Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-06-03486/USCOURTS-ca8-06-03486-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 06-3326

___________

Wayne Schooley; Laurie Schooley, *

*

Plaintiffs - Appellants, *

*

v. *

*

Orkin Extermination, Co., Inc., a *

wholly-owned subsidiary of Rollins, *

Inc.; Rollins, Inc., a foreign *

corporation, *

*

Defendants - Appellees. *

Appeals from the United States 

District Court for the Southern

District of Iowa.

___________

No. 06-3486

___________

Wayne Schooley; Laurie Schooley, *

*

Plaintiffs - Appellees, *

*

v. *

*

Orkin Extermination, Co., Inc., a *

wholly-owned subsidiary of Rollins, *

Appellate Case: 06-3486 Page: 1 Date Filed: 09/19/2007 Entry ID: 3353275
1

The Honorable John F. Nangle, United States District Judge for the Eastern

District of Missouri, sitting by designation.

2

The negligent misrepresentation verdict has not been appealed. 

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Inc.; Rollins, Inc., a foreign *

corporation, *

*

Defendants - Appellants. *

___________

Submitted: May 14, 2007

Filed: September 19, 2007

___________

Before BYE and SMITH, Circuit Judges, and NANGLE,1

 District Judge.

___________

BYE, Circuit Judge.

Wayne and Laurie Schooley (Schooleys) hired Orkin Exterminating Co., Inc.,

(Orkin) to protect their home against termites. After the home sustained extensive

termite damage, the Schooleys sued Orkin claiming fraudulent and negligent

misrepresentation. The Schooleys sought compensatory damages for repair costs, loss

of use, and reduction in value, and punitive damages. A jury found in favor of the

Schooleys on the fraud and negligent misrepresentation claims, and awarded $138,000

in compensatory damages and $276,000 in punitive damages. The district court

granted Orkin's post-trial motion for judgment as a matter of law (JAML) on the claim

for punitive damages and granted Orkin's new trial motion on the award of

compensatory damages. The court denied Orkin's JAML motion on the fraudulent

misrepresentation claim.2

 A second jury returned a compensatory damages award of

$96,030.

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On appeal, the Schooleys argue the district court erred by granting JAML on

the claim for punitive damages and by granting a new trial on compensatory damages.

In its cross-appeal, Orkin argues the district court erred by denying its JAML motion

on the fraudulent misrepresentation claim. It also appeals the second award of

compensatory damages, arguing the district court's instruction on compensatory

damages was erroneous and it asks us to reduce the compensatory damages to

$25,030. We reverse the district court's order granting JAML on punitive damages

and the order granting a new trial on compensatory damages, and reinstate the original

damage awards.

I

The facts viewed in the light most favorable to the fraudulent misrepresentation

claim and punitive damages award are as follows. In Re Knickerbocker, 827 F.2d

281, 284 (8th Cir. 1987).

 

The Schooleys purchased their home in 1978 and observed no signs of termite

activity until 1992. After discovering evidence of termites in 1992, they contacted

Orkin. An Orkin representative inspected the home and told the Schooleys the

company's treatment process would create a complete chemical barrier against

termites and protect the home. The Schooleys purchased Orkin's treatment package,

including an annual renewable option for a limited lifetime retreatment guarantee

which stated: "Orkin guarantees that it will, at no extra cost, apply any necessary

additional treatment to the premises if an infestation of the aforesaid wood infesting

organism is found in the treated premises during the period this Guarantee is in force."

 The house was first treated in 1992 to establish the complete chemical barrier

against termites. In 1993, Orkin conducted an annual inspection and found no termite

activity. Satisfied the problem was under control, the Schooleys began a remodeling

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project which initially consisted of a multilevel deck attached to the back of the home.

In 1994, Laurie discovered evidence of termite activity and contacted Orkin. Orkin

sprayed the infested area and assured the Schooleys the problem was under control.

At trial, however, Kent Heinzman, a branch manager for Orkin, testified the

appearance of termite activity within two years of an initial application indicated the

application had been inadequately applied or the chemical barrier had broken down.

He testified the complete chemical barrier from the initial application would generally

be expected to last between six to fourteen years. The Schooleys testified Orkin never

provided this information to them.

 

In 1995, the Schooleys expected Orkin to conduct an annual inspection in

March or April – it did not. In October, Laurie again discovered evidence of termite

activity in the same location of the house and called Orkin. An inspector inspected

the home and recommended a complete retreatment to his superiors instead of a spot

retreatment. The recommended complete retreatment was not approved by the branch

manager and a second spot retreatment was performed.

At trial, an Orkin technician testified spot retreatments generally do not provide

complete termite control. Indeed, they can force termites from the treated area to

untreated points of entry. Conversely, an unbreached chemical barrier completely

prevents termites from entering the home. The Schooleys testified they were not told

the inspector had recommended complete retreatment or that spot treatments could be

ineffective in treating termite infestations.

Prior to 1996, the Schooleys had observed evidence of termite activity only on

the walls of the basement. In July 1996, Laurie noticed for the first time the termite

activity had moved from the basement to the inside wall of the front porch, the east

interior wall of the dining room, the main floor, and an internal stairway in the center

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of the home. Orkin told the Schooleys this was probably old damage, performed

another spot retreatment, and in October pronounced the home termite free.

In 1997, the Schooleys embarked on an extensive remodeling project. Before

doing so, Laurie called Orkin for assurances the termite problem was under control.

Laurie described their remodeling plans and, after inspecting and applying additional

chemical prophylactically, Orkin advised the Schooleys there was no termite activity.

The Schooleys spent approximately $120,000 on the remodeling project which

included, among other improvements, finishing the previously unfinished basement.

Upon completion of the project in 1997, Laurie again noticed termite damage

around the front porch. Orkin sprayed the area and told Laurie it was old damage. In

1998, she observed pin holes in newly hung wallpaper and indentations in newly

decorated walls. Nonetheless, in September 1998 and February 1999, Orkin

conducted annual inspections and reported no termite activity.

 

Soon after the February 1999 inspection, Laurie noticed termite damage to the

basement floor which had been installed as part of the 1997 remodeling project.

Faced with proof of an obvious reinfestation, Orkin's inspector reported termite

activity. She complained as to the spot retreatments obviously not working and

expressed concern because they had extensively remodeled the home. The possibility

of a complete retreatment, as suggested by Orkin's inspector in 1995, was never

discussed with the Schooleys. Instead, the company installed a bait monitoring

system and advised the Schooleys it would resolve the problem in no time. The

Schooleys testified they relied on the company's representations of expertise in the

field of termite control, believed the inspectors who said the various treatments would

control the termite problem, and accepted its invitation to "trust" it to solve the termite

problem. 

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Despite Orkin's promise to monitor the bait stations monthly, there were several

months when no one came to the home. In October 1999, after waiting four months

for an inspector, Laurie discovered evidence of termites in the basement stairway. She

called Orkin and two days later the branch manager, Heinzman, came to the home and

left a written message stating one bait trap containing 80,000 dead termites had been

consumed and there was no further evidence of termite activity. At trial, Heinzman

admitted there are upwards of one million termites in any given colony, capable of

infesting several homes at the same time. In other words, the presence of 80,000 dead

termites was no indication the infestation was under control.

 

In 2000, Orkin only inspected the home and bait stations when Laurie called

requesting an inspection. During 2000, she observed no further evidence of termites

and concluded the bait stations were working. In January 2001, however, she noticed

termite damage to the main floor in the center of the home and to the floor in the

main-floor bathroom. She also discovered damage to the stairway wall leading from

the main floor to the second floor. Further examination revealed the wood flooring

in the bathroom had been eaten by termites. Once again, Orkin assured her this was

old damage but agreed to install a bait station in the bathroom. Days later, Wayne

discovered evidence of active termites in the basement directly under the main-floor

bathroom. Orkin was contacted and representatives assured the Schooleys the bait

stations would solve the problem. 

In March 2001, after being called by the Schooleys, and in April 2001, Orkin

inspected the Schooleys' home and reported no activity. Two days after the April

inspection, Laurie discovered obvious evidence of termites in three different locations

in the basement. She called the inspector and asked why only two days earlier he had

reported no activity. She was told: "I'm sorry, Ma'am. That's what they told me to

put. You're what's known as a problem house."

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In June 2001, the Schooleys discovered additional and extensive termite

damage to the main floor of the home. They undertook repairs of the damage and in

the process observed active termites in the walls of the home. A videotape

documenting the damage, repairs, and live termites was presented to the jury.

At this juncture, Orkin chose to apply a different chemical to reestablish a

complete chemical barrier. A month later it removed all the bait stations. Laurie

asked how they would be able to monitor termite activity without the stations and was

told by the branch manager he was running a business and could not afford to send

someone out every month to check for termites. In the fall of 2002, the Schooleys

discontinued their relationship with Orkin and hired a different termite control

business.

II

A

Orkin argues the district court erred by denying its JAML motion on the

Schooleys' claim for fraudulent misrepresentation. Orkin contends its representatives

only predicted the treatments would be successful and there was no evidence Orkin

suspected otherwise or intended to deceive the Schooleys. Additionally, Orkin argues

there was no evidence the Schooleys relied on any alleged misrepresentations. For

example, when Orkin's inspector reported no termite activity in April 2001, Laurie

conducted her own inspection and discovered termites. According to Orkin, this

proves the Schooleys were not relying on its representations. It also denies the

Schooleys consulted with Orkin prior to undertaking the 1997 remodeling project and

therefore did not undertake the project based on assurances from Orkin.

 

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We review de novo the district court's denial of judgment as a matter of law.

Arabian Ag. Servs. Co. v. Chief Indus., Inc., 309 F.3d 479, 482 (8th Cir. 2002).

Judgment as a matter of law is only appropriate where the evidence adduced at trial

is entirely insufficient to support the verdict. Id. In making this determination, we

consider all evidence in the record without weighing credibility, and resolve conflicts

and make all reasonable inferences in favor of the non-moving party. Id. An

inference is reasonable when it "may be drawn from the evidence without resort to

speculation." Id. (quoting Fought v. Hayes Wheels Int'l, Inc., 101 F.3d 1275, 1277

(8th Cir. 1996) (internal quotation marks omitted)).

In Iowa, fraud must be established by clear, satisfactory, and convincing

evidence. Beeck v. Aquaslide 'N' Dive Corp., 350 N.W.2d 149, 155 (Iowa 1984);

Lockard v. Carson, 287 N.W.2d 871, 873-74 (Iowa 1980). The elements of fraud are

1) representation, 2) falsity, 3) materiality, 4) scienter, 5) intent to deceive, 6)

justifiable reliance, and 7) resulting injury and damage. Garren v. First Realty Ltd.,

481 N.W.2d 335, 338 (Iowa 1992); Cornell v. Wunschel, 408 N.W.2d 369, 374 (Iowa

1987). Orkin argues there was no evidence it knowingly made a false representation

or of justifiable reliance.

 

A plaintiff can establish scienter, or knowledge of the falsity of a material

representation, by showing the defendant had actual knowledge of the falsity,

possessed reckless disregard for the truth, or falsely stated or implied the

representations were based on personal knowledge or investigation. McGough v.

Gabus, 526 N.W.2d 328, 331 (Iowa 1995) (citing Cornell, 408 N.W.2d at 375-76;

Beeck, 350 N.W.2d at 155). A plaintiff cannot recover if he "blindly relies on a

misrepresentation the falsity of which would be patent to him if he had utilized his

opportunity to make a cursory examination or investigation." Id. at 332 (quoting

Lockard, 287 N.W.2d at 878). Nevertheless, the Iowa Supreme Court has refused to

impose an objective standard of ordinary care on plaintiffs in fraud actions. Id. (citing

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Orkin contends it was prohibited by federal law from performing a complete

retreatment because the label on the chemical recommended against such treatments.

A fair reading of the label indicates it did not absolutely prohibit complete

retreatments. Rather, it recommended against them on an annual basis. 

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Lockard, 287 N.W.2d at 878). Instead, the standard is "whether the complaining

party, in view of his own information and intelligence, had a right to rely on the

representations." Id. (quoting Lockard, 287 N.W.2d at 878).

 

The evidence presented at trial shows Orkin had reason to believe as early as

1994 the initial treatment had been ineffective because the complete chemical barrier,

which would normally be effective for six to fourteen years, failed to prevent

reinfestation. In 1995, Orkin's inspector recommended a complete retreatment instead

of further spot retreatments but the request was denied.3

 The evidence further reveals

Orkin did not advise the Schooleys of these facts. Nor were the Schooleys advised

spot retreatments could be ineffective. In 1996, the Schooleys discovered termite

damage in parts of the home previously unaffected but were advised it was old

damage. In 1997, after consulting with Orkin about a major remodeling project, Orkin

pronounced the home free of termites. Within months of completing the project, and

again in 1998 and 1999, after Orkin reported no termite activity, additional new

evidence of an ongoing infestation was uncovered. It was not until 1999, when

damage was discovered in the newly remodeled basement, that Orkin admitted to an

ongoing problem. Notably, the admission came on the heels of an inspector's report

finding no termite activity only two days earlier.

 

Even after the discovery of termite activity in 1999, Orkin continued to

downplay the seriousness of the problem and exaggerate the effectiveness of its

treatments. It installed a bait monitoring system and assured the Schooleys the

problem would be solved quickly. Instead of monitoring the system on a monthly

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basis as promised, Orkin ignored the Schooley home and generally conducted

inspections only if asked. When it was discovered one of the bait traps had been

completely consumed by termites, the Schooleys were led to believe all the insects had

been killed. Finally, in 2001, after repeated inspections, repeated treatments, and

repeated discoveries of new termite damage, an Orkin inspector told Laurie he had

been instructed to ignore obvious evidence of active termites. Later, the branch

manager told her he was running a business and could not afford to send inspectors

to perform promised inspections.

Orkin attacks the credibility of this evidence but does not argue that, if believed,

it is insufficient to sustain a finding of fraudulent misrepresentation. Because we must

view the evidence in the light most favorable to the verdict, Orkin's attempts to

discredit the evidence must be disregarded. A fair reading of the evidence shows

Orkin, over a period of ten years, intentionally minimized the termite infestation and

overstated its ability to control the problem. Moreover, despite evidence early on

indicating the initial treatment had not worked, Orkin refused to approve a complete

retreatment in lieu of less effective, less expensive alternatives. Finally, Orkin

instructed its inspector to disregard evidence of an ongoing infestation and to falsify

his inspection report. Accordingly, we affirm the district court's denial of Orkin's

JAML motion of the fraudulent misrepresentation claim.

B

The Schooleys argue the district court erred by granting Orkin's JAML motion

on the issue of punitive damages. We agree.

Under Iowa law, a jury may award punitive damages if the plaintiff proves "by

a preponderance of clear, convincing, and satisfactory evidence that the defendant's

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conduct amounted to a willful and wanton disregard for the rights of another." Iowa

Code § 668A.1 (1991). Punitive damages are appropriate in fraud cases when, in

addition to fraud, there is some aggravating factor such as legal malice. State Savings

Bank v. Allis-Chalmers Corp., 431 N.W.2d 383, 387 (Iowa Ct. App. 1988). "To

establish legal malice it need only be shown that wrongful or illegal conduct was

committed or continued with a reckless disregard at another's rights." Id. (quoting

Kimmel v. Iowa Realty Co., Inc., 339 N.W.2d 374, 384 (Iowa 1983)). Willful and

wanton means the defendant intentionally committed an unreasonable act in disregard

of a known or obvious risk so as to make it highly probable harm would follow, and

which is usually accompanied by a conscious indifference to the consequences. Fell

v. Kewanee Farm Equip. Co., 457 N.W.2d 911, 919 (Iowa 1990) (quoting W. Page

Keeton et al., Prosser & Keeton on Torts § 34, at 213 (1984)).

At the end of the Schooleys's case and again before the case was submitted to

the jury, the district court denied Orkin's JAML motion on punitive damages. Once

the jury awarded punitive damages, Orkin renewed its motion and the court

reconsidered and reversed the award. In so holding, the court reviewed evidence

offered by the Schooleys in support of their claim for punitive damages and concluded

it did not constitute clear, convincing, and satisfactory evidence of willful or wanton

conduct.

For example, the Schooleys offered an estimate prepared by an Orkin employee

regarding the amount of chemical necessary to adequately perform the initial

treatment. The estimate called for sixty gallons more of the chemical than was

actually applied, and the Schooleys argued the estimate showed Orkin intentionally

applied less chemical than necessary in an effort to save money. They further argued

Orkin knew the failure to apply the required amount of chemical caused the complete

chemical barrier to fail after only two years. The district court, instead of viewing this

evidence in the light most favorable to the verdict, weighed it against conflicting

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evidence tending to show the estimate overstated the amount of chemical needed, and

concluded Orkin applied adequate chemical.

Similarly, the court rejected evidence suggesting Orkin knew there was a

serious problem in 1995 and intentionally failed to act appropriately. The Schooleys

argued Orkin knew, but failed to disclose, that the complete chemical barrier should

have protected the house for at least several years. They argued when new termite

activity was found in 1995, Orkin knew it should have reestablished the complete

chemical barrier instead of trying less expensive remedial measures. The court

concluded this evidence was not indicative of any wrongful intent because

reinfestation was a possibility and the discovery of termites sooner than expected did

not suggest wrongful intent. The issue, however, was not whether the parties could

have anticipated the possibility of reinfestation, but rather whether, after only two

years, Orkin knew the termite problem was more serious than it led the Schooleys to

believe.

The Schooleys also argued there was an incentive for branch managers to

authorize spot retreatments instead of more effective complete retreatments. The

evidence showed each branch receives a $750 internal credit for every spot

retreatment irrespective of how much each actually costs. Conversely, no internal

credit is given if a complete retreatment is required. Thus, branch managers

concerned about profits naturally favor spot retreatments over complete retreatments

– even if the latter are less effective. The district court rejected this argument, finding

there was no testimony stating the credit was expressly intended to encourage spot

retreatments over complete retreatments. Further, the court concluded it was equally

likely the policy was intended to protect customers by encouraging necessary spot

retreatments.

 

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4

In its discussion of the fraud claim – but not the punitive damages claim – the

district court compares Laurie's testimony with the inspector's trial testimony denying

the admission. In doing so, the court improperly weighed the credibility of the

evidence. 

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The district court improperly weighed this evidence. Perhaps the policy was

instituted to protect customers and not to maximize profitability at the expense of

customers. That decision, however, was for the jury. If, as the district court stated,

there were equally plausible explanations for the policy, it was improper for the

district court to substitute its judgment for the jury's.

 

The district court's order granting JAML discusses and rejects additional

evidence offered in support of the punitive damages claim, but fails to mention other

evidence of willful or wanton conduct offered by the Schooleys. For example, the

district court failed to mention 1) the rejected 1995 recommendation that a complete

retreatment be performed, 2) evidence indicating Orkin knew a complete chemical

barrier should last at least six to fourteen years, 3) Orkin's repeated claims that new

evidence of termites was undiscovered old damage, and 4) Orkin's assurances,

notwithstanding evidence of a serious ongoing infestation, that the termite problem

was under control. The district court also ignored Laurie's testimony indicating she

was told by an inspector he was instructed to file a false report and disregard obvious

evidence of a serious ongoing infestation.4

 Finally, there is no mention of the branch

manager's refusal to authorize monthly inspections as promised.

Viewing this evidence in the light most favorable to the jury's verdict, we

conclude there was sufficient evidence to show Orkin intentionally misled the

Schooleys and consciously disregarded the harm almost certain to occur from the

unabated infestation. Accordingly, we reverse the district court's grant of JAML and

reinstate the award of punitive damages.

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C

The Schooleys appeal the district court's order granting Orkin's motion for a

new trial on compensatory damages. Orkin cross-appeals the jury's award of

compensatory damages from the second trial, arguing the district court's compensatory

damages instruction misstated the law.

 

At the first trial, the Schooleys offered evidence of Orkin's net worth ($138

million) in support of their claim for punitive damages. After holding the issue of

punitive damages should not have been presented to the jury, the district court

concluded the compensatory damages award ($138,000) was suspect because of its

similarity to the evidence regarding Orkin's net worth. The court further concluded

the damages evidence presented by the Schooleys did not support the award and

granted a new trial.

The district court may order a new trial if convinced the verdict goes against the

clear weight of the evidence or where a miscarriage of justice will result. Benjamin

v. Aluminum Co. of Am., 921 F.2d 170, 173 (8th Cir. 1990). While the district court's

discretion is not boundless, it can rely on its own reading of the evidence in

determining whether the verdict goes against the clear weight of the evidence. White

v. Pence, 961 F.2d 776, 780 (8th Cir. 1992). We review a grant of new trial for abuse

of discretion. Mears v. Nationwide Mut. Ins. Co., 91 F.3d 1118, 1123 (8th Cir. 1996).

The amount of damages awarded is a function of the jury, not the court, Gorden

v. Carey, 603 N.W.2d 588, 590 (Iowa 1999), and a court should not set aside a verdict

simply because it might have reached a different conclusion, Ort v. Klinger, 496

N.W.2d 265, 269 (Iowa Ct. App. 1992). The jury's verdict should not be set aside or

altered unless it 1) is flagrantly excessive or inadequate, 2) is so out of reason as to

shock the conscience or sense of justice, 3) raises a presumption it is the result of

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passion, prejudice, or other ulterior motive, or 4) is lacking in evidentiary support.

Gorden, 603 N.W.2d at 590. 

The most important of the above enumerated tests is support in the

evidence. If the verdict has support in the evidence the others will hardly

arise, if it lacks support they may all arise. The real question in most

cases, and here, is the amount and sufficiency of evidence to support the

award made. Where the verdict is within a reasonable range as

indicated by the evidence we will not interfere with what is primarily a

jury question.

Yoch v. Cedar Rapids, 353 N.W.2d 95, 98 (Iowa Ct. App. 1984) (emphasis added).

The district court is not required to grant a new trial on compensatory damages

because evidence of a defendant's net worth was allowed and an award of punitive

damages is later reversed. Lala v. Peoples Bank & Trust Co. of Cedar Rapids, 420

N.W.2d 804, 807 (Iowa 1988). A new trial may be required if it appears the jury

improperly considered evidence of net worth in calculating an award for

compensatory damages. Id.

At trial, the Schooleys presented evidence through Alan Janssen, a certified

appraiser, showing their home was appraised in 1998 at $157,000. He testified the

house would be worth only 20-30% of its appraised value due to a history of termite

infestation. According to Janssen, the Schooleys suffered a loss in value of between

$109,900 to $125,000. The Schooleys also presented evidence showing they had

incurred approximately $8,000 in repair costs. Further, despite the district court's

claim that the loss of use damages were unsubstantiated, the record shows Laurie

testified the Schooleys were unable to use much of their home while repairs were

undertaken during January, February, June, July, August and September of 2001. The

district court's post-trial order accepted the evidence relating to cost of repairs,

rejected any loss of use damages, and questioned the loss in value evidence because

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no current appraisal showing the value of the home at the time of trial was offered.

In the end, the district court's decision to grant a new trial was primarily based on the

correlation between the evidence of net worth and the award of compensatory

damages. 

The award of compensatory damages is well within the range of potential

awards supported by the evidence presented at trial. Assuming a loss in value of

$125,000, coupled with $8000 in repair costs, the jury could reasonably have found

damages of $133,000 before ever considering any loss of use damages. We note the

district court expressed concern about the reliability of the 1998 appraisal, but it did

not reject it as without evidentiary value. Indeed, the jury could have reasonably

inferred a more recent appraisal would have shown the loss in value was higher.

Further, it was an abuse of discretion to reject the Schooleys's loss of use damages

when there was evidence offered to support the claim. We find nothing about the

jury's compensatory damages award of $138,000 excessive or shocking to the

conscience or to our sense of justice. We conclude the Schooleys presented adequate

evidence of loss in value, loss of use, and cost of repairs to support the award of

$138,000. Because the award was "within a reasonable range as indicated by the

evidence," the district court abused its discretion by "interfer[ing] with what is

primarily a jury question." Yoch, 353 N.W.2d at 98. Accordingly, we reverse the

grant of a new trial and reinstate the original award of compensatory damages. 

III 

We affirm the district court's order denying Orkin's JAML motion on the issue

of fraudulent misrepresentation. We reverse the district court's order granting JAML

on the punitive damages award and its order granting a new trial on compensatory

damages, and reinstate the original awards of compensatory and punitive damages.

Because our decision renders it moot, we do not reach Orkin's cross-appeal.

______________________________

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