Loveland Essential Group Llc v. Grommon Farms Inc.

• Decision Date: 16 September 2010
• Docket Number: No. 09CA1021.,09CA1021.
• Citation: 251 P.3d 1109
• Parties: LOVELAND ESSENTIAL GROUP, LLC, a Minnesota limited liability company, Plaintiff–Appellant and Cross–Appellee,v.GROMMON FARMS, INC., a Colorado corporation, Gary Grommon, and Connie Grommon, Defendants–Appellees and Cross–Appellants.
• Court: Colorado Court of Appeals

251 P.3d 1109

LOVELAND ESSENTIAL GROUP, LLC, a Minnesota limited liability company, Plaintiff–Appellant and Cross–Appellee,

v.GROMMON FARMS, INC., a Colorado corporation, Gary Grommon, and Connie Grommon, Defendants–Appellees and Cross–Appellants.

No. 09CA1021.

Colorado Court of Appeals, Div. I.

Sept. 16, 2010.

Cline, Williams, Wright, Johnson & Oldfather, L.L.P., Tracy A. Oldemeyer, Fort Collins, Colorado, for Plaintiff–Appellant and Cross–Appellee.Fischer and Fischer, LLP, Erik G. Fischer, Fort Collins, Colorado, for Defendants–Appellees and Cross–Appellants.Opinion by Judge J. JONES.

This case arises from a sale of real property and assets involving the following parties: Loveland Essential Group, LLC (Buyer); Grommon Farms, Inc., Gary Grommon, and Connie Grommon (collectively Seller); and Martin Jara and PoolTyme, L.L.C. (collectively Tenant). The district court found that Seller had breached two contracts (a real estate purchase agreement and an asset purchase agreement) and a warranty deed by conveying the property subject to an encumbrance, the lease, but awarded Buyer no damages. The court ruled in Seller's favor on Buyer's fraud claim, which also pertained to the existence of the lease.

Buyer appeals and Seller cross-appeals various aspects of the district court's judgment. We uphold the district court's findings that Seller breached the real estate purchase agreement and the warranty deed by conveying the property subject to the lease, as well as the court's finding that Buyer did not prove fraud. However, we reverse the district court's finding that Seller breached the asset purchase agreement. We also conclude that the court applied an incorrect measure of damages to Buyer's breach of contract and breach of warranty claims. Therefore, we affirm in part, reverse in part, and remand the case for further proceedings regarding Buyer's claimed damages.

I. Background

In March 2006, Seller and Buyer entered into a letter of understanding for the sale of Loveland RV Village, which comprised two parcels. A recreational vehicle park was on one parcel (the RV Property). A sports bar was on the other, smaller parcel (the Bar Property), which Seller leased to Tenant.

In April 2006, Seller and Buyer entered into a Real Estate Purchase Agreement (RPA) and an Asset Purchase Agreement (APA), in which Seller agreed to sell the real property and assets, respectively, of Loveland RV Village to Buyer. The RPA required that there not be any encumbrances on the real property, other than those identified therein. The APA similarly required that there not be any encumbrances on the assets, other than those identified therein. Neither the RPA nor the APA identified Tenant's lease as an encumbrance.

During negotiations, Seller allegedly told Buyer that Tenant paid $2,800 per month under an oral month-to-month lease for the Bar Property. But two days before closing, Buyer discovered that Tenant had a written lease for the Bar Property, and received a copy of that lease the following day. According to the written lease, Tenant's rent obligation is $2,800 per month. It states that it would expire on April 1, 2009, but gives Tenant an option to renew it for an additional six years, an option Tenant exercised during the pendency of this litigation. Representatives of Seller and Tenant testified that they signed the lease in 2005, but backdated it to 2003.

Buyer sent Seller a written objection to the lease the day of the closing. Seller responded that Buyer had to accept the lease or there would be no sale. Buyer closed on the property, but no representative of Buyer said that Buyer would accept the lease. Nor did Buyer so indicate in writing. At the closing, Seller executed a Warranty Deed in which Seller conveyed Loveland RV Village to Buyer, warranting that the property was free and clear of all encumbrances, except those identified in an attachment. The lease was not an identified exception.

Several months after Buyer took possession, it sent Tenant three notices to quit the Bar Property. Tenant refused. Buyer filed separate lawsuits against Seller and Tenant, which the court consolidated. Buyer claimed that Seller breached the RPA, the APA, and the Warranty Deed by conveying the property subject to the lease; Seller committed fraud by representing that it did not have a written lease with Tenant; Tenant conspired to commit fraud by executing the written lease on the eve of closing and backdating it; and Seller was obligated to indemnify Buyer for damages incurred by virtue of the existence of the lease. Tenant asserted a counterclaim for intentional infliction of emotional distress, alleging harassment by Buyer arising out of the dispute over the validity of the lease.

The case was tried to the court. The court found that Seller breached the RPA, the APA, and the Warranty Deed because the lease encumbers the property. However, the court did not award Buyer any damages, concluding that Tenant's payment of fair market rent under the lease ($2,800 per month) means that Buyer is not harmed by the existence of the lease. The court also found against Buyer on its fraud and conspiracy claims, finding that the lease was validly executed in 2005 and that Buyer was aware of the written lease and its terms before the closing. The court found against Tenant on its counterclaim, but determined that Tenant was entitled to an award of its reasonable attorney fees from Buyer under the prevailing party provision of the lease, and subsequently ordered Seller to indemnify Buyer in the amount of Tenant's reasonable attorney fees. Finally, the court concluded that Buyer was not entitled to an award of its attorney fees from Seller.

II. Buyer's Appeal

Buyer contends the district court erred by (1) concluding that it was not entitled to damages from Seller for breach of the RPA, APA, and Warranty Deed; (2) concluding that it was not entitled to an award of its reasonable attorney fees; and (3) finding that Seller did not commit fraud.¹

We conclude that a remand is necessary for further findings on Buyer's claimed damages, but otherwise reject Buyer's contentions.

A. Buyer's Damages for Seller's Breach

Relying on Downtown Parking Co., Inc. v. Vorbeck, 524 P.2d 629 (Colo.App.1974) (not published pursuant to C.A.R. 35(f)), the district court ruled that the proper measure of damages for a breach of an agreement to convey property free and clear of encumbrances, where the encumbrance at issue is a lease, is the fair rental value of the property to the expiration of the lease term.² The court found that Tenant pays fair rental value under the lease, and therefore Buyer was not entitled to any damages for Seller's breach of the RPA, APA, and Warranty Deed.

Buyer contends the court applied an incorrect measure of damages. It argues that the proper measure is the diminution in the property's fair market value caused by the existence of the lease—as measured assuming a more profitable use than that to which the property is currently being put—rather than the measure articulated in Downtown Parking. We agree that under the circumstances here, Buyer could claim damages for diminution in the value of the property potentially exceeding the fair rental value of the property. Because the district court did not make any findings concerning Buyer's request for such loss in value, we remand the case to the district court for such findings.

We review de novo the district court's application of governing legal standards; however, the district court “has the sole prerogative to assess the amount of damages and its award will not be set aside unless it is manifestly and clearly erroneous.” Morris v. Belfor USA Group, Inc., 201 P.3d 1253, 1257 (Colo.App.2008).

“In a breach of contract action, the measure of damages is the amount it takes to place the plaintiff in the position it would have occupied had the breach not occurred.” Acoustic Marketing Research, Inc. v. Technics, LLC, 198 P.3d 96, 98 (Colo.2008). This principle applies to breaches of covenants in real estate purchase contracts and warranty deeds. See 14 Richard R. Powell, Powell on Real Property § 81.04[2] (Michael Allan Wolf ed., 2009) ( Powell ); see also Terry v. Salazar, 892 P.2d 391, 393 (Colo.App.1994) (deeds are generally construed in accordance with rules of construction of written instruments), aff'd, 911 P.2d 1086 (Colo.1996); cf. Clough v. Williams Production RMT Co., 179 P.3d 32, 42 (Colo.App.2007) (applying this principle to a breach of a covenant in a lease). ³

At issue here are breaches of covenants against encumbrances.

An encumbrance within the meaning of the covenant is a right or interest in the land which diminishes the value of, but is not inconsistent with the ability to convey, fee title. It includes “any burden resting not only on the title to the real estate, but on the real estate itself which tends to lessen the value or interfere with its free enjoyment.”

Feit v. Donahue, 826 P.2d 407, 410 (Colo.App.1992) (quoting in part 7 George W. Thompson, Real Property § 3183, at 272 (1962)); see Powell § 81A.06 [2][c][i], at 81A–117. An unexpired lease is an encumbrance. Feit, 826 P.2d at 410; Downtown Parking, 524 P.2d at 631; see Powell §§ 81.03[6][d] [iii], 81A.06[2][c][iv].

A covenant warranting that the property is free from encumbrances is an agreement to indemnify the purchaser from any loss to the value of the property due to an encumbrance's existence. S. Utsunomiya Enterprises, Inc. v. Moomuku Country Club, 75 Haw. 480, 866 P.2d 951, 962 (1994); Campbell v. Karb, 303 Or. 592, 740 P.2d 750, 752 (1987); Patel v. Khan, 970 P.2d 836, 840 (Wyo.1998); see Powell § 81A.06[2][c][i], at 81A–177, § 81A.06[4][b], at 81A–129. Thus, in the event of a breach of this covenant, where the purchaser has paid to remove an encumbrance or has the right to do so unilaterally, the necessary reasonable expense to cure the defect (not exceeding the amount the purchaser paid the...