February 28, 2015

e-Legislative Report: February 17, 2015

legislationCBA Legislative Policy Committee

For followers who are new to CBA legislative activity, the Legislative Policy Committee (“LPC”) is the CBA’s legislative policy making arm during the legislative session. The LPC meets weekly during the legislative session to determine CBA positions from requests from the various sections and committees of the Bar Association.

Meeting held Friday, February 13

SB 15-129 — Preserving Parent-child Relationships
Sponsor: Senator Kevin Lundberg (R)
The LPC voted to oppose this bill in part because of the fundamental way that it changed the presumption of parenting time away from the “best interest of the child” to a different standard more focused on the parents in divorce proceedings. The bill was heard in committee on Wednesday the 11th and was passed on a party line vote after substantial amendments. SB-129 was referred to the Appropriations Committee for consideration of the bill’s fiscal impact.

SB 15-174 — Uniform Substitute Decision Making Documents Act
Sponsor: Senator Patrick Steadman (D)
The LPC voted to oppose this bill. The committee felt that the bill conflicts with existing statute, was unnecessary in many respects and that it potentially created more gaps and questions with existing law than its adoption would solve.

HB 15-1091 — Policies On Juvenile Shackling In Court
Sponsors: Representative Susan Lontine (D), Senator Michael G. Merrifield (D)
The LPC was concerned that while this bill was very well intentioned, it raised significant potential problems with separation of power between the legislative and judicial branches.

At the Capitol: Week of February 9

SB 15-049 — Real Estate Title Vests In Entity Once Formed
Sponsors: Senator Beth Martinez Humenik (R), Representative Jon Keyser (R)
This bill, supported by the Bar, passed through the Senate this past week. It has been assigned to the House Business Affairs and Labor Committee and has not yet been calendared for a hearing.

HB 15-1121 — Wind Energy Generation
Sponsors: Representative Jon Becker (R), Senator Jerry Sonnenberg (R)
The bill, supported by the Bar, also passed through its first chamber (the House) last week. It will next be heard in the Senate, where it has been assigned to the Agriculture, Natural Resources & Energy Committee. It will be heard by that committee on February 19.

SB 15-077 — Parents’ Bill of Rights
Sponsors: Senator Tim Neville (R), Representative Patrick Neville (R)
The bill passed out of the Senate committee hearing on a party line vote, and was debated on the floor. The bill was passed with amendments, and now moves to the House for consideration. It has not been calendared for consideration.

SB 15-042 — Mandatory Reports Of Animal Abuse
Sponsors: Senator Jerry Sonnenberg (R), Representative Jon Becker (R)
This bill was Postponed Indefinitely (killed) in committee. It will not be considered again this year. The CBA was opposed to the legislation.

HB 15-1101 — Public Defender ADC Records Open Records
Sponsors: Representatives Rhonda Fields (D), Polly Lawrence (R)
This bill was Postponed Indefinitely (killed) in committee. It will not be considered again this year. The CBA was opposed to the legislation.

HB 15-1174 — Information Protections Domestic Violence Victims
Sponsors: Representative Terri Carver (R), Senator Laura Woods (R)
The CBA has not taken a position on this bill—though we are working with the sponsors to ensure that the program will work as intended and not harm the real estate transaction process as a result of its adoption or implementation. It is likely that the CBA and its sections will participate in stakeholder groups and work sessions this summer.

New Bills of Interest

Senate

SB 15-177 — HOA Construction Defect Lawsuit Approval Timelines
Sponsors: Brian DelGrosso (R), Mark Scheffel (R), Jonathan Singer (D), Jessie M. Ulibarri (D)
The bill states that when the governing documents of a common interest community require mediation or arbitration of a construction defect claim and the requirement is later amended or removed, mediation or arbitration is still required for a construction defect claim. These provisions are in section 2 of the bill.

Section 2 also specifies that the mediation or arbitration must take place in the judicial district in which the community is located and that the arbitrator must:

  • Be a neutral third party;
  • Make certain disclosures before being selected; and
  • Be selected as specified in the common interest community’s governing documents or, if not so specified, in accordance with the uniform arbitration act.

Section 1 adds definitions of key terms. Section 3 requires that before a construction defect claim is filed on behalf of the association:

  • The parties must submit the matter to mediation before a neutral third party; and The board must give advance notice to all unit owners, together with a disclosure of the projected costs, duration, and financial impact of the construction defect claim, and must obtain the written consent of the owners of units to which at least a majority of the votes in the association are allocated.

Section 4 adds to the disclosures required prior to the purchase and sale of property in a common interest community a notice that the community’s governing documents may require binding arbitration of certain disputes.

House

HB 15-1025 — Competency To Proceed Juvenile Justice System
Sponsors: Representative Paul Rosenthal (D), Senator Linda M. Newell (D)
The bill establishes a juvenile-specific definition of “incompetent to proceed” for juveniles involved in the juvenile justice system, as well as specific definitions for “developmental disability”, “intellectual disability”, “mental capacity”, and “mental disability” when used in this context. The bill clarifies the procedures for establishing incompetency, as well as for establishing the restoration of competency.

HB 15-1216 — Basis For Expert Opinion Testimony
Sponsors: Representative Kevin Priola (R), Senator John Cooke (R)
The bill prohibits a person from testifying concerning the person’s expert opinion unless certain conditions are met.

Colorado Court of Appeals: Blunt Wraps Not “Tobacco Products” under Statutory Definition so Tax Disallowed

The Colorado Court of Appeals issued its opinion in Creager Mercantile Co., Inc. v. Colorado Department of Revenue on Thursday, February 12, 2015.

Blunt Wraps—Tobacco—Tax—CRS § 39-28.5-101(5).

Creager Mercantile Company, Inc. (Creager) is a distributor of groceries, tobacco, and other products to convenience stores. In 2003, Creager began distributing Blunt Wraps, which are rolling papers consumers can use to roll their own cigars or cigarettes. Blunt Wraps are made from homogenized tobacco leaves and contain between 30% and 48% tobacco. Although the Colorado Department of Revenue (DOR) did not previously assess tax on these products, it audited Creager and assessed tax on the Blunt Wraps for tax years 2004–06. Creager appealed to the district court, and the district court affirmed the DOR’s final determination that Creager is liable for certain taxes on tobacco products.

On appeal, Creager claimed that the district court erred in holding that Blunt Wraps are “tobacco products” within the meaning of CRS § 39-28.5-101(5). Blunt Wraps are not specifically listed in the statute, and the statute’s phrase “other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or for smoking in a pipe or otherwise” is ambiguous. The listed products include several varieties of cigars, chewing tobacco, and forms of tobacco generally consumed by smoking in a pipe or hand-rolled cigar or cigarette. Each of the products on the list is a focus of consumption; absent are products that, like Blunt Wraps, contain some tobacco but are only suitable for consuming other products. Therefore, Blunt Wraps are not “tobacco products” within the meaning of CRS § 39-28.5-101(5), and the district court erred in affirming the tax assessment related to Blunt Wraps. The judgment was reversed and the case was remanded with directions.

Summary and full case available here, courtesy of The Colorado Lawyer.

e-Legislative Report: February 10, 2015

legislationCBA Legislative Policy Committee

For followers who are new to CBA legislative activity, the Legislative Policy Committee (“LPC”) is the CBA’s legislative policy making arm during the legislative session. The LPC meets weekly during the legislative session to determine CBA positions from requests from the various sections and committees of the Bar Association.

Meeting held Friday, February 6
The following bills were discussed for action during last Friday’s LPC meeting.  Other bills of interest from that agenda are tracked and updated below.

SB 15-042 – Mandatory Reports Of Animal Abuse
(Senator Sonnenberg & Representative J. Becker)
The intent of the sponsors was to criminalize the recording of undercover videos showing animal cruelty in farming practices.  The Bar sections could not support the bill, or a subsequent “strike below”* amendment, because the language was overly broad, potentially unconstitutional and would lead to unintended consequences.  The LPC voted to oppose this bill at the recommendation of the Animal Law and Agricultural Law Sections.

HB 15-1101 – Public Defender ADC Records Open Records
(Representatives Field and Lawrence)
The LPC voted to oppose this bill as well.  The committee was concerned about the impact of Rule 1.6 and the financial impact of the bill to the State.  There was also concern that this bill would open the door for CORA requests of the Judicial Branch – and the potential impact that would have.  The LPC voted unanimously to oppose this bill.

HB 15-1037 – Freedom of Conscience Higher Ed
(Representative Priola & Senator Neville)
This bill was considered at the request of the Civil Rights Committee who presented that the bill was intended to “protect religious freedom and the right of association.”  After some discussion, the LPC voted to take no position on this bill.

At the Capitol: Week of February 2

HB 15-1135 – Terminally Ill Individuals End-of-life Decisions
(Representatives Court and Ginal & Senator Guzman)
HB 1135 was the big bill last week at the capitol.  Testimony began a little after 9:30am and concluded shortly before 10pm!  The emotional level of testimony was compelling.  There were approximately 120 people that signed up to testify for the bill ranging from all types of organizations and all walks of life. Many made passionate testimony on both sides of the bill which was a true indicator that our group made the correct policy decision to fix the issues and then maintain our neutrality. It is an issue that people either feel at a core level to support or they don’t.  The Committee voted to send the bill to the next committee Appropriations.  That motion failed 8-5.  There was a motion to Postpone the bill indefinitely, (passing 9-4) killing the bill for the remainder of the session.

Many Bar sections weighed in on the bill, its technical merits, and the drafting problems of the bill.  While individual sections had vigorous debates on the policy of “death with dignity” or physician assisted suicide, the LPC took no position on the bill itself.

SB 15-077 – Parents’ Bill of Rights
(Senator Neville & Representative Neville)
This Senate Bill sponsored by the father-son legislative team from Jefferson County was heard and passed out of the Senate committee last week.  The bill is set for its key second reading on Wednesday. Senate Bill 77, the so-called “Parents’ Bill of Rights” sponsored by Sen. Tim Neville and Rep. Patrick Neville, would give parents certain rights over the health care, education and mental health care of minor children.  The Bar Association voted to oppose this legislation at its LPC meeting on January 30.

SB 15-049 – Real Estate Title Vests In Entity Once Formed
(Senator Martinez Humenik & Representative Keyser)
This bill – supported by the bar – continues through the legislature on a straightforward course. It has now passed the Senate and will be heard in the Hose Business Affairs and Labor Committee, where Rep. Keyser will be the key sponsor.

HB 15-1121 – Wind Energy Generation
(Representative J. Becker & Senator Sonnenberg)
This Bar supported bill is also progressing through the legislative process.  Representative Becker has successfully completed the House process, and the bill passes to Senator Sonnenberg for the final leg of its legislative journey.

New Bills of Interest

Senate

SB 15-129 – Preserving Parent-child Relationships
(Senator Lundberg)
The bill amends provisions relating to best interests of a child in domestic relations actions and certain other actions in the juvenile code. With respect to such actions, the bill:

Amends the legislative declaration to emphasize the fundamental liberty interest of both parents and children in maintaining the parent-child relationship;

With respect to temporary orders hearings, if there has been a temporary or permanent protection order entered against one or both parties either prior to or in conjunction with the domestic relations action, requires the court to grant an expedited hearing at the request of either party for purposes of modifying provisions in the protection order relating to parenting time, communication, and access to a child. The court shall order substantially equal parenting time and access to the child unless it finds that such orders are clearly not in the child’s best interest. The court shall also enter any orders necessary for the safety of the protected party relating to the restrained party’s parenting time with the child.

Changes the nature of an investigation by a court-appointed child and family investigator (CFI) from evaluation and recommendations to investigation and fact-finding. CFIs will conduct an objective investigation of issues as specifically directed by the court and will provide written factual findings to the court that are supported by credible evidence. A CFI’s report will not make recommendations regarding the allocation of parental responsibilities but will provide the court with the factual findings the court deems necessary to make such determinations.

Amends language in the legislative declaration regarding the allocation of parental rights and responsibilities relating to the best interests of the child. Also, the bill requires the court to allocate substantially equal parenting time unless the court finds that doing so would endanger a child’s physical health or significantly impair the child’s emotional development. In addition, the court shall award mutual decision-making responsibilities with respect to the child unless the court finds that such an order is clearly not in the child’s best interest.

For purposes of temporary orders in a domestic relations action, requires the court to award substantially equal parenting time to the parties unless the court finds that doing so would endanger a child’s physical health or significantly impair the child’s emotional development. In addition, the court shall order mutual decision-making responsibilities unless mutual decision-making is clearly not in the child’s best interest.

Changes the nature of an evaluation by a court-appointed parental responsibilities evaluator to an investigation by a mental health professional. The mental health investigation is limited to mental health diagnoses, assessments of relevant addictions, or other mental health-related issues that are relevant to the court’s allocation of parental responsibilities for the child. The investigator’s report shall contain findings of fact but shall not contain conclusions or recommendations relating to the allocation of parental rights and responsibilities.

Clarifies that the 2-year restriction on filing motions that request a substantial change in parenting time and that also change the party with whom the child resides the majority of the time do not apply to moderate changes to parenting time when the existing parenting time order awarded substantially equal parenting time to the parties; and

Amends the provisions relating to modification of decision-making responsibility for a child from requiring the court to retain the prior decision-maker unless certain criteria are met to permitting the court to change the decision-maker after considering certain criteria, including whether an award of mutual decision-making responsibilities is now in the child’s best interest.

SB 15-174 – Uniform Substitute Decision Making Documents Act
(Senator Steadman)
Colorado Commission on Uniform State Laws. The bill adopts, with amendments, the “Uniform Substitute Decision-making Documents Act” as Colorado law. The bill establishes the circumstances under which a substitute decision-making document (document) executed outside this state is valid in this state. A person may assume in good faith that a document is genuine, valid, and still in effect and that the decision-maker’s authority is genuine, valid, and still in effect. A person who is asked to accept a document shall do so within a reasonable amount of time. The person may not require an additional or different form of document for authority granted in the document presented. A person who refuses to accept a substitute document is subject to:  A court order mandating acceptance of the document; and Liability for reasonable attorney’s fees and costs incurred in an action or proceeding that mandates acceptance of the document. A person is not required to accept a substitute document under certain described conditions.

House

HB 15-1043 – Felony Offense For Repeat DUI Offenders
(Senators Cooke and Johnson & Representatives McCann and Saine)
Under current law, a DUI, DUI per se, or DWAI is a misdemeanor offense. The bill makes such an offense a class 4 felony if the violation occurred: (1) After 3 or more prior convictions for DUI, DUI per se, or DWAI; vehicular homicide; vehicular assault; or any combination thereof; or (2) not more than 7 years after the first of 2 prior convictions for DUI, DUI per se, or DWAI; vehicular homicide; vehicular assault; or any combination thereof, if the violation included at least one of the following circumstances: One or more persons less than 18 years of age were present in the person’s vehicle at the time of the violation;  In committing the violation, the person caused damage or injury to any property or persons;  After committing the violation, the person fled the scene; or At the time of the violation, or within 2 hours after the violation, the person’s BAC was 0.15 or higher. Under current law, aggravated driving with a revoked license is a class 6 felony. The bill changes the penalty to a class 1 misdemeanor but requires a sentencing court to ensure that an offender spends a minimum of 60 days in the custody of a county jail. Under current law, a person whose privilege to drive was revoked for multiple convictions for any combination of a DUI, DUI per se, or DWAI must hold an interlock-restricted license for at least one year following reinstatement prior to being eligible to obtain any other driver’s license. The bill expands this period to a minimum of 2 years and a maximum of 5 years. The bill repeals provisions relating to the crime of aggravated driving with a revoked license when the offender also commits DUI, DUI per se, or DWAI as part of the same criminal episode. The bill makes conforming amendments.

HB 15-1161 – Public Accommodation First Amendment Rights
(Representative Klingenschmitt)
The bill specifies that neither the civil rights division, the civil rights commission, nor a court with jurisdiction to hear civil actions brought under the public accommodations laws may compel involuntary speech or acts of involuntary artistic expression or involuntary religious expression by a person when such speech or acts of artistic or religious expression would lead to that person directly or indirectly participating in, directly or indirectly supporting, or endorsing or impliedly endorsing an ideology, ceremony, creed, behavior, or practice with which the person does not agree.

HB 15-1189 – Uniform Fiduciary Access to Digital Assets Act
(Representative Keyser & Senator Steadman)
Colorado Commission on Uniform State Laws. The bill enacts the “Uniform Fiduciary Access to Digital Assets Act”, as amended, as Colorado law. The bill sets forth the conditions under which certain fiduciaries may access: The content of an electronic communication of a principal or decedent; A catalog of electronic communications sent or received by a decedent or principal; and  Any other digital asset in which a principal has a right or interest or in which a decedent had a right or interest at death. As to tangible personal property capable of receiving, storing, processing, or sending a digital asset, a fiduciary with authority over the property of a decedent, protected person, principal, or settlor may access the property and any digital asset stored in it and is an authorized user for purposes of computer fraud and unauthorized computer access laws.

“Fiduciary” means a personal representative, a conservator, an agent, or a trustee. A custodian and its officers, employees, and agents are immune from liability for an act or omission done in good-faith compliance with the provisions of the bill.

HB 15-1203 – Concerning earned time for certain offenders serving life sentences as habitual offenders
(Representative Rosenthal & Senator Steadman)
Under current law, an offender who was sentenced to a habitual offender 40-calendar-year life sentence before July 1, 1993, is not accruing earned time. The bill permits those sentenced under those circumstances to accrue earned time.

HB 15-1212 – Authority To Sell State Trust Lands To Local Gov
(Representative KC Becker & Senator Kerr)
In 2010, a law was enacted that allowed the state board of land commissioners (board) to convey land to units of local government if the conveyance would add value to adjoining or nearby state trust property, benefit board operations, or comply with local land use regulations. When enacted, the authority was set to repeal on July 1, 2015. The bill repeals that automatic repeal and makes the board’s authority permanent.

 

*a “Strike Below” amendment essentially replaces the entire bill below the title with an entirely different bill.  In practice this changes almost everything about the bill – but addresses the same topic, allowing for the sponsor to retain his/her bill and to continue working on the topic.  It is generally used when interested parties and stakeholders need a complete rewrite of the bill as originally introduced in ordrr to try and reach consensus.

 

Colorado Supreme Court: Entity that was Non-Existent when Contractual Duty Created Still May Be Subject to Interrelated Contracts Doctrine

The Colorado Supreme Court issued its opinion in S K Peightal Engineers, Ltd. v. Mid Valley Real Estate Solutions V, LLC on Monday, February 9, 2015.

Economic Loss Rule—Interrelated Contracts Doctrine.

In this civil case, the Supreme Court considered: (1) whether entities that did not exist at the time the relevant contracts were completed can still be subject to the economic loss rule through the interrelated contracts doctrine; and (2) whether commercial entities situated similarly to respondent, which was a third-party beneficiary to a contract that interrelated to the contract by which the home at issue was built, are among the class of plaintiffs entitled to the protections of the independent tort duty to act without negligence owed by construction professionals to subsequent homeowners when constructing residential homes. The Court held that (1) the fact that an entity was nonexistent at the time the relevant contracts were completed does not alter the analysis under the interrelated contracts doctrine; and (2) the independent duty at issue does not apply here because, as a third-party beneficiary of a commercially negotiated contract that interrelates to the contract under which the home was built, respondent cannot properly be considered a subsequent homeowner. The judgment was reversed and the case was remanded to the court of appeals to return to the trial court for further proceedings consistent with this opinion.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: PSLRA Requires Showing of Intent to Deceive, Defraud, or Manipulate In Order to Prove Scienter

The Tenth Circuit Court of Appeals issued its opinion in In re Gold Resource Corp. Securities Litigation: Banker v. Gold Resource Corp. on Friday, January 16, 2015.

Gold Resource Corporation (GRC) is a publicly traded Colorado corporation engaged in mining for gold, silver, and other minerals in Mexico. At one of its mines, the El Aguila property, GRC began stockpiling ore and developed an aggressive business plan calling for increased mining activities. GRC had a single buyer for its mining products from the El Aguila property. GRC issued a press release in January 2012, announcing “record” production at the El Aguila facility and predicting continued growth and success. GRC issued several other press releases and filings with the SEC documenting “record” production and growth.

GRC first announced production problems at the El Aguila facility on July 19, 2012, admitting its second quarter production was lower than expected due to several factors. It lowered its production outlook by 15 percent, causing stock values to plummet. GRC announced its third quarter results in an October 2012 press release, notifying investors that production was lower still than expected. In November 2012, GRC issued a press release announcing that settlement of its billing dispute with its single buyer required restatement of the already-reported financial results. It submitted a Form 8-K to the SEC explaining that executive management became aware of significant variances between GRC’s assays and those of the buyer in the third quarter of 2012, but that GRC believed those discrepancies were remedied as of September 30, 2012.

Nitesh Banker and others, investors, brought suit against GRC, alleging violation of § 10(b) of the Securities Exchange Act. Investors asserted that by September 30 at the latest, GRC was aware of serious problems with its accounting control, and therefore misled investors with its first and second quarter financial reportings. Investors also alleged that two statements in the January 30, 2012, press release were materially misleading, because GRC was aware of significant production problems but failed to report them, and because the statement about continuing on the trajectory of projected growth did not prove to be accurate. The district court dismissed the complaint with prejudice, finding plaintiff investors failed to meet the heightened scienter requirement required by the Private Securities Litigation Reform Act (PSLRA). Plaintiffs appealed.

The Tenth Circuit first examined the requirements for properly stating a claim for securities fraud, and the heightened pleading requirements for the untrue statement and scienter requirements under the PSLRA. The PSLRA requires that plaintiffs must show with particularity a mental state involving intent to deceive, manipulate, or defraud, in order to prove the scienter requirement.

First addressing plaintiffs’ allegations of scienter because of the misstatement of first and second quarter profits, the Tenth Circuit found no wrongdoing by GRC. The Tenth Circuit found other plausible inferences in GRC’s accounting misstatements and SOX miscertifications, including that employees in Oaxaca did not immediately tell executive management in Denver about the variances because they thought buyer’s figures were wrong, and it was prudent of the management to investigate the variances before confirming the discrepancy publicly. Addressing the accounting practices, the Tenth Circuit found no recklessness where GRC recognized as income the amount buyer agreed to pay, rather than the amount buyer eventually did pay, since that was the contractual agreement between GRC and the buyer. The Tenth Circuit similarly dismissed plaintiffs’ remaining assertions of scienter, finding instead that at most the conduct constituted negligence, and defendants’ explanation offered a plausible alternative. The defendants had every right not to disclose the variances before the matter was investigated and resolved.

As for the production problems, the Tenth Circuit accepted defendants’ explanations for encountering difficulties as a plausible reason to produce less ore than originally expected. The risks of the mining business were set forth in the cautionary statements issued to investors, and encountering the risks did not rise to the level of scienter.

The Tenth Circuit affirmed the district court’s dismissal of plaintiffs’ claims with prejudice. The Tenth Circuit also concluded the district court did not abuse its discretion by failing to allow plaintiff to amend its complaint and in denying its motion to strike.

Compensation During Dissolution of Law Firm LLCs

Editor’s Note: This article originally appeared in the Colorado Bar Association Business Law Section’s January 2015 newsletter. Click here for the Business Law Section webpage.

HerrickLidstoneBy Herrick K. Lidstone, Jr., Esq.

The Colorado Limited Liability Company Act was front-and-center in a January 2015 decision from the Colorado Supreme Court. The case, LaFond v. Sweeney, 2015 CO 3 (January 20, 2015) involved the dissolution of a law firm organized as a two-member LLC with no written agreement regarding the treatment of assets and liabilities on dissolution. Richard LaFond brought a contingent fee case into the law firm and performed a significant amount of work on that case before the firm dissolved. He continued his work on the matter after dissolution. His now former partner, Charlotte Sweeney, claimed an interest in the contingent fee.

Mr. LaFond brought a declaratory judgment action against Ms. Sweeney to obtain a judicial determination regarding her right to any portion of the contingent fee. The trial court entered judgment for Ms. Sweeney, finding that she would be entitled to one-half of the fees earned from the contingency case, up to a maximum of $298,589.24 potentially to be paid to Ms. Sweeney (based on the time spent by the LaFond & Sweeney law firm before dissolution and assumed billable rates).

Ms. Sweeney appealed the trial court’s decision to the Colorado Court of Appeals. Ultimately, the Colorado Supreme Court ruled that absent an agreement to the contrary, all profits derived from winding up the LLC’s business belong to the LLC to be distributed in accordance with the members’ or managers’ profit sharing agreement, and the LLC Act does not grant winding up members or managers the right to receive additional compensation for their winding up services.

Court of Appeals Decision

In its decision (2012 WL 503655, Feb. 16, 2012), the Court of Appeals recognized that it would have to decide:

[That since] there was no written agreement that specifically described how the contingent fee generated by the case should be distributed[,] we must look to other authority to decide the ultimate issue raised by this appeal: should the contingent fee be divided between LaFond and Sweeney, and, if so, how?

The Court of Appeals went on to decide that:

  1. Cases belong to clients, not to attorneys or law firms;
  2. When attorneys handle contingent fee cases to a successful resolution, they have enforceable rights to the contingent fee; and
  3. A contingent fee may constitute an asset of a dissolved law firm organized as a limited liability company.

The important conclusion by the Court of Appeals and affirmed by the Supreme Court was that when a limited liability company formed under Colorado law dissolves, the members/managers owe a duty to each other to wind up the business of the LLC, and unless otherwise agreed between the parties, no additional compensation is paid for winding up activities.

Supreme Court Decision

The statute in question is § 7-80-404(1)(a), which provides that members in a member-managed LLC and managers of a manager-managed LLC have a duty to:

Account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member or manager in the conduct of winding up of the limited liability company business or derived from a use by the member or manager of property of the limited liability company, including the appropriation of an opportunity of the limited liability company.

The Supreme Court noted that, in 2006, the General Assembly added C.R.S. § 7-80-803.3 (entitled “Right to wind up business”) to Colorado’s limited liability company act, but did not include any provision allowing the person winding up the business of the LLC to be compensated for such actions, absent an agreement for such compensation. The Supreme Court also noted that the 1996 version of the Uniform Limited Liability Company Act did contemplate compensation to members who engage in winding up activities: (“A member is not entitled to remuneration for services performed for a limited liability company, except for reasonable compensation for services rendered in winding up the business of the company.” See Unif. Ltd. Liab. Co. Act § 403(d) (1996)). Colorado did not adopt this provision even though, as the Supreme Court noted, “the General Assembly’s 2006 amendments to the LLC Act incorporated some elements from the Model Act.”

The Supreme Court also noted that, in 1997, the General Assembly enacted the Colorado Uniform Partnership Act which, in C.R.S. § 7-64-401(8) “explicitly states that a partner is entitled to additional compensation for services performed in winding up the business of the partnership.” The Supreme Court went to the next logical conclusion:

If it wished, the legislature could have included language that would give members or managers the right to additional compensation for their services in winding up the LLC, but did not do so in the original LLC Act or its subsequent amendments.

Based on its analysis of the Colorado limited liability company act, the Colorado Supreme Court affirmed the Court of Appeals’ decision and concluded that:

  1. an LLC continues to exist after dissolution to wind up its business;
  2. upon dissolution, pending contingency fee cases are an LLC’s business;
  3. absent an agreement to the contrary, all profits derived from winding up the LLC’s business belong to the LLC to be distributed in accordance with the members’ or managers’ profit sharing agreement; and
  4. the LLC Act does not grant winding up members or managers the right to receive additional compensation for their services in winding up LLC business.

Members and Managers Fiduciary Duties?

In another portion of the opinion (at paragraphs 36–37), the Supreme Court addressed fiduciary duties in the LLC context in a manner that is inconsistent with the Colorado LLC Act. While acknowledging that the client has the right to choose legal counsel and to enter into and to terminate engagements with counsel, the Supreme Court said:

Under Colorado law, members and managers of an LLC cannot act to induce or persuade a client to discharge the LLC for the benefit of a particular member or manager of the LLC to the exclusion of the others; they breach their fiduciary duties to the LLC if they attempt to do so.

Unfortunately this misinterprets the Colorado LLC Act which carefully does not use the term “fiduciary duty” to define the duties of the members and managers. Furthermore the Supreme Court’s language treats the duties of members and managers as being identical, whether or not the LLC is member-managed or manager-managed. For example, the duty to “account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member or manager in the conduct or winding up of the limited liability company business” (C.R.S. § 7-80-404(1)(a)) only applies to members of a member-managed LLC, not to members of a manager-managed LLC. Members of a manager-managed LLC only owe the obligation to “discharge the member’s … duties to the limited liability company and exercise any rights consistently with the contractual obligation of good faith and fair dealing.” (C.R.S. § 7-80-404(3)) The Supreme Court’s ultimate conclusion is not dependent on the fiduciary duty analysis which may, in fact, be applicable in other forms of ownership (such as a general partnership).

In this case, the articles of organization reflect that LaFond & Sweeney was, in fact, organized as a member-managed LLC and, therefore, the members did in fact have the duties to “hold as trustee” for the benefit of the LLC. In a trust as described in C.R.S. § 15-16-302, a trustee “shall observe the standards in dealing with the trust assets that would be observed by a prudent man dealing with the property of another, and if the trustee has special skills or is named trustee on the basis of representations of special skills or expertise, he is under a duty to use those skills.” This arises to a higher duty than the “contractual obligation of good faith and fair dealing. ” The Court should have reached a similar conclusion in the context of this case without using the overly-broad language referring to fiduciary duties.

In the end, Mr. LaFond is obligated to share the contingent fee with his former law partner under the same sharing ratio as the two had shared things during the existence of their law firm, and he was not separately compensated for his efforts in finishing the case as part of his obligation to wind up the business of the LLC. Is it fair that Richard LaFond took the case to a successful conclusion after the dissolution of LaFond & Sweeney while his former partner shares on a 50-50 basis in the award? Is it fair that had the decision been under CUPA or the Uniform Limited Liability Company Act the decision would likely have been different? Whether the Colorado LLC Act should be amended to provide for “reasonable compensation for services rendered in winding up the business of the limited liability company” is an open policy question.

Herrick K. Lidstone, Jr., Esq., is a shareholder of Burns Figa & Will, P.C. in Greenwood Village, Colorado. He practices in the areas of business transactions, including partnership, limited liability company, and corporate law, corporate governance, federal and state securities compliance, mergers & 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. He has practiced law in Denver since 1978. He writes for many publications, including the Colorado Bar Association Business Law Newsletter, where this article originally appeared.

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.

Nominations Now Being Accepted for Denver Business Journal’s Outstanding Women in Business Award

The Denver Business Journal is seeking nominations for its 2015 Outstanding Women in Business special section. Nominations can be in multiple categories, such as law, government and nonprofits, small and large business owner, lifetime achievement award, and Mile High leaders. Nominees will be evaluated on innovation, entrepreneurship, professional accomplishment, and community leadership.

The special section will run August 21, 2015, and women selected as Outstanding Women in Business will also be honored at an awards event. Nominations must be submitted via the Denver Business Journal’s online form and must be received no later than 5 p.m. on Friday, April 24, 2015.

For more information about eligibility requirements and the nomination process, click here.

Colorado Court of Appeals: Unemployment Taxes Not Required Where Workers not “Employees” for CESA Purposes

The Colorado Court of Appeals issued its opinion in Whitewater Hill, LLC v. Industrial Claim Appeals Office on Thursday, January 29, 2015.

Agricultural Work—Taxes—Exempt—Colorado Employment Security Act—CRS § 8-70-120(1)(a).

Petitioner Whitewater Hill, LLC (Whitewater) operates a small vineyard and winery. Following an audit, the Colorado Department of Labor and Employment (Department) issued a liability determination concluding that agricultural work performed by certain workers for Whitewater amounted to covered employment and that Whitewater must pay taxes on amounts it paid those workers. The hearing officer concluded that the workers’ services were not employment, but rather exempt agricultural labor. Therefore, Whitewater was not required to pay taxes on the amounts it paid the workers. The Industrial Claim Appeals Officeconcluded that the workers’ services constituted covered employment.

On appeal, Whitewater contended that the workers’ services were exempt agricultural labor under the Colorado Employment Security Act(CESA) and that the Panel misinterpreted CRS § 8-70-120(1)(a). CRS § 8-70-120(1)(a) provides that during the current or preceding year, when a putative employer employs ten or more agricultural workers within each of twenty different weeks, the workers’ services constitute employment. Here, because Whitewater had employed ten or more agricultural workers in only four different weeks from 2011 through the first quarter of 2013, the workers’ services were not “employment” under CRS § 8-70-120(1)(a). Consequently, Whitewater was not required to pay unemployment taxes on amounts it paid the workers. The order was set aside and the case was remanded with directions.

Summary and full case available here, courtesy of The Colorado Lawyer.

SB 15-086: Repealing Requirement of Criminal Background Check Prior to Gun Sales

On January 14, 2015, Sen. Kent Lambert and Rep. Janak Joshi introduced SB 15-086 – Concerning Criminal Background Checks Performed Pursuant to Transfer of FirearmsThis summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The bill repeals the requirement that before any person who is not a licensed gun dealer transfers possession of a firearm to a transferee, he or she must require that a criminal background check be conducted of the prospective transferee and must obtain approval of the transfer from the Colorado bureau of investigation (CBI). The bill repeals the requirement that CBI impose a fee for performing an instant criminal background check pursuant to the transfer of a firearm. The bill makes conforming amendments.

The bill was assigned to the Senate Judiciary Committee.

SB 15-049: Vesting Title to Real Estate in An Entity Upon Formation

On January 8, 2015, Sen. Beth Martinez-Humenik and Rep. Jon Keyser introduced SB 15-049 — Concerning the Vesting of Title to Real Estate in a Grantee that is an Entity that has not yet Been Formed Once the Entity has Been Formed. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

Current law specifies that when a grantee of a deed is a corporation whose incorporation papers have not yet been filed, title to the real estate vests in the corporation once the papers are filed. The bill expands this law to apply to all entities, specifying that title vests once the entity is formed.

The bill was assigned to the Senate Business, Labor, & Technology Committee.

SB 15-069: Repealing “Job Protection and Civil Rights Enforcement Act of 2013″

On January 14, 2015, Sen. Laura Woods and Rep. Libby Szabo introduced SB 15-069 — Concerning the Repeal of the “Job Protection and Civil Rights Enforcement Act Of 2013.” This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

In 2013, the general assembly enacted HB13-1136, the “Job Protection and Civil Rights Enforcement Act of 2013″ (act), which established compensatory and punitive damage remedies, as well as front pay, for a person who proves that an employer engaged in a discriminatory or unfair employment practice under state law. These remedies were created in addition to equitable relief, such as back pay, reinstatement, or hiring, that was already available to employment discrimination victims. Additionally, the act: ! Expanded age discrimination claims under state law to persons 70 years of age or older; Authorized the use of moneys in the risk management fund to pay claims for compensatory damages against the state or its officials or employees; and Required the state civil rights commission to create a volunteer working group to assist in education and outreach efforts and provide the commission with information to post on its web site regarding educational resources available to employers to help them understand and comply with antidiscrimination laws. With the exception of the expansion of age-based discrimination claims to individuals who are 70 years of age or older, the bill repeals all components of the act and restores the equitable relief remedies that were available to employment discrimination victims making claims under state law prior to the passage of the act.

The bill was assigned to the Senate Business, Labor, & Technology Committee.

HB 15-1071: Attorney-Client Privilege Vests in Surviving Entity Post-Merger

On January 9, 2015, Rep. Jon Keyser and Sen. Owen Hill introduced HB 15-1071 — Concerning Clarification That, Following a Merger of Entities, the Surviving Entity is Entitled to Control the Premerger Attorney-Client Privileges of a Constituent Entity. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

Existing law specifies that when entities merge, all of the privileges of each of the merging entities vest as a matter of law in the surviving entity. The bill clarifies that the attorney-client privilege is among the privileges that vest in the surviving entity.

The bill was assigned to the House Business Affairs and Labor Committee. It passed committee reading unamended and was referred to the House Committee of the Whole, where it also passed Second and Third Reading unamended.