Protectors Insurance Service, Inc. v. United States Fidelity & Guaranty Co.

F I L E D
United States Court of
Appeals
PUBLISH
January 5, 1998
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT PATRICK FISHER
Clerk
PROTECTORS INSURANCE SERVICE, INC.,
a Colorado corporation,
Plaintiff-Appellee,
v. No. 96-1399
UNITED STATES FIDELITY & GUARANTY COMPANY,
a Maryland Corporation; FIDELITY & GUARANTY
INSURANCE UNDERWRITERS, INC., an Ohio
corporation; and FIDELITY & GUARANTY INSURANCE
COMPANY, an Iowa corporation,
Defendants-Appellants.
Appeal from the United States District Court
District of Colorado
(D.C. No. 94-B-2669)
Bruce A. Menk, Hall & Evans, LLC, Denver, Colorado (Alan Epstein of
the same firm, and Mark Holtschneider, USF&G, Baltimore, Maryland,
with him on the briefs), for appellants.
Gerald P. McDermott, McDermott & Hansen, Denver, Colorado, for
appellee.
Before BALDOCK and BRORBY, Circuit Judges, and BROWN,* District
Judge.
BROWN, District Judge.
* The Honorable Wesley E. Brown, Senior District Judge, United
States District Court for the District of Kansas, sitting by
designation.
The defendants (hereinafter “USF&G”) appeal a jury verdict in
plaintiff’s favor totaling $844,650.00. The jury found that USF&G
breached a contract with plaintiff and that, as a result, plaintiff
lost future profits in the amount of $809,650.00 and received
$35,000.00 less than fair market value upon the sale of its
business. On appeal, USF&G concedes liability for breaching the
contract, but argues that the lost profits award should be vacated
because it represents an impermissible double recovery. In the
alternative, USF&G argues that the evidence was insufficient to
support an award of lost profits. The jurisdiction of the district
court was founded upon 28 U.S.C. § 1332(a); we have jurisdiction
pursuant to 28 U.S.C. § 1291. The parties agree that the law of
Colorado governs this contract dispute. See New York Life Ins.
Co. v. K N Energy, Inc., 80 F.3d 405, 409 (10th Cir. 1996) (federal
court sitting in diversity must apply the substantive law of the
forum state).
Summary of Facts.
The plaintiff, a Colorado corporation, was an insurance agency
formed in 1979. The sole owner of plaintiff’s corporate stock was
Earl Colglazier. Plaintiff was an agent of USF&G and had a written
contract authorizing it to solicit and submit applications for
USF&G insurance. If the applications were accepted, plaintiff
would be paid a commission by USF&G. Although plaintiff was an
independent agency, it had contracts with only two insurance
carriers; thus, over 80% of the insurance it sold from 1979 to 1992
was USF&G business. Insofar as termination of the agency agreement
2
between plaintiff and USF&G was concerned, the contract stated that
the parties “agree to make a good faith effort to provide for
rehabilitation and thereby avoid termination of this Agreement.”
In March of 1992, USF&G notified Colglazier that because of
profitability concerns it was establishing a formal rehabilitation
program for plaintiff. The program set a goal of achieving
certain “earned loss ratios” (which measure the agent’s
profitability to the insurance company) in plaintiff’s commercial
and personal lines of insurance in 1992. In October of 1992, USF&G
notified Colglazier that it was going to terminate its personal
lines contract with plaintiff in 180 days if the goals of the
rehabilitation program were not met by the end of 1992. The letter
stated that after May 1, 1993, USF&G would not accept any new
personal lines business and would nonrenew the current business.
In response, Colglazier wrote USF&G and asserted that his personal
and commercial accounts were intertwined and that terminating the
personal lines, although only 20% of his sales, would effectively
put him out of business. Faced with this situation, Colglazier
decided to sell all of plaintiff’s assets, including the rights,
title and interest on its insurance policies, to Centennial Agency,
Inc., on January 1, 1993. The purchase agreement called for
plaintiff to receive cash payments of slightly over $148,000.00.1
1
The principal owner of Centennial, Mark Swanson, is the
brother of David Swanson, the USF&G special agent that was assigned
to work on plaintiff’s rehabilitation. After the sale, David
3
Plaintiff later brought this suit alleging that USF&G
breached the contract by not making a good faith effort at
rehabilitation to avoid termination of the agreement. For our
purposes it suffices to say that the jury could reasonably find
from the evidence that USF&G breached the agreement by improperly
measuring plaintiff’s loss ratios, by unfairly changing the goals
and criteria of the rehabilitation program, and/or by certain other
arbitrary actions.
With respect to damages, plaintiff presented the testimony of
John Putnam, an expert in valuation of insurance agencies. Putnam
testified that plaintiff’s business was sold at a “distressed”
price because of the circumstances under which it was sold,
including time pressure to make a sale and USF&G’s stated intention
of terminating the agency’s personal lines insurance. Putnam
testified that the agency would have been worth approximately
$175,000 had it not been sold under distress. Aplt. App. at 226.
Putnam arrived at this value by using three different methods: a
multiple of revenues, a price/earnings ratio, and a capitalization
of earnings. Id. at 254. In addition to this evidence, Earl
Colglazier testified that he would have continued to operate the
agency for at least ten more years had USF&G not given him the
termination notice. Plaintiff also presented rather confusing
Swanson left his job and joined his brother’s agency, becoming the
agent responsible for plaintiff’s former book of business. Aple.
Supp.App. at 49.
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evidence with respect to its net profits in the years before the
sale. According to Colglazier’s testimony, Protectors Insurance
Service was operated in conjunction with a company called
Protectors Management Service, which conducted “all of the office
insurance activities, salary, payroll, paying everybody on behalf
of Protectors Insurance Service.” Aplt. App. at 72. The returns
of Protectors Insurance Service showed reported net income in the
years before the sale ranging from a low of about $36,000 to a high
of about $84,000, with an average of about $59,000. Plaintiff
argues that the returns of Protectors Management Service show that
plaintiff’s net income was actually higher than this. Defendant,
on the other hand, argues that the combined returns of the two
companies show that plaintiff made under $2,000 in 1991 and lost
over $17,000 in 1992.
The district court instructed the jury with respect to damages
as follows:
To the extent that actual damages have been
proved by the evidence you shall award as
actual damages:
1. The amount of net income and earnings the
Plaintiff ... would have earned if the
Defendants had not breached the contract; and
2. The amount which is the difference between
the price the Plaintiff ... received for the
sale of the agency’s business and the
reasonable sale value of the agency’s business
if the Defendants had not breached the
contract....”
Aplt. App. at 41. USF&G objected to this instruction, arguing that
5
it permitted plaintiff to obtain a double recovery because the
reasonable sale value of the agency was based on the agency’s
ability to earn future profits and, thus, plaintiff would be
compensated twice if it received lost profits on top of the sale
price. The district court rejected this, finding that the two
items were distinct because the sale value in 1992 was a “snapshot
in time” that did not include lost future profits. Aplt. App. at
60. As indicated previously, the jury returned a special verdict
finding $809,650 in lost profits and a $35,000 difference between
the actual sale price of the agency and its reasonable sale value.
Discussion.
USF&G first argues that the district court’s damage
instruction was erroneous because it permitted the plaintiff to
obtain a double recovery. We agree. In a breach of contract
action, the objective is to place the injured party in the same
position it would have been in but for the breach. McDonald’s
Corp. v. Brentwood Center, 942 P.2d 1308, 1310 (Colo.App. 1997).
A double or duplicative recovery for a single injury, however, is
invalid. Westric Battery Co. v. Standard Elec. Co., 482 F.2d 1307,
1317 (10th Cir. 1973). Plaintiff contends there was no double
recovery here because “[t]he record is devoid of any factual basis
for believing that the damages for the decreased sales price are
based upon or included future lost profits.” Aple. Br. at 30.
This assertion is contradicted both by the record and by common
6
sense. The testimony of plaintiff’s expert, John Putnam, shows
that his determination of the reasonable sale value of the agency
was based largely -- if not entirely -- upon the agency’s ability
to generate future profits. His testimony makes clear that the
value of an agency to a buyer is determined from its potential to
generate a future income stream. See e.g., Aplt. App. at 226.
Putnam conceded that all of the methods he used to determine value
took into account the agency’s ability to generate future profits.
Aplt. App. at 254. When asked what the reasonable sale price of
the agency’s business would have been but for the distress factors
brought about by the defendant, Putnam replied:
Well, at the time that it was sold, you know,
based upon income, because to a large degree
this is what we all — and I am talking about
commission revenue, what kind of income is
coming into the agency, what kind of expenses
they had. In my opinion the agency was worth
approximately $175,000 at the time that it was
sold had it not been sold under duress or
distress.
Aplt. App. at 228.
We agree with USF&G that Albrecht v. The Herald Co., 452 F.2d
124 (8th Cir. 1971), although it is not controlling in this
diversity action, is analogous to the situation before us. In
Albrecht, the plaintiff was a contract carrier for a newspaper
publisher. After plaintiff charged the subscribers on his route a
greater price than the suggested retail price of the publisher, the
publisher began competing directly with the plaintiff on his own
7
route. As a result of defendant’s actions, plaintiff was forced to
sell the route for $12,000. The publisher’s actions were later
found to violate the Sherman Act and the plaintiff obtained a jury
verdict comprised of three elements of damages: (1) plaintiff’s
lost profits prior to the sale caused by the publisher’s
competition; (2) the difference between the fair market value of
plaintiff’s business (with all his customers intact) at the time of
the sale and the actual sale price received; and (3) loss of future
profits following the forced sale. Id. at 126.2 In reversing the
award of lost profits, the Eighth Circuit explained after an
extensive review of cases why such an award was impermissible:
[N]one of these cases allowed a plaintiff
damaged by an antitrust violation to recover
both the value of the business as a going
concern at the time of the damage and future
profits of that business after the time of the
damage. The future profits which were allowed
in those cases were used as a method of
calculating the damage to the value of the
businesses involved because no other reliable
method of valuing the business was presented.
However, in the instant case we have clear
proof in the record of the value of
plaintiff’s business as a going concern, and
that value must necessarily take into
consideration its future profit-earning
potential. Thus, we think that the cases
relied on by the defendant, which allow the
plaintiff to recover the going-concern value
of his business, but not future profits in
addition, are applicable to the instant case.
* * *
The jury awarded damages for three items in the respective
2
amounts of $2,000, $12,000, and $57,000. Id. at 126.
8
It is our opinion that the plaintiff has
received all permissible damages under items
one and two, damages occasioned prior to the
sale and the full market value on the sale of
his route as a going concern, free of the
restrictive practices. This value is figured
on the basis of his reconstituted route with
all 1200 customers. Fair market value would be
that price a willing seller could secure from
a willing buyer, and the evidence establishes
$24,000 as the maximum price obtainable.
Plaintiff has thus been made whole on his
actual damages [....] He is not entitled to
sell the route, receive full compensation
therefor, and still receive the profits the
route might have made over his reasonable
work-life expectancy. The trial judge did cut
these damages down to future losses occurring
after the sale for a period of three years. We
feel this also is duplicitous. The prospect of
future earnings is considered in arriving at
the fair market value of a given business.
Here undoubtedly the value of the route rested
not in its tangible assets of an old truck and
paper wrapper (valued $600) but in the
exclusive contract for distribution of a well
regarded newspaper in a given area. Whatever
that fair market value might be, plaintiff has
received it. Capitalizing and discounting
future profits is one method of figuring
present value, but this does not mean that a
person is entitled to present value plus
future profits.
Id. at 131.
To the extent Colorado courts have addressed the question of
duplicative damages, they have adopted a view similar to Albrecht.
For example, in State of Colorado v. Morison, 148 Colo. 79, 365
P.2d 266 (Colo. 1961),3 the court addressed the damages recoverable
3
Morison was overruled in part on other grounds by Evans v.
Bd. of County Comm. of El Paso County, 174 Colo. 97, 482 P.2d 968(Colo. 1971).
9
by a farmer whose dairy cows had become diseased through the
defendant’s negligence:
[T]he Morisons are admittedly entitled to such
special damages as they are able to show with
reasonable certainty resulted from defendants'
negligence. This would include loss of
profits due to diminished milk production from
the cows before their sale; the value of
silage or feed that became contaminated and
therefore unusable; and the reasonable cost of
disinfecting the milking equipment, barn
facilities, and the farm in general.
However, the Morisons are not entitled to
be awarded any sum representing loss of
profits for the dairy operation from and after
the date of the sale of their diseased cows.
Nor are they entitled to be compensated for
the loss of the progeny which they could
reasonably have expected from the cows.
Having received the diminution in their market
value[,] to allow these additional items would
be a form of double recovery. In other words,
fair market value itself reflects, inter alia,
the fact that the farm animal may have income
producing ability, including the ability to
propagate.
A similar approach was taken by the Colorado Court of Appeals
in Forsyth v. Associated Grocers of Colorado, Inc., 724 P.2d 1360(Colo.App. 1986), where a jury had awarded damages to an
independent grocer who had to sell his business as a result of a
misrepresentation by the defendant. The court of appeals reversed
the judgment because the trial court’s instruction on damages
permitted the jury to award lost profits in addition to an amount
awarded to ensure that plaintiff received the fair market value of
the business. “Such a result,” the court concluded, “would lead to
an improper double recovery.” Id. at 1365.
10
Numerous jurisdictions hold to the view that “when the loss of
business is alleged to be caused by the wrongful acts of another,
damages are measured by one of two alternative methods: (1) the
going concern value; or (2) lost future profits.” Malley-Duff &
Assoc. v. Crown Life Ins. Co., 734 F.2d 133, 148 (3rd Cir. 1984).
See also Johnson v. Oroweat Foods Co., 785 F.2d 503, 508 (4th Cir.
1986) (the courts allow a plaintiff to recover either the present
value of lost future earnings or the present market value of the
lost business, but not both). The “going concern value” is the
price a willing buyer would pay and a willing seller would accept
in a free marketplace for the business in question. Malley-Duff,
734 F.2d at 148. It measures damages by awarding the difference
between the going concern value and the price actually received by
the plaintiff upon sale of the business. Cf id. This is clearly
the measure of damages that was presented by plaintiff’s expert in
the instant case and it properly supports the consequent award of
$35,000 by the jury. The award of lost profit damages in addition
to this amount, however, was an improper double recovery.
Plaintiff contends that Atlas Building Products Co. v. Diamond
Block & Gravel Co., 269 F.2d 950 (10th Cir. 1959) supports the view
that an injured plaintiff can recover lost profits as well as a
“diminution in value” of the business. Atlas is distinguishable
because the plaintiff in that case continued to operate the
business despite the injury. Such a plaintiff might not be made
11
whole by receiving lost profits because the business may be left
with assets (e.g., intangible assets such as goodwill) that have
less value than before the injury. Such a loss would be realized
by the owner upon a subsequent sale of the business. But where the
business is sold as a going concern and the owner is awarded the
fair market value of the business without the injury,4 the owner
has been made whole because that value takes into account the
prospect of future profits as well as the unreduced value of all
the business’ assets. Cf. Morison, supra (plaintiff could recover
profits lost before his cows were sold but not after). Plaintiff
also relies on Twentieth Century-Fox Film Corp. v. Brookside
Theatre Corp., 194 F.2d 846 (8th Cir. 1952), but that case did not
arise under Colorado law and thus does not diminish the holdings in
Morison and Forsyth, supra. Moreover, we think it clear that the
4
Plaintiff argues that Arnott v. The American Oil Co., 609
F.2d 873 (8th Cir. 1979), supports its position, but upon close
inspection it does not. First of all, Arnott recognized that
“going concern value” and lost future profits are alternative
measures of damage, which necessarily means that it is improper to
award both. See id. at 887. Moreover, the court said that the
jury in that case could have found that the sale “was a forced sale
with no allowance for goodwill or the value of a going business and
therefore that [plaintiff] had not received the fair market value
of his business.” Id. at 887. This analysis in inapplicable to
the instant case. The evidence in this case clearly showed that
the business was sold as a going concern, with its value arising
from the fact that it would continue to operate as an insurance
agency. Second, the damage instruction given to the jury in this
case told them to award the difference between the actual price
received for the business and “the reasonable sale value of the
agency’s business if the Defendants had not breached the contract.”
This instruction was clearly designed to ensure that the plaintiff
received fair market value for the business.
12
Eighth Circuit’s view of duplicative damages was refined in
Albrecht and it is the latter decision which provides guidance on
the question before us.
We do not mean to suggest that there can never be an award of
lost profits in addition to damages for reduction in the value of
the plaintiff’s business. As we recognized in Westric Battery Co.
v. Standard Elec. Co., 482 F.2d 1307 (10th Cir. 1973), “[i]t is
conceivable that there could be capital loss shown in addition to
out-of-pocket expenses and loss of profits.” Id. at 1317. Such a
loss must exist clearly independently of the lost profits, however,
and “[t]he jury must be cautioned about duplicative items of
damage.” Id. Neither of these requirements was satisfied in the
instant case. In sum, we conclude that the judgment must be
vacated in part because it awards plaintiff an impermissible double
recovery.
Not surprisingly, the parties disagree as to what effect a
double recovery has upon disposition of the appeal. Plaintiff
argues that only the $35,000 award for diminished sale value should
be vacated and that the lost profits award should stand, while
USF&G argues just the opposite. Although, as indicated above, the
“going concern” and “lost profit” measures are generally considered
alternative remedies, in this case we conclude that the award of
lost profits must be vacated. Just as in Albrecht, here we have
“clear proof in the record of the value of plaintiff’s business as
13
a going concern, and that value must necessarily take into
consideration its future profit-earning potential.” Albrecht, 452
F.2d at 129. In fact, plaintiff’s expert in this case testified
solely to the going concern value and did not make an estimate of
lost future profits.5 Lost future profits may be used as a method
of calculating damage where no other reliable method of valuing the
business is available, see id., but that was not the case here.
Plaintiff has been made whole by receiving the fair market value of
the business; he “is not entitled to sell the [business], receive
full compensation therefor, and still receive the profits the
[business] might have made over his reasonable work-life
expectancy.” Id. See also R.E.B., Inc. v. Ralston Purina Co., 525
F.2d 749, 754 (10th Cir. 1975) (ability to earn future profits is
to be calculated as part of reduction of market value). Moreover,
we note that the lost profits award in this case would still be
duplicative even if the $35,000 were vacated because the former
fails to take into account the additional sum received by plaintiff
(over $148,000) for the sale of the business. Thus, the award of
5
Plaintiff did not present a specific estimate of lost
profits from any witness but instead relied on the plaintiff’s tax
returns and the arguments of counsel. Although plaintiff at one
point attempted to establish the amount of lost profits through its
expert, the trial court sustained an objection to this testimony
because it was beyond the scope of the expert’s report and
designation. Aplt. App. at 232. In addition to its other
arguments, USF&G contends that the lost profits award should be
vacated because it was based on speculation by the jury. Because
we find that the lost profit award must be vacated for other
reasons, we do not reach this issue.
14
lost profits cannot stand.
Under the circumstances, we conclude that the proper course is
to vacate the portion of the judgment awarding $809,650 in lost
profit damages. The alternative award of $35,000 for diminution in
market value is appropriate and is AFFIRMED. The case is REMANDED
to the district court for entry of judgment in accordance with this
opinion.
15