Navigating a Fallen Sky Civil Theft & Contracts after Bermel v: BlueRadios, Inc., 0122 COBJ, Vol. 51, No. 1 Pg. 30

• Author: BY COLIN MORIARTY, J.
• Position: Vol. 51, 1 [Page 30]

Navigating a Fallen Sky Civil Theft and Contracts after Bermel v: BlueRadios, Inc.

No. Vol. 51, No. 1 [Page 30]

Colorado Lawyer

January, 2022

FEATURE CONTRACTLAW

BY COLIN MORIARTY, J.

Colorado's Rights in Stolen Property statute allows a litigant asserting a civil theft claim to seek treble damages and attorney fees and obtain a judgment that may be non-dischargeable in bankruptcy.

This article discusses the viability of such claims where the parties involved had a contract.

Colorado's Rights in Stolen Property statute allows litigants to assert a civil theft claim and seek treble damages and attorney fees.^[1] These are powerful and attractive remedies. But over the last few decades, Colorado courts have considered whether such claims can be asserted if the parties to the civil theft also have a contract concerning the same subject matter. In 2019, the Colorado Supreme Court held in Bermel v. BlueRadios, Inc. that the economic loss rule no longer bars claims (if it ever did) for civil theft where the parties have such a contract.^[2] Does this mean that every contract case will now include a claim for treble damages? Has the sky fallen? The BlueRadios, Inc. dissent and some commentators seem to think so.^[3]

However, the reality is more nuanced. The economic loss rule developed its role as a defense to statutory claims only recently, and even then it was unclear exactly how much protection it offered. BlueRadios, Inc. in many ways represents a return to the foundation of the economic loss rule as a barrier to negligence claims but perhaps not much more.

Yet it is undeniable that the economic loss rule no longer offers the hope of protection against claims for civil theft. So while the sky has not entirely fallen, adventurers into this area should check their maps carefully before exploring. This article provides some landmarks on that map. It describes the interplay between the civil theft statute and the economic loss rule and offers practical advice on handling civil theft claims in the context of contract disputes.

The Rights in Stolen Property Statute

In Colorado, crimes like embezzlement, stealing, and similar acts are largely subsumed under a single criminal statute that defines "theft."^[4] Under CRS § 18-4-401, the theft statute, the act of theft has three general elements: (1) obtaining, retaining, or controlling someone else's property; (2) without authorization or by threats or deception; and (3) with a culpable state of mind, which can be proven directly or inferred through one of several factual circumstances listed in the statute.^[5] State of mind can be shown by proving that the defendant does one of the following:

■ intends to deprive the other person permanently of the use or benefit of the thing of value;

■ knowingly uses, conceals, or abandons the thing of value in such manner as to deprive the other person permanently of its use or benefit;

■ uses, conceals, or abandons the thing of value intending that such use, concealment, or abandonment will deprive the other person permanently of its use or benefit;

■ demands consideration to which he or she is not legally entitled as a condition of restoring the tiling of value to the other person; or

■ knowingly retains the thing of value for more than 72 hours after the agreed-upon return time in any lease or hire agreement.^[6]

This criminal statute can of course be prosecuted by the state. But theft victims can also bring a civil theft claim under the Rights in Stolen Property statute, CRS § 18-4-405. The remedies available to the victim under this statute are significant; a prevailing plaintiff is entitled to treble damages plus attorney fees. Unlike exemplary damages, these remedies are mandatory.^[7] Further, a civil theft judgment also likely renders the resulting debt non-dis-chargeable in bankruptcy.^[8]

History of the Economic Loss Rule in Colorado

The economic loss rule limits tort claims where the parties have a contract defining their rights and duties on the same subject matter. The belief that the economic loss rule could preclude a civil theft claim even where the statutory elements were satisfied is a product of the gradual evolution of the doctrine over the last few decades.

The Rule's Origins

Colorado has permitted individuals to bring private actions for civil theft since 1861.^[9] The economic loss rule was recognized here over 100 years later, in the 1988 Court of Appeals opinion Jardel Enterprises, Inc. v. Triconsultants, Inc.^[10] In this original formulation, the Court explained that "no cause of action lies in tort when purely economic damage is caused by a negligent breach of a contractual duty."^[11] It reasoned that when parties form a contract, they are free to negotiate and restrict remedies in the event of a breach.^[12] Thus, a claim for negligent breach would allow one party to escape these negotiated restrictions.^[13]

Initially, the economic loss rule barred only negligence claims^[14] and did not even extend to bar negligent misrepresentation in a business transaction.^[15] But the doctrine's reach was already on the march, and the Court of Appeals soon expanded the rule to bar claims from third-party beneficiaries of contracts^[16] and suggested that it might be relevant to quasi-contract claims as well.^[17]

The Colorado Supreme Court adopted the economic loss rule in 2000 in Town of Alma v. AZCO Construction, Inc.,^[18] taking a broader view of the rule than the Court of Appeals. Rather than focusing on barring negligent breach of contract claims, the Court viewed the doctrine as aimed more generally at "prevent[ing] tort law from 'swallowing' the law of contracts" in light of developments in products liability cases.^[19] Thus, "whether the plaintiff may maintain an action in tort for purely economic loss turns on the determination of the source of the duty" and, in particular, whether this duty "arises under the provisions of a contract."^[20] This suggested the appropriate inquiry was whether the tort duty allegedly violated arose independently of the duties imposed by the contract.^[21]

But what did "independent" mean? Did it merely require litigants to point at a common law or a statutory source of duty on top of the contract, or did it require that the tort duty be totally separate from any contractual duty? In other words, what outcome did the economic loss rule imply when the parties adopted a contract duty that happened to overlap with a preexisting tort duty? Should the overlapping tort claims survive?

The Rule's Evolution

A few years later, in BRW, Inc. v. Dufficy and Sons, Inc., the Colorado Supreme Court seemingly came down in favor of barring overlapping claims.^[22] It explained that the economic loss rule required "courts to focus first on the contractual context among and between the parties to see whether there was a contractual relationship that established the duty of care alleged to have been breached."^[23] If that duty was memorialized in the contract, it was irrelevant if it also arose in tort.^[24] The Court hoped that parties to a contract would properly analyze all risks involved when forming a deal and "presumably will take into account the risk that these contingencies will occur while negotiating the contract."^[25]

BRW,Inc. also addressed a line of older cases discussing misrepresentation that predated the economic loss rule. Before 2000, the Court had considered the interplay between contracts and misrepresentation claims under other theories. For example, in Bill Dreiling Motor Co. v. Schultz fraud or misrepresentation was not barred by the doctrine of parol evidence, which normally prevents a party from introducing evidence external to the contract to vary its terms.^[26] Similarly, the Court held in Keller v. A.O. Smith Harvestore Products, Inc. that merger or integration clauses stating that the contract was the full and final articulation of the parties' agreement did not bar misrepresentation claims.^[27] The Court explained these prior holdings by noting that "in some circumstances," at least where there was no overlapping contract duty, a claim for "negligent misrepresentation based on principles of tort law, independent of any principle of contract law, may be available [.] "^[28] But the economic loss rule could bar claims such as those for negligent misrepresentation where the duty to avoid such misrepresentation is "memorialized in the contracts."^[29] In BRW, Inc. the contract included a requirement for BRW, Inc. to inspect the project and disclose nonconformance, so the Court determined that the contract imposed the duty to disclose.^[30] The Court distinguished Keller by noting that the misrepresentation there had occurred before the contract was signed, while in BRW, Inc. the misrepresentation arose after the parties had already bargained for a specific allocation of duties.^[31] It thus appeared that tort duties that overlapped with contractual duties, even for misrepresentation, could now be barred by the economic loss rule.

But in the year after BRW, Inc., the Colorado Supreme Court seemed to endorse the contrary view that so long as the tort duty had an independent source, it survived regardless of whether it overlapped with a contract, at least where the tort duty predated the contract.^[32] The Court held in AC. Excavating v. Yacht Club II Homeowners Ass'n that a builder's duty to homeowners was recognized at common law,^[33] the Colorado General Assembly had explicitly recognized this duty in enacting the Construction Defect Action Reform Act, and this duty survived the reasoning in Town of Alma.^[34] It concluded that even where the same or similar tort duties were written into the contract, the economic loss rule would not bar the claim.^[35]

Other cases seemed to agree with the survival of overlapping tort duties. The Supreme Court held that a fiduciary relationship can impose a duty of care that supports a tort action...