APPEAL FROM THE CIRCUIT COURT OF THE FOURTH JUDICIAL CIRCUIT LAWRENCE COUNTY, SOUTH DAKOTA HONORABLE RANDALL L. MACY Judge.
The opinion of the court was delivered by: 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 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.
[¶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.
[¶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 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 ...