Kreisers Inc. v. First Dakota Title Ltd. Partnership , 2014 S.D. LEXIS 88 ( 2014 )

#26809, #26818-a-DG
2014 S.D. 56
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
KREISERS INC.; DAVID H. LARSON;
DAVID A. LARSON, JR.; CHRISTOPHER
N. LARSON; SCOTT R. LARSON; and
PHILIP L. JOHNSON, Plaintiffs and Appellees,
v.
FIRST DAKOTA TITLE LIMITED
PARTNERSHIP d/b/a FIRST
DAKOTA TITLE and d/b/a THE
TITLE RESOURCE NETWORK, Defendants and Appellants.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
****
THE HONORABLE STUART L. TIEDE
Judge
****
TIMOTHY M. GEBHART
Davenport, Evans, Hurwitz
& Smith, LLP
Sioux Falls, South Dakota Attorneys for plaintiffs and
appellees.
THOMAS K. WILKA
Hagen, Wilka & Archer, LLP
Sioux Falls, South Dakota Attorneys for defendants and
appellants.
****
CONSIDERED ON BRIEFS
MAY 27, 2014
OPINION FILED 07/30/14
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GILBERTSON, Chief Justice
[¶1.] Kreisers Inc. hired First Dakota Title to assist it with a like-kind
property exchange in order to receive tax deferred benefits under 26 U.S.C. § 1031.
After a partial failure of that exchange, Kreisers sued First Dakota for negligence
and negligent misrepresentation. The circuit court determined that First Dakota
was negligent in assisting Kreisers with the exchange. First Dakota appeals. We
affirm.
FACTS AND PROCEDURAL HISTORY
[¶2.] Kreisers Inc. is a Subchapter S corporation that distributes and sells
medical supplies. Its principal office is located in Sioux Falls, South Dakota. In
2006, Kreisers owned real property (hereinafter “relinquished property”) located on
South Minnesota Avenue in Sioux Falls. Kreisers moved its business from the
relinquished property in 2001, and placed the property on the market for sale in
2005. Around the time Kreisers placed the relinquished property on the market, it
sought to acquire replacement property for warehouse services. Kreisers retained
Dan Tunge to market the relinquished property and to assist with locating and
acquiring replacement property. Tunge was informed that Kreisers was interested
in pursuing a possible like-kind property exchange under 26 U.S.C. § 1031. 1
1. § 1031 provides in part:
No gain or loss shall be recognized on the exchange of property
held for productive use in a trade or business or for investment
if such property is exchanged solely for property of like kind
which is to be held either for productive use in a trade or
business or for investment.
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[¶3.] In October 2006, Kreisers accepted an offer to sell the relinquished
property to Urology Specialists Chartered for $765,000. Philip Johnson, an
accountant and the eventual Chief Financial Officer of Kreisers, was already
contemplating a like-kind exchange at this time; however, he knew little about §
1031 exchanges. Accordingly, officers from Kreisers met with MSM McGladrey,
Inc., an accounting firm that performed regulation accounting and tax services for
Kreisers and some of its shareholders. Following the meeting, Jason Zanderson and
Tracy Peterson of McGladrey sent Johnson a memo on October 20, 2006, regarding
like-kind exchanges of property. The memo discussed a new building to be
constructed on replacement property as part of the like-kind exchange.
[¶4.] Prior to receiving the offer from Urology Specialists, Tunge had located
possible replacement property in the Sioux Falls Industrial Park in the northeast
part of Sioux Falls. Kreisers hoped to construct a new warehouse facility on the
replacement property. On October 20, 2006, Kreisers entered into a purchase
agreement with the Sioux Falls Development Foundation, Inc. to purchase the
replacement property for $356,160.
[¶5.] Following the agreement to purchase the replacement property,
Kreisers began preliminary work on developing plans for the construction of a new
warehouse to be built on the replacement property. In March 2007, Kreisers
selected Peska Construction as the contractor. A final contract between the parties
was executed in May 2007. Peska Construction was informed of the § 1031
exchange and of the requisite time constraints for completing such an exchange.
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[¶6.] On February 28, 2007, Urology Specialists assigned its purchase
agreement with Kreisers to Brenkevco Properties LLC by written agreement.
Shortly after the signing of the Brenkevco agreement, Tunge recommended that
Johnson contact James Rogers of First Dakota Title regarding the possibility of
First Dakota assisting Kreisers with a § 1031 exchange. Rogers, who is an attorney,
was the manager of the title department at First Dakota. First Dakota advertised
that it could provide § 1031 tax deferred exchange services. It did not advertise any
limits on the types of § 1031 services it provided.
[¶7.] Sometime in early March 2007, Johnson called Rogers. The
conversation was brief, lasting about three to four minutes. Johnson informed
Rogers that Kreisers was working with McGladrey on a § 1031 exchange. Rogers
testified that he recalled discussing a § 1031 exchange with Johnson, but did not
remember the specifics of the conversation. Rogers told Johnson that First Dakota
performed § 1031 exchange services. Rogers did not rely on a checklist of
information and did not recall asking Johnson many questions. First Dakota had
no written protocol or procedures to guide its employees in connection with § 1031
exchanges. There is no evidence that Johnson and Rogers discussed an
improvement (or construction) § 1031 exchange. Johnson testified that he told
Rogers to call Zanderson of McGladrey. Rogers did not call Zanderson, and Johnson
did not instruct Zanderson to call Rogers.
[¶8.] A closing date was set for both the replacement property and the
relinquished property. To comply with § 1031, closing on the relinquished property
occurred first. First Dakota agreed to act as the closing agent and to provide § 1031
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exchange services. Rogers was charged with assembling the necessary information
for a § 1031 exchange, which included preparing documents that had been created
by Attorney Sam Assam, who was retained by First Dakota to draft a series of form
documents for § 1031 exchanges. After preparing the documents, Rogers sent them
back to Assam for review.
[¶9.] Assam’s documents were only meant for forward § 1031 exchanges as
it was First Dakota’s policy to only handle forward or delayed exchanges. In a
forward exchange, First Dakota would act as a “qualified intermediary.” It would
take an assignment of the purchase agreement from the seller of property and act
as a seller for purposes of facilitating a § 1031 exchange. It would then receive the
sale proceeds from the purchaser of the relinquished property following closing and
agree to hold and use those proceeds to purchase replacement property for the seller
at a later closing. First Dakota, as a matter of policy, did not handle construction
exchanges, although they did not advertise this restriction. 2
[¶10.] Rogers did not ask whether Kreisers intended a construction exchange
instead of a forward exchange. Although it was normally his practice to contact a
client’s attorney or accountant to discuss the details of a § 1031 exchange, Assam
did not do so in this case. Assam reviewed the documents, but did not discuss with
Kreisers or Rogers whether something other than a forward exchange was
contemplated.
2. It is undisputed that a construction exchange is slightly more complex than a
forward exchange. A construction exchange requires the parties to designate
the improvements that will be made to the replacement property. Those
improvements must be then made within 180 days.
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[¶11.] Kreisers closed on the relinquished property at the office of First
Dakota on April 16, 2007. The closing was conducted in phases with the buyer and
seller meeting separately to execute the necessary documents. David H. Larson,
President of Kreisers, and Johnson represented Kreisers at the closing. The closing
agent for First Dakota was Sue Reiff. Tunge was also present.
[¶12.] At closing, First Dakota provided Kreisers with the closing documents,
including the § 1031 documents that had been prepared by Rogers and reviewed by
Assam. Reiff briefly summarized each document for Larson and Johnson while
Larson signed the documents. Johnson testified that he talked about the
warehouse construction project at the closing. Larson did not recall any such
conversation. Reiff stated that she had no independent recollection of the closing,
but testified that if there was any indication that Kreisers intended a construction
exchange, rather than a forward exchange, she would have stopped the closing to
obtain additional guidance because of First Dakota’s policy of not handling
construction exchanges. 3 Reiff told Larson and Johnson that she would fill in the
property description on the form required to designate the replacement property.
Larson signed the blank description form. Reiff later completed the designation of
replacement property by describing the replacement property that was to be
purchased from the Foundation. Reiff never sent the completed form to Kreisers.
[¶13.] Kreisers closed on the replacement property at First Dakota on April
19, 2007. Mary Olson handled the closing for First Dakota on April 19. Once again,
First Dakota acted as both the closing agent and the qualified intermediary for the
3. Tunge did not testify at trial.
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§ 1031 exchange; and both the buyer and the seller met separately with First
Dakota. Larson and Johnson represented Kreisers at the closing. The closing
lasted about five minutes. There was no discussion regarding a construction
exchange. There is no evidence that Kreisers read the closing documents or that
their attorneys reviewed the documents.
[¶14.] The Foundation delivered a warranty deed dated April 20, 2007, to
First Dakota conveying title to the replacement property. The deed was recorded by
First Dakota on April 25. Kreisers was not provided a copy of the deed at closing.
The deed and final owner’s policy of title insurance were not mailed to Kreisers
until July 1, 2007.
[¶15.] Following closing, First Dakota held the excess proceeds of
$328,733.87, which represented the difference between the net cash received from
the sale of the relinquished property and the amounts paid by Kreisers for closing
costs and the purchase of the replacement property. Kreisers had 45 days from the
closing of the relinquished property to designate replacement property. First
Dakota knew that Kreisers had designated the property from the Foundation as
replacement property.
[¶16.] On or around June 30, 2007, and after the expiration of the 45 days,
Peska submitted to Kreisers its first request for payment for its construction of the
warehouse on the replacement property. Johnson instructed First Dakota to pay
Peska from the excess proceeds still retained by First Dakota. Rogers informed
Johnson that Kreisers’s § 1031 exchange was not qualified as a construction
exchange. Johnson contacted Zanderson at McGladrey to see if anything could be
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done to salvage the tax deferral on the remaining funds. Rogers spoke with Mark
Wahlstrom, the President of First Dakota. Wahlstrom instructed Rogers to contact
a § 1031 expert to see if the deferral could be salvaged. Rogers contacted Chris
Moran of Dakota Homestead Title Insurance Company. Ultimately, no construction
proceeds were disbursed by First Dakota to Peska, and the remaining funds on
deposit were paid to Kreisers on August 27, 2007. As a result, the amount of
proceeds from the sale of the relinquished property used to purchase the
replacement property qualified for tax deferral. However, the remaining proceeds
that were ultimately paid to Kreisers by First Dakota did not qualify for tax
deferral, and therefore, were subject to various taxes. The recognized gain for tax
purposes was $317,087.
[¶17.] In light of the partial failure of the like-kind exchange, Kreisers sued
First Dakota for monetary damages, alleging claims of negligence and negligent
misrepresentation against First Dakota. First Dakota asserted that Kreisers was
contributorily negligent. The case was tried by a court trial on September 11-13,
2012. The court rejected Kreisers’s negligent misrepresentation claim. However,
the circuit court determined that First Dakota was negligent in the performance of
its duties and that Kreisers was not contributorily negligent. Kreisers was awarded
$119,704, plus prejudgment interest, which represented Kreisers’s additional tax
liability of $172,804 minus certain offsets for tax savings.
[¶18.] On appeal, First Dakota alleges that the circuit court erred because it
applied tort law instead of the contract signed by the parties. Similarly, First
Dakota argues that the circuit court erred in concluding that First Dakota had a
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common law duty beyond the contract entered between First Dakota and Kreisers.
Finally, First Dakota claims that Kreisers was contributorily negligent.
[¶19.] Kreisers also filed a notice of appeal in this case. Kreisers argues that
the circuit court erred in concluding that First Dakota was not guilty of negligent
misrepresentation. Additionally, Kreisers asserts that the circuit court erred in its
calculation of damages when it applied certain tax offsets.
ANALYSIS AND DECISION
[¶20.] 1. Whether the circuit court erred in applying negligence principles
rather than the contractual documents.
[¶21.] First Dakota argues that the circuit court erred in applying tort law
rather than contract law to determine what duty First Dakota owed Kreisers. First
Dakota asserts that under Fisher Sand & Gravel Co. v. South Dakota Department of
Transportation, 1997 S.D. 8, 558 N.W.2d 864, Kreisers and First Dakota had no
relationship outside of the contract formed by the closing documents. First Dakota
maintains that the contractual documents set forth the duties of the parties with
respect to the transaction. Whether a duty exists in a negligence action is a
question of law that we review de novo. Patitucci v. City of Hill City, 2013 S.D. 62,
¶ 9, 836 N.W.2d 623, 626 (citation omitted).
[¶22.] “Tort liability requires ‘a breach of a legal duty independent of
contract.”’ Schipporeit v. Khan, 2009 S.D. 96, ¶ 7, 775 N.W.2d 503, 505 (quoting
Grynberg v. Citation Oil & Gas Corp., 1997 S.D. 121, ¶ 18, 573 N.W.2d 493, 500).
“This independent legal duty must arise ‘from extraneous circumstances, not
constituting elements of the contract.”’ Id. (quoting Grynberg, 1997 S.D. 121, ¶ 18,
573 N.W.2d at 500). In contrast, “negligence that consists merely in the breach of a
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contract will not afford grounds for a tort action by third parties and is limited
under a breach of contract cause of action to the party to the contract or for whose
benefit the contract was made.” Fisher Sand & Gravel Co., 1997 S.D. 8, ¶ 15, 558
N.W.2d at 868.
[¶23.] The circuit court determined that First Dakota owed Kreisers a
common law duty of care that arose when First Dakota held itself out as being
qualified to handle § 1031 exchanges. First Dakota agreed to provide these services
prior to signing any contract with Kreisers. Therefore, the circuit court concluded
that First Dakota had a common law duty to exercise reasonable and proper care in
the handling of the § 1031 exchange, including the drafting of the closing
documents.
[¶24.] In an attempt to distinguish the circuit court’s decision, First Dakota
relies on Fisher Sand & Gravel Co., where this Court rejected a negligence claim
against the South Dakota Department of Transportation (DOT). 1997 S.D. 8, ¶ 16,
558 N.W.2d at 868. Fisher Sand & Gravel Co. involved a breach of contract claim
and a negligence claim brought by Fisher, a supplier of aggregate, against DOT.
DOT had accepted a bid for a concrete paving project, with Fisher acting as a
subcontractor on the project. However, DOT required Fisher to obtain sand from a
different source than was Fisher’s custom, which resulted in a “mark up” in the cost
of Fisher’s performance. Id. ¶ 6, 558 N.W.2d at 866. In rejecting Fisher’s
negligence claim, we noted that Fisher failed to show “that DOT breached any
duties, rights, or obligations independent of those imposed upon them under the
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contract.” Id. ¶ 18, 558 N.W.2d at 869. We stated that “[o]utside of the contract
there was no relationship between [Fisher and DOT].” Id. ¶ 13, 558 N.W.2d at 867.
[¶25.] However, we also observed in Fisher Sand & Gravel Co. that “[i]f the
relationship of the parties is such as to support a cause of action in tort, that cause
of action is not to be denied because the parties happened also to have made a
contract.” Id. ¶ 19, 558 N.W.2d at 869 (quoting Redgrave v. Boston Symphony
Orchestra, Inc., 557 F. Supp. 230, 238 (D. Mass. 1983)). Furthermore, “it is
generally recognized that one who undertakes to provide professional services has a
duty to the person for whom the services are performed to use such skill and care
ordinarily exercised by others in the same profession.” Limpert v. Bail, 447 N.W.2d
48, 51 (S.D. 1989) (citation omitted). And, “[l]iability in tort for breach of that duty
may arise as the result of negligence during the performance of the contract, even if
there has been no breach of contract.” Id. (citation omitted).
[¶26.] As the circuit court correctly observed in this case, First Dakota owed a
duty of care to Kreisers beyond the contract between the two parties. This case is
distinguishable from Fisher Sand & Gravel Co. because an independent duty to
exercise reasonable care arose from extraneous circumstances not constituting the
elements of the contract. 4 Both parties agree that § 1031 exchanges can be
incredibly complex. Prior to the signing of the closing documents, First Dakota
4. It is also important to note that Fisher Sand & Gravel Co. involved a lawsuit
against the State of South Dakota. The lawsuit was cognizable under SDCL
31-2-34, which permits a suit “against the South Dakota Department of
Transportation [for] any claim, right, or controversy arising out of the work
performed, or by virtue of the provisions of any construction contract entered
into by the South Dakota Department of Transportation.” Fisher Sand &
Gravel Co., 1997 S.D. 8, ¶ 9, 558 N.W.2d at 867. We stated that under that
statute, “if there is no contract or quasi-contract, there is no lawsuit.” Id.
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advertised that it handled § 1031 exchanges. The advertisement was not limited to
forward exchanges. Nevertheless, there is no evidence that Rogers, or anyone else
at First Dakota, informed Johnson or anyone else at Kreisers that First Dakota only
provided its services in connection with forward exchanges. First Dakota was
aware of the different kinds of § 1031 exchanges, but Rogers did not use a checklist
or ask any questions of Johnson to gauge his knowledge of § 1031 exchanges so as to
ascertain whether Kreisers wanted something other than a forward exchange.
[¶27.] Moreover, because of the complexity of some § 1031 exchanges, it was
customary for First Dakota to refer more complex exchanges—like construction
exchanges—to other providers; however, in this case First Dakota did not even
inquire or verify whether Kreisers was interested in a construction exchange so as
to determine whether Kreisers needed a different provider. Additionally, Assam
never inquired into the type of exchange that Kreisers desired. Finally, in
completing the forms, Reiff, of First Dakota, instructed Larson, of Kreisers, to sign
the blank property description form, which she would fill in later. After doing so,
she did not show the completed forms to anyone at Kreisers. David Brown, an
attorney who owns a company that provides qualified intermediary services in
Iowa, testified as an expert witness in this case. He opined that First Dakota
breached the standard of care as a qualified intermediary by failing to gather
necessary information and failing to make certain it understood what the client was
trying to accomplish and how the transaction was structured. This duty of
reasonable care existed independent of any contract that was signed between
Kreisers and First Dakota.
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[¶28.] As a company providing professional services, First Dakota had, at a
minimum, an independent legal duty to exercise reasonable care by ascertaining
what the client wanted. The subsequent closing contract did not alleviate that duty.
Given that independent duty, the circuit court did not err in applying tort law
rather than contract law to determine the duty that First Dakota owed to Kreisers.
Economic Loss Doctrine
[¶29.] First Dakota further contends, however, that the economic loss
doctrine precludes Kreisers’s claim. The economic loss doctrine provides that
“purely economic interests are not entitled to protection against mere negligence.”
Diamond Surface, Inc. v. State Cement Plant Comm’n, 1998 S.D. 97, ¶ 22, 583
N.W.2d 155, 160 (citation omitted). The significance of the doctrine is that it
“precludes parties under certain circumstances from eschewing the more limited
contract remedies and seeking tort remedies.” Ins. Co. of N. Am. v. Cease Elec. Inc.,
688 N.W.2d 462, 467 (Wisc. 2004). “The prohibition against tort actions to recover
solely economic damages for those in contractual privity is designed to prevent
parties to a contract from circumventing the allocation of losses set forth in the
contract by bringing an action for economic loss in tort.” Tiara Condo. Ass’n, Inc. v.
Marsh & McLennan Cos., Inc., 110 So. 3d 399, 402 (Fla. 2013) (citation omitted).
The “doctrine draws a legal line between contract and tort liability that forbids tort
compensation for ‘certain types of foreseeable, negligently caused, financial injury.’”
Terracon Consultants Western, Inc. v. Mandalay Resort Grp., 206 P.3d 81, 87 (Nev.
2009) (quoting Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50, 52 (1st Cir.
1985)). The economic loss doctrine, therefore, sets forth that regardless of whether
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a tort duty may exist between contracting parties, the actual duty one party owes to
another for purely economic loss should be based exclusively on the contract to
which they agreed and assigned their various risks. See Indianapolis-Marion Cnty.
Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 729-30 (Ind. 2010).
Kreisers argues that First Dakota’s position stretches the doctrine “too far.”
[¶30.] In City of Lennox v. Mitek Industries, Inc., 519 N.W.2d 330, 333 (S.D.
1994), this Court adopted the economic loss doctrine. However, in that case our
application of the doctrine was limited to commercial transactions under the
Uniform Commercial Code. See id. We have not yet extended the doctrine to the
type of professional services offered in this case. Effectively, First Dakota asks us to
extend that doctrine to this case.
[¶31.] In formulating our economic loss rule, we cited Minnesota law, which
has declined to extend the economic loss doctrine beyond commercial transactions.
See McCarthy Well Co., Inc. v. St. Peter Creamery, Inc., 410 N.W.2d 312, 314-15
(Minn. 1987); see also Mitek Industries, Inc., 519 N.W.2d at 333. A number of other
jurisdictions have also declined to apply the economic loss rule to purely
professional services. See, e.g., Cargill, Inc. v. Boag Cold Storage Warehouse, 71
F.3d 545, 550 (6th Cir. 1995) (stating that the economic loss doctrine “is associated
with ‘transactions in goods,’ and not transactions in services”) (citation omitted);
Cease Elec., Inc., 688 N.W.2d at 472 (holding that “the economic loss doctrine is
inapplicable to claims for the negligent provision of services”). But see Terracon
Consultants Western, Inc., 206 P.3d at 90 (barring a purely economic negligence
claim against a design professional under the economic loss doctrine); 2314 Lincoln
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Park W. Condo. Ass’n v. Mann, Gin, Ebel & Frazier, Ltd., 555 N.E.2d 346, 353 (Ill.
1990) (applying the economic loss rule to an alleged claim of architectural
malpractice).
[¶32.] Given the nature of the professional services offered by First Dakota to
Kreisers, we decline to extend the economic loss doctrine to this case. South Dakota
already allows a number of claims, like legal malpractice, to be brought under
either breach of contract or negligence. See Haberer v. Rice, 511 N.W.2d 279, 286
(S.D. 1994) (“A legal malpractice suit may have two causes of action, one which is
for breach of contract and another in negligence.”). Moreover, the application of the
economic loss doctrine to negligence claims like the one in this case has been
soundly rejected elsewhere. See, e.g., Clark v. Rowe, 701 N.E.2d 624, 627 (Mass.
1998) (“The general rule in this country is that the economic loss rule is inapplicable
to claims of legal malpractice.”); Collins v. Reynard, 607 N.E.2d 1185, 89 (Ill. 1992)
(“[I]t is singularly inappropriate to attempt to apply the economic loss . . . doctrine
to attorney malpractice actions.”); see also Congregation of the Passion, Holy Cross
Province v. Touche Ross & Co., 636 N.E.2d 503, 514-15 (Ill. 1994) (declining to
extend the economic loss doctrine to accountant malpractice). The reason for this is
that the economic loss rule is usually more appropriate when there is no fiduciary
relationship so that the parties can more freely bargain concerning allocation of
risk. See Clark, 701 N.E.2d at 626 (citation omitted). As Kreisers argues, by
extending the economic loss doctrine to this case, we might risk foreclosing future
negligence actions for claims like legal malpractice, which quite often only involve
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claims for purely economic loss. We decline to reach this result, and hold that the
economic loss doctrine does not bar Kreisers’s claim.
Contract Indemnification
[¶33.] First Dakota next asks us to consider whether the contract
indemnification language in the closing documents bars Kreisers’s claim. The
Indemnification Agreement between Kreisers and First Dakota provides in part
that Kreisers agrees to indemnify First Dakota “in connection with the inability of
Kreisers’s exchange transaction to qualify for tax deferral pursuant to the
provisions of Section 1031 of the Internal Revenue Code, for any reason (except for
First Dakota’s failure to comply with the provisions of the Exchange Agreement or
Supplemental Agreement).”
[¶34.] “[T]o relieve a party of the consequences of its own negligence the
language of [an indemnification] agreement must be clear and unequivocal.” Bell v.
E. River Elec. Power Coop., Inc., 535 N.W.2d 750, 753 (S.D. 1995) (citations
omitted). The circuit court concluded that the contract indemnification was both
ambiguous and unhelpful to First Dakota. In concluding that the indemnification
provision was unhelpful, the court noted that the Indemnification Agreement
provided:
Kreisers shall, and does hereby agree to indemnify, defend (by
counsel reasonably acceptable to First Dakota), protect and hold
First Dakota, its general partners, limited partners, officers,
employees, attorneys or agents (collectively “Indemnitee”) free
and harmless from any claim, liability, demand, expense, tax or
assessment of any nature or kind, expressed or implied, whether
sounding in tort or in contract that may be asserted against
Indemnitee, by any person (other than Kreisers) . . . .
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(Emphasis added). As the circuit court emphasized, the above language appears to
exclude Kreisers from the indemnity obligation. Although First Dakota points to a
different provision in the agreement to indemnify itself from suit, the two provisions
read together at a minimum make the agreement ambiguous. 5 Because our law
requires the indemnification language to be “clear and unequivocal,” we conclude
that the indemnification language does not foreclose Kreisers’s negligence claim.
[¶35.] 2. Whether the circuit court erred in concluding that Kreisers was
not contributorily negligent.
[¶36.] First Dakota argues that Kreisers was negligent in failing to read the
closing documents and in failing to have its own attorney and accountant review the
closing documents before signing them. Contributory negligence is a question of
fact, which is reviewed under the clearly erroneous standard. Wood v. City of
Crooks, 1997 S.D. 20, ¶ 3, 559 N.W.2d 558, 560.
[¶37.] In support of its position that Kreisers was contributorily negligent,
First Dakota underscores that both its transmittal letter dated April 13, 2007, and
the Agreement of Indemnification advised Kreisers to consult with its own advisers
regarding the transaction. However, as the circuit court noted, these documents
were the only suggestion presented to Kreisers that they should consult a different
representative. Throughout discussions with various individuals at First Dakota
leading up to the transmittal of those documents, there is no evidence that any such
advisements were made to representatives of Kreisers. Moreover, as the circuit
court highlighted, Kreisers already believed that it had an expert in § 1031
5. The circuit court had previously found the indemnification agreement to be
ambiguous in denying First Dakota’s motion for summary judgment on
December 11, 2011.
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exchanges in First Dakota, which never informed Kreisers that its work was limited
to forward exchanges. It is important to once again note the complexity of these
exchanges. There is no evidence that anyone at Kreisers had any expertise in §
1031 exchanges. Kreisers was putting faith in First Dakota to properly exercise its
knowledge and expertise to facilitate the § 1031 exchange. The circuit court’s
finding that Kreisers was not negligent is not clear error.
[¶38.] First Dakota next argues that Kreisers failed to take reasonable steps
to salvage the tax deferral. Both Attorney Assam and Chris Moran of Dakota
Homestead Title Insurance testified that, in their opinion, the transaction could
have been salvaged as late as July 2007 if the parties had cooperated. However,
neither opined that any attempt to salvage the transaction was guaranteed to be
successful. Moreover, Moran’s testimony was undercut by his own memorandum to
Rogers where he stated that any attempt to fix the problem at that late of a date
would be a “bad move.” The circuit court ultimately relied on the fact that none of
First Dakota’s expert witnesses were willing to guarantee a fix without substantial
risk. The circuit court, therefore, found that it was reasonable for Kreisers to decide
not to try to unwind the transaction and re-structure it in an effort to fully qualify
under § 1031. Given this reasoning, we find no error with the circuit court’s finding
on this issue.
[¶39.] 3. Whether the circuit court erred in its calculation of damages.
[¶40.] Kreisers asks us to consider whether the circuit court erred in its
calculation of damages. “The amount of damages to be awarded is a factual issue . .
. .” Weekley v. Wagner, 2012 S.D. 10, ¶ 13, 810 N.W.2d 340, 343 (citations omitted).
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“Damages must be reasonable and must be proved with reasonable certainty.” Id.
(citation omitted). “Reasonable certainty ‘requires proof of a rational basis for
measuring loss,’ without requiring the trier of fact to speculate.” Id. (quoting Lord
v. Hy-Vee Food Stores, 2006 S.D. 70, ¶ 31, 720 N.W.2d 443, 454). “This Court
reviews the issue of damages under the clearly erroneous standard.” Id. (citation
omitted).
[¶41.] There is no dispute that Kreisers had to pay $172,804 in tax liabilities
as a result of the partial failure of the like-kind exchange. Kreisers contends,
however, that the circuit court erred in its calculation of certain tax offsets.
[¶42.] In calculating damages, the circuit court considered the testimony of
both Zanderson and John Wenande, a certified public accountant and the expert
witness for First Dakota. Wenande testified that the additional taxes paid by
Kreisers in 2007 needed to be offset by the additional depreciation available to
Kreisers on the increased basis for the newly constructed building as well as the
increased basis in the stock of the shareholders of Kreisers. Wenande calculated
the net present value of the future tax savings at $49,600. Wenande also
determined that a second offset needed to be made for tax savings on the personal
tax return of Larson as a result of deducting additional state taxes (from Iowa) he
paid in 2007. Wenande calculated that Larson had tax savings of $3,500 in 2008.
[¶43.] While Zanderson agreed with Wenande that there would be some
offsets, he differed on the amount. Zanderson believed that Wenande’s calculations
were speculative. First, Zanderson disagreed with Wenande’s assumption of a 33
percent tax rate, testifying that Kreisers’s historical tax rate was 23 percent.
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Additionally, Wenande used a 4.4 percent discount rate, while Zanderson believed a
more appropriate rate was 5.08 percent in light of the historical rate of return
experienced by Kreisers. Zanderson calculated the offset due to the increased
depreciation to be only $3,000. Zanderson also opined that Larson’s actual savings
were closer to $1,000, instead of the $3,000 savings predicted by Wenande.
[¶44.] There was no dispute that the stepped up basis in the warehouse
permits additional depreciation deductions over the useful life of the property.
After weighing the opinions of both expert witnesses, the circuit court ultimately
found Wenande’s opinion regarding certain offsets “to generally be more reliable
and on a more sound foundation.”
[¶45.] On appeal, Kreisers posits that the “tax benefit rule” illustrates the
erroneousness and speculative nature of Wenande’s opinion and the circuit court’s
decision. “The tax benefit rule is a judicially developed principle that is codified in
part in the Internal Revenue Code, 26 U.S.C.A. § 111, and prevents plaintiffs from
reaping multiple recoveries.” Cody v. Edward D. Jones & Co., 502 N.W.2d 558, 561-
62 (S.D. 1993) (citation omitted). Furthermore, we have stated that “public policy
supports disregarding tax benefits in awarding damages.” Id. at 562. This is
because “[t]here is a deterrent value against committing fraud if the fraudulent
party realizes he will have to compensate the other party for the full extent of his
damages with no offset for any tax benefits the other party may have received.” Id.
(citation omitted).
[¶46.] In response to Kreisers’s “tax benefit rule” claim, First Dakota alleges
that this issue was not properly raised before the circuit court, and is therefore
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waived. We have consistently stated that we will not address issues raised for the
first time on appeal not raised before the lower court. Hall v. S.D. Dep’t of Transp.,
2006 S.D. 24, ¶ 12, 712 N.W.2d 22, 26-27 (citation omitted). After a review of the
record, it does not appear that Kreisers fully presented this argument before the
circuit court. Because the circuit court and First Dakota did not have an
opportunity to fully address and consider the application of the tax benefit rule, we
decline to reach it here.
[¶47.] The circuit court was therefore left to determine the extent of damages
based on the testimony of two competing expert witnesses. We have acknowledged
that “[d]amages are speculative, not when the amount is uncertain, but when the
fact of damages is uncertain.” Bailey v. Duling, 2013 S.D. 15, ¶ 35, 827 N.W.2d 351,
363 (citation omitted). And “courts have some leeway in calculating damages . . . .”
Weekley v. Prostrollo, 2010 S.D. 13, ¶ 24, 778 N.W.2d 823, 830. Ultimately, the fact
of damages in this case was not in dispute, and the court found Wenande’s opinion
to be more reliable on the amount of damages. Accordingly, we conclude that the
circuit court did not clearly err in its calculation of damages.
[¶48.] We affirm the circuit court on all issues. 6
[¶49.] KONENKAMP, ZINTER, SEVERSON, and WILBUR, Justices, concur.
6. Because we conclude that First Dakota was negligent, we do not consider
whether First Dakota was also guilty of negligent misrepresentation as
Kreisers would not be entitled to additional damages on that claim.
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