court: Colorado Court of Appeals

412 P.3d 751

BOULDERS AT ESCALANTE LLC, a Colorado limited liability company, Plaintiff–Appellee,

v.OTTEN JOHNSON ROBINSON NEFF AND RAGONETTI PC, a Colorado professional corporation, Defendant–Appellant.

Court of Appeals No. 14CA0900

Colorado Court of Appeals, Div. I.

Announced June 18, 2015

Beem & Isley, P.C., Clifford L. Beem, A. Mark Isley, Danielle C. Beem, Denver, Colorado, for Plaintiff–Appellee

Reilly Pozner LLP, Sean Connelly, Patrick A. Withers, Denver, Colorado, for Defendant–Appellant

Opinion by JUDGE BERGER

¶ 1 In this legal malpractice case, defendant, Otten Johnson Robinson Neff and Ragonetti PC (Law Firm), appeals the judgment entered on a jury verdict in favor of plaintiff, Boulders at Escalante LLC (Developer). We affirm the judgment to the extent that the damages were based on the legal fees and related expenses Developer incurred that it would not have incurred but for Law Firm's negligence, and we remand for further proceedings to determine the amount of those damages. However, regarding the principal issues on appeal, we agree with Law Firm that, to the extent that the damages award was based on Developer's claimed business losses, the evidence was insufficient as a matter of law to prove that Law Firm's negligence was the legal cause of those losses. We therefore reverse the judgment in part.

I. Relevant Facts and Procedural History

A. Law Firm's Representation of Developer

¶ 2 Developer was a real estate development company formed to develop townhomes on a lot owned by one of the company's principals in a subdivision in Durango. Law Firm was hired to represent Developer in a lawsuit filed against it by its general contractor to foreclose the contractor's mechanic's lien.

¶ 3 On Developer's behalf, Law Firm filed several compulsory counterclaims against the contractor for breach of contract and negligence. Developer was concerned that the contractor would be unable to pay a judgment if Developer succeeded on the counterclaims. It asked Law Firm to review the insurance policies it had obtained for the project, under which both Developer and the contractor were insured, to determine whether the policies would pay a judgment in favor of Developer and against the contractor.

¶ 4 In October 2006, Law Firm told Developer that there was $2 to $4 million of coverage under the policies to pay a judgment against the contractor.¹ But in April 2009, after Law Firm withdrew from the lawsuit and Developer obtained new representation, Developer learned that the policies contained a "cross-liability exclusion." The cross-liability exclusion precluded one named insured from recovering insurance proceeds for a claim against another named insured. Accordingly, the insurance policies would not pay a judgment against the contractor if Developer succeeded on its counterclaims.

¶ 5 In 2012, Developer entered into a settlement agreement with the contractor under which both parties agreed to dismiss the claims against the other with prejudice, without payment by either party.

B. Developer's Legal Malpractice Action against Law Firm

¶ 6 In 2011, Developer filed this action against Law Firm. Developer asserted that Law Firm was negligent in incorrectly advising it that there was $2 to $4 million in insurance coverage to pay a potential judgment against the contractor. Developer's theory of liability was based upon its principals' testimony at trial that, in reliance on Law Firm's advice about the insurance coverage, Developer made a series of decisions that resulted in extensive losses (including legal fees and related expenses for continuing to litigate the counterclaims against the contractor).

¶ 7 The principals testified that in 2006 and early 2007, Developer had sold twenty townhomes (units) at a loss of $50,000 each. It had nine other units under contract for a price that also would have resulted in a $50,000 loss on each, and eight units that had not yet been sold. A new appraisal on those seventeen remaining units appraised their value substantially higher than the contract prices for the nine units or the prices at which the other twenty units had been sold.

¶ 8 According to the principals' testimony, under the belief that there was $2 to $4 million in insurance coverage to pay a potential judgment against the contractor, in 2007, Developer decided to cancel the nine existing contracts and pull all seventeen remaining units off the market. To cancel two of the existing contracts, Developer had to buy out the contracts for $30,000 each.

¶ 9 The principals testified that by promising its principal construction lender 60% of the proceeds of any judgment against the contractor, Developer was able to extend the maturity date on the loan, lower the interest rate, and obtain additional funds. Developer then leased the nine units that had been under contract and finished the remaining work on the other eight units. The principals testified that they believed that when they put the units back on the market, they would sell for a higher price than the prices at which the nine units had been under contract and the twenty initial units had sold, thus reducing the losses sustained by Developer.²

¶ 10 However, by the time Developer was able to put the units back on the market in 2008, the real estate market in Durango and elsewhere had collapsed. Accordingly, although all of the units had sold by the time of trial, they had sold for much less than their appraised value and many had sold for less than the contract prices of the nine units previously under contract or the selling prices of the initial twenty units.

¶ 11 Developer's principals testified that had Law Firm correctly advised them in 2006 about the cross-liability exclusion, and thus had they known in 2007 that there was no insurance coverage to pay a judgment against the contractor, they would not have made the same decisions. Rather, they would have sold the nine units under contract at the contract prices, and they would have sold the remaining eight units by the end of 2007 for whatever prices they could get. The principals testified that Developer then would have paid off what obligations it could and wound down its operations.

¶ 12 The principals also testified that beginning November 1, 2006 (after Developer received the incorrect insurance coverage advice from Law Firm), and continuing until the settlement with the contractor in 2012, Developer incurred hundreds of thousands of dollars in legal fees and related expenses in litigating the counterclaims against the contractor. They testified that Developer would not have incurred those legal expenses had they known that there was no insurance coverage to pay a judgment against the contractor on the counterclaims.

¶ 13 Developer hired a forensic accountant to determine what losses it had suffered by relying on Law Firm's incorrect advice about the insurance coverage and thus pursuing the course of action that it did. The accountant testified at trial that he based his calculations on the assumption that but for Law Firm's advice, Developer would have sold all thirty-seven units by the end of 2007 and wound down. He testified that had Developer pursued that course of action, the project would have ended with Developer sustaining a $1.7 million loss on the project. However, by taking the path that it actually took, the accountant testified that Developer actually sustained a project loss of almost $5 million. Thus, according to the accountant, not including the legal expenses Developer incurred in pursuing its counterclaims, Developer suffered a financial loss of almost $3.2 million that it would not have sustained but for Law Firm's advice.

¶ 14 Law Firm moved for a directed verdict at the close of Developer's case-in-chief and renewed the motion at the close of evidence. Law Firm argued that Developer failed to prove an essential element of a legal malpractice case—that the outcome of the underlying litigation between Developer and the contractor would have been more favorable for Developer but for Law Firm's negligent advice (the "case within a case" requirement). Law Firm also argued that Developer failed to establish causation; that the case was not filed within the statute of limitations; and that Developer's theory of damages was not legally cognizable. The trial court denied the motions.

¶ 15 The jury found that Law Firm was negligent and that its negligence caused 82.5% of the damages suffered by Developer (with Developer 17.5% at fault). The jury determined that the total amount of Developer's damages was $3,287,379.59.

¶ 16 The trial court entered judgment for Developer for $2,712,079.91, plus pre- and post-judgment interest. The court later ordered prejudgment interest in the amount of $1,611,459.01.

¶ 17 Law Firm filed two motions for judgment notwithstanding the verdict and a motion for a new trial, arguing the same grounds it had raised in its motions for a directed verdict and that the damages award was excessive. The trial court denied the motions.

¶ 18 Law Firm appeals, arguing: (1) Developer's claim was barred by the statute of limitations; (2) Developer did not establish its claim as a matter of law because it did not prove a case within a case; (3) the evidence was insufficient as a matter of law to establish that Law Firm owed a duty to Developer regarding the advice given; (4) the evidence was insufficient as a matter of law to establish that Law Firm's incorrect advice caused Developer's losses; (5) Developer suffered no cognizable damages; and (6) the award of prejudgment interest was legally erroneous.

II. Standard of Review

¶ 19 We review de novo a trial court's rulings on motions for directed verdicts and judgments notwithstanding the verdict. Vaccaro v. Am. Family Ins. Grp., 2012 COA 9, ¶ 40, 275 P.3d 750. To the extent that such a motion concerned a question of fact, we consider whether the evidence, viewed in the light most favorable to the nonmoving party, compels the conclusion that reasonable...