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A Burst Sewage Pipe Causes a Legal Mess; Castleton Corner Owners Association, Inc. v. Conroad Associates, L.P.

This is a commercial case that arises from an unfortunate situation—a malfunctioning sewer lift station that flooded a retail shop in Castleton. The issues on appeal deal with expert opinions and the proper amount of damages, which can inform just about any case.

Conroad owned a building in Castleton that it leased to Pier 1. Pier 1’s lease was set to expire in 2016, but Pier 1 had the option to extend the lease for two 5-year terms. A sewer lift station maintained by the Association failed in 2015, flooding the store with sewage. Pier 1 terminated its lease as a result. Conroad was eventually able to re-lease the building, but at a lower base rent.

Conroad sued the Association for failing to properly maintain the sewer lift station, and the matter proceeded to trial. At trial, an appraiser testified about the value of Conroad’s building. Conroad had the appraiser’s report admitted into evidence over the Association’s objection. Conroad’s general partner also testified that he believed that Pier 1 would have exercised its options to extend the lease but for the sewage situation.

After a bench trial, the trial court found for the Association on Conroad’s claims for negligence and breach of fiduciary duty. But the trial court found for Conroad on its breach of contract claim. It awarded damages for lost rent, lost property taxes, and other expenses, but the court did not award lost rent associated with the optional extensions, finding that Conroad did not prove that Pier 1 would have extended its lease. Both parties appealed. The Association argued that the trial court erred when finding that it breached its contract with Conroad. The contract provided, in pertinent part, 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.

Despite the fact that the contract provided for the continuous operation of the facilities, the Association argued that the “reasonably necessary or prudent” language modified this obligation. The Court disagreed, holding that this language expanded the definition of “maintenance costs,” rather than limiting the promise to keep the facilities continuously in operation.

The omnibus clause is introduced by the conjunction “and,” which means “also,” “in addition to,” “as well as.” And the words “any other” signal that the omnibus clause covers matters not previously mentioned in the paragraph. Together, these words—“and” and “any other”—clearly mean that that omnibus clause supplements the other provisions. ... Here, the specific provision requiring the Association to pay “all of the costs necessary” controls over the general omnibus clause providing, in addition, that the Association pay for “any other expense reasonably necessary or prudent.”

The language of this agreement meant that the Association, and not its members, was “chargeable with ... the risk of a lift station failure,” and must pay the damages associated with that failure.

The Association argued that it was “inconsistent” to find for it on Conroad’s negligence claim, but against it on the breach of contract claim. But the Court found that this argument “conflates the elements of a negligence claim with those of a breach of contract claim.” As these are different claims with different elements, these differing judgments were not inconsistent.

To prevail on its negligence claim, Conroad was required to show that the Association owed it a duty, that the Association had breached that duty by allowing its conduct to fall below the applicable standard of care, and that Conroad had been harmed by the Association’s breach of duty. On the other hand, to prove a breach of contract, Conroad was only required to show that a contract existed and that the Association breached it. In other words, while acting reasonably and pursuant to a particular standard of care can defeat a negligence claim, Conroad was not required to show that the Association had acted unreasonably in order to prevail on its breach of contract claim.

The Court next addressed the admission of the expert report. The Association argued that it was hearsay and inadmissible. The Court overruled the objection, stating the following:

Indiana Evidence Rule 703 provides that an expert “may testify to opinions based on inadmissible evidence, provided that it is of the type reasonably relied upon by experts in the field.” Further, this Court has held that an expert may utilize hearsay information in forming his opinion. Here, while Lady did not testify to every opinion contained within his 263-page report, he testified that he prepared the report and that his report contained his opinions, at which time the report was admitted into evidence. As such, the report became Lady’s testimony. ... Indeed, the Association does not even acknowledge Indiana Evidence Rule 703 or otherwise explain why Lady’s report was inadmissible under that rule. Accordingly, we hold that the Association has not met its burden on appeal to demonstrate that Lady’s report was inadmissible or that the court abused its discretion when it admitted the report.

Finally, the Court dealt with the damages issue Conroad raised in its cross-appeal—whether it was entitled to lost rent for the time during Pier 1’s optional lease extensions. Conroad insisted that the only evidence in the record on this issue supported its argument—its general partner’s statement that it was “reasonably foreseeable” that Pier 1 would exercise that option because its rents were at or below market value. But Conroad introduced “no evidence that Pier 1 had taken any steps or otherwise indicated to Conroad that it intended to exercise the options to extend the lease.” The Court found Conroad’s evidence was speculative and based on “mere conjecture,” and could not support an award of these damages.

Lessons:
1. A negligence claim requires proof that a defendant acted unreasonably; a breach of contract claim does not.
2. Expert reports may be admissible over a hearsay objection.
3. Lost rent based on optional lease extensions will not be recoverable without evidence that the tenant is likely to exercise the extensions.