August 25, 2016

Tenth Circuit: No Error where District Court Granted Summary Judgment Prior to Rule 26(f) Meeting

The Tenth Circuit Court of Appeals issued its opinion in Trans-Western Petroleum, Inc. v. United States Gypsum Co. on Tuesday, July 26, 2016.

United States Gypsum (USG) owns the oil and gas underlying 1,700 acres of land in Utah. USG entered into an oil and gas lease in 1995 that was subsequently assigned to Wolverine Oil & Gas Corp. and extended through August 17, 2004. In 2004, Douglas Isern, the owner and sole officer of Trans-Western, called USG and expressed interest in leasing the oil and gas rights when the Wolverine lease expired. Trans-Western sent USG a proposed five-year lease beginning August 17, 2014, and a check for $32,680. USG executed the lease on September 15, 2004 but did not cash the check.

On October 1, 2004, Wolverine protested the recording of the lease, claiming its lease remained valid. USG then rescinded the Trans-Western lease both orally and in writing. Trans-Western brought suit against Wolverine in 2006, seeking a declaratory judgment that Wolverine’s lease had expired on August 17, 2004. The district court determined that the lease had expired and granted the parties’ joint motion for a Rule 54(b) certification and stay. The Tenth Circuit affirmed on appeal. Thereafter, USG and Trans-Western executed a Ratification and Lease Extension for a primary five-year term beginning December 11, 2009.

In 2010, Trans-Western filed a second amended complaint, seeking a declaratory judgment that its lease with USG was valid and damages for breach of contract and breach of the covenant of quiet enjoyment. Trans-Western moved for partial summary judgment, which USG opposed. The district court granted partial summary judgment but denied attorney fees due to disputed material facts on damages. At a bench trial on damages, Trans-Western contended it was entitled to expectation damages because USG deprived it of the opportunity to assign. The district court disagreed, finding Trans-Western was entitled to only nominal damages based on the contract’s value on the date of the breach. The parties appealed.

The Tenth Circuit certified a question to the Utah Supreme Court regarding how expectation damages should be measured for the breach of an oil and gas lease. The Utah Supreme Court responded that consequential damages are those that are reasonably foreseeable by the parties at the time the contract was made. The court also held that the trial court may exercise its discretion to allow for the use of post-breach evidence to help calculate expectation damages.

The Tenth Circuit first evaluated USG’s cross-appeal, in which it argued that the district court should have granted its Rule 56(d) motion and deferred ruling on its partial summary judgment motion so that USG could conduct discovery. The district court determined that USG had a correct understanding of certain facts and constructive notice of others, thereby allowing the case to be resolved as a matter of law. In the district court, USG argued that extra time would allow it to discover evidence that Trans-Western was aware that USG was under a mistaken impression. On appeal, USG argued that discovery would have shown there was no meeting of the minds due to a lack of consideration from Trans-Western. The Tenth Circuit found these arguments different, and ruled that USG waived its argument. The Tenth Circuit further noted, though, that even if it were to consider the argument, USG did not meet the requirements for Rule 56(d) deferral because its allegations were vague and non-specific.

USG also argued the district court violated a scheduling order by granting summary judgment prior to the Rule 26(f) meeting. The Tenth Circuit found no abuse of discretion, noting that nothing suggested that USG sought to enforce the scheduling order and the order did not preclude motions practice. USG next argued the district court erred by granting Trans-Western’s motion for partial summary judgment because the lease failed for want of mutuality and consideration. The Tenth Circuit again disagreed. Trans-Western issued a bank draft in 2004, and USG had the ability to negotiate the draft from the moment of its delivery. Because the parties exchanged promises with adequate consideration, the district court did not err in granting partial summary judgment.

The Tenth Circuit affirmed the district court but remanded for calculation of damages consistent with the Utah Supreme Court’s opinion.

Tenth Circuit: Lower-Rung Participant in RICO Association-in-Fact Enterprise Can Play Part in Carrying Out Affairs

The Tenth Circuit Court of Appeals issued its opinion in George v. Urban Settlement Services on Monday, August 15, 2016.

Plaintiffs Richard George, Steven Leavitt, Sandra Leavitt, and Darrell Dalton asserted claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) against Bank of America (BOA) and Urban Settlement Services, along with a promissory estoppel claim against BOA, based on the defendants’ allegedly fraudulent administration of the Home Affordable Modification Program (HAMP). BOA was required to participate in HAMP and comply with the program guidelines because it received funds pursuant to the Emergency Economic Stabilization Act of 2008. BOA contracted with third parties, including Urban, to administer its HAMP program. Each of the four plaintiffs had a home mortgage through BOA and applied for home loan modifications through HAMP, interacting with BOA and Urban representatives during the application process. Despite various misleading representations from BOA and Urban, the plaintiffs were unable to obtain HAMP relief, depriving them of opportunities to sell their homes or pay off other debts.

Plaintiffs brought RICO claims against BOA and Urban, alleging defendants formed a RICO enterprise with the common goal of wrongfully denying HAMP loan modifications to qualified homeowners by developing a scheme to obstruct and delay borrowers’ HAMP loan modification requests. Plaintiffs also asserted promissory estoppel claims against BOA, alleging BOA made clear promises in Trial Period Plan (TPP) documents and on its website promising permanent loan modifications to qualified borrowers who completed TPPs. BOA and Urban filed Rule 12(b)(6) motions to dismiss. BOA argued the plaintiffs failed to sufficiently allege a RICO enterprise distinct from BOA, while Urban argued they failed to sufficiently allege Urban participated in the enterprise. Both defendants argued plaintiffs failed to sufficiently allege a pattern of racketeering activity. The district court granted both defendants’ motions and dismissed plaintiffs’ claims.

On appeal, plaintiffs argued the factual allegations in their amended complaint state facially plausible RICO claims against BOA and Urban and the district court erred in dismissing the claims. The plaintiffs argued that because they alleged an association-in-fact enterprise consisting of independently owned and operated companies, the alleged enterprise is sufficiently distinct from BOA. The Tenth Circuit agreed. The plaintiffs contend the enterprise’s common purpose was to extend as few HAMP modifications as possible while appearing to comply with program rules. The district court concluded that Urban employees were BOA’s agents, who did nothing more than follow BOA’s instructions, but the Tenth Circuit disagreed. The Tenth Circuit found that plaintiffs sufficiently showed that BOA and Urban formed an association-in-fact enterprise, and that by orchestrating and operating a scheme to deny HAMP modifications, BOA and Urban furthered the enterprise’s scheme to delay modifications.

The district court also concluded that plaintiffs failed to show Urban’s participation in the enterprise. The district court characterized Urban as an outside entity having no participation in BOA’s enterprise. The Tenth Circuit noted that this mischaracterization failed to appreciate that BOA was not the alleged enterprise. Plaintiffs alleged Urban was a lower-rung participant knowingly carrying out BOA’s orders, and the Tenth Circuit agreed, noting that even a bit part participant can play some part in carrying out the enterprise’s affairs.

Defendants alternatively argued that the Tenth Circuit could affirm the district court because plaintiffs failed to show a pattern of racketeering activity. Plaintiffs alleged several acts of mail and wire fraud, but defendants argued plaintiffs failed to show particularity. As to BOA, the Tenth Circuit disagreed, noting that plaintiffs had illustrated several conversations with various BOA employees about their HAMP modifications. As to Urban, the Tenth Circuit found it was a close call. Plaintiffs argued that they were unable to show particularity without further discovery, because Urban employees frequently held themselves out as BOA employees. The Tenth Circuit found this sufficient to survive a motion to dismiss. The Tenth Circuit reversed the district court’s dismissal of plaintiffs’ RICO claims and remanded for further proceedings.

Turning to the promissory estoppel claims against BOA, the Tenth Circuit again found the district court erred. Plaintiffs described BOA’s unambiguous promises to provide permanent HAMP modifications for borrowers who complied with their TPPs. The district court found that BOA made no promise, but the Tenth Circuit determined this to be in error. Screenshots of the BOA website and TPP documents unambiguously promised borrowers permanent modifications if they complied with their TPPs. The Tenth Circuit found this sufficient to satisfy the first step of the promissory estoppel analysis. Because the district court did not address the remaining factors, the Tenth Circuit remanded for further proceedings.

The Tenth Circuit reversed the district court’s dismissal of plaintiffs’ RICO and promissory estoppel claims, and remanded for further proceedings consistent with its opinion.

Two Law Legends and CBA-CLE Recognized by International CLE Organization for Legal Publication: Limited Liability Companies & Partnerships in Colorado

StarburstAwardsLogoThe Association for Continuing Legal Education (ACLEA), an international continuing legal education organization, awarded Colorado Bar Association CLE (CBA-CLE) with the Award of Outstanding Achievement in the publication category for its business law book Limited Liability Companies and Partnerships in Colorado.

Lidstone-SparkmanAttorneys Herrick Lidstone, Jr. and Allen Sparkman, two business law legends in Colorado, have taken a complex subject and written a clear, concise treatise on how to structure a business. The criteria for an ACLEA award include excellence in style, innovation, and content, in addition to the book’s appeal to a broad spectrum of the legal community. CBA-CLE Assistant Executive Director Dawn McKnight says, “We are extremely honored to win this award and grateful to have as authors two legends in the field, Herrick Lidstone and Allen Sparkman. Their vast experience, diligence, and thoroughness are evident throughout the book. They spent countless hours researching, writing, and revising this treatise to make it a comprehensive guide for practitioners.”

ABOUT THE BOOK:

Partnerships and other business entities have a fascinating history going back thousands of years.  Now in the twenty-first century, the variety of ways in which a new business may be formed and operated has made this a complex and especially important practice area.  Limited Liability Companies and Partnerships is a business law treatise for practitioners as they advise clients on issues from the time of a business’s formation to the time of dissolution. Topics include: choice of entity, formation and dissolution of the entity, creditor rights, securities and tax issues, as well as ethical considerations.

ABOUT THE AUTHORS:

Lidstone_HerrickHerrick Lidstone, Esq. is a shareholder and managing director of Burns Figa & Will, P.C. in Greenwood Village, Colorado. Mr. Lidstone practices in the areas of business transactions, including partnership, limited liability company, and corporate law, federal and state securities compliance, mergers and acquisitions, contract law, tax law, real estate law, and natural resources law. Mr. Lidstone’s work includes the preparation of securities disclosure documents for financing transactions, as well as agreements for business transactions,

limited liability companies, partnerships, lending transactions, real estate and mineral property acquisitions, mergers, and the exploration and development of mineral and oil and gas properties.

SparkmanAllenAllen Sparkman, Esq. practices law in Denver and Houston as a partner of Sparkman + Foote LLP. Mr. Sparkman’s practice includes the areas of business transactions, securities, tax, and professional responsibility. Mr. Sparkman’s work includes the preparation of securities disclosure documents for start-up companies in a variety of fields, including offshore oil and gas exploration, foreign mining operations, real estate, and comic book certification. He also regularly prepares LLC and partnership documents, and represents buyers and sellers of businesses, including preparing or reviewing all necessary legal documents.

ABOUT CBA-CLE:
Colorado Bar Association CLE (CBA-CLE) is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association. We produce high-quality continuing legal education programs and legal publications for attorneys and legal professionals.

Tenth Circuit: ERISA Plan Consultant Did Not Act as ERISA Fiduciary When Calculating Benefits

The Tenth Circuit Court of Appeals issued its opinion in Lebahn v. National Farmers Union Uniform Pension Plan on Monday, July 11, 2016.

Trent Lebahn contacted a consultant hired by his company’s employee pension plan for information regarding his monthly distribution amount. The consultant told Mr. Lebahn that he would receive $8,444.18 per month and verified the amount when Mr. Lebahn asked her to double-check. He retired and began receiving the monthly payments, only to be informed a few months later that he had been being overpayed by nearly $5,000 per month. The plan’s attorney told Mr. Lebahn that he would need to return over $43,000 in overpayments. Unable to retire on the plan’s true monthly distribution, Mr. Lebahn tried to go back to work, but could not find a job. Mr. Lebahn and his wife sued under ERISA, arguing that the plan, the pension committee, and the consultant’s employer incurred liability under theories of breach of fiduciary duty and equitable estoppel. The defendants moved for dismissal based on failure to state a claim, which the district court granted, and the Lebahns appealed.

On appeal, the Tenth Circuit first addressed the Lebahns’ claims for breach of fiduciary duty. The district court dismissed the claims because the consultant had not acted as an ERISA fiduciary when calculating the pension benefits. The Tenth Circuit agreed, finding that because the consultant lacked discretionary authority in administering the pension plan, she was not a plan fiduciary and therefore the district court properly dismissed the claims.

The Tenth Circuit found that the district court also correctly dismissed the Lebahns’ equitable estoppel claims. The district court found that the Lebahns had failed to plead facts to satisfy two of the five prongs of equitable estoppel: awareness of the true facts and justifiable reliance. The Lebahns failed to adequately address justifiable reliance on appeal and therefore forfeited their argument.

The Tenth Circuit affirmed the district court’s dismissal of the Lebahns’ claims.

Commercial/Preference Owned Business in the Commercial Marketplace

Editor’s Note: This article is reprinted with permission courtesy of Richard F. Busch, II,  www.rbuschlaw.com. All rights reserved.

By Richard F. Busch, II, Esq.

Why should an otherwise commercial company consider entering the Government market place as a prime contractor, vendor, or subcontractor at any level, especially if you can qualify for a preferred status (Veterans, SDVOSB, or Women Owned Small Business? 

Due to the growth in technology, the Government has determined that the commercial business sector must be the primary force to develop and provide the products and services they need to achieve society’s goals. Consequently, the Federal Acquisition Regulation (“FAR”) and the individual agency supplements have been revised to become much more “commercial” friendly in most situations. If the potential contractor is a “commercial” business engaged in supplying commercial products or services, many of the complex requirements simply do not apply. Except for a very limited number of government unique provisions, most clauses are negotiable. In addition, there are award goals set by Federal statute that define prime contracting goals for small businesses, veteran owned small businesses, women-owned small business, Service Disable Veteran Owned Small Businesses, and more.

The following are some general points a commercial/preference business should consider:

  • Just over $573B DoD 2016 proposed spending plan and an additional $163 B for Veterans Affairs programs (total government budgets much bigger)
  • Limited government audit rights for commercial companies with commercial products
  • Terms and conditions more conducive to commercial application (subject to the unique mission of the government)
  • Over 11 Million commercial supplies (products) and services at volume discounts offered on GSA Schedule contracts
  • Favorable research and development terms if negotiated correctly
  • Commercial pricing based on the market—(Government does request the best commercial prices under like terms and conditions)
  • Electronic Payment with automatic interest on due and payable amounts for late payments
  • Joint venture, teaming arrangements, and subcontract opportunities in addition to prime status purchases

The government market sector has vast potential for a company that has the resources and products/services to benefit the goals of the government. If a company is considering doing business with the government, the effort must be based on one simple principle—DO IT RIGHT!

© Busch Law Firm LLC (2016)

Richard Busch, II, is a solo practitioner at The Busch Law Firm, which is a boutique government contract practice firm. His practice involves all aspects of government contracts, commercial contracts, conflict management systems design, ADR, and white collar crime. More specifically, his practice focuses on the formation and administration of contract relationships through the utilization of a proactive approach of addressing the objectives of the relationship, requirements for successful performance, and the resolution of disputes. Mr. Busch has extensive experience in negotiating complex business issues involving high technology and major weapons system contracts, contract compliance issues, and resolving both internal and external disputes involving the business organization. Richard has reviewed and negotiated multimillion dollar solicitations, proposals, equitable adjustments, terminations, and other related government acquisition and commercial-based contract matters with a number of government agencies and subcontractor/vendors. He concentrates on the legal issues facing a corporation doing business with the government or its prime contractors in the areas of construction, high technology, major weapons systems, and information⁄communication technology. Mr. Busch has worked with corporations, the DoD, and other government agencies in the highly structured areas of classified contracts. As a result, he has gained a wealth of experience in dealing with classified authorities pertaining to these agencies. Prior to entering private practice, Mr. Busch held positions as General Counsel of a multi-billion dollar product area with a Fortune 50 defense contractor and a legal advisor to the Director of Contracts at the National Security Agency (NSA).  Mr. Busch earned an L.L.M. (Government Contract Designation) from George Washington University National Law Center, a J.D. from the Hamline University School of Law, and a B.A. from Westminster College, Fulton, Missouri.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 

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CLE Program: Finding Federal Contract Work — Meet the Attorneys, Veterans, the SBA and Bankers Your Clients Need

This CLE presentation will occur on September 16, 2016, at the CBA-CLE offices (1900 Grant Street, Third Floor), from 9 a.m. to 4:10 p.m. Register for the live program here or register for the webcast here. You may also call (303) 860-0608 to register.

Can’t make the live program? Order the homestudy here: CD • MP3Video OnDemand.

Colorado Court of Appeals: Notice-Prejudice Rule Applies Where Claim Filed with Insurance Company After Contractual Period

The Colorado Court of Appeals issued its opinion in MarkWest Energy Partners, L.P. v. Zurich American Insurance Co. on Thursday, July 14, 2016.

Insurance—Notice-Prejudice Rule—Occurrence Liability Policy.

MarkWest Energy Partners, L.P. (MarkWest), a natural gas company, procured from Zurich American Insurance Company (Zurich) a commercial general liability policy (the policy) with a limited pollution liability endorsement (the endorsement), covering “incidents” occurring between November 1, 2012, and November 1, 2013. On November 4, 2012, MarkWest was constructing a pipeline when a chemical used in the drilling process escaped the drilling area, thereby contaminating the surrounding area. MarkWest immediately reported the incident to local environmental officials, who approved a chemical cleanup protocol and confirmed that cleanup had been successfully completed in February 2013. On March 28, 2013, MarkWest notified Zurich of the contamination and filed an associated claim. Zurich denied the claim because MarkWest had failed to provide notice within 60 days of the incident, as required by the endorsement. MarkWest filed an action for damages, and the district court granted Zurich’s motion for summary judgment.

On appeal, MarkWest contended that the notice-prejudice rule applied and the district court erred in granting Zurich’s motion for summary judgment. Colorado’s notice-prejudice rule applies even where, as here, the notice requirement is a condition precedent to coverage under an occurrence liability policy. Therefore, unless Zurich can show that its ability to investigate the occurrence or defend against a claim was prejudiced by MarkWest’s late notice, the court cannot deny a claim based solely on a failure to strictly comply with the notice provision. Because the district court concluded otherwise, its decision was reversed and the case was remanded for further proceedings.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Proposed Development Plan Need Not Include Outdoor Gathering Space

The Colorado Court of Appeals issued its opinion in Rangeview, LLC v. City of Aurora on Thursday, July 14, 2016.

Rezoning of Property—Site Plan—Standards—Abuse of Discretion.

BFR’s application to rezone its parcel of property (the property) was granted. Rangeview LLC owns Rangeview Estates, which borders the property to the west, and Eades and Sellery each own property in the neighborhoods surrounding the property. Rangeview, Eades, and Sellery (collectively, Rangeview) filed the underlying action against the City of Aurora, claiming that the Aurora City Council exceeded its jurisdiction in granting BFR’s application to rezone the property. The district court affirmed the City Council’s decision.

On appeal, Rangeview argued that City Council abused its discretion by approving the site plan because the plan did not include an outdoor gathering space as mandated by the Aurora Municipal Code’s (Code) sustainable infill redevelopment (SIR) zoning district design standards. The Code defaults to the terms of the SIR handbook, which states that projects “should” provide a public space. Therefore, although a public space is desirable, it is not required. Because City Council’s approval was supported by competent evidence, it did not abuse its discretion.

Rangeview also argued that City Council abused its discretion in rezoning the property to an SIR district when the property does not meet the requirements of an “infill development parcel,” the proportions of which are defined in the Code. Because the Code language’s ordinary meaning does not reference any requirement related to the proportions of developed boundaries, the City Council did not abuse its discretion by approving the rezoning request even though the property would not meet the definition of an “infill development parcel.”

The judgment was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Jury Properly Instructed on Elements of Theft

The Colorado Court of Appeals issued its opinion in People v. Stellabotte on Thursday, July 14, 2016.

John Arthur Stellabotte is the owner of J&J Towing. After several incidents where J&J towed cars without authorization and charged high fees for return of the vehicle, Stellabotte was charged with six counts of aggravated motor vehicle theft, four counts of theft, and five habitual criminal counts. He was convicted of one count of aggravated motor vehicle theft, two class 4 felony counts of theft, one class 2 misdemeanor count of theft. He was sentenced to 24 years on all felony theft counts and one year on the misdemeanor count, to run concurrently.

On appeal, Stellabotte raised two contentions related to jury instructions, argued that his sentence should be halved because of new legislation reducing the severity of the offenses, and argued the 24-year sentences were grossly disproportionate to the severity of the offenses. The court of appeals analyzed the jury instructions and found no error; the instructions correctly stated the law despite formatting differences. The court also disagreed with Stellabotte that the trial court erred in using the dictionary definition of “authorization.” The court of appeals found no abuse of discretion in the trial court’s definition. However, the court of appeals agreed with Stellabotte that he should receive the benefit of the legislative changes. Because the General Assembly reduced the theft offenses to class 5 felonies, Stellabotte should have been sentenced under the legislative scheme in effect at the time of sentencing.

The court vacated Stellabotte’s sentences and remanded for the court to resentence him in the correct presumptive range. The court emphasized that this decision did not affect the aggravated motor vehicle theft or misdemeanor counts, only the class 4 felony theft convictions. Finally, the court of appeals rejected Stellabotte’s argument that the sentences were disproportionate to the severity of his crimes.

Judge Dailey concurred in part and dissented in part; he would have affirmed the sentences on the theft counts since the incidents occurred when the old sentencing scheme was in effect.

Colorado Supreme Court: Disclosed Costs Can Be Actionable Under CCPA if Costs Are Not Actual, Necessary, and Reasonable

The Colorado Supreme Court issued its opinion in State v. The Castle Law Group, LLC on Monday, July 5, 2016.

In this C.A.R. 21 original proceeding, the State appealed from the trial court’s order barring testimony of market rate prices. The State brought CCPA claims against Castle and several affiliated vendors, alleging that the vendors conspired with Castle to charge above market rate prices for various foreclosure-related services, and the inflated charges were eventually carried by mortgage servicers and the public because they relied on Castle’s representation that the costs were “actual, necessary, and reasonable.”

The trial court limited the State’s ability to provide market rate comparisons because it ruled that charging high prices is not illegal, and as long as Castle disclosed everything it charged, there was no deception. The Colorado Supreme Court disagreed with the trial court’s characterization of the CCPA claims. The court ruled that the trial court misperceived the alleged deception: that the prices charged were not “actual, necessary, and reasonable.” Because market rate comparison evidence directly impacts the determination of whether the charges were “actual, necessary, and reasonable,” the supreme court made its Order to Show Cause absolute and remanded to the trial court for further proceedings.

Colorado Supreme Court: Title of Ballot Initiative Misleading and Confusing

The Colorado Supreme Court issued its opinion in In re Title, Ballot Title, and Submission Clause for 2015-2016 #156 on Tuesday, July 5, 2016.

Initiative #156 seeks to restrict the sale of certain “intoxicants” at retail food stores, including full strength beer, liquor, marijuana, and marijuana products. The Colorado Supreme Court held that the title was confusing because it could invoke voter speculation as to whether the initiative sought to prevent current holders of licenses of those “intoxicants” from renewing their licenses, to revoke the licenses of current holders, or to prevent new licenses from issuing. The court remanded to the title board.

Tenth Circuit: Overly Optimistic Reporting Not Enough to Prove Scienter

The Tenth Circuit Court of Appeals issued its opinion in Anderson v. Spirit AeroSystems Holdings, Inc. on Tuesday, July 5, 2016.

Spirit AeroSystems Holdings, Inc., agreed to manufacture parts for two Gulfstream aircraft and a Boeing 787. Spirit managed the production of the parts through three projects, each of which encountered production delays and cost overruns. Nevertheless, Spirit executives expressed optimism to investors about the company’s ability to break even. However, in October 2012, Spirit announced the projected loss of hundreds of millions of dollars on the three projects. The investors brought a class action against Spirit and four of its executives—CEO and president Jeffrey Turner, CFO Philip Anderson, Oklahoma Senior Vice President Alexander Kummant, and Vice President Terry George, who was overseeing the Boeing 787 project—for violating § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Plaintiffs alleged that Spirit and the executives misrepresented and failed to disclose cost overruns and project delays. Defendants moved to dismiss, arguing that the plaintiffs failed to allege facts showing misrepresentations or omissions that were false or misleading and material, and failed to show scienter. The district court granted defendants’ motion, in part agreeing that plaintiffs had failed to show scienter. Plaintiffs appealed.

The Tenth Circuit compared the evidence set forth by plaintiffs to show scienter with the defendants’ explanations, noting that the inference of scienter would only suffice if it were at least as cogent and compelling as any other inference that could be drawn from the facts. Plaintiffs alleged that defendants knew throughout the class period that the projects were experiencing setbacks and generating so much in additional costs that a loss would be inevitable, yet they failed to warn investors of the forward loss until October 2012. Defendants argued that despite the setbacks, they were optimistic that the projects would meet the original cost forecasts, and expected revenues to exceed total costs. When Spirit realized that a loss was likely, it promptly announced a forward loss on the three projects. The Tenth Circuit found Spirit’s explanation that it was overly optimistic more compelling than an inference that the executives intentionally misrepresented or recklessly ignored economic realities. The Tenth Circuit noted that the plaintiffs presented little evidence to presume malevolence over benign optimism.

The Tenth Circuit approved of the district court’s consideration of a lack of a motive to commit securities fraud as a mitigating factor against scienter. Although the plaintiffs did not need to show a motive, the absence of one was relevant. The plaintiffs also proposed testimony by corroborating witnesses, but the Tenth Circuit determined the witnesses were too far removed from the executives to have been able to testify as to the executives’ state of mind. Plaintiffs also alleged that the defendants had a duty to disclose project overruns and delays, but the Tenth Circuit refused to infer scienter from the defendants’ failure to disclose, finding instead that there was no evidence that the defendants knew they needed to disclose more or were reckless in their failure to disclose. The Tenth Circuit disposed of plaintiffs’ remaining claims, characterizing them as “fraud by hindsight” but not securities fraud. Plaintiffs argued that Spirit’s recovery plan for the 787 project supported an inference of scienter, but the Tenth Circuit again accepted the defendants’ explanations of innocent optimism. The plaintiffs also argued that the sheer magnitude of the loss supported an inference of scienter, but the Tenth Circuit noted that the plaintiffs failed to show that the executives knew that their public reports were too encouraging or had recklessly failed to heed red flags from problem reports.

The Tenth Circuit affirmed the district court’s dismissal. Judge McHugh concurred in part and dissented in part; she would have found that Anderson and Turner made materially false statements, therefore satisfying the scienter element.

Colorado Court of Appeals: Jurisdiction for Appeal of Final Administrative Action Lies in Court of Appeals, Not District Court

The Colorado Court of Appeals issued its opinion in West Colorado Motors, LLC v. General Motors, LLC on Thursday, June 30, 2016.

Lack of Subject Matter Jurisdiction—Motion to Dismiss—Final Agency Action.

Park Meadows is a franchised Buick and GMC automobile dealership located in Lone Tree. Alpine is also a franchised Buick and GMC automobile dealership located in Denver. General Motors, LLC (GM) is a manufacturer and distributor of automobiles. C.R.S. § 12-6-120.3(1) required GM to provide at least 60-days notice to certain of its franchised dealers if it intended to relocate an existing motor vehicle dealer to a location that was within another motor vehicle dealer’s “relevant market area.” GM provided statutory notice to Park Meadows that it intended to approve the relocation of the Alpine dealership to Littleton. Park Meadows then sent a letter to the Executive Director of the Colorado Department of Revenue protesting the relocation and requesting an investigation, hearing, or cease and desist order. The Executive Director responded, stating that there was no basis to proceed with an investigation. Park Meadows sent another letter to the Executive Director, alleging violations of C.R.S. § 12-6-120.3. The Executive Director responded, again stating there was no basis upon which to proceed with an investigation. Park Meadows then filed a complaint in Denver District Court alleging that GM unreasonably approved Alpine’s relocation in violation of C.R.S. § 12-6-120.3(1.5) and, in the alternative, against the Executive Director to order her to undertake an investigation or other action. The Executive Director filed a motion to dismiss, arguing that her second letter was “final agency action” that was subject to review only in the court of appeals. The district court agreed and dismissed the action as to the Executive Director. It denied a motion by Park Meadows for reconsideration. Alpine filed a motion to dismiss for lack of subject matter jurisdiction, which the district court granted, finding that jurisdiction for any relief lies in the court of appeals.

Park Meadows appealed all three orders, arguing that the Executive Director’s second letter did not constitute “final agency action.” The court disagreed. It found that the letter was clearly final action finding that Park Meadows had no basis on which to proceed. The court then found no abuse of discretion in the district court’s denial of Park Meadows’ motion for reconsideration. The court also affirmed the district court’s dismissal of the claim against Alpine because the court had sole jurisdiction to review the Executive Director’s decision.

The orders were affirmed.

Summary provided courtesy of The Colorado Lawyer.