Otteman v. Journey Homes, LLC.: Slipping Out of Contractual Arbitration Provisions

Recently, the District Court of Weld County Colorado granted a motion for preliminary injunction regarding the enforceability of an arbitration provision in a purchase and sales agreement. Ms. Sue E. Otteman (the “Plaintiff”) signed a Purchase and Sale Agreement for a residence in Windsor, Colorado with Journey Homes, LLC (the “Defendant”). The agreement contained a provision calling for binding arbitration to resolve any and all claims arising between the two parties. The provision called for arbitration to be conducted by three arbiters from the American Arbitration Association (”AAA”) and for the costs to be divided equally.

Plaintiff filed a demand for arbitration with the AAA and paid the initial filing fee of $2,750 and a deposit of $1,620. Upon receiving an invoice from the AAA totaling $17,280 for her half of the arbitration fees, Plaintiff filed a motion seeking that the Defendant advance Plaintiff’s share, or in the alternative, allowing Plaintiff to commence suit in District Court. The Court granted Plaintiff’s request because Defendant refused to advance payment on behalf of the Plaintiff and Plaintiff provided a Financial Affidavit showing her inability pay for the arbitration bills.

Based on prior decisions from the Tenth Circuit Court of Appeals, the U.S. Supreme Court, and the Colorado Court of Appeals, the Weld County District Court found that Plaintiff adequately proved her inability to financially pursue her claims in arbitration, paving the way for her claims in the District Court. See Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999); see also Green Tree Financial Corp. - Alabama v. Randolph, 531 U.S. 79 (2000); and see Rains v. Foundation Health Systems Life & Health, 23 P.3d 1249 (Colo. App. 2001).

In Shankle, the Tenth Circuit Court of Appeals found that a plaintiff could not afford the cost of arbitration and affirmed the district court’s decision not to compel arbitration. In coming to the decision, the appellate court found compelling arbitration would have put the plaintiff between a rock and a hard place, which would have prohibited plaintiff from being able to resolve his claims. Shankle, 163 F.3d at 1235. The court found persuasive the fact that the arbitration provision, because of its expense to the plaintiff, failed to provide an accessible forum in which plaintiff could resolve his claims. Id.

A year later the United States Supreme Court, in Green Tree, upheld the notion that an arbitration provision could be disregarded where the costs preclude a plaintiff from vindicating his or her rights. Green Tree, 531 US at 90. However, the Supreme Court stated that such determination must be on a case-by-case inquiry and also, the party claiming the arbitration is prohibitively expensive has the burden to prove the likelihood of incurring such expenses. Id. at 92.

The Colorado Court of Appeals' case, Rains, relies on both Shankle and Green Tree in coming to its holding that arbitration provisions may, in some cases, be circumvented. See Rains, 23 P.3d 1253 – 1254. In Rains the court followed Green Tree finding that a court must, on a case-by-case inquiry, determine whether enforcing the arbitration provision will prohibit a party from pursuing its claims. Id. at 1253. The court eventually found that the Rains plaintiff did not establish the cost of arbitration would prohibit enforcement of her rights when compared to the cost of pursuing those right in court. Id.

In the Otteman v. Journey Homes, LLC case, the court found that Plaintiff met her burden by showing that she would incur at least $17,280 of additional fees in arbitration. Plaintiff also met her burden of showing that such amount was beyond her means to pay and that Defendant was unwilling to advance payment for Plaintiff. Because of all of these factors the court found that arbitration would not allow here to vindicate her rights and that Plaintiff would be allowed to proceed with her claims in District Court.

Defendant immediately appealed the order to argue that Plaintiff did not adequately prove her case regarding prohibitive costs of arbitration. Particular to Defendant's appeal was that Plaintiff’s financial affidavit, standing alone, was not sufficient to support a finding that Plaintiff could not pay the $17,280 up front arbitration costs. Additionally, Defendant argued that Plaintiff did not make any comparison to those costs which she might incur in court as opposed to arbitration. The Court of Appeals agreed with Defendant in part, vacating the order, but remanding the case with instructions for further evidentiary hearings regarding Plaintiff’s financial position.

Upon remand the court again found Plaintiff was not financially able to pay for arbitration. However, soon after that Defendant moved for summary judgment based on the statute of limitations, which was granted. Plaintiff’s claims were dismissed but after she won a reprieve from arbitration to pursue her claims in District Court. The lesson here seems to be, arbitration provisions are as susceptible to judicial tinkering as other contractual provisions. Until someone drafts a better arbitration provision, that is.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Colorado Court of Appeals Rejects Retroactive Application of C.R.S. § 13-20-808.

In TCD, Inc. v. American Family Mutual Insurance Company, TCD appealed the district court’s summary judgment ruling in favor of American Family. TCD, Inc. v. American Family Mutual Insurance Company Colo. App. No. 11CA1046 (April 12, 2012). TCD was the general contractor on a project to construct a building for Frisco General Gateway Center, LLC (“Gateway”). TCD subcontracted with a roofer named Petra Roofing and Remodeling Company (“Petra”) to performing the roofing work for the building. The subcontract required Petra to defend and indemnify TCD and to name TCD as an additional insured under its CGL policy. American Family issued a CGL policy to Petra that named TCD as an additional insured from 2006-2007.

TCD filed suit against Gateway seeking payment for its work at the project. Gateway counterclaimed against TCD for breach of contract, negligence, and violation of the CCPA. TCD demanded that American Family defend it from the counterclaims pursuant to Petra’s policies. American Family denied coverage and a separate coverage suit ensued. At the trial court level, the court entered summary judgment for American Family because the counterclaims of Gateway did not trigger the duty to defend or indemnify TCD as an additional insured.

On appeal, TCD argued that: 1) the counterclaims raise a genuine issue of material fact regarding American Family’s duty to defend; 2) the court should hear evidence beyond the four corners of the complaint; and, 3) the court should apply C.R.S. § 13-20-808 retroactively.

Gateway’s counterclaims alleged that defective work was performed, but did not specify any resulting property damage from such work. Therefore, the Court of Appeals upheld the trial court’s ruling that the counterclaims do not constitute property damage caused by an occurrence.

TCD next argued that the court should allow it to bring in evidence beyond the counterclaims to determine if coverage exists for TCD. TCD cited two federal cases that interpreted Colorado’s “four corners of the complaint” rule liberally.[1] The Court of Appeals in this matter characterized these two cases as narrow exceptions, and found no reason to depart from the broad rule.

Finally, TCD argued that C.R.S. § 13-20-808(3) should be applied retroactively. This statute, if applied retroactively, would give TCD the benefit of a presumption for coverage. HB 10-1394, the legislation which gave rise to C.R.S. § 13-20-808, stated that the law “applies to all insurance policies currently in existence or issued on or after [May 21, 2010].” As this blog has previously covered, Colorado trial courts have held both for and against the retroactive applicability of this statute. Until this decision, no appellate court had weighed-in on whether the statute should be applied retroactively.

The Court of Appeals found the HB 10-1394 language to be unambiguous, and held that the statute should not be applied retroactively. The Court furthered its rationale with Colorado’s presumption that statutes are to be prospectively applied. The Court also heard TCD’s well-reasoned argument that this particular “occurrence” policy, like most CGL policies, would allow for claims after the prescribed policy period had ran. Under this premise, TCD argued that the CGL policy is still “in existence” on or after May 21, 2010. In rejecting this argument, the Court of Appeals concluded with “[a] plain reading of ‘currently in existence’ supports the conclusion that section 13-20-808 applies only to policies for which the policy period had not yet expired on May 21, 2010.” Therefore, as the law stands today, Colorado construction professionals will not gain the benefit of retroactive applications of C.R.S. § 13-20-808.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] See Apartment Investment Co. v. Nutmeg Insurance Co., 593 F.3d 1188 (10^th Cir. 2010); Pompa v. American Family Mutual Insurance Co., 520 F.3d 1139 (10^th Cir. 2008).

Yet Another District Court Weighs in on HB 10-1394

Since its inception, HB 1394, memorialized as C.R.S. § 13-20-808, has gathered an increasing amount of attention. Part of the interest is due to the ambiguous nature of how the second part of the statute is being ruled on by trial courts. There is a dispute which has not yet been resolved by appellate courts in Colorado regarding whether the second part of the statute is retrospective or not. The following is an analysis of an order regarding summary judgment in American States Insurance Company v. J.P. Enterprises, 2010 CV215, District Court of Larimer County.

American States Insurance Company (“ASIC”) filed a motion for summary judgment against J.P. Enterprises (“JPE”) on the basis that coverage had not been triggered and therefore, ASIC did not owe a duty to defend or indemnify. In its analysis, the court decided that ASIC did have a duty to defend based on the language of C.R.S. § 13-20-808, which did allow for retrospective application.

The background facts of the case entail a complaint by the Board of County Commissioners for Larimer County (the “Board”) filed against JPE and Delta Construction (“Delta”). The Board amended its complaint twice, alleging that the Board hired, was a third party beneficiary, or was in privity with all named defendants relating to the design and construction of the buildings which collectively comprise the Larimer County Fairgrounds buildings. All of the buildings included in that collection were completed and delivered in September 2003.

The complaint alleges that the buildings contained a number of construction defects including, but not limited to: inadequate load bearing capacity; resulting damage to real property; actual loss of use of real property and risk of bodily injury and death; construction failing to meet the standard of care resulting in defective construction, which caused material physical property damage; and, failure to use reasonable care. The Board claims the buildings need to be repaired or replaced and seek remuneration and compensation for all direct and direct costs of repairing the buildings, and for the loss of use of the buildings, which are not suitable or fit for their intended purpose.

At and around the time that the alleged causes of action arose, ASIC provided a series of insurance policies to JPE which are generally described as Commercial General Liability (“CGL”) policies and umbrella policies. The CGL policies were issued from February 22, 2002 through July 18, 2005, while the umbrella policies were issued from April 21, 2004 through July 18, 2006. The CGL policies cover any “property damage” which was caused by an “occurrence” during the policy period.[1] The ASIC policies also have the typical exclusions for damage to “your product” and to “your work.”[2]

Based on the language in the CGL policies (and similar language in the umbrella policies), ASIC sought summary judgment using the argument that ASIC has no duty to defend or indemnify JPE because the underlying complaint neither alleges property damage nor an occurrence as required by the CGL and umbrella policies. In denying ASICs motion for summary judgment in part, the court found that the second amended complaint alleged both physical property damage and loss of use resulting from JPE’s negligent work. Since these are the distinct situations the CGL and umbrella policies define as property damage, the court found that the complaint implicates both the CGL and umbrella policies.

As for whether an occurrence has been triggered under the policies, ASIC argued that the General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) case applies. General Security defined “occurrence” in the same manner as the policies in the present case, however, General Security held that “a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence, regardless of the underlying legal theory pled.” Id. at 532. ASIC argued under General Security, that JPE’s poor workmanship does not rise to the definition of “occurrence” triggering the policies.

JPE, countered that, General Security was no longer good law due to the passage of HB 1394 into law as, C.R.S. § 13-20-808. According to JPE, along with overruling General Security, C.R.S. § 13-20-808 also applied to policies in effect before the statute’s effective date of May 21, 2010. JPE argued that because the policies are occurrence-based policies that continue in effect long after the policy periods cease and have not expired, then the application would not implicate retroactivity. ASIC disagreed, arguing such application would be unconstitutionally retrospective.

The court found that C.R.S. § 13-20-808 properly applies to the CGL and umbrella policies both under JPE’s argument and under a retroactive analysis. The court acknowledged that retroactive application of statutes is general disfavored, but nevertheless noted that it is permitted in certain circumstances. A two-part analysis determines whether retroactive application of a statute is appropriate.[3]

In the first step, the Court determined that the language of the statute clearly indicated the legislature’s intention for retroactive application. C.R.S. § 13-20-808 states in pertinent part, “This act applies to all insurance policies in existence or issued on or after the effective date of this act.” Section 3 of HB 10-1394 (emphasis added). The court found that the distinction between policies “in existence” and those “issued on or after the effective date,” demonstrates the legislatures intent for C.R.S. § 13-20-808 to apply to policies issued before May 21, 2010, the effective date of the statute.

Having met the first step of the analysis, the court tackled the second step. In its analysis, the court found that C.R.S. § 13-20-808 does not implicate a vested right and thus must create a new obligation, impose a new duty, or attach a new disability for it to be applied retroactively. The court found that because of General Security, insurers would not be required to defend those insureds who had been sued for damages arising solely from such insureds’ alleged poor workmanship, under an occurrence based policy. C.R.S. § 13-20-808, on the other hand, obligates insurers to defend those insured against allegations that such insured’s work caused damage to another construction professionals work. Thus, C.R.S. § 13-20-808 creates a different obligation for insurers than had existed after General Security satisfying the second step of the two part analysis.

In the end, the court found that ASIC had a duty to defend JPE, pursuant to the CGL and umbrella policies. The motion for summary judgment was denied in part on these issues and granted on separate issues, regarding Delta.  

As stated above, the retroactive issue is still in dispute and will not be conclusively resolved until the appellate courts weigh in. This ruling is only one more on the side of retroactive application. Stay tuned for another case analysis, TCD, Inc. v. American Family Mutual Insurance Company which comes out on the other side, denying the retroactive application of C.R.S. § 13-20-808.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

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[1] Both phrases are defined in the typical language of CGL policies. Occurrence means: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Property damage means: “(a) physical injury to tangible property, including all resulting loss of use of that property. All such loss shall be deemed to occur at the time of the physical injury that caused it; or (b) loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.”

[2] Your Product Exclusion: “Property Damage” to “your product” arising out of it or any part of it. Your Work Exclusion: “Property Damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

[3] In the first step the Court must look at whether the legislature intended the statute to be applied retroactively. The second step states that a statute can be retrospective if it either: (1) impairs a vested right; or (2) creates a new obligation, imposes a new duty, or attaches a new disability. With regard to vested rights, three factors apply: (i) whether the public interest is advanced or retarded; (ii) whether the statute gives effect to or defeats the bona fide intentions or reasonable expectations of the affected individuals; and (iii) whether the statute surprises individuals who have relied on contrary law.