Core-Mark Midcontinent Inc. v. Sonitrol Corp.

370 P.3d 353

CORE–MARK MIDCONTINENT INC., Core–Mark International Inc., United States Fire Insurance Co., and Commonwealth Insurance Co., Plaintiffs–Appellants and Cross–Appellees,

v.SONITROL CORPORATION, Defendant–Appellee and Cross–Appellant.

Court of Appeals No. 14CA1575

Colorado Court of Appeals, Div. III.

Announced February 11, 2016

Davis Graham & Stubbs LLP, Andrew M. Low, Shannon Wells Stevenson, Kyle W. Brenton, Benjamin B. Strawn, Gregory Silbert, Thomas Dunford, Denver, Colorado; Weil, Gotshal & Manges LLP, Adam Banks, New York, New York; Watkins & Letofsky, LLP, Brian Letofsky, Newport Beach, California, for Plaintiffs–Appellants and Cross–Appellees.

Bartlit Beck Herman Palenchar & Scott LLP, Sean C. Grimsley, John M. Hughes, Katherine L.I. Hacker, Daniel C. Taylor, Denver, Colorado, for Defendant–Appellee and Cross–Appellant.

Opinion by JUDGE J. JONES

¶ 1 Plaintiffs, Core–Mark International, Inc. and its wholly owned subsidiary, Core–Mark Midcontinent, Inc. (collectively, Core–Mark); and Core–Mark's casualty insurers, United States Fire Insurance Company and Commonwealth Insurance Company (collectively, the Insurers), appeal the judgment entered after a jury trial to determine damages on their breach of contract claims against defendant, Sonitrol Corporation. Sonitrol cross-appeals the judgment and conditionally cross-appeals the district court's denial of its motion to strike a portion of Core–Mark's damages claim. We affirm the judgment and dismiss Sonitrol's conditional cross-appeal.

I. Background

¶ 2 Core–Mark distributes merchandise to convenience stores. Core–Mark contracted with Sonitrol to install and monitor a security system at a warehouse Core–Mark used to store inventory.¹

¶ 3 In 2002, three men burglarized Core–Mark's warehouse. Sonitrol employees failed to detect or respond to the break-in while the burglars looted the building for several hours. Sonitrol employees ignored several alarms activated by the burglars' noise. One of the burglars started a fire in the warehouse that destroyed the building and its contents.

¶ 4 Core–Mark and the Insurers sued Sonitrol, asserting both tort and contract claims to recover for losses resulting from the burglary. The district court dismissed Core–Mark's tort claims and granted Sonitrol's motion for summary judgment on the contract claims based on a limitation of liability clause in Core–Mark's contract with Sonitrol.

¶ 5 On appeal, a division of this court affirmed the dismissal of the tort claims, but reversed the grant of summary judgment on the contract claims, holding that Core–Mark's claims for willful and wanton breach of contract were not subject to the contractual limitation of liability. U.S. Fire Ins. Co. v. Sonitrol Mgmt. Corp., 192 P.3d 543 (Colo. App. 2008) (Sonitrol I ). The division remanded the case for a trial on the breach of contract claims.

¶ 6 On remand, a jury found that Sonitrol had willfully and wantonly breached its contract with Core–Mark and breached the contractual duty of good faith and fair dealing. The jury awarded $7,348,732 to Core–Mark and $10,965,777 to the Insurers.

¶ 7 On appeal, a division of this court affirmed the jury's verdict as to Sonitrol's liability, but reversed the damages award. Core–Mark Midcontinent, Inc. v. Sonitrol Corp., 2012 COA 120, 300 P.3d 963 (Sonitrol II ). The division held that the district court erred by excluding the testimony of Sonitrol's expert witnesses regarding the foreseeability of the extent of Core–Mark's losses. The division remanded the case for a new trial on damages, at which Sonitrol's experts would be permitted to testify. Id. at ¶¶ 35, 39–40.

¶ 8 On remand, a jury awarded Core–Mark $2,750,000.

II. Core–Mark's Appeal

¶ 9 Core–Mark makes three primary contentions on appeal: (1) the district court erred in allowing Sonitrol to present evidence that the arson was not foreseeable; (2) the district court erred in refusing to give the jury Core–Mark's tendered instruction explaining the phrase "natural and probable consequence" used in a damages instruction; and (3) the district court abused its discretion by excluding evidence of how Sonitrol breached the contract. We address and reject these contentions in turn.

A. Foreseeability of Arson

1. Procedural Background

¶ 10 In Sonitrol II, the division held that to be liable for the losses claimed by a plaintiff, "[t]he defendant must have had reason to foresee both the type and the general magnitude of damages." Sonitrol II, ¶ 31. The division reversed and remanded "for a new trial on damages," id. at ¶ 1 ; see id. at ¶¶ 40, 50, because the district court had erroneously precluded three experts from testifying for Sonitrol that Core–Mark's storage of excessive amounts of flammable liquids in the warehouse, and other related actions and circumstances, contributed significantly to the loss resulting from the fire. Id. at ¶¶ 30–40. On remand, Core–Mark filed a motion in limine asking the court to exclude "all evidence attempting to controvert the Court of Appeals' ruling that the type of damages resulting from the fires was foreseeable to Sonitrol." Core–Mark characterized the "type" of damages at issue as "an arson fire started by an undetected burglar," and argued that the Sonitrol II division's statement "[w]e assume that Sonitrol could have foreseen that if it failed to detect a break-in at the warehouse, a burglar could start a fire," see Sonitrol II, ¶ 32, was the "law of the case" as to whether the fire was foreseeable. In short, Core–Mark argued that the division's assumption that the fire was foreseeable was a holding that the fire was foreseeable.

¶ 11 Sonitrol's opposition to Core–Mark's motion in limine argued, as now relevant, that the division's assumption was not a holding, the law of the case doctrine does not apply to an issue (like the foreseeability of the fire) that the appellate court did not decide, and the Sonitrol II mandate did not limit the trial on remand to the question of the extent of fire-related damages, but to "damages generally." In so arguing, Sonitrol also characterized "arson" as a "type" of damages.

¶ 12 The district court denied Core–Mark's motion, for two reasons. First, the court ruled that the division's assumption that the fire was foreseeable was not the law of the case because it was not necessary to the division's holdings. Second, the court ruled that evidence regarding the foreseeability of the fire was not precluded by the scope of the division's remand.

¶ 13 At trial, one of Core–Mark's experts testified that the arson was foreseeable. He did not say that arson was a "probable" result of the breach, noting that burglars committing arson in connection with a burglary was "statistically quite rare." Rather, he opined that the fire was foreseeable in the same sense that a commercial airline pilot becoming incapacitated is foreseeable because though "statistically rare," it does happen. Another of Core–Mark's experts testified, in response to a question whether Core–Mark's damages were "a natural and probable consequence of the breach of contract," that "Sonitrol's breach of contract flowed through the natural flow, probable breach of what they did." Core–Mark has not pointed to any other evidence it introduced at trial as to the foreseeability of its claimed damages.

¶ 14 A long-time Sonitrol employee testified that the purpose of Sonitrol's burglar alarm system was to detect break-ins, not fires, and that the nature of what was stored in the warehouse was not relevant to services Sonitrol was to provide under the burglar alarm contract. He also testified that, in the thirty-six years he had worked for Sonitrol, the only burglary of a Sonitrol-monitored facility that involved a fire, of which he was aware, was the burglary of Core–Mark's warehouse. Two experts testified on behalf of Sonitrol that Core–Mark stored more than thirty times the amount of flammable or combustible materials allowed by fire and building codes, and that Core–Mark's violations of those codes was a significant contributing factor to the extent of the fire loss.

¶ 15 The district court's instruction to the jury on the foreseeability of damages read:

General damages is the amount required to put the plaintiff in the same position as if the breach had not occurred. You may award general damages if you find that they were a natural and probable consequence of the defendant's breach of contract that the defendant reasonably could have foreseen at the time the parties entered into the contract and the damages would probably occur if defendant breached the contract.

If general damages have been proved, you shall award damages in the following categories:

• Inventory lost

• Fixed assets lost

• Accounts receivable lost

• Extra expenses

• Business income lost[.]

¶ 16 During closing argument, Core–Mark's attorney argued that damages are the "natural and probable consequence" of a breach if the breach was the "but for" cause of the damages, and asserted that arsons are a common occurrence in the United States. Counsel also argued the following regarding whether damages "probably result" from a breach:

Can I talk to you for a second about probabilities? And you'll see this in Instruction 4. Here's the number one. This number one represents an absolute certainty, something is going to happen. Here's the number zero. This number represents an impossibility, it will not occur. Somewhere in between zero and one is probability, and Sonitrol wants you to believe that because of arson fire statistics, that they couldn't have predicted this. It's on the probability scale. It is probable that an arson fire will occur if you do not detect a burglar in one of the buildings that you're monitoring. Sonitrol knows that from the testimony that we presented and based on their experience as a nationwide fire alarm company.

¶ 17 Sonitrol's attorney, in contrast, argued that probable and probably mean more likely than not. Specifically, Sonitrol's attorney said,

And as

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