Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-02060/USCOURTS-ca10-87-02060-0/pdf.json

Parties Involved:
Blaine Chase
Appellant
Dow Chemical Company
Appellee
C. Alan Hackstaff
Appellant
Robert Hackstaff
Appellant

Document Text:

PUBLISH FILED 

UNITED STATES COURT OF APPEALS United States Court of Appeals Tenth Circuit · 

TENTH CIRCUIT MAY 191989 

ROBERT L. HOECKER 

Clerk 

87-2060 

BLAINE B. CHASE, C. ALAN 

HACKSTAFF and ROBERT HACKSTAFF, 

Plaintiffs-Appellants, 

v. 

THE DOW CHEMICAL COMPANY, 

a Delaware corporation, 

Defendant-Appellee. 

) 

) 

) 

) On Appeal From The 

) United States District Court 

) For The District Of Colorado 

) (D.C. Civil No. 86-K-680) 

) 

) 

) 

) 

William E. Dorigan of Robins, Zelle, Larson & Kaplan, Minneapolis, 

Minnesota, for Plaintiffs-Appellants. 

Bruce D. Drucker of Rivkin, Radler, Dunne & Bayh, Chicago, 

Illinois (Warren S. Radler, Dale R. Crider, Dorothy B. Zimbrakos, 

and Victoria A. Walkowicz of Rivkin, Radler, Dunne & Bayh, 

Chicago, Illinois, Walter A. Steele and Michael L. O'Donnell of 

White and Steele, Denver, Colorado, and J. Roger Lochhead of The 

Dow Chemical Company Legal Department, Litigation Section, 

Midland, Michigan, of counsel), for Defendant-Appellee. 

Before LOGAN, SETH and TACHA, Circuit Judges. 

SETH, Circuit Judge. 

Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 1 
Plaintiffs brought this diversity action to recover damages 

... allegedly caused by defendant Dow Chemical Company's product, 

Sarabond, to the exterior masonry walls of plaintiffs' three-story 

office building. Dow moved for summary judgment, citing a 1981 

Release and Indemnification Agreement executed between it and 

plaintiffs, wherein Dow paid plaintiffs $30,000 to resolve a 

dispute over cracking in the brick piers supporting the canopy 

over the front door of plaintiffs' building. By the terms of this 

release, plaintiffs agreed to give up "any and all claims, 

demands, and causes of action [they] have now or might have now, 

ever had, or may have in the future, known or unknown,'' arising 

from or connected with the use of Sarabond in the building. 

The parties agree on appeal that the release, if binding, 

bars all the claims plaintiffs raise in this suit. Plaintiffs 

alleged in their Second Amended Complaint, however, that the 

release should be declared void since Dow fraudulently induced 

plaintiffs to execute it. In granting summary judgment to Dow, 

the trial court held that, as a matter of law, plaintiffs could 

not satisfy three of the five elements necessary to establish a 

claim for fraud under Colorado law. In re Dow Company "Sarabond" 

Products Liability Litigation, 660 F. Supp. 270, 274 (D. Colo.). 

The trial court also held that the doctrine of mutual mistake 

could not be applied to void the terms of the release. Id. at 

275. Plaintiffs appeal from this judgment. Because we find the 

trial court did not properly apply the law to the evidence 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 2 
contained in the record on the issue of whether the release was 

procured through fraud,.we reverse as to that issue. 

Summary judgment is appropriate only when the documentary 

evidence before the court demonstrates that "there is no genuine 

issue as to any material fact." Fed. R. Civ. P. 56(c). A fact is 

"material" if it ''might affect the outcome of the suit" when 

applying the relevant substantive law. Anderson v. Liberty Lobby, 

Inc., 477 U.S. 242, 248. In reviewing the trial court's entry of 

summary judgment for Dow, "[t]he evidence of the [plaintiffs] is 

to be believed, and all justifiable inferences are to be drawn in 

[their] favor." Id. at 255. The evidence presented by plaintiffs 

in response to Dow's motion· for summary judgment is summarized 

below. 

Sarabond was developed by Dow in the 1950's to increase the 

bond strength of brick to mortar, thus making for stronger brick 

walls. The main solid component of Sarabond is saran latex, which 

contains vinylidene chloride. Vinylidene chloride releases 

chlorine when mixed with mortar, which in turn leads to the 

corrosion of steel embedded in the mortar. Over a period of years 

the corrosion product buildup occupies a far greater volume than 

the original steel. The stress exerted by this buildup eventually 

leads to cracking in the mortar and the bricks. 

Research conducted by Dow resulted in findings that Sarabond 

does cause corrosion and cracking. The November 2, 1972 Frenier 

Report contains information about the corrosive tendencies of 

Sarabond that would be crucial to any engineer investigating the 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 3 
masonry distress of a building containing Sarabond. As relevant 

to this lawsuit, the Frenier Report concludes: 

1. The amount of chloride released by 

Sarabond after one year is 67 times the amount 

found in the normal mortar, and over twice the 

amount identified by Dow as the threshold 

amount necessary to start corrosion. Further, 

the chloride release from Sarabond continues 

as the mortar ages. 

2. Where a steel rod is fully encased in 

Sarabond, corrosion is considerably worse than 

is the case for a rod fully encased in normal 

mortar. 

3. Where a steel rod is partially 

encased in Sarabond and partially kept in a 

water-filled void, the interaction of the 

Sarabond and the water causes corrosion to 

occur in the void 100 times faster than the 

rate of corrosion for the embedded portion, 

while in a normal mortar sample the corrosion 

rate is only 14.5 times greater in the waterfilled void. 

Affidavit of Dr. Robert Kudder at 5. See also Affidavit of David 

Austin at 5. This data is highly technical information that a 

prudent structural engineer would not know or have reason to 

expect. Plaintiffs and theit experts did not obtain access to the 

information contained in the 1972 Frenier Report until May 1985. 

Architect Michael Lombardi used Sarabond in the exterior 

walls of plaintiffs' building when it was constructed in 1970. In 

1975, certain hairline cracks appeared in the brick piers 

supporting the canopy over the front door of the building. Over 

the course of the next year and a half, Dow conducted a rather 

lengthy correspondence with Lombardi and with Mr. Dell Hogy, a 

representative of plaintiffs, over Sarabond's role in causing the 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 4 
cracking. Dow feigned ignorance as to the cause of the cracking 

and repeatedly-,requested specific-evidence linking the cracking to 

Sarabond. In a letter dated June 22, 1976, Dow made the following 

representations to Mr. Hogy: 

"SARABOND is sold on the assurance that it 

produces a high strength mortar--considerably 

stronger ••• than any mortar with which I am 

familiar. There is also an implied warranty 

that this strength will not deteriorate with 

time, and there is~ considerable body of data 

that supports this fact. If there is data [to 

the contrary], we are, of course, most qnxious 

to have you share this information with us." 

(Emphasis added.) This letter was written by Mr. Dallas Grenley, 

one of the authors of Dow's 1972 Frenier Report. Lombardi asked 

Dow numerous times during this period if there was any available 

in-house data concerning potential Sarabond deterioration or 

corrosion but was never provided with the rrenier Report or any 

other internal data from Dow. 

Dow inspected plaintiffs' building in October 1976, in 

June 1978, and in September 1979. At the request of Dow's expert, 

plaintiffs shipped masonry samples to a lab in Texas. In 

December 1979, plaintiffs' lawyer asked Dow for feedback from the 

inspections. Dow responded by letter, stating that the samples 

were "currently being evaluated" but that "additional samples and 

pictures'' were needed. Dow acknowledged it had examined a number 

of buildings containing Sarabond that were experiencing similar 

cracking problems. "What we are finding is a consistent pattern 

of design defects in the structures or faulty workmanship or both. 

Neither cause has anything to do with Sarabond." The letter 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 5 
described Dow's effort as "cooperative" and noted that Dow "[does] 

~not regard [itself] as in an adversary position to [the 

plaintiffs]." 

In 1979, plaintiffs retained David Austin, an independent 

consultant, to evaluate their building's problems. While Austin 

had heard that Sarabond released chlorides into mortar, he 

believed that oxygen and moisture leaking through the outside 

walls might be combining with the chlorides to cause corrosion and 

cracking. Austin and Lombardi both recommended that the cracks be 

caulked and the walls sealed--all to prevent further entry of 

water and air. They believed this repair would sufficiently limit 

access of outside oxygen and water to the steel so as to retard 

further corrosion. This recommendation was communicated to Dow. 

Plaintiffs held two meetings with Dow, in July 1980 and 

January 1981, following Dow's investigation of the cracking. Dow 

claimed the building had been designed and constructed so as to 

allow excess air and water to enter and be retained inside the 

masonry. Dow claimed the cracking occurred after the excess water 

froze. Dow specifically denied that Sarabond played any role in 

the cracking or in the corrosion of the steel. Instead, it stated 

that its in-house data demonstrated Sarabond did not deteriorate 

and was not corrosive. Finally, Dow agreed that blocking the 

entry of air and water from the outside should resolve the 

problem. At no time did Dow mention the data concerning 

Sarabond's corrosive behavior contained in the 1972 Frenier 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 6 
Report. See Affidavits of David Austin, c. Allan Hackstaff, and 

Blaine Chase. 

Based upon Dow's representations and the advice of their own 

expert, plaintiffs believed that caulking and sealing the building 

would solve the cracking and corrosion problem. Accordingly, 

plaintiffs accepted $30,000 from Dow in 1981 pursuant to the 

Release and Indemnification Agreement. This money was for 

replacement of the cracked masonry piers of the canopy and for 

caulking and sealing the rest of the building. 

In May 1985, plaintiffs were contacted by Lombardi and told 

of the existence and content of the 1972 Frenier Report. Lombardi 

obtained access to the report while serving as an expert in 

another Sarabond-related lawsuit in Minnesota. After reviewing 

the report, Lombardi informed plaintiffs that Sarabond could cause 

enough distress in their building to create "a danger to person or 

property." As a result of Lombardi's warning, plaintiffs engaged 

a structural engineer with previous Sarabond experience, 

Dr. Robert Kudder, to inspect the building. Kudder determined 

that the entire masonry facade of the building was irreparably 

distressed due to Sarabond and would have to be replaced at an 

estimated cost of over $1 million. Kudder concluded that the 

distress was unrelated to the entry of excess air and water and 

that the caulking and sealing performed by plaintiffs was totally 

ineffectual. In Kudder's opinion, Sarabond has been the sole 

cause of the building's distress. According to Kudder, a 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 7 
reasona~ly prudent engineer would not have reached this conclusion 

without. access to the-data-contained in the Frenier Report. 

The five elements of fraud under Colorado law are set out in 

Morrison v. Goodspeed, 68 P.2d 458 (Colo.): (1) a false 

representation of a material fact or a concealment of a material 

existing fact; (2) knowledge on the part of the one making the 

representation that it is false or knowledge that he is concealing 

a material fact that in equity or good conscience ought to be 

disclosed; (3) ignorance on the part of the one to whom the 

representation is made or from whom such fact is concealed of the 

falsity of the representation or of the existence of the fact 

concealed; (4) the representation or concealment is intended to be 

acted upon; (5) action is taken on the representation or 

concealment that causes damages. 

The theory of fraud advanced by plaintiffs at trial can be 

stated rather simply. They allege that Dow made numerous false 

and misleading representations that induced them to enter into the 

Release and Indemnification Agreement. Further, they allege that 

Dow knew these representations were false or misleading and 

intended that plaintiffs would rely on them in deciding to enter 

into the release. "A release is an agreement to which the general 

contract rules of interpretation and construction apply." Rocky 

Mountain Ass'n of Credit Management v. Hessler Manufacturing Co., 

553 P.2d 840, 842 (Colo. App.). Like any contract, a release 

procured through fraud can be set aside. Dodds v. Frontier 

Chevrolet Sales & Service, Inc., 676 P.2d 1237, 1238 (Colo. App.). 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 8 
The trial court granted Dow's motion for summary judgment 

after finding that, as a matter of law, plainti£fs would be unable 

to satisfy the first, third, and fifth of the five elements of 

fraud. We consider each element in turn. 

The trial court held that plaintiffs could not satisfy the 

first element of their cause of action for fraud in the inducement 

because Dow had no duty to disclose the information contained in 

the 1972 Frenier Report, or any other information regarding 

Sarabond, to the plaintiffs prior to executing the release. 660 

F. Supp. at 273. This focus on the existence of a duty to 

disclose resulted from the trial court's overly strict 

interpretation of plaintiffs' claim as one for fraudulent 

concealment. Where, as here, plaintiffs alleged and offered 

evidence of affirmative misrepresentations and misleading halftruths on the part of Dow, the existence of a duty to disclose is 

no longer determinative. 

We hold that plaintiffs have established a genuine issue of 

material fact as to the first element of their claim of fraud in 

the inducement. Plaintiffs have presented evidence that, from 

1976 to 1981, Dow continually feigned ignorance as to the cause of 

the cracking in plaintiffs' building and repeatedly requested 

specific evidence linking the cracking to Sarabond. In Dow's 

June 22, 1976 letter to plaintiffs, Mr. Dallas Grenley (one of the 

co-authors of Dow's 1972 Frenier Report} first represented that "a 

considerable body of data" existed supporting the proposition that 

Sarabond does not cause masonry to deteriorate. Dow presented no 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 9 
evidence to the trial court in support of this representation. 

M~.-Grenley next represented that_ Dow was unaware of any data 

contradicting the proposition that Sarabond does not cause masonry 

to deteriorate. This statement was made by Grenley with full 

knowledge of the contents of the Frenier Report. 

Plaintiffs also presented evidence of two meetings held 

between Dow and plaintiffs in July 1980 and January 1981. At 

those meetings, Dow claimed the building had been designed and 

constructed so as to allow excess air and water to enter and be 

retained inside the masonry. Dow claimed the cracking occurred 

after the excess water froze. Dow specifically denied that: 

Sarabond played any role in the cracking or in the corrosion of 

the steel. Instead, it stated that its in-house data show~d 

! 

i 

Sarabond did not deteriorate and was not corrosive. Finally, Dow 

agreed that blocking the entry of air and water from the ou:~side 

would resolve the problem. At no time during these meetings did 

Dow mention the data contained in the 1972 Frenier Report 

concerning Sarabond's corrosive behavior. 

Plaintiffs also presented evidence, including expert 

testimony, demonstrating that the representations discussed above 

were either false or misleading. Plaintiffs have pleaded and 

offered sufficient evidence of Dow's misrepresentation of material 

facts to satisfy the first element of their claim of fraud in the 

inducement. 

The trial court next held that plaintiffs could not satisfy 

the third element of their claim of fraud in the inducement since 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 10 
they had full knowledge of the facts that Dow is alleged to have 

.misrepresented. 660 F. Supp. at 274. The trial court held that 

the evidence before it "amply demonstrate[s] plaintiffs' awareness 

and active pursuit of a claim that the damage to [their] building 

was caused by Sarabond's alleged defective qualities." Id. 

The trial court's opinion oversimplifies and thus 

misconstrues the nature of plaintiffs' claim in this case. 

Plaintiffs have never disputed that they suspected Sarabond was 

partly to blame for the cracking and corrosion occurring in their 

building. Plaintiffs blamed Sarabond for the damage to their 

building because they suspected Sarabond's chlorides were 

combining with air and water from outside the building to cause 

the corrosion of steel embedded in the mortar. Dow represented to 

plaintiffs that their theory was correct. Dow agreed that the 

elimination of excess air and water by caulking the building would 

remedy the corrosion and cracking, while in reality Dow's internal 

testing demonstrated that the elimination of all outside air and 

water would not prevent further corrosion and cracking. 

Thus, Dow's alleged misrepresentation occurred when Dow 

confirmed plaintiffs' theory about how the damage to their 

building was being caused. Plaintiffs claim that Dow 

misrepresented the extent of its knowledge as to the cause of the 

distress, the nature of the corrosion process, and the appropriate 

means for preventing future damage. Plaintiffs now know their 

theory was incorrect and they allege that, even though Dow knew it 

was incorrect, Dow induced plaintiffs to enter into the release by 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 11 
fraudulently convincing them that their theory was indeed correct 

and that further corrosion and cracking could be prevented by 

merely caulking the building. Plaintiffs' experts state that only 

I 

through access to Dow's 1972 Frenier Report would plaintiffs have 

been.able to know that outside air and water entry played no 

significant role in causing the distress in their building. Only 

from this data could they have known of the inadequacy of Dow's 

remedial proposal. i 

Nothing contained in the documentary evidence offered by Dow 

defeats plaintiffs' theory on this issue under the standard of 

review prevalent on a motion for summary judgment. In particular, 

we have reviewed the 1981 complaint filed by plaintiffs against 

Dow in connection with problems plaintiffs\were experiencing at a 

second office buildin<;J and we find nothing:Jn that complaint which 

> :J 

refutes plaintiffs' claim that they were fta.udulently induced to 

enter into the release at issue in this case. 

Because plaintiffs offered evidence that they did not become 

aware of the data contained in the Frenier Report until 1985, four 

years after they entered into the release, they have made the 

requisite showing that they were ignorant of the particular facts 

they now accuse Dow of misrepresenting. Plaintiffs have pleaded 

and offered sufficient evidence to satisfy the third element of 

their claim of fraud in the inducement. 

Finally, the trial court held that plaintiffs could not 

satisfy the fifth element of their claim of fraud in the 

inducement since they were unjustified in relying on the veracity 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 12 
of Dow's representations. 660 F. Supp. at 274. The trial court 

noted that-thecrelationship between Dow-and plaintiffs was a 

"fully adversarial" one. Id. at 273. Further, plaintiffs "knew 

or should have known of the existence of their fraud claim at the 

time the release was executed •••• Under these circumstances, 

plaintiffs had no right to rely on any misrepresentations, or to 

act on any concealments, concerning Sarabond's possible causal 

role in their building's damage." Id. at 274. The trial court 

relied on Pettinelli v. Danzig, 722 F.2d 706 (11th Cir.), for the 

proposition that when negotiating the settlement of an existing 

controversy involving.fraud, it is unreasonable to rely on 

representations made by the allegedly dishonest parties. Id. at 

710. 

It is important at this point to distinguish between 

plaintiffs' claim that Dow fraudulently induced them to enter into 

the release and plaintiffs' claim that Dow was guilty of fraud 

when it marketed Sarabond in the early 1970's. The essence of the 

trial court's holding is that the existence of the latter claim, 

coupled with plaintiffs' awareness of that claim in 1981, bars the 

assertion of the former claim in this suit. 

Under the trial court's reasoning, one is never justified in 

believing anything represented by an adversary to a dispute that 

involves a claim of fraud. We cannot agree with such a doctrine. 

The public routinely negotiates the settlement of disputes in 

reliance upon the representations of the other party. While every 

dispute is "adversarial" to some degree, the parties must have 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 13 
.\ 

( some assurance of legal recourse if they are induced to settle the 

dispute on the .,basis of .. f-alse representat-ions of. material facts. 

To hold otherwise would discourage parties from settling their 

I 

disputes out of court. This is.true regardless of whether or not ; 

the underlying dispute involves an allegation of fraud. Thus, we 

hold that a party is not categorically barred from relying on the 

representations of the opposing party when negotiating the 

1 

settlement of a dispute which involves a claim for fraud. 

This case presents a far different factual background from 

the one in Pettinelli. Unlike Pettinelli, the underlying dispute 

between plaintiffs and Dow primarily involved a claim for property 

damage, not fraud. Plaintiffs' claim that Dow was guilty of fraud 

when ' it marketed Sarabond in the early 1970's was only one of many 

Sarabond-related claims in~~yded for settlement when plaintiffs 

and Dow entered into the l~Bl Release and Indemnification 

Agreement. . See plaintiffs 11 1981 complaint against Dow, filed in 

connection with problems plaintiffs were experiencing at a second 

office building. (Dow asserts that the claims contained in that 

complaint are identical to the claims plaintiffs intended to 

assert in this case prior to executing the Re~ease and 

Indemnification Agreement.) 

We also disagree with the trial court's characterization of· 

the relationship between plaintiffs and Dow as "fully 

adversarial." To the contrary, plaintiffs and Dow had been 

working together for several years in a supposedly mutual effort 

to remedy the problems with plaintiffs' building. Dow inspected 

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. 

Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 14 
the building on numerous occasions and even went so far as to have 

its .masonry expert inspect, and analyze .masonry ... samples from the 

building. In a December 20, 1979 letter to plaintiffs, Dow 

described its relationship with plaintiffs as "cooperative" and 

noted that Dow did not regard itself as in "an adversary position" 

to plaintiffs. Dow repeatedly advised plaintiffs on the nature of 

their problem and offered opinions on how to remedy the problem. 

Plaintiffs believed Dow was sincere in its efforts to help, and 

Dow's advice seemed reasonable given the state of plaintiffs' 

technical knowledge during this period. 

Plaintiffs have pleaded and offered sufficient evidence to 

satisfy the fifth element of their claim of fraud in the 

inducement. A jury could find that plaintiffs reasonably relied 

on Dow's allegedly false representations. 

Plaintiffs alleged sufficient facts through their pleadings, 

documents and affidavits to establish genuine issues of material 

fact relating to their claim that Dow fraudulently induced them to 

enter into the 1981 Release and Indemnification Agreement. The 

trial court erred in granting Dow summary judgment on this claim. 

Plaintiffs also appeal the trial court's entry of summary 

judgment for Dow on their claim that the release was the product 

of a mutual mistake. We affirm that portion of the trial court's 

opinion which holds that plaintiffs bore the risk of a mistake 

under the terms of the release agreement. 660 F.2d at 275. 

Absent fraud on the part of Dow inducing plaintiffs to enter into 

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Appellate Case: 87-2060 Document: 01019963419 Date Filed: 05/19/1989 Page: 15 
~ ( the release, plaintiffs are bound by the terms of the release and 

are barred from bringing this suit. 

Finally, Dow argues on appeal that plaintiffs' claims are 

! time barred by the applicable Colorado statutes of limitation. 

\ 

The trial court declined to rule on this issue. 

This court is "generally reluctant to affirm a trial court's 

decision on legal grounds not considered by the trial court." 

i Wilson v. St. Louis-San Francisco Ry. Co., 673 F.2d 1152, 1155 

(10th Cir.). Numerous factual issues relating to the application 

of Colorado's statutes of limitation to this case were not 

addressed by:the trial court and we decline to address them on 

appeal. 

The judgment of the trial court is AFFIRMED in part and 

REVERSED iri::part and the case is REMANDED for further proceedings. ;,- :; 

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