Just in Case Bus. Lighthouse, LLC v. Murray

• Decision Date: 18 July 2013
• Docket Number: Court of Appeals No. 12CA1261
• Parties: JUST IN CASE BUSINESS LIGHTHOUSE, LLC, a Colorado limited liability company, Plaintiff–Appellee, v. Patrick MURRAY, Defendant–Appellant.
• Court: Colorado Court of Appeals

383 P.3d 1

JUST IN CASE BUSINESS LIGHTHOUSE, LLC, a Colorado limited liability company, Plaintiff–Appellee,

v.Patrick MURRAY, Defendant–Appellant.

Court of Appeals No. 12CA1261

Colorado Court of Appeals, Div. IV.

Announced July 18, 2013

As Modified on Denial of Rehearing Aug. 15, 2013

Cristiano Law, LLC, Francis V. Cristiano, Greenwood Village, Colorado, for Plaintiff–Appellee.

McGloin, Davenport, Severson and Snow, PC, Michael M. McGloin, Krista L. Tushar, Karl D. Kaesemeyer, Denver, Colorado, for Defendant–Appellant.

Opinion by JUDGE WEBB

¶ 1 This case involves alleged fraud in the negotiated termination of agreements concerning a commission payable for facilitating the sale of a business. Defendant, Patrick Murray, appeals the judgment entered on a jury verdict against him on the fraudulent misrepresentation and concealment claim of plaintiff, Just In Case Business Lighthouse, LLC. We conclude that a limited remand is required for the trial court to address striking one of plaintiff's witnesses as a sanction for improperly agreeing to compensate that witness with a percentage of plaintiff's recovery, which is a question of first impression in Colorado.

I. Facts

¶ 2 Plaintiff, which is solely owned and operated by Joseph Mahoney, entered into two successive agreements (Harvest Agreements) with Pearl Development Company. Under these agreements, plaintiff acted as Pearl's agent in seeking a buyer for the company and in posturing it for sale. Plaintiff received a $ 5,000 monthly fee for consulting services, and would be paid a commission on any sale that occurred during the terms of the agreements or within a tail period thereafter.

¶ 3 Pearl and Epic Energy Resources, Inc. entered into a letter of intent, without plaintiff's knowledge, during the term of the second Harvest Agreement. Defendant, who was at that time president of Pearl, contacted Mahoney about ending the Harvest Agreements, but did not tell him about the letter of intent. Mahoney and defendant had two telephone conversations concerning the provisions for termination. Mahoney recorded both conversations, which were the primary basis for the fraud claim against defendant.

¶ 4 Shortly after these conversations, plaintiff and Pearl entered into the Termination Agreement. This agreement provided plaintiff with a one-time payment of $ 100,000, but excluded it from any commission if Epic, among other named entities, bought Pearl. Pearl made this payment. Five months later, the sale of Pearl to Epic closed.

¶ 5 When plaintiff learned of the closing, it brought this action alleging that Pearl had breached the Harvest Agreements and that defendant, Bret Rhinesmith and Curtis Good (both owners of Pearl), acting on behalf of Pearl had deceived it by “misrepresenting, concealing, and/or failing to disclose the fact that Epic had manifested a specific and well-defined, interest in and intent to purchase Pearl, thereby inducing plaintiff to sign the termination agreement....” Plaintiff sought damages including “Plaintiff's entitlement to a commission pursuant to the applicable commission or ‘success fee’ in the first Harvest Agreement ($ 1,550,000), less the $ 100,000 Plaintiff was paid pursuant to the ‘termination agreement.’ ”

¶ 6 Pearl took bankruptcy. Rhinesmith and Good settled with plaintiff. The jury awarded damages of $ 1,691,000 against defendant, which the trial court reduced to $ 563,610.30 based on the comparative fault of Rhinesmith and plaintiff.

II. Testimony of Preston Sumner

A. The Trial Court Did Not Err in Rejecting a Per Se Rule That Would Preclude Sumner's Testimony Because His Compensation Was Contingent on the Outcome of the Case.

¶ 7 Plaintiff hired Preston Sumner, a long-time acquaintance of Mahoney, as an advisor to develop its case. Sumner spent between 500 and 1,000 hours, over four years, primarily examining business records and preparing the summaries addressed in section III below. Sumner's agreement with plaintiff provided that he would receive ten percent of any judgment or settlement obtained.

¶ 8 Based on this contingent interest, defendant moved in limine to preclude Sumner from testifying as either an expert or a fact witness. (Defendant also objected to Sumner's testimony as a summary witness, which is discussed in section IIC.) The court ruled that Sumner could testify only as a fact witness, but otherwise denied defendant's motion.¹

¶ 9 This ruling raises a question of first impression in Colorado: does compensating a fact witness on a contingent basis require the exclusion of that witness's testimony? Although we disapprove of compensating a fact witness on a contingent basis, we reject such a per se rule. Instead, we conclude that contingent compensation 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, did not rule on the propriety of a sanction, and lacked the benefit of our holding, a limited remand is required.

B. Contingent Compensation of a Fact Witness

¶ 10 Ethical rules have long prohibited lawyers from compensating witnesses on a contingent basis. See ABA Model Code of Professional Responsibility, DR 7–109(C) (1969) (“A lawyer shall not pay, offer to pay, or acquiesce in the payment of compensation to a witness contingent upon the content of his testimony or the outcome of the case.”).² In People v. Belfor, 197 Colo. 223, 226, 591 P.2d 585, 587 (Colo.1979), an attorney was disciplined under DR 7–109, among other rules, for arranging payment of a judgment against the witness “meant to be a gift to [the witness], contingent upon his favorable testimony, or a loan with a contingency that it would be forgiven if he testified favorably.” The supreme court explained that “[i]t is both illegal and against public policy to pay or tender something of value to a witness in return for his testimony.” Id.

¶ 11 At all times pertinent to this case, Colo. RPC 3.4(b) provided that a lawyer shall not “falsify evidence, counsel or assist a witness to testify falsely, or offer an inducement to a witness that is prohibited by law.” Comment [3] differs from the ABA Model Rule by stating, “[i]t is improper to pay any witness a contingent fee for testifying.” (Emphasis added.)

¶ 12 Although no other Colorado case has addressed payment of a contingent fee to a fact witness, both the supreme court and a division of this court have disapproved of such compensation for an expert witness. In City & Cnty. of Denver v. Board of Assessment Appeals, 947 P.2d 1373, 1379 (Colo.1997), the supreme court vacated decisions in valuation proceedings because the appraisers who had testified were salaried employees of appraisal firms “that had executed contingent fee agreements with taxpayer clients.”³ It explained: “If the expert's payment is contingent on the ultimate outcome of the case, the witness' own interest will become intensified, and the reliability of the testimony and impartiality of the expert's position will be significantly weakened.” Id. ; see also Buckley Powder Co. v. State, 70 P.3d 547, 559 (Colo.App.2002) (“An expert witness should not receive a contingent fee because the expert may thereby be improperly motivated to enhance his or her compensation and thus lose objectivity.”).

¶ 13 Similar concerns over the contingent compensation of fact witnesses have been recognized in other jurisdictions.⁴ However, these concerns are not implicated when a fact witness receives only reasonable compensation for actual expenses incurred or the reasonable value of the witness's time expended in testifying and, in some cases, preparing to testify.⁵

¶ 14 Here, plaintiff asserts that Sumner was not a contingent fee witness because its agreement with Sumner did not require him to testify. Although Sumner testified voluntarily, his contingent compensation under that agreement bore no relationship to his expenses or time expended in testifying. Therefore, we disapprove of giving Sumner a contingent interest in the outcome of the case and then calling him as a fact witness. Yet, this conclusion does not resolve whether such a fact witness must be stricken, as defendant urges.

1. Per Se Exclusion

¶ 15 With few exceptions, “[a]ll relevant evidence is admissible,” CRE 402, and “[e]very person is competent to be a witness,” CRE 601.⁶ Notwithstanding these rules, defendant asserts that a fact witness who can provide relevant testimony but is entitled to contingent compensation should per se be precluded from testifying. We reject this assertion based on the following four reasons.

¶ 16 First, although the “common law at one time disqualified from testifying all parties and others with any pecuniary or proprietary interest in the outcome of a suit,” the “assumption that interested witnesses necessarily lie or that disqualification is the best way to deal with the threat of perjury” has been rejected. 27 Charles A. Wright & Victor J. Gold, Federal Practice & Procedure § 6005, at 69 (2007); see generally Osborn v. People, 83 Colo. 4, 26, 262 P. 892, 901 (1927).

¶ 17 Second, under CRE 601, per se exclusion of testimony is disfavored. See People v. Romero, 745 P.2d 1003, 1016 (Colo. 1987) (“per se rule of admissibility or inadmissibility [based on hypnosis of witness] ... is inconsistent with the general trend of witness competency that every person is competent to be a witness”); People v. McKeehan, 732 P.2d 1238, 1240 (Colo.App. 1986) (“While evidence of relaxation techniques may be used to impeach a witness' credibility ... it does not render the witness per se incompetent to testify.”); see also United States v. Cervantes–Pacheco, 826 F.2d 310, 315 (5th Cir. 1987) (rejecting a per se rule that “an informant who is promised a contingent fee by the government is [ ] disqualified from testifying,” citing similar Fed.R.Evid. 601 ).

¶ 18 Third, the potentially corrupting effect of contingent compensation implicates credibility, but does not involve...