Castleton Corner Owners Ass'n, Inc. v. Conroad Assocs., L.P.

159 N.E.3d 604

CASTLETON CORNER OWNERS ASSOCIATION, INC., Appellant/Cross-Appellee,

v.CONROAD ASSOCIATES, L.P. and McKinley, Inc., Appellees/Cross-Appellants.

Court of Appeals Case No. 19A-PL-2687

Court of Appeals of Indiana.

Filed October 30, 2020

Attorneys for Appellant: Jenny R. Buchheit, Angela P. Krahulik, Ice Miller LLP, Indianapolis, Indiana

Attorneys for Appellees: Edward F. Schrager, Arthur R. Baxter, Jr., Baxter Rose & Schrager LLP, Indianapolis, Indiana

Najam, Judge.

Statement of the Case

[1] Conroad Associates, L.P. ("Conroad") owns a building that it leased to Pier 1 Imports (U.S.), Inc. ("Pier 1"). The lease between Conroad and Pier 1 was set to expire in February 2016, but Pier 1 had the option to extend the lease for two five-year terms. On February 14, 2015, a sewer lift station maintained by the Castleton Corner Owner's Association, Inc. ("the Association") failed and flooded Pier 1 with sewage. Following the flood, Pier 1 terminated its lease with Conroad.

[2] Conroad filed a complaint for breach of contract, negligence, and breach of fiduciary duty against the Association for failing to properly maintain the lift station. Conroad requested damages for lost rent and other expenses through the end of the base term of its lease with Pier 1 and for lost rent for the two option terms. Following a three-day bench trial, the court found in favor of Conroad on its breach of contract claim and awarded damages for lost rent and other costs through the base term but declined to award Conroad lost rent for the two option terms.

[3] The Association appeals the trial court's judgment and raises three issues for our review, which we revise and restate as follows:

1. Whether the trial court erred when it concluded that the Association had breached its contract with Conroad.

2. Whether the trial court abused its discretion when it admitted an expert's report on the issue of damages.

3. Whether the trial court erred when it calculated Conroad's damages through the end of the base term of the lease with Pier 1.

[4] Conroad cross-appeals and asserts that the trial court erred when it declined to award Conroad damages for lost rent for the two option terms.

[5] We affirm the trial court's judgment that the Association breached the contract and the court's admission of the expert's report. As for the damage award, we reverse the trial court's calculation of damages through the end of the base period and remand with instructions for the court to revise that award, but we affirm the court's denial of damages for the two option terms.

Facts and Procedural History

[6] In early 2006, Conroad purchased a retail building in an area of Indianapolis known as Castleton Corner. At the time Conroad purchased the Castleton Corner building, it was occupied by Pier 1. On February 28, Conroad and Pier 1 entered into a ten-year lease agreement, which was set to terminate on February 29, 2016. However, Pier 1 had the "right, privilege and option" to extend the lease for two five-year periods. Appellant's App. Vol. 3 at 90.

[7] As the owner of the building, Conroad became a member of the Association, which exists to establish "minimum standards pertaining to the development, use and maintenance" of Castleton Corner. Appellant's App. Vol. 2 at 79. Pursuant to the Association's Declaration of Development Standards, Covenants, and Restrictions ("the Declaration"), the Association agreed to pay "all Maintenance Costs in connection with" improvements constructed at Castleton Corner, which costs are then allocated among the members based on their proportionate share. Id. at 82.

[8] The Declaration defines "Maintenance Costs" as follows:

"Maintenance Costs" shall mean all of the costs necessary to maintain the Roads, drainage ditches, sewers, utility strips and other facilities within Castle Corner to which the term as used in the relevant sections herein applies, and to keep such facilities operational and in good condition, including, but not limited to , the cost of all upkeep, maintenance, repair, replacement of all or any part of such facilities, payment of any taxes imposed on either the facilities or on the underlying fee, easements or rights-of-way, and any other expense reasonably necessary or prudent for the continuous operation of such facilities .

Id. at 80 (emphases added). In addition, the Association's Code of By-Laws requires its Board of Directors to provide for the "ownership, operation, maintenance, upkeep, repair, replacement, administration, and preservation of the roads, drainage ditches, utility strips and sewers, including a sanitary lift station " in Castleton Corner. Id. at 104 (emphasis added).

[9] The sanitary lift station at Castleton Corner collects the toilet and sink runoff from each of the Association's buildings. The lift station then uses two electrically powered pumps to propel the runoff upward until it eventually joins the City of Indianapolis' sewer system. In the event of a malfunction with the pumps, there is a window of two to three hours before the lift station overflows.¹ If the lift station were to overflow, the runoff would flood Conroad's building as it is the lowest one on the Association's sewer system.

[10] Beginning in 2006, McKinley, Inc. ("McKinley") provided maintenance services for the Association. Every Friday, Curtis Pitts, an employee of McKinley, performed visual inspections of the lift station. In addition, every Monday, Pitts would test the generator to ensure that it functioned normally. Pitts was always on call in order to respond to issues with the lift station.

[11] On Friday, February 13, 2015, Pitts conducted his inspection of the lift station and concluded that it was operating normally "with no sign of any issue." Ex. Vol. 3 at 247. However, the next morning, a Pier 1 employee opened the store at 9:00 a.m. and found one-quarter to one-half of an inch of water containing "raw human sewage" in the back of the store, which levels continued to rise. Id. at 251.

[12] Instead of calling Pitts, the employee called a plumbing company, but that company was unable to stop the flooding. Pitts was ultimately notified about the flood at Pier 1 at 6:00 p.m. Pitts arrived at the location and confirmed that the lift station's control panel was not receiving electrical power, which had caused the lift station to fail. Pitts called several companies, and a plumbing company arrived with a vacuum truck to remove the sewage. By that time, the raw human sewage in Conroad's building had "seeped" into the cracks and spaces between the flooring squares and into the drywall. Id. In addition, an electrician arrived to work on the lift station and ultimately repaired it the next morning.

[13] Following the flood of sewage, Pier 1 informed Conroad that it would not pay rent until Conroad repaired the building. Conroad retained a restoration company to clean and restore the building. However, Pier 1 never reopened its store. Instead, on March 1, Pier 1 returned possession of the building to Conroad. Pier 1 then terminated its lease and paid Conroad a termination payment of $128,000. On April 12, 2016, Conroad leased its building to Furniture Discounters, Inc., which lease "carried a lower Base Rent than the Base Rent that Pier 1 would have paid if Pier 1 had renewed its lease" with Conroad. Id. at 249.

[14] On July 3, 2017, Conroad filed an amended complaint against the Association in which Conroad claimed, in relevant part, that the Association was negligent and that it had breached the terms of the Declaration when it failed to ensure that the lift station operated properly. Conroad also claimed that the Association had breached its fiduciary duty to its members.²

[15] The court held a three-day bench trial beginning on June 10, 2019. At trial, Lloyd Abrams, Conroad's general partner, testified that, while Pier 1 had no obligation to extend the lease past February 2016, he believed that Pier 1 would have remained in Conroad's building had the lift station failure not occurred. Specifically, Abrams testified that Pier 1 would have exercised its options to extend the lease because Pier 1 had occupied the building for twenty years at the time Conroad purchased the building, the rent Pier 1 was paying to Conroad was "favorable" to Pier 1, and the exterior of the building was a "signature" of Pier 1. Tr. Vol. 2. at 135-36.

[16] Michael Lady, a real estate appraiser, testified about the value of Conroad's building. During his testimony, Conroad moved to admit Lady's appraisal report, which the court admitted over the Association's hearsay objection. Lady's report indicated that, had Pier 1 remained in the building through February 29, 2016, it would have paid Conroad $125,429 in total rent. See Ex. Vol. 3 at 126. The report further indicated that Conroad would have received the following additional income from Pier 1 from March 1 through February 29, 2016: $31,983 in property taxes, $2,641 in building insurance, and $17,604 in common area maintenance ("CAM") charges. See id.

[17] At trial, Lady testified that the "effective gross income" Conroad would have received from Pier 1 had Pier 1 remained in the building through February 29, 2016, was $177,656. Tr. Vol. 2 at 111. Lady then acknowledged that Pier 1 had paid Conroad $128,000 to terminate its lease, which resulted in total lost income of $49,656 during the base term of the contract. Lady also testified that, had Pier 1 exercised both of its options to extend the contract, Pier 1 would have paid $485,000 more in rent to Conroad than Furniture Discounters, Inc.

[18] Following the trial, the court entered detailed findings of fact and conclusions thereon in which the court found in favor of the Association on Conroad's claims for negligence and breach of fiduciary duty. However, the court concluded that the "phrase ‘continuous operation’ in the Declaration imposed a strict liability obligation on the Association. By contract, the Association was required to keep the Lift...