Prospect Dev. Co. v. Holland & Knight, LLP, Court of Appeals No. 17CA0744

• Decision Date: 26 July 2018
• Docket Number: Court of Appeals No. 17CA0744
• Citation: 433 P.3d 146
• Court: Colorado Court of Appeals
• Parties: PROSPECT DEVELOPMENT COMPANY, INC., Plaintiff–Appellant, v. HOLLAND & KNIGHT, LLP, Defendant–Appellee.

433 P.3d 146

PROSPECT DEVELOPMENT COMPANY, INC., Plaintiff–Appellant,

v.HOLLAND & KNIGHT, LLP, Defendant–Appellee.

Court of Appeals No. 17CA0744

Colorado Court of Appeals, Division VI.

Announced July 26, 2018

Diamond McCarthy LLP, Stephen T. Loden, Denver, Colorado, J. Gregory Taylor, Rebecca A. Muff, Houston, Texas, for Plaintiff-Appellant

McConnell Fleischner Houghtaling, LLC, Michael T. McConnell, Cecelia A. Fleischner, Denver, Colorado, for Defendant-Appellee

Opinion by JUDGE ASHBY

¶ 1 Plaintiff, Prospect Development Company, Inc. (Prospect), appeals the district court’s dismissal of its claims against its former counsel, defendant, Holland & Knight, LLP (H&K), under C.R.C.P. 12(b)(5). We reverse and remand.

I. Background

¶ 2 Prospect owned and sold undeveloped lots near Crested Butte, Colorado. It relied on H&K, its counsel, to prepare federally mandated property reports for prospective buyers of the lots. These property reports stated that Prospect was responsible for the costs of constructing roads, sewage systems, and other infrastructure for the lots. They also stated that individual lot purchasers would not be responsible for these costs. The property reports neglected to disclose that the special district in which the lots were located would purchase the infrastructure from Prospect using property tax revenue collected from the lots, effectively passing the cost of the infrastructure on to the lot owners.

¶ 3 In 2010, several lot owners who had purchased lots from Prospect complained that they were not notified before they purchased their lots that they would ultimately pay for the cost of the infrastructure through property taxes. According to Prospect, when it told H&K about the lot owners’ complaints, H&K assured Prospect that the property reports complied with the applicable law. Nevertheless, Prospect entered into a tolling agreement with the lot owners in 2010, agreeing to stay the running of any limitations period applicable to any claims that the lot owners might have against Prospect.

¶ 4 In 2011, H&K withdrew from representing Prospect. In 2013, the lot owners filed suit against Prospect based on its failure to disclose that the cost of the infrastructure would eventually be borne by the lot owners through property taxes. Prospect settled with the lot owners in 2015.

¶ 5 Also in 2015, Prospect entered into a tolling agreement with H&K agreeing to toll any claims that Prospect might have against H&K. Prospect sued H&K in October 2016, alleging that H&K was professionally negligent and breached its fiduciary duty by (1) failing to disclose in the property reports that the cost of the infrastructure would be passed on to the lot owners; (2) incorrectly advising Prospect that the property reports were legally sufficient; and (3) failing to correct this erroneous advice before withdrawing from representing Prospect.

¶ 6 H&K did not answer the complaint. Instead, H&K moved to dismiss the complaint under C.R.C.P. 12(b)(5), arguing that Prospect’s claims were barred by the statutes of limitations applicable to each claim. H&K argued that Prospect’s claims accrued in 2011 at the latest, and therefore the two-year statute of limitations for negligence and three-year statute of limitations for breach of fiduciary duty expired before the tolling agreement took effect in 2015. H&K also attached to its motion several exhibits from the underlying litigation between the lot owners and Prospect to support its assertion that Prospect’s claims accrued in 2011. Prospect opposed H&K’s motion to dismiss and argued in its response that the trial court should disregard the exhibits attached to H&K’s motion. Alternatively, Prospect argued that if the court considered the exhibits, it should convert H&K’s motion to one for summary judgment and allow Prospect to present its own evidence.

¶ 7 The district court granted the motion to dismiss, ruling that Prospect’s claims were time barred. In doing so, the court denied Prospect’s request to convert H&K’s motion into one for summary judgment and also considered two of the exhibits attached to H&K’s motion.

¶ 8 Prospect appeals.

II. Dismissal was Error

¶ 9 Prospect argues that the district court erred by considering matters outside the complaint in granting H&K’s C.R.C.P. 12(b)(5) motion to dismiss. H&K responds that any matters outside the complaint that the district court considered were properly the subject of judicial notice, and were therefore appropriate to consider. We agree with Prospect that the district court erred.

¶ 10 We review a district court’s ruling on a motion to dismiss under C.R.C.P. 12(b)(5) de novo. See Walker v. Van Laningham , 148 P.3d 391, 394 (Colo. App. 2006). We apply the same standards as the district court, accepting all of the factual allegations in the complaint as true and viewing those allegations in the light most favorable to the plaintiff. Id.

A. C.R.C.P. 12(b)(5) Motions Asserting an Affirmative Defense

¶ 11 A motion to dismiss under C.R.C.P. 12(b)(5) alleges that dismissal is appropriate because, even if the facts alleged in the complaint are true, the complaint fails to state a claim upon which relief can be granted. C.R.C.P. 12(b)(5). If, when considering such a motion,

matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in C.R.C.P. 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by C.R.C.P. 56.

C.R.C.P. 12(b). Colorado courts have held that documents attached to or referred to in the complaint are not "matters outside the pleading" for purposes of C.R.C.P. 12(b). See, e.g. , Yadon v. Lowry , 126 P.3d 332, 336 (Colo. App. 2005). A document that is referenced in and central to the complaint may therefore be considered by the court when ruling on a C.R.C.P. 12(b)(5) motion. Id.

¶ 12 Opinions in Colorado have also held that courts may take judicial notice of certain material and consider that material when ruling on a C.R.C.P. 12(b)(5) motion. See Walker , 148 P.3d at 398 (citing to numerous cases and identifying the type of material that courts may consider). But H&K has cited no case, and we have found none, where a Colorado appellate court has applied these general principles to a C.R.C.P. 12(b)(5) motion asserting an affirmative defense.

¶ 13 With narrowly tailored exceptions, affirmative defenses must be raised in an answer to a complaint, not in a C.R.C.P. 12(b)(5) motion to dismiss the complaint before an answer is filed. See C.R.C.P. 8(c) (requiring affirmative defenses to be raised in a responsive pleading); C.R.C.P. 12(b) ("Every defense, in law or in fact, to a claim for relief in any pleading ... shall be asserted in the responsive pleading thereto if one is required" except for the defenses listed in C.R.C.P. 12(b)(1)-(6), which do not include affirmative defenses.); Bristol Bay Prods., LLC v. Lampack , 2013 CO 60, ¶ 41, 312 P.3d 1155. "This is so because a plaintiff has no obligation to anticipate an affirmative defense in the complaint and include allegations intended to negate it." Bristol Bay Prods. , ¶ 41.

¶ 14 However, there is an exception to the general rule that an affirmative defense must be raised in an answer. An affirmative defense may be raised in a C.R.C.P. 12(b)(5) motion to dismiss if "the bare allegations of the complaint" reveal that the affirmative defense applies. Campaign Integrity Watchdog, LLC v. All. for a Safe & Indep. Woodmen Hills , 2017 COA 22, ¶ 27, ––– P.3d –––– (quoting Wagner v. Grange Ins. Ass’n , 166 P.3d 304, 307 (Colo. App. 2007) ); see Bristol Bay Prods. , ¶¶ 44-45. This exception is consistent with the justification underpinning the general rule because it does not require a plaintiff to anticipate an affirmative defense and plead facts that negate it. Instead, this exception merely permits a plaintiff to "plead itself out of court by alleging (and thus admitting) the ingredients of a defense." Bristol Bay Prods. , ¶ 44 (quoting U.S. Gypsum Co. v. Ind. Gas Co., Inc. , 350 F.3d 623, 626 (7th Cir. 2003) ).

¶ 15 This narrow exception would, however, violate the underpinnings of the general rule if it applied more broadly. For instance, when ruling on a C.R.C.P. 12(b)(5) motion asserting an affirmative defense, the general rule would be violated if courts could look beyond the bare allegations of the complaint, consider material on which the plaintiff has not relied, and base its ruling on judicially noticeable material of the type H&K asks us to permit here. If this were permissible, a plaintiff would be compelled to anticipate both the judicially noticeable material and the affirmative defense it supported, and plead facts to defend against both. Moreover, permitting the use of judicially noticed material under these circumstances would violate the plain language of C.R.C.P. 12(b), which requires that a motion be converted to one for summary judgment so that both sides may present summary judgment evidence if the court considers matters outside the pleading. See C.R.C.P. 12(b) ("If, on a [ C.R.C.P. 12(b)(5) motion], matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment....") (emphasis added); see also Weise v. Casper , 507 F.3d 1260, 1267 (10th Cir. 2007) (citing 5C Charles Alan Wright & Arthur P. Miller, Federal Practice & Procedure § 1366, for the proposition that consideration of an affirmative defense in a Fed. R. Civ. P. 12(b)(6) motion necessitates treating the motion as one for summary judgment under Fed. R. Civ. P. 56 ).

¶ 16 Our supreme court addressed this issue in Bristol Bay Productions . In that case, the trial court took judicial notice of California court records in ruling on a C.R.C.P. 12(b)(5) motion to dismiss based on the affirmative defense of issue preclusion. Bristol Bay Prods. , ¶ 46. To determine whether this was error, ...