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LLC v. American Family Mutual Insurance Co.

United States District Court, D. Colorado

September 5, 2014

KF 103-CV, LLC, a Colorado limited liability company Plaintiff,
AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a Wisconsin corporation, Defendant.


RICHARD P. MATSCH, Senior District Judge.

This insurance dispute arises out of an underlying state court action, Woodmen Heights Metropolitan District et al., v. Prairie Home Vista, LLC et al., Case No. 08CV4553, in the District Court for El Paso County, colorado ("the Underlying Action").

In this federal diversity action, plaintiff KF 103-CV, LLC ("KF 103") seeks declaratory relief determining that defendant American Family Mutual Insurance Company ("American Family") was and is obligated to defend and indemnify KF 103 with respect to claims brought against KF 103 in the Underlying Action. KF 103 also seeks damages based on claims of breach of contract and violation of duties of good faith and fair dealing; unfair claims settlement practices in violation of C.R.S. § 10-3-1104(1)(h), and improper denial of insurance benefits in violation of C.R.S. §§ 10-3-1115 and 10-3-1116. American Family denies liability.

On March 17, 2014, American Family moved pursuant to Fed.R.Civ.P. 56, seeking summary judgment in its favor on the issue of its duty to defend. KF 103 moved pursuant to Fed.R.Civ.P. 56, seeking determinations that American Family breached the duties of defense and indemnification.

The parties have submitted a joint Statement of Undisputed Facts; the Insurance Policy; orders and pleadings from the Underlying Action, and other evidence. The material facts are not in dispute.

The Underlying Action arose out of an easement dispute. The background and procedural history of that dispute are as follows:

In late 2004 and 2005, an entity known as Keller/Campbell Joint Venture, LLC purchased real property in El Paso County, Colorado from Infinity Holding Company, LLC and Howard amily Investments, LLC, and H2 Land Co., LLC. (collectively "the Infinity Group") pursuant to two Purchase Agreements. In November 2006, Keller/Campbell Joint Venture, LLC conveyed the property to KF 103.

The property is commonly known as Cumbre Vista. KF 103 planned the development of a new residential subdivision known as the Cumbre Vista Subdivision.

The Purchase Agreements required the seller - i.e., the Infinity Group - to complete improvements to boundary streets adjoining the property. Those streets included an intersection of Ski Lane and Sorpresa Lane (the "Intersection"), located generally at the southernmost boundary of the property.

The Infinity Group designed a reconfiguration of the Intersection that involved changes to roads, including modification of the width and elevation of Sorpresa Lane. Grading work for construction of the Intersection began in approximately May 2007.

Owners of adjoining properties objected, contending that the planned modification of the Intersection would violate an express easement that provided access to their properties ("the Easement"). Construction of the Intersection stopped from approximately June 2007 to mid-November 2007 due to those objections. In March, 2008, Infinity Group conveyed the property underlying the Intersection to Woodmen Heights Metropolitan District (" the Metropolitan District").

On September 4, 2008, the Metropolitan District and KF 103 commenced the Underlying Action as a quiet title action, seeking determination of rights in the right-of-way Easement and a declaration that the Easement could be relocated. (Pl.'s Ex. 4).[1] The named defendants included William M. Peck ("Peck"); Darrel H. Oliver, Sr. and Kelly Ann M. Oliver ("the Olivers"); William Marchant and Maureen M. Marchant ("the Marchants"); Marilyn J. Howell ("Howell"); C. Arlene Nance ("Nance"), and Susan Hanson ("Hanson") (collectively, "the Neighbors").

In early October 2008 - when the litigation was still in its initial stage - construction of the Intersection was completed.

In October and November 2008, the Neighbors answered the complaint and some filed pro se counterclaims. Over a year later, on March 22, 2010, the El Paso County District Court dismissed those counterclaims without prejudice on the ground that they failed to provide proper notice of the specific claims being alleged. (Pl.'s Ex. 6).

On October 13, 2010, the El Paso County District Court held a bench trial and issued oral rulings. (Pl.'s Ex. 7; Def.'s Ex. B). The Court rejected the claims of KF 103 and the Metropolitan District, concluding that the Neighbors' Easement rights had been impaired by the reconstruction of the Intersection and the plaintiffs had not complied with requirements under Colorado law for the relocation of easements. When announcing those rulings, the Court stated:

I would note that the developer as early as 2005 and 2006 by deciding to unilaterally go forward with this development without getting the consent of owners of recorded easements across his property did so at its own risk, and did so frankly in violation of Colorado Common Law as it relates to easements. So doing so subjected them to the possibility of significant financial impact even though they probably didn't know it. They had no, um, bad state of mind if you will or bad will whatsoever. I'm sure they were doing the business they do best, which is planning for them for the most financially feasible and appropriate use of their property, and unfortunately by doing so they significantly interfered with the rights of easement owners.

(Def.'s Ex. B, Tr. (Oct. 13, 2010) at 18:13-24). The Court ordered the Metropolitan District and KF 103 to provide a proposal of how and when the Neighbors' easement rights could be restored. ( Id. at 20:11-22).

On December 23, 2010, the El Paso County District Court issued a written order on post-trial motions. (Pl.'s Ex. 8; Def.'s Ex. C). In that order the Court stated, inter alia:

It was also of considerable note in my findings that the plaintiff developer was alerted early on to the easement issues that interfered with his proposed grading and changes. That developer was apparently advised by the City that he should consider relocating his road alignment to not interfere with the deeded easements. That warning was given at a time when the developer could have avoided much of this dispute and either not changed the defendants' deeded rights of way or otherwise have made changes that only minimally impacted those defendants [sic] easements. The developer decided that he would lose some lots if he left Sorpresa and Ski Lane in their original size and elevation. The developer elected to go ahead with the plan that is currently in place, heedless of the City's warning to consider other alternatives. So the fact that the developer has chosen to make dramatic changes to Sorpresa Lane and has further placed utilities in that street was a choice made with full knowledge of the potential risks. In unilaterally making the road changes that it did, the developer trespassed on the deeded rights of way and has substantially damaged Sorpresa and the defendants' rights to it.

(Def.'s Ex. C at pp. 2-3). The order stated that a hearing on the issue of remedies would be required and that the Neighbors were "free to ask for restoration, or damages or both." The Court required them to "submit a pleading in advance of the hearing to specify the remedies that each party seeks." ( Id. at p. 5).

During the relevant time period, KF 103 was the named insured on several consecutive Commercial General Liability Policies issued by American Family.[2] In January, 2011, KF 103 notified American Family of the Underlying Action and the potential for counterclaims to be filed against KF 103.

In May, 2011 through mid-August 2011, the Neighbors asserted counterclaims against KF 103 as follows:

Peck filed his "Statement of Claims 2nd Amended Counterclaim" on May 18, 2011. ("Peck's 2011 Counterclaims, " Pl.'s Ex. 9; Def.'s Ex. D). In that pleading Peck alleged a claim of trespass against KF 103 and requested equitable relief as the remedy. He also sought sanctions for alleged misconduct of its counsel.

Hanson filed a letter with the subject line "Documentation of my Counterclaims" on June 8, 2011, stating that she was seeking compensation for deprivation of the use of the access road; trespass; compensation for physical and emotional distress, and "punitive damages for intentional and willful actions taken on the part of the developers, with full knowledge and awareness of their actions." (Def.'s Ex. E).

The Marchants, Howell, and Nance jointly filed Amended Counterclaims on August 18, 2011, alleging three claims styled as (1) trespass and continuing trespass; (2) negligence, and (3) restoration. ("Marchants' 2011 Counterclaims, " Pl.'s Ex. 10; Def.'s Ex. F). They requested injunctive relief, including restoration of the Easement, and damages for "the loss of value to Defendants' properties" and "inability to access their properties, " interest, fees and costs.

On August 29, 2011, KF 103 formally tendered the defense of the counterclaims to American Family in an email which attached the transcript of the El Paso County District Court's October 13, 2010 oral ruling; the written Order dated December 23, 2010; Peck's 2011 Counterclaims, and the Marchants' 2011 Counterclaims. (Pl.'s Exs. 11; see also Pl.'s Ex.12).

In a letter dated October 17, 2011, American Family declined to provide a defense or indemnity to KF 103. (Pl.'s Ex. 12).

KF 103 requested reconsideration of the denial of coverage, and on March 14, 2012, American Family issued another letter denying coverage. (Pl.'s Exs. 13 & 14).

In July 2012, amended counterclaims and third party complaints were filed in the Underlying Action. The Marchants, Howell, and Nance jointly filed a Second Amended Counterclaim and Third-Party Complaint on July 17, 2012, alleging eight claims against KF 103 styled as (1) trespass and continuing trespass; (2) negligence; (3) restoration; (4) negligent misrepresentation; (5) negligence [sic] misrepresentation; (6) prescriptive easement; (7) Nance trespass, and (8) civil conspiracy. ("the Marchants' 2012 Counterclaims, " Pl.'s Ex. 15, Def.'s Ex. G). Again they requested injunctive relief, including restoration of their Easements, "damages for the loss of use to Defendants' Easements"; "damages for the loss of value to Defendants' properties", and "damages for Defendants' inability to access their properties." Their 2012 Counterclaims also included requests for "damages for the personal injuries of annoyance and discomfort"; damages for the personal injuries of annoyance and discomfort"; "damages for personal injuries of emotional distress and mental anguish;" exemplary damages; interest, costs and attorney's fees. With respect to the claim styled as "Nance trespass, " Nance requested restoration or damages for damage to her individual property based on allegations that the plaintiffs or third party defendants had regraded a portion of her property, constructed a road across its northern boundary and removed large quantities of soil without her consent.

Peck filed his Third Amended Counterclaim and Third-Party Complaint on July 18, 2012, alleging claims against KF 103 and others styled as trespass and continuing trespass; negligence; restoration; negligent misrepresentation; prescriptive easement; and civil conspiracy ("the 2012 Peck Counterclaims, " Pl.'s Ex. 15a, Def.'s Ex. H).

In a letter dated August 30, 2012, KF 103 re-tendered the defense of the counterclaims to American Family. That letter incorporated KF 103's original tender dated August 29, 2011, and enclosed the Marchant Group's 2012 Counterclaims and Peck's 2012 Counterclaims. (Pl.'s Ex. 16).

By letter dated September 21, 2012, American Family again denied KF 103's request for defense and indemnity. (Pl.'s Ex. 17).

In October 2012, the El Paso County District Court held a second trial in the Underlying Action for the purpose of determining remedies. On November 26, 2012, the Court issued a 24-page written order captioned "Order Re: Equitable Remedies and Judgment, " reconfirming the Court's legal conclusions from the first trial and making additional findings and conclusions. (Pl.'s Ex. 18). The Court found in favor of the Neighbors on their claim of trespass and also concluded that "there was a Civil Conspiracy among virtually all of the Plaintiffs and third party defendants to trespass on the Neighbor's [sic] easements." ( Id. at 10). The Court also found in favor of the Neighbors on their claim of negligence.

With respect to the civil conspiracy claim, the Court found that by March 2005, the individuals and entities "on the developers' side of the lawsuit" (which included KF 103) had either constructive or actual notice of the Neighbors' easement rights by virtue of a title commitment and survey and by the Neighbors' use of the road for years. The Court further found that those persons had agreed to a plan that resulted in the destruction of deeded and prescriptive right-of-way easements. ( Id. at 10). The Court found that such actions were not taken with "malicious" intent, describing testimony showing that KF 103 and others had relied on advice of counsel who told them that the easements could be legally moved without consent, condemnation or court action. The Court stated that "while various entities may have relied on advice of counsel, that does not absolve them of their responsibility for the trespass." ( Id. at 12).

With respect to KF 103's participation in the conspiracy, the Court found inter alia:

... While KF 103 was likely acting with an innocent assumption that the neighbors [sic] claims were being legally dealt with, it nonetheless is equally responsible for trespass and being part of a conspiracy to trespass. It had a legal duty to insure that the adverse claims to the roads were legally resolved before it graded the land.
Keller and KF 103 were equally present throughout the run up to this suit. Mr. Gonzales participated and identified himself to the board and the neighbors as representing both Keller and KF 103. When it became obvious to Mr. Larsen of the City that the neighbors that the neighbors [sic] had more than just passing complaints, the City approached Mr. Gonzales in an attempt to move the road further north into the proposed development. On behalf of Keller and KF 103, he refused, insuring that the trespass would continue....

( Id. at 12-13).

With respect to claim of negligence, the Court stated:

All of the developer parties owed a duty to the various neighbors to take reasonable steps to insure that they do not trespass or damage the real property of the neighbors. Each individual and entity violated that duty by ignoring title exceptions, survey and prescriptive uses made of the roads. The fact that they may have relied on the advice of counsel is a ...

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