Schipporeit v. Khan

#25112, #25128-r-JKM

2009 SD 96

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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TATE D. SCHIPPOREIT and
SARAH E. SCHIPPOREIT, Plaintiffs and Appellees,

v.

GHAZANFAR KHAN, Defendant and Appellant.

* * * *

APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
LAWRENCE COUNTY, SOUTH DAKOTA

* * * *

HONORABLE RANDALL L. MACY
Judge

* * * *

THOMAS E. BRADY
KAREN PAIGE HUNT
RICHARD A. PLUIMER of
Brady & Pluimer, P.C.
Spearfish, South Dakota Attorneys for plaintiffs
and appellees.

SCOTT SUMNER Attorney for defendant
Rapid City, South Dakota and appellant.

* * * *
ARGUED AUGUST 26, 2009

OPINION FILED 11/04/09
#25112, #25128

MEIERHENRY, Justice

[¶1.] Tate and Sarah Schipporeit (Schipporeits) brought suit against

Ghazanfar Khan claiming breach of contract, conversion, and fraudulent

misrepresentation. Schipporeits sought compensatory and punitive damages. A

jury found in favor of Schipporeits on all claims and awarded compensatory and

punitive damages. Khan asserts that the conversion and fraudulent

misrepresentation claims, along with the punitive damages request, should have

been dismissed because the claims were not independent torts apart from the

breach of contract claim. We agree and reverse.

FACTS AND PROCEDURAL BACKGROUND

[¶2.] This dispute centers on the purchase and sale of a Quality Inn in

Spearfish, South Dakota, owned by Khan. On April 17, 2007, Schipporeits executed

a purchase offer for the purchase of the Quality Inn from Khan. Khan agreed to sell

the Quality Inn to Schipporeits for $1,700,000. The agreement originally specified a

closing date of May 31, 2007.

[¶3.] Prior to the closing date, Khan denied that a contract existed and

refused to perform on the purchase offer. As a result, Schipporeits filed suit against

Khan for specific performance and damages for breach of contract. Khan denied the

basis for the claim maintaining that the April 17, 2007, purchase offer did not

create a binding contract. The parties subsequently agreed to complete the

transaction pursuant to the purchase offer. Schipporeits did not waive their claims

against Khan for damages, costs, expenses, disbursements, or attorneys’ fees. The

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closing date was set for July 19, 2007. The parties completed the sale and

transferred the property on August 3, 2007.

[¶4.] Schipporeits immediately initiated suit against Khan for breach of

contract, conversion, and fraudulent misrepresentation. Schipporeits’ claims for

conversion and misrepresentation were based on allegations of missing property,

supplies, equipment, and room reservations. The parties tried the case to a jury

over three days beginning October 6, 2008. The jury awarded Schipporeits damages

for breach of contract in the amount of $148,889, damages for conversion in the

amount of $28,336, damages for fraudulent misrepresentation in the amount of

$11,234, and punitive damages in the amount of $317,900. Khan filed a motion for

a new trial and renewed his motion for judgment as a matter of law. The trial court

denied Khan’s motions.

ISSUE

[¶5.] Khan’s issue on appeal is whether the trial court erred in submitting

Schipporeits’ tort claims for conversion and fraudulent misrepresentation, along

with punitive damages, to the jury. Khan has not appealed the jury’s award of

$148,889 in damages for Schipporeits’ breach of contract claim.

ANALYSIS

[¶6.] Whether Schipporeits’ conversion and fraudulent misrepresentation

claims are independent torts is a question of law that we review de novo. Grynberg

v. Citation Oil & Gas Corp., 1997 SD 121, ¶22, 573 NW2d 493, 500 (“The existence

of a legal duty is a question of law.”) (citation omitted). If the facts do not support

the independent tort claims, Schipporeits are not entitled to punitive damages. As

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a general rule, punitive damages are not recoverable in a breach of contract claim.

Grynberg, 1997 SD 121, ¶17, 573 NW2d at 500. See SDCL 21-3-2. The public policy

reasons for this rule are explained in Grynberg as follows:

First, breach of contract is generally a private injury, unlike a
malicious tort, which some authorities have held to be a public
injury. Second, our free market system allows economically
efficient breaches of contract, for example, when it costs less for
one party to breach an unwise contract and to pay the other
party compensatory damages than it would cost to completely
perform the contract. Third, “[w]hile compensatory damages
encourage reliance on business agreements, the threat of
additional punitive damages would create uncertainty and
apprehension in the marketplace.”

1997 SD 121, ¶17, 573 NW2d at 500 (internal citations omitted).

[¶7.] Punitive damages are recoverable only when a “party can prove an

independent tort that is separate and distinct from the breach of contract.” Id. ¶18.

See Smith v. Weber, 70 SD 232, 236, 16 NW2d 537, 539 (1944). We said in

Grynberg that “‘[c]onduct which merely is a breach of contract is not a tort, but the

contract may establish a relationship demanding the exercise of proper care and

acts and omissions in performance may give rise to tort liability.’” Grynberg, 1997

SD 121, ¶18, 573 NW2d at 500 (quoting Hoffman v. Louis Dreyfus Corp., 435 NW2d

211, 214 (SD 1989)). Tort liability requires “a breach of a legal duty independent of

contract.” Id. This independent legal duty must arise “from extraneous

circumstances, not constituting elements of the contract.” Id. “[E]very contract

contains an implied covenant of good faith and fair dealing [that] prohibits either

contracting party from preventing or injuring the other party’s right to receive the

agreed benefits of the contract.” Farm Credit Servs. of Am. v. Dougan, 2005 SD 94,

¶8, 704 NW2d 24, 27 (citations omitted). Consequently, an independent legal duty

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must extend beyond a contract’s implied covenant of good faith and fair dealing. We

previously indicated that “South Dakota does not recognize an independent [tort]

for breach of the implied covenant of good faith and fair dealing.” Dougan, 2005 SD

94, ¶6, 704 NW2d at 27. An independent legal duty may be related to a contract

between the parties, but it must be “born of that wider range of legal duty which is

due from every man to his fellow, to respect his rights of property and person, and

refrain from invading them by force or fraud.” Grynberg, 1997 SD 121, ¶21, 573

NW2d at 501 (emphasis in original) (quoting Smith, 70 SD at 236, 16 NW2d at 539).

This Court has recognized the independent tort doctrine as follows: “It is settled

law in [South Dakota] that a breach of duty may arise from a contractual

relationship, and while matters complained of may have their origin in contract, the

gist of an action may be tortious.” Kunkel v. United Sec. Ins. Co. of N.J., 84 SD 116,

135, 168 NW2d 723, 733 (1969) (citing Smith, 70 SD at 236, 16 NW2d at 539). The

independent tort doctrine has two functions:

First, it maintains the symmetry of the general rule of not
allowing punitive damages in contract actions, because the
punitive damages are awarded for the tort, not the contract.
Secondly, the independent tort requirement facilitates judicial
review of the evidence by limiting the scope of review to a search
for the elements of the tort.

Grynberg, 1997 SD 121, ¶19, 573 NW2d at 500 (emphasis removed) (quoting Vernon

Fire & Cas. Ins. Co. v. Sharp, 264 Ind 599, 349 NE2d 173 (1976)).

[¶8.] In Grynberg, we found that the independent tort of deceit was properly

submitted to the jury because a legal duty existed beyond the contract obligation.

Id ¶22. In that case, the contract was between the plaintiffs who owned the oil

field and the defendant who managed the exploration and production of oil and

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accounted for the profits and expenses on behalf of the owners. Id. Not only did the

plaintiffs in Grynberg not receive the benefits due to them under the contract, they

were also defrauded by false representations. The false representations and

fraudulent accounting practices caused the owners to agree to continue to have the

defendant manage the oil fields and caused the owners to pay excessive costs. Id.

¶6. Thus, the tortious conduct involved more than the elements, i.e. terms of the

contract, and were based, in part, on the nature of the on-going relationship

between the parties.

[¶9.] Grynberg is similar to the earlier case of Smith. Smith involved

independent tortious conduct arising out of a landlord-tenant relationship created

by contract. 70 SD at 235, 16 NW2d at 538. In Smith, the tenant alleged that the

landlord had entered into a tortious course of conduct to remove the tenant from the

premises, and as a result, damaged the tenant’s property and rendered the

apartment uninhabitable. Id. Recognizing that a “legal duty . . . may spring from

extraneous circumstances, not constituting elements of the contract,” we approved

submitting the tort claims to a jury. Even though the conduct was “connected with

and dependent upon” the contract, the landlord had a wider duty of not “invading”

the renter’s “rights of property and person” by “force or fraud.” Grynberg, 1997 SD

121, ¶21, 573 NW2d at 501.

[¶10.] Two other cases decided by this Court reached a contrary result -

Sundt Corp. v. State ex rel. S.D. Dep’t of Transp., 1997 SD 91, 566 NW2d 476, and

Fisher Sand & Gravel Co. v. State ex rel. S.D. Dep’t of Transp., 1997 SD 8, 558

NW2d 864. In both cases, the facts did not support an independent tort being

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submitted to a jury. In Sundt Corp., the Department of Transportation (DOT)

awarded Sundt Corporation a single highway paving contract. 1997 SD 91, ¶2, 566

NW2d at 477. Sundt Corporation was to perform under this single contract with

the DOT and provide gravel and surface reinforcement for 20 miles of road. Id. A

dispute arose over whether the State had been negligent in maintaining the

shoulders of the highway to be repaired, thereby increasing the time and expense to

Sundt Corporation in performing under the contract. Id. We held the State would

prevail on the negligence claim because “no legal duty [] existed outside the

contract.” Id. ¶10.

[¶11.] Similarly, in Fisher Sand & Gravel Co., we determined that the

highway construction contract between Fisher Sand & Gravel Co. and the DOT was

the only basis for a relationship between the parties. 1997 SD 8, ¶13, 558 NW2d at

867. Consequently, we declared that “rights are not to be determined by playing a

game of labels” and that a contract “cannot be converted into a tort merely by

attaching to the contract, or to the breach, new labels that sound in tort.” Id. ¶19.

Neither Fisher Sand & Gravel Co. nor Sundt Corp. involved the type of relationship

that gave rise to the heightened duty not to invade another’s property by force or

fraud present in Grynberg and Smith.

Schipporeits’ Claims for Conversion and Fraudulent Misrepresentation

[¶12.] The basis of Schipporeits’ conversion claim was that Khan had

converted room reservations, equipment, supplies, and other personal property that

were supposed to have been transferred as part of the sale of the Quality Inn.

Schipporeits claimed Khan had transferred the reservations, other items, and

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property to the Comfort Suites, the nearby competing facility owed by Khan. The

basis of Schipporeits’ fraudulent misrepresentation claim was that Khan had

represented as part of the contract and/or negotiations that the room reservations,

equipment, supplies, and other personal property of Quality Inn would be

transferred to Schipporeits at closing. Schipporeits claimed they relied on these

representations and that Khan knew the representations were false and made them

with reckless disregard for the truth.

[¶13.] For purposes of our analysis, we consider as true the evidence as

presented by Schipporeits. The evidence showed that Kawasaki Motors had

reserved a block of rooms at the Quality Inn for ten days during the Sturgis

Motorcycle Rally. Shortly before the sale of the Quality Inn was to occur, Khan

transferred the reservations to the Comfort Suites. Schipporeits’ evidence also

showed Khan: did not provide sufficient sheets and towels to stock the rooms of the

hotel; removed items from the hotel, including a television from the breakfast room

and the computer for guest use; and, did not leave sufficient supplies to operate the

Quality Inn.

[¶14.] In order for Schipporeits to prevail on their claim that Khan’s conduct

constituted independent torts, they must be able to show Khan had a legal duty

apart from the terms of the contract. One of the terms of the contract provided that

the sale would include “all goods[,] equipment, supplies, . . . other personal

properties . . . , [and] room reservations.” The contract terms provided as follows:

This offer of sale includes all the real estates together with all
easements and rights of way, all improvements thereon and all
fixtures thereon, all goods[,] equipment, supplies, furniture,
furnishings, machinery, appliances and other personal

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properties, the goodwill, business or trade name, services and
trademarks, logos, room reservations and other intangible
personal property on the premises of the Property.

The contract also required Khan to leave “a reasonable inventory of room supplies,

laundry supplies, and breakfast supplies.” The contract provision was as follows:

Seller and Purchaser shall conduct a physical inventory of all
furniture, fixtures and equipment located on and used in
connection with the business operated on the Property. The
entire inventory of Seller used and housed in the business is to
be included in this sale. Seller is selling these physical
inventories in “As is” condition. Seller will leave Purchaser a
reasonable inventory of room supplies, laundry supplies, and
breakfast supplies.

The language of the contract expressly required Khan, as part of the sale, to deliver

the room reservations, a reasonable inventory of supplies, equipment, and personal

property.

[¶15.] Because Khan’s obligation to deliver these items at closing was

specifically included in the terms of the contract, Schipporeits have not shown that

Khan’s breach was extraneous to the contract. Nor have Schipporeits shown that

the relationship between Khan and the Schipporeits resulted in a heightened duty

owed by Khan. Merely singling out terms of the contract by attaching labels to

them that sound in tort does not convert Schipporeits’ breach of contract claim into

independent torts or punitive damages. The only basis for the parties’ relationship

was the one-time contract for the sale of the facility. The terms of the contract

detailed the duties of the parties. Khan’s conduct constituted a breach of the terms

of the contract. However, instead of including the terms of the contract in their

breach of contract claim, Schipporeits singled out certain terms, attempting to label

them as independent torts. Without establishing an independent legal duty,

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Schipporeits’ tort claims cannot survive. See Fisher Sand & Gravel Co., 1997 SD 8,

¶7, 558 NW2d at 869. Schipporeits’ remedy was in contract, not tort. The trial

court erred in submitting the tort claims to the jury. As a result, Schipporeits are

not entitled to compensatory or punitive damages awarded for the tort claims.

[¶16.] We reverse.

[¶17.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER, and

SEVERSON, Justices, concur.

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