Appeals court affirms breach of contract claim after sewage leak

In a dispute between a property owner and an association of property owners over a sewage mishap, the Indiana Court of Appeals ruled that the even though the association was not negligent, it still breached its contract.

Conroad Associates L.P. sued Castleton Corner Owners Association Inc. after a lift station failed and flooded Conroad’s building with raw human sewage in February 2015. Pier 1 Imports, which leased the space, had to close and eventually decided to terminate its lease.

In its amended complaint filed in July 2017, Conroad claimed the association was negligent and had breached the terms of the Declaration of Development Standards, Covenants, and Restrictions when it failed to ensure the lift station operated properly. In addition, Conroad asserted the association had breached its fiduciary duty to its members.

The Marion Superior Court found in favor of the association on the claims of negligence and breach of fiduciary duty. However, the trial court determined the association had breached the contract because the phrase “continuous operation” in the declaration imposed a strict liability obligation. Therefore, under the contract, the association was required to keep the lift working.

The association appealed, and the Court of Appeals affirmed in part and reversed in part in Castleton Corner Owners Association, Inc. v. Conroad Associates, L.P. and McKinley, Inc., 19A-PL-2687.

In regard to the breach of contract finding, the association contended the court’s finding in favor of the association on the negligence claim could not be reconciled with its conclusion that it had breached its contract. The association argued that since the court had found it had acted reasonably, the court could not have also found it breached the contract.

Citing King v. Ne. Sec., Inc., 790 N.E.2d 474, 484 (Ind. 2003), and Gerdon Auto Sales v. John Jones Chrysler Dodge Jeep Ram, 98 N.E. 3d 73, 78 (Ind. Ct. App. 2018), the Court of Appeals pointed out that 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.

“In other words, while acting reasonably 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,” Judge Edward Najam wrote for the court. “Because the Declaration imposed a strict obligation on the Association to keep the lift station in continuous operation, the court’s determination that the Association had acted reasonably in maintaining the lift station is not inconsistent with its determination that the Association had nonetheless breached the contract.”

Also, the association appealed the award of damages.

The trial court awarded Conroad $49,656 in lost rent from Pier 1 plus $32,248 in lost property taxes, $2,400 in lost insurance premiums, and $14,300 in lost common area maintenance (CAM) charges. However, the association argued, that figure also included compensation for taxes, insurance and CAM charges such that the damage award actually compensated Conroad twice for those expenses.

The Court of Appeals agreed. It highlighted the report by Michael Lady, a real estate appraiser, who noted he included lost rental payments as well as real estate taxes, insurance and CAM charges in his calculation of lost income. When the trial court awarded damages both for lost rent based on Lady’s calculation of “lost income” and for the additional reimbursable expenses, the court awarded the same damages twice.

“The evidence supports damages in the amount of $49,656 for lost rent and other reimbursable expenses Pier 1 would have paid,” Najam wrote. “The evidence does not support the separate and additional award of damages for insurance premiums, real estate taxes, or CAM charges.”

The Court of Appeals thus remanded with instructions for the trial court to award damages to Conroad in the amount of $49,656 for lost rent, property taxes, insurance premiums and CAM charges.