August 31, 2015

Colorado Court of Appeals: Adverse Inference Instruction Allowable where Non-Party Invokes Fifth Amendment

The Colorado Court of Appeals issued its opinion in McGillis Investment Company, LLP v. First Interstate Financial Utah, LLC on Thursday, August 13, 2015.

Fifth Amendment Privilege Invoked in Front of Jury by Nonparty—Adverse Inference Instruction.

This appeal, as stated by the Court, “follows a long and complicated history, ncluding prior litigation in Utah, an earlier appeal to this court, an eight-day trial, and a series of motions brought before, during, and after the trial and verdict. A voluminous record, spanning thousands of pages, contains an exhaustive rendition of the facts.”

McGillis Investment Company, LLP’s (MIC) principal, McGillis, and First Interstate Financial Utah, LLC’s and First Interstate Financial LLP’s (FIF) principal, Thurston, worked to finance a multitude of commercial real estate loans between 1995 and 2009. This dispute concerns a 2003 loan made by MIC and FIF to Kersey Commercial Park, LLC (Kersey Commercial) for $1.85 million (Kersey Loan) to purchase sixty-three acres of property to develop an industrial park (Kersey Property). When Thurston recommended that MIC finance the Kersey Loan, MIC did not know that the purchasers were involved in a series of transactions of questionable legitimacy surrounding the Kersey Property.

Kersey Commercial never made a payment on the Kersey Loan and was in default by May 2004. Thurston, on behalf of MIC and FIF, executed a Dry-Up Agreement on July 29, 2004, which sold certain Water Rights of the Kersey Property to Lower Latham Reservoir Company in return for a payment of $785,000 to one of the developers. In October 2004, MIC and FIF commenced foreclosure proceedings and on May 12, 2005 purchased the Kersey Property at foreclosure for $1.6 million. On June 6, 2006, FIF sued the appraisers. On November 8, 2006, Thurston had MIC execute an assignment of the Property (Assignment) from McGillis Investments to FIF (though the purpose of the Assignment is disputed). In 2012, FIF settled the appraiser litigation for $438,500 and remitted the proceeds to MIC.

In February 2009, FIF sued Sytech Development (one of the developers) over the Kersey Loan. After McGillis’s son took over MIC in 2008, he concluded that FIF had breached its fiduciary duty to MIC in a variety of transactions, and in April 2009, MIC filed suit in Utah against FIF. In October 2012, the jury returned a verdict in MIC’s favor for $1.25 million. Three days after the Utah verdict, FIF recorded the Assignment with the Weld County Clerk and Recorder. FIF settled the Sytech litigation on November 17, 2012 for $20,000.

On June 1, 2011, MIC filed this lawsuit against FIF, seeking to quiet title to the Kersey Property and damages for breach of fiduciary duty for FIF’s recording the Assignment and settling the Sytech litigation. On cross-motions for summary judgment, the trial court granted partial summary judgment based on claim preclusion in favor of FIF as concerned the validity of the Assignment and quieted title to the Kersey Property in FIF. MIC appealed, and a division of the Court of Appeals affirmed in part and reversed in part, vacating the decree quieting title and reversing the summary judgment on claim preclusion. Following trial on remand, the jury returned a verdict for MIC for $1,300,625 and found that MIC owned the Kersey Property.

In this appeal, FIF argued that the trial court did not follow the Court’s mandate on remand by failing to determine whether MIC knew or should have known of the Assignment’s validity when it filed the Utah action and that it was error to allow the Sysum brothers to invoke their Fifth Amendment privilege against self-incrimination in front of the jury and in giving an adverse inference instruction. In civil cases, an adverse inference may be drawn against a party who invokes the Fifth Amendment privilege against self-incrimination. The Court found no Colorado case addressing whether a nonparty witness’s invocation of the Fifth Amendment privilege constitutes admissible evidence. It adopted the analysis set forth in LiButti v. United States, 107 F.3d 110, 123 (2d Cir. 1997): the admissibility of a nonparty’s invocation of the Fifth Amendment privilege and concomitant drawing of adverse inferences should be considered on a case-by-case basis to ensure any inference is reliable, relevant, and fairly advanced. The overarching concern is whether the adverse inference is trustworthy and will advance the search for the truth.

Based on the record before it, the Court found no error in the trial court’s having decided that one of the brothers could answer a generic question, to which he invoked his Fifth Amendment right, and that there was enough evidence presented to give the adverse inference instruction as to him. The Court found it was error to allow the other brother to invoke his Fifth Amendment privilege because there wasn’t enough evidence to involve him in the alleged fraud. However, the trial court remedied this error when it did not give the adverse inference instruction as to this brother but told the jury to disregard his invocation of the privilege.

FIF also argued that it was error for the trial court not to have determined whether MIC knew or should have known there was a dispute concerning the Assignment’s validity when it filed the Utah action. The jury did consider this issue, but FIF argued it should have been the trial court that made the determination. The Court disagreed. The law of the case established in MIC I was to determine what MIC knew or should have known and there was an interrogatory to the jury that covered this issue. The jury’s answering of the interrogatory resolved the factual dispute dispositive of claim preclusion against FIF and that satisfied the law of the case.

The Court also rejected FIF’s arguments that MIC could not re-litigate anything concerning the Kersey Loan transaction other than the issue concerning the validity of the Assignment and the settlement of the Sytech litigation. The Court determined that this argument was based on a fundamental misunderstanding of the prior ruling in MIC I on the part of FIF. The judgment was affirmed.

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

Colorado Court of Appeals: First in Time Charging Order Issued in Colorado Takes Priority

The Colorado Court of Appeals issued its opinion in McClure v. JP Morgan Chase Bank, NA on Thursday, August 13, 2015.

Charging Order Priority.

In July 2013, JP Morgan Chase Bank NA (Chase) obtained an Arizona judgment of roughly $20 million against Reginald D. Fowler and Spiral, an Arizona corporation. In November 2013, the Arizona court issued charging orders in favor of Chase, charging Fowler’s membership interests in three Colorado LLCs. In December 2013, the Chase charging orders were served on the LLCs, and the Denver District Court entered an order domesticating Chase’s Arizona judgment. In March 2014, the McClures obtained a $1.5 million judgment in Arizona against Fowler and Spiral. In April 2014, the McClures domesticated their Arizona judgment in Colorado by filing it in the Arapahoe County District Court. During May through June 2014, the Arapahoe Court issued charging orders in favor of the McClures, charging Fowler’s and Spiral’s membership interests in the same Colorado LLCs as those charged in the Chase charging orders, and the McClures served the orders on the LLCs. In August 2014, the Denver District Court entered an order domesticating Chase’s Arizona charging orders.

The LLCs paid Fowler’s distributions into the Arapahoe County District Court registry. The McClures filed a motion for release of the funds and Chase intervened in opposition. The district court ruled that because the McClures’ charging orders were issued by a Colorado court, they “were the first enforceable charging orders served on the [LLCs] and, hence, they have priority over [Chase’s] Arizona charging orders.”

On appeal, Chase argued it was error to rule that its Arizona charging orders were unenforceable in Colorado until they had been domesticated. The Court disagreed, holding that until it had domesticated the charging orders, they were unenforceable in Colorado.

Chase also argued that its first-in-time but (not yet) domesticated charging orders took priority over the McClure’s later-in-time but Colorado-issued charging orders. The Court held the priority of charging orders issued against Colorado LLCs is determined by first-in-time service of charging orders enforceable in Colorado. The order was affirmed.

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

Colorado Court of Appeals: Refusal to Bake Cake Because of Opposition to Same-Sex Marriage Discriminatory

The Colorado Court of Appeals issued its opinion in Craig v. Masterpiece Cakeshop, Inc. on Thursday, August 13, 2015.

Public Accommodations Law—Same-Sex Marriage—Freedom of Speech—Free Exercise of Religion—Relation Back Doctrine of CRCP 15 (c)—CRS § 24-34-306(2)(b)(II).

This appeal arose from an administrative decision by the Colorado Civil Rights Commission (Commission), which upheld the decision of an administrative law judge (ALJ), who ruled in favor of Craig and Mullins (complainants) and against Masterpiece Cakeshop, Inc. (Masterpiece) and its owner, Phillips, on cross-motions for summary judgment. In July 2012, complainants visited Masterpiece and asked Phillips to design and create a cake to celebrate their same-sex wedding. Phillips declined, stating he doesn’t create wedding cakes for same-sex weddings because of his religious beliefs.

Craig and Mullins filed charges of discrimination with the Colorado Civil Rights Division (Division), alleging discrimination based on sexual orientation under the Colorado Anti-Discrimination Act (CADA). Following a finding of probable cause, complainants filed a formal complaint with the Office of Administrative Courts, alleging Masterpiece had discriminated against them in a place of public accommodation because of their sexual orientation, in violation of CRS § 24-34-601(2).

The ALJ found in favor of complainants on cross-motions for summary judgment; the Commission affirmed and issued a cease and desist order requiring that Masterpiece (1) take remedial measures to ensure compliance with CADA, and (2) file quarterly compliance reports for two years with the Division.

On appeal, Philips claimed error in denying a motion to dismiss, alleging the Commission lacked jurisdiction to adjudicate the charges against him because only Masterpiece was named in the initial charge of discrimination with the Commission. The ALJ applied the relation back doctrine of CRCP 15(c) and found that adding Philips was permissible. The Court agreed and held that the relation back doctrine applied to a CADA charging document.

On the merits, Masterpiece argued it was error for the ALJ to conclude that its refusal to create a wedding cake was due to respondents’ sexual orientation, not its opposition to same-sex marriage. The Court disagreed. Because the act of same-sex marriage is closely correlated to respondents’ sexual orientation, it was not error for the ALJ to find that the refusal to create the wedding cake was because of their sexual orientation, in violation of CADA.

The Court considered whether the Commission’s application of the law violated Masterpiece’s rights to freedom of speech and free exercise of religion. Masterpiece argued that wedding cakes convey a celebratory message about marriage and therefore it was being unconstitutionally compelled to convey a celebratory message about same-sex marriage in conflict with its religious beliefs. The Court disagreed. The order merely requires that Masterpiece not discriminate against potential customers in violation of CADA, and such conduct, even if compelled by the government, is not sufficiently expressive to warrant First Amendment protections.

Masterpiece also contended that the Commission’s order unconstitutionally infringed on its right of free exercise of religion. The Court concluded that CADA is a neutral law of general applicability and therefore offends neither the First Amendment nor article II, § 4, of the Colorado Constitution. The order was affirmed.

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

5 Components of a Great Business Plan

HYS2015Have you ever wanted to start your own law firm? It can be a great way to practice in the areas you’re especially interested in while controlling your time and caseload. However, many lawyers are unsure about the business side of running a law business. Accounting, personnel issues, technology—there is a lot more to think about than simply your preferred practice area.

Our three-day institute, “Hanging Your Shingle,” can help. Learn about the ins and outs of running a law practice from successful solo and small firm attorneys. Some of the topics to be covered at this year’s institute include “Writing Your Business Plan,” “Trust Account Management and Fee Agreements,” “Marketing and Business Development,” “Technology: Your First Partner,” and more.

Qusair Mohamedbhai and Siddhartha Rathod of Rathod Mohamedbhai LLC will present “Writing Your Business Plan.” These partners know first-hand the keys to succeeding at a small practice, and appreciate the opportunity to share their experience with attorneys just beginning their own firms. Among other topics, they will discuss these five components of a great business plan:

  1. Executive Summary – explains what the firm does, establishes goals, creates a mission statement, and elucidates milestones
  2. General Company Overview – provides a glimpse into what makes your firm unique and offers detailed attorney biographies
  3. Industry Analysis – this is an important part of the business plan that examines area demand and crucial details such as price, location, experience, and competition
  4. Financial Plan – also a very important part of a great business plan, the financial plan sets expense and revenue projections and determines profit margins
  5. Marketing Strategies – marketing is key to continuing your successful business, including referrals, traditional marketing, word of mouth, and more

Listen to Mohamedbhai and Rathod speak at “Hanging Your Shingle” this week. Call us at (303) 860-0608 or click the links below to register.

CLE Program: Hanging Your Shingle

This CLE presentation will take place from Thursday, August 20, 2015 through Saturday, August 22, 2015 at the CLE offices. Click here to register for the live program and click here to register for the webcast..

Can’t make the live program? Order the homestudy here – Video OnDemand – MP3

 

Colorado Court of Appeals: Jury Improperly Instructed that “Any Note” is a Security; Reversal Required

The Colorado Court of Appeals issued its opinion in People v. Mendenhall on Thursday, August 13, 2015.

Promissory Note—Securities Fraud—Colorado Securities Act—Jury Instructions—Testimony—Prosecutorial Misconduct.

Defendant was employed as a salesperson by an insurance company that specializes in low-risk insurance products for retirement-age persons. Defendant also was licensed to sell securities through an affiliated broker–dealer. Defendant obtained loans from clients or customers whom he had met through his employment to fund his personal real estate investments, giving each of them a promissory note. He was convicted by a jury of multiple counts of securities fraud and theft.

On appeal, defendant argued that the trial court erred in instructing the jury that any note is a security. One of the elements of securities fraud under the Colorado Securities Act (CSA) is that the defendant engaged in fraud in connection with a security. If there is no security, there cannot be securities fraud. The CSA defines “security” to include “any note.” Because sometimes notes are not securities, however, the court’s instruction constituted error. Because this instructional error was not harmless beyond a reasonable doubt, defendant’s securities fraud convictions were reversed.

Defendant also argued that the trial court erred in admitting the testimony of the district attorney’s investigator regarding his process for investigating someone suspected of criminal activity; under what circumstances he recommended pursuing criminal charges; and the specific investigation of, and decision to pursue charges against, defendant. Because probable cause to charge defendant was not at issue here, the investigator’s statements regarding how many potential cases he received each year and in how many of those cases charges were brought constituted inadmissible evidence. However, because there was overwhelming evidence that defendant was guilty of theft and the investigator’s comments were minimal, any error was harmless.

Defendant further contended that the prosecutor committed misconduct in closing argument when he likened defendant to Bernie Madoff and referred to the victims as members of the “greatest generation.” The Court concluded that the prosecution’s mention of Madoff was referencing a victim’s testimony, and referring to the victims as the “greatest generation” did not rise to the level of plain error.

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

Tenth Circuit: Concealment of Arbitration Agreements Until Late Stage of Litigation Constituted Waiver of Right to Arbitrate

The Tenth Circuit Court of Appeals issued its opinion in In re Cox Enterprises, Inc.: Healy v. Cox Communications, Inc. on Wednesday, June 24, 2015.

Cox is a cable provider involved in class-action litigation brought by subscribers to its cable service. In 2009, subscribers in several jurisdictions filed suits against Cox, alleging the company illegally tied provision of its cable service to rental of a set-top box. The actions were consolidated in a multi-district litigation and transferred to the U.S. District Court for the Western District of Oklahoma. Cox moved to dismiss, and during the pendency of its motion began inserting mandatory arbitration clauses into contracts with many of its customers, including class members. Cox does not appear to have notified the District Court about its insertion of the clauses. Plaintiffs’ efforts to certify a nationwide class failed, and instead they sought to certify several classes for geographic regions. These actions were again consolidated and transferred to the Western District of Oklahoma.

The instant case was originally brought in April 2012, and Cox unsuccessfully moved to dismiss in September 2012. The parties then engaged in substantial discovery, and named plaintiff Healy moved to certify a class in September 2013. Cox at no time mentioned the arbitration clauses. The court granted class certification in January 2014 as the parties continued to engage in discovery. Cox appealed to the Tenth Circuit in March 2014, again failing to mention the arbitration clauses, but its petition was denied. In April 2014, Cox moved for summary judgment, and that same day it moved to compel arbitration against both the absent class and named plaintiff Healy, citing the arbitration clauses for the first time. It later clarified that it was not compelling arbitration against Healy. The district court denied the motion to compel on the basis that Cox’s prior conduct in the litigation constituted waiver. Cox appealed.

The Tenth Circuit used its six-factor Peterson test to evaluate whether the right to arbitration had been waived. The six factors are (1) whether the party’s actions are inconsistent with the right to arbitrate, (2) whether the parties were well into the preparation of a lawsuit before a party notified the opposing party of an intent to arbitrate, (3) whether a party requested arbitration enforcement close to a trial date or delayed for a long period before seeking a stay, (4) whether a defendant seeking arbitration filed a counterclaim without requesting a stay, (5) whether important intervening steps like discovery had taken place, and (6) whether the delay affected, misled, or prejudiced the opposing party.

The district court determined Cox’s failure to inform it of the presence of arbitration agreements until after class certification was inconsistent with an intent to arbitrate and suggested an attempt to manipulate the process, as it would affect the numerosity of the class. The Tenth Circuit agreed, also finding that because Cox did not request for its motion for summary judgment to be stayed pending arbitration implied an attempt to “play heads I win, tails you lose” by manipulating the litigation machinery. The district court found, and the Tenth Circuit agreed, that the second, third, and fifth Peterson factors also cut strongly against Cox. Cox did not invoke the arbitration agreements until two years after the lawsuit was commenced, and substantial discovery had occurred before the invocation. Further, Cox failed to mention a factor that would have significantly affected the district court’s Rule 23 analysis, and Healy would be significantly prejudiced if arbitration were allowed. The Tenth Circuit opined that perhaps the greatest prejudice would be to the integrity of the judicial process, since both the district court and Tenth Circuit had invested significant time and energy in analyzing literally thousands of pages of documents.

Cox argued the Peterson factors were inapplicable because a party does not invariably waive its right to impose arbitration by filing its motion to compel after class certification. The district court rejected this argument as an improper attempt to artificially narrow the scope of the waiver, and the Tenth Circuit agreed. Cox could have asserted its right to arbitration at many earlier litigation stages but chose to conceal the arbitration provisions. Further, the district court’s denial of the motion to compel was based not on Cox’s failure to compel arbitration earlier but rather its specific conduct evincing an attempt to “take multiple bites of the apple.”

The Tenth Circuit affirmed the district court.

Colorado Court of Appeals: Actual and Potential Rental Income Properly Used as Measure of Restitution

The Colorado Court of Appeals issued its opinion in Zeke Coffee, Inc. v. Pappas-Alstad Partnership on Thursday, July 30, 2015.

Commercial Lease—Eviction—Erroneous Judgment—Restitution—Discount Rate.

In March 2004, plaintiffs (collectively, Zeke) entered into afive-year lease agreement with Pappas-Alstad Partnership to operate a coffee shop. In September 2008, Zeke notified Pappas-Alstad of its intent to exercise an option to extend the lease for an additional five years. Pappas-Alstad said Zeke had breached a term of the lease and, after Zeke refused to cure the alleged breach, it notified Zeke that the lease had been terminated and converted into a month-to-month tenancy. In June 2009, Pappas-Alstad served a three-day demand for compliance or possession on Zeke. Zeke filed an action in district court seeking a declaratory judgment that the lease remained in effect and that Pappas-Alstad had breached it. Pappas-Alstad served Zeke a notice to quit and included in its amended answer a counterclaim seeking Zeke’s eviction. The district court issued a writ of eviction restoring possession of the property to Pappas-Alstad. A division of this Court of Appeals reversed, finding that Zeke had properly exercised the option to extend the lease and had been wrongfully evicted. In a written order, the district court determined that restitution was the appropriate remedy. Pappas-Alstad was required to restore everything it gained through the erroneous judgment.

On appeal, Pappas-Alstad contended that the district court erred in using its actual and potential rental income from the premises as a measure of the appropriate restitution. Zeke would have had to pay rent to Pappas-Alstad had the erroneous judgment never been entered. However, Zeke also would have been able to maintain its coffee business and the business income opportunities associated with it. Therefore, the district court did not abuse its discretion in not reducing Pappas-Alstad’s rental income by the rent it would have otherwise received from Zeke. The court also was not required to reduce from the award Pappas-Alstad’s expenses or losses in re-leasing the property.

Pappas-Alstad argued that the court erred in selecting the Treasury Bill rate as the discount rate to determine the present value of its future cash flow. The district court determined that the value of all future rent proceeds through the end of Zeke’s lease (from 2014 to 2019) should be calculated using a discount rate. The Treasury Bill rate has been recognized as a valid method for discounting future cash flows to present value. Therefore, the court’s decision to use the Treasury Bill rate was not an abuse of discretion. The order was affirmed and thecase was remanded to district court to award Zeke a reasonable amount of attorney fees incurred on appeal.

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

Tenth Circuit: Sole Shareholders Should Not Be Discouraged from Infusing Capital Into Failing Businesses

The Tenth Circuit Court of Appeals issued its opinion in In re Alternate Fuels, Inc.: Redmond v. Jenkins on Friday, June 12, 2015.

Alternative Fuels, Inc. (AFI) is a Kansas corporation that formerly engaged in surface coal mining operations in Missouri. AFI filed for Chapter 11 bankruptcy in Kansas in 1992 and briefly continued operations while its bankruptcy was pending. John Warmack acquired 100% of AFI’s stock and formed Cimarron Energy Co. to continue the mining operations for which AFI still held permits. Mr. Warmack provided the State of Missouri with new reclamation bonds to assure that AFI would reclaim the mining land when its mining operations were finished. The bonds were secured with 24 certificates of deposit, worth approximately $1.4 million.

Mr. Warmack finished mining in 1999 and entered into an agreement with Mr. Jenkins where Mr. Jenkins would fulfill the reclamation obligations and obtain the proceeds of the 24 certificates of deposit and Cimarron’s remaining mining equipment. Mr. Jenkins paid Mr. Warmack $549,250 in exchange for 100% of AFI’s stock and 99% of Cimarron’s stock, certain equipment owned by Cimarron, and the 24 certificates of deposit. On the same day, AFI executed a promissory note for $500,000 to Mr. Jenkins. AFI executed three promissory notes to Mr. Jenkins altogether—two for $500,000 and one for $1,000,000. In 2002, AFI filed a lawsuit against certain state officers and employees, alleging tortious interference with the reclamation efforts. AFI assigned $3,000,000 of its potential recovery to Mr. Jenkins.

Judgment entered for AFI in the tort suit for $6.4 million, which, following an appeal and payment of attorney fees and costs, resulted in a recovery of about $5 million. AFI’s creditors began making claims against the proceeds, and in 2009 AFI applied for help from the bankruptcy court in distributing the funds. Mr. Jenkins filed a proof of claim against AFI’s estate for about $4.3 million. Exercising discretion and applying the Tenth Circuit test for recharacterization, the bankruptcy court recharacterized the transfers evidenced by the promissory notes as equity infusions and found he no longer held a claim secured by the alleged assignment of the suit proceeds. The bankruptcy court held in the alternative that Mr. Jenkins failed to provide sufficient documentation to prove the amount of his claim, and additionally held in the alternative that equitable subordination would be appropriate since Mr. Jenkins had acted inequitably to the detriment of AFI’s creditors and his claim should be subordinated to the level of an unsecured creditor. Mr. Jenkins appealed. The Tenth Circuit Bankruptcy Appellate Panel affirmed, and Mr. Jenkins again appealed.

The Tenth Circuit first rejected Mr. Jenkins’ argument that two recent Supreme Court decisions overruled Tenth Circuit precedent in In re Hedged Investments. The two cases relied on by Mr. Jenkins dealt with disallowance, not recharacterization, so the Tenth Circuit found the 13-step Hedged Investments recharacterization test applied. The bankruptcy court found three steps superficially supported treating Mr. Jenkins’ advances as loans: the names given to the certificates evidencing indebtedness, no increased participation in management as a result of the advances, and the extent to which the advances were used to acquire capital assets. The Tenth Circuit agreed that these three steps supported treating the advances as loans, but averred they did so more than superficially.

The Tenth Circuit found little support for the bankruptcy court’s determination that other factors necessitated recharacterization. It discounted the bankruptcy court’s decision that the ninth factor, the identity of interest between creditor and shareholder, pointed to recharacterization, finding that because there was only one shareholder this factor did not apply. As for the second factor, the presence or absence of a fixed maturity date, the Tenth Circuit disagreed with the court’s finding that the notes lacked a maturity date, finding instead they each required full payment after five years. The fact that Mr. Jenkins did not seek repayment did not render the requirement meaningless. Concerning the eighth factor, recapitalization, the Tenth Circuit found that placing too much emphasis on the factor could discourage investors from funding “rescue efforts” for failing businesses. As to the seventh factor, the intent of the parties, the Tenth Circuit found the parties intended the capital contributions to be treated as loans. The Tenth Circuit balanced the remaining factors and decided the bulk of the Hedged Investments factors weighed against recharacterization. The Tenth Circuit painted a picture of Mr. Jenkins as a sole shareholder loaning money to a failing business in hopes of keeping it afloat.

The Tenth Circuit similarly rejected the bankruptcy court’s alternative holding discharging Mr. Jenkins’ claim because he failed to meet his burden of persuasion as to amount. The Tenth Circuit found the copies of the three promissory notes proved his claim amount. The Tenth Circuit also declined to accept the bankruptcy court’s determination that if Mr. Jenkins’ claim were allowed to proceed it should be equitably subordinated. The Tenth Circuit noted that equitable subordination is an extraordinary remedy that should be employed sparingly and only if three factors are present: inequitable conduct, injury to the other creditors, and consistency with the provisions of the Bankruptcy Code. The Tenth Circuit further noted that the inequitable conduct warranting subordination must be egregious, tantamount to fraud, or involving moral turpitude. The Tenth Circuit found no such conduct from Mr. Jenkins.

The Tenth Circuit reversed the bankruptcy court’s judgment, finding neither recharacterization nor equitable subordination appropriate to Mr. Jenkins’ claims. Judge Phillips wrote a thoughtful and detailed dissent.

New Crowdfunding Rules Released by Division of Securities

The Colorado Crowdfunding Act, HB 15-1246, was signed into law by Governor Hickenlooper on April 13, 2015, with an effective date of August 5, 2015. The goal of the Act was to increase equity opportunities for Colorado start-ups by creating a crowdfunding option with limitations to protect investors. The Act required the Securities Commissioner to promulgate rules and regulations in order to protect small businesses and investors.

The Colorado Department of Regulatory Agencies’ Division of Securities released comprehensive new crowdfunding rules on Thursday, July 30, 2015. The regulations are available here. The Division of Securities also issued guidelines about the new rules, noting that before a business can take advantage of the new crowdfunding rules it must file various forms with the Division of Securities; there are limits to how much money can be raised and how much individual investors can contribute; and all aspects of the transaction must take place between Colorado residents. The Division’s guidelines are available here.

Business Use of Unmanned Aircraft Systems (Drones) Expanding Exponentially

DroneDrones, also known as Unmanned Aircraft Systems (UAS) or Unmanned Aircraft Vehicles (UAV), are not just for hobbyists anymore. Drones are devices that are used for flight in the air without an onboard pilot. Drones can be small and simple, such as remote-controlled aircraft popularized by hobbyists, or large and complex, like the surveillance aircraft used by the military in hostile areas. The military has been using drones for many years to conduct surveillance and deliver weapons in dangerous war zones. However, in the last several years, civilian and business use of drones has increased dramatically.

Non-military drone use is categorized into public aircraft operations and civil operations. Public aircraft operations are uses by public agencies or organizations of a particular aircraft for a particular purpose in a particular area. Public operation uses can include law enforcement, firefighting, border patrol, disaster relief, search and rescue, and military training. Civil operations are any operations that do not meet the statutory criteria for public aircraft operations, including business uses such as for agricultural purposes, construction, security, TV and movie industry uses, environmental monitoring, insurance, aerial photography, news media, and much more.

Because they utilize airspace for their operations, drones are regulated by the FAA. In 2013, the FAA issued a comprehensive plan for the safe integration of civil unmanned aircraft systems into the country’s airspace. In early 2015, the FAA issued a Notice of Proposed Rulemaking for small UAS. The goal of the proposed rules is to provide a framework of regulations to allow routine use of certain small UAS while maintaining flexibility to accommodate future changes in technology. The public comment period for the proposed rules ended April 24, 2015.

Businesses wishing to utilize drones must obtain a Section 333 Exemption from the FAA. Petitions for Section 333 Exemption must be filed with and approved by the FAA before the drone may be used for business purposes. The FAA can also grant businesses the right to use airspace via Special Airworthiness Certificates. Special Airworthiness Certificates are available for research and development or experimental aircraft.

Attorney Thomas Dougherty, II, head of Lewis Roca Rothgerber’s Unmanned Aircraft Systems Industry Team, will discuss drone law at CLE on July 28, 2015. Topics to be explored include potential drone uses, FAA regulations covering drones, required information for petitions for Section 333 Exemption, Certificates of Waiver or Authorization, the FAA’s enforcement authority, and legal issues arising out of state and local laws for the use of drones. Register now by clicking the links below or calling (303) 860-0608.

CLE Program: Drones for Lawyers: The Do’s and Don’ts for Clients

This CLE presentation will take place Tuesday, July 28, 2015 at the CLE offices. Click here to register for the live program or click here to register for the webcast.

Can’t make the live program? Order the homestudy here – Video OnDemand – MP3

 

New Pretrial Rules for Civil Cases—What Is Changed (Part 1 of 2)

Editor’s Note: This article originally appeared in the July 2015 issue of The Colorado Lawyer. This is the first half of the article; click here for the second half. Reprinted with permission.

DickHolmeBy Richard P. Holme

Effective July 1, 2015, the Colorado Supreme Court has adopted a series of amendments to the Colorado Rules of Civil Procedure designed to significantly reduce the cost of and delays in litigation and to create a new culture for the handling of lawsuits. The amended rules will increase involvement of judges to establish early and personal judicial oversight of pretrial activities; provide for expedited discovery motions; change the breadth of required disclosures; limit discovery to what is needed, not what is wanted; limit expert discovery; clarify obligations when responding to interrogatories and requests for documents; and strengthen judges’ ability to award sanctions for noncompliance with these rules. The newly amended rules are available at www.courts.state.co.us/Courts/Supreme_Court/Rule_Changes/2015.cfm (click on Rule Change 2015(05)).

These revised pretrial rules will apply only to cases filed on or after July 1, 2015. Cases filed before then will continue to be governed by the older rules.[1] This article explains, for both judges and lawyers, the nature of and justification for the changes and how the changes endeavor to foster a new culture and paradigm for handling civil cases in a way that will be faster and less expensive, while preserving the necessary search for and application of justice.

Reasons for the Changed Rules

With the approaching termination of the Civil Action Pilot Project (CAPP) in early 2014, the Colorado Supreme Court asked its Civil Rules Committee to consider what should be done with those rules. The Civil Rules Committee appointed a subcommittee that considered and recommended a number of amendments to the rules,[2] which were discussed, modified, and approved by the entire Committee. The Supreme Court solicited written comments, held a public hearing to discuss the proposals, and adopted the recommended amendments with a few changes.

The reasons for these changes arose in conjunction with a dramatically increased nationwide recognition of the problem and the need for revised rules. The proposed rules were described in the April 2015 article in The Colorado Lawyer[3] (“Part I: A New Paradigm”). The primary influences on the changes were (1) the changes to the Federal Rules of Civil Procedure (Federal Rules) recommended by the federal Judicial Conference Committee on Rules of Practice and Procedure, which are expected to be effective December 1, 2015;[4] and (2) the June 30, 2015 expiration of CAPP for the handling of business actions applicable in five of the Denver metropolitan counties.[5] The more specific reasons and justifications for substantive changes in Colorado’s various amended rules are discussed below. The amendments contain a number of other organizational and non-substantive technical and conforming changes that are not detailed in this article.

It is significant that the Supreme Court has adopted not only the revised rules (New Rules) discussed below, but also a set of Comments that are published along with the New Rules. Thus, interpretation of the New Rules, if necessary, should begin with an analysis of any pertinent provisions of the Court’s “2015 Comments.”

Rule 1—Scope of Rules

Other than the belated removal of the reference to the “Superior Court,” gone for so long that most readers will have never heard of it,[6] the reason for amending Rule 1 was to make clear the intended breadth of its impact. Thus, securing “the just, speedy, and inexpensive determination of every action” is no longer simply a basis for “liberal construction” of the Civil Rules. As amended, Rule 1 now requires that the rules are also to be “administered and employed by the court and the parties” to achieve a just, speedy, and inexpensive determination of all cases. (Emphasis added).

The amended language in Rule 1 is taken verbatim from the change recommended for Federal Rule 1. As explained by the federal Advisory Committee on Civil Rules (Advisory Committee), a significant reason for bringing parties under the requirements of Rule 1 is to emphasize the need for the parties, and their counsel, to cooperate with each other to bring about the expeditious and effective processing of cases.[7]

No one challenges the proposition that litigation moves much more smoothly, quickly, and efficiently when parties, and especially the lawyers, cooperate with each other in handling lawsuits. Although it is difficult to legislate civility, with the broadening of Rule 1’s applicability, lawyers can expect courts to remind them regularly of the importance—and effectiveness—of cooperating among themselves.

Rule 12—Defenses and Objections

The changes to Rule 12 are largely cosmetic. Rule 12(a) is broken into several subsections to make its provisions somewhat easier to find and read. Also, a number of changes were made to amend gender-based terminology.

It is noteworthy, however, and consistent with the aim of making litigation more just, speedy, and inexpensive, that the 2015 Comment to Rule 12 also pointedly notes that, “The practice of pleading every affirmative defense listed in Rule 8(c), irrespective of a factual basis for the defense, is improper under C.R.C.P. 11(a).” The 2015 Comment notes that defenses may be pleaded only if well founded in fact and warranted by existing law or a good-faith argument for changing existing law. If an adequate basis for a defense is subsequently discovered, a defendant may then move to amend the answer to add it.

Rule 16—Case Management

The case management provisions of Rule 16(b) through (e) are largely rewritten, and the central focus of case management has been significantly changed. The primary change has been to involve the trial judge in case management personally and actively from an early stage of the case. As noted in “Part I: A New Paradigm” in describing the proposed amendments to the Federal Rules, the federal Advisory Committee said, “What is needed can be described in two words—cooperation and proportionality—and one phrase—sustained, active, hands-on judicial case management.”[8] Likewise, this judicial involvement and oversight were crucial and widely appreciated aspects of CAPP by both lawyers and judges.[9] Early, active judicial case management is also an important factor emphasized by leading judges nationwide.[10]

Early judicial involvement should include review and discussion of a number of matters, depending on the individual case. It can and should include identifying pleading and discovery issues proportional to the needs of the case, narrowing the claims and defenses, focusing and targeting discovery, establishing limits on allowable discovery, emphasizing the expectation that parties must cooperate civilly and efficiently, and setting a firm trial date.[11]

New Rule 16 provides that the initial case management conference will be held within forty-nine days of the at issue date of the case.[12] There is nothing in the Rule, however, that precludes a judge from initiating an earlier, in-person (or telephonic or video) status conference. Indeed, a number of judges use such early conferences.[13] There are several matters that can be accomplished at such an early status conference and probably within about fifteen minutes. For example, the court can impress on the parties its view of the importance that counsel cooperate and maintain civility; and in smaller cases, it can urge the parties to give serious consideration to using Simplified Procedure under Rule 16.1 as a means of avoiding the need to prepare a proposed case management order (proposed order). (One of the reasons Simplified Procedure was successful during its pilot phase, under Judges Harlan Bockman and Christopher Munch, but was not as successful later, was that the pilot judges specifically urged parties to use simplified procedure, but subsequent judges generally have not affirmatively encouraged its use.) The court can also urge parties to demonstrate genuine cooperation and to agree on appropriately proportional discovery in their proposed order so they can avoid the necessity of a subsequent initial case management conference, as provided in Rule 16(d)(3). Additionally, the court can encourage reducing unnecessary claims and defenses, as well as targeting initial discovery on a key issue or issues in the case.

To facilitate meaningful case management, the parties will need to communicate early in the case to prepare a proposed order that will provide the court the basic information it needs to meaningfully participate. The new Rule 16 also anticipates an expanded use of oral motions and the potential for more regular contact between the parties and the judge to keep the case moving efficiently.

The revisions to Rule 16 reflect several matters learned both from CAPP and from the case management experience of the members of Civil Rules Committee. Under CAPP, case management conferences were to be attended in person by lead counsel;[14] they were to be preceded by a fairly extensive report of pertinent matters; and they were then followed by a case management order from the judge.[15] Thereafter, courts were instructed by CAPP to provide “active case management,” including prompt conferences by telephone if permitted by the court.[16] Firm trial dates were to be set at the case management conference and not changed absent extraordinary circumstances.[17]

After more than two years of experience with CAPP, the Institute for the Advancement of the American Legal System (IAALS) at the University of Denver published its report of the case data and experience of lawyers and judges with CAPP based on surveys, interviews, and reviews of case filings.[18] For lawyers, “CAPP’s focus on early, active and ongoing judicial management of cases received more positive feedback than any other aspect of the project.”[19] Similarly, judges found that the initial case management conference was “the most useful tool for determining a proportionate pretrial process.”[20]

The use of the “presumed case management order” was adopted by the Colorado Supreme Court in 2002 as a means of reducing the time attorneys spend preparing individual proposed orders. Nonetheless, the intervening years have shown that it also isolated the judges from involvement in the early and frequently most expensive and time-consuming aspects of litigation. The presumed case management order also had the somewhat perverse effect of disengaging the lead trial lawyers from much thought or collaboration with opposing counsel about the genuine needs of the case. Thus, in some cases, much of the pretrial disclosure and discovery was left in the hands of junior lawyers with less experience and little or no independent responsibility and accountability to the judicial system. The prevailing culture of “leave no stone unturned regardless of the cost” remained unchanged.

Prior to the current amendments, Rule 16(b) normally meant that no case management order would be issued by the court. The Rule itself became the “presumptive” order, unless the parties filed either a stipulated or disputed case management order within forty-two days of the at-issue date. Experience suggests that having an actual court order improves compliance with the discovery terms and is easier to enforce, when needed. Without judicial awareness of pretrial activities, lawyers’ financial incentives and concerns about protection against possible future malpractice claims meant that many cases proceeded on a “give us everything” basis without independent oversight and supervision.

Although Rule 16(b) focuses on the initial case management conference, courts and parties should note that nothing in this rule prevents additional status conferences when the need becomes apparent. Indeed, in complex cases, it may be desirable to have regularly scheduled status conferences (for example, “3:30 p.m. on the last Friday of every month”) to deal with new issues that may have arisen or to determine which conference can be cancelled if no new problems have arisen that would benefit from the court’s participation and oversight.

Rule 16(a)—Purpose and Scope

First, and importantly, the Civil Rules Committee did not revise Rule 16(a). The message and meaning of that section remain significant and should create the environment for the remainder of Rule 16 (and all other pretrial matters).

(a) Purpose and Scope. The purpose of this Rule 16 is to establish a uniform, court-supervised procedure involving case management which encourages professionalism and cooperation among counsel and parties to facilitate disclosure, discovery, pretrial and trial procedures.

This purpose carries added weight and reemphasizes the expansion of Rule 1’s requirement that court and parties now also administer and employ these rules to secure the just, speedy, and inexpensive determination of every action.

Rule 16(b)—Case Management Order

This section of Rule 16 has been completely revised. The parties must now prepare and submit to the court a proposed order not later than forty-two days after the case is at issue. There is now an approved form—JDF 622—that can be downloaded and filled in to comply with this requirement. The proposed order is to be submitted in editable format so that the court can make whatever amendments to the proposed order it deems to be appropriate and desirable. It is expected that many proposed orders will have attached pages providing the information requested in the form. Also, when the parties are not in agreement on certain issues, each party must supply on the form its own version of the information sought by any particular inquiry.

Although there are a number of items of information that must be included, the judges who had experience with the use of a detailed form under CAPP[21] have concluded that the greater amount of information was necessary for them to effectively provide guidance at the case management conference. While the required information will necessitate more thought and more conferring at the outset of the case by parties and their counsel, this information should, in any event, be discussed early in the case if the goal of just, speedy, and inexpensive is to be approached. Furthermore, although some lawyers complain that preparation of this information is unnecessary “front-loading” of expense, counsel and parties will need this same information to evaluate and expedite any possible settlement or to consider the wisdom of proceeding to trial.

Each of the requirements contained in revised Rule 16(b) is described below. Readers are cautioned to read the text of the rules, because not all details of each subsection are discussed.

Rule 16(b)(1)—At-issue date. The at-issue date still triggers the timing requirements of the proposed order, initial disclosures, and discovery. The at-issue date remains the day when all parties have been served and all Rule 7 pleadings have been filed, or defaults or dismissals have been entered. The at-issue date is included in the proposed order for the court’s information.

Rule 16(b)(2)—Responsible Attorney. As in the prior Rule 16(b)(2), the responsible attorney is charged with organizing and preparing the proposed order and the steps leading to the preparation of that order. Normally, the responsible attorney will be plaintiff’s counsel, unless the plaintiff is pro se; in that case the responsible attorney may be the defendant’s counsel. The proposed order must identify the responsible attorney and provide contact information for the court’s use.

Rule 16(b)(3)—Meet and Confer. Within two weeks of the at-issue date, lead counsel and unrepresented parties are to confer about the case and the proposed order. The rule specifically calls for these conferences to be person-to-person (“in person or by telephone”) so that ordinary e-mails are insufficient to comply. Indeed, it is anticipated that preparing proposed orders may require multiple conferences and meetings. To ensure these conferences take place in a timely fashion, the rule also requires that the proposed order list the dates and identities of persons participating in those conferences. The conferences are held to discuss the basis for the claims and defenses, anticipated initial disclosures, the proposed order, and possible dates for the case management conference. The responsible attorney, who has arranged the conference, must obtain a date for the case management conference from the court. This sounds like a lot of time and effort, but if started in a timely fashion (and much can be done even before the final pleadings are filed), it should normally be easy to accomplish, because the time between the at-issue date and the case management conference can be up to seven weeks, and the proposed order does not have to be filed until one week before the case management conference.

Rule 16(b)(4)—Description of the Case. To advise the court of the nature of the case, each party must prepare a one-page (double-spaced) description of the case, including identification of the issues to be tried. Obviously, this is not intended to be a detailed factual recitation or a regurgitation of the entire complaint. It simply needs to be enough for the court to tell, for example, whether this is a single or multiple car accident, an antitrust case, or a building defect dispute. If publishers such as West Publishing can summarize a case decision in a paragraph or two, it was felt that parties to the litigation should also be able to describe the case succinctly.

Rule 16(b)(5)—Pending Motions. When there are motions under Rule 12 or otherwise that have not been resolved or ruled on when the proposed order is submitted, they are to be listed so the court will be reminded of them. Parties should be prepared to argue or discuss those motions at the case management conference, even if the time for full briefing has not expired. The court may decide them at that time, either by written order or orally from the bench.

Rule 16(b)(6)—Evaluation of Proportionality. For other than smaller, routine cases, this may be one of the more important parts of the proposed order. It will not be unusual for one of the major topics of discussion at the case management conference to be the proportionality of desired discovery, with the court deciding how much discovery is appropriate under the circumstances of the case. To the extent that the parties are seeking either more discovery than the limits set out in Rule 26(b)(2) or are seeking to limit even that discovery, this is the portion of the proposed order in which to address those issues. Parties should at least discuss the proportionality considerations listed in Rule 26(b)(1) that are relevant to the case at hand. These may include: (1) the importance of the issues at stake in the action, (2) the amount in controversy, (3) the parties’ relative access to relevant information, (4) the parties’ resources, (5) the importance of the discovery in resolving the issues, and (6) whether the burden or expense of the proposed discovery outweighs its likely benefit. Individual cases may have additional matters that a court should consider, and they should be identified in this section of the proposed order.

Rule 16(b)(7)—Initial Exploration of Prompt Settlement and Prospects for Settlement. The parties are required to discuss possible settlement, describe the prospects for settlement, and provide future dates for mediation or arbitration. Experience shows that more than 95% of the cases will not go to trial, so this requirement merely reflects that reality and seeks to have the parties start the discussions earlier rather than later. The discussion may also be helpful in organizing discovery. For example, if the defendant believes that liability is probably going to be established but that it needs to understand the plaintiff’s damages before settlement discussions are likely to be useful, the parties or court may suggest phasing discovery to focus on damages before going into all other areas. This way, settlement can be reopened before unnecessary sums are spent on less pertinent issues. Thus, in this example, proposed dates for settlement could be set for shortly after the projected date for completing discovery on damages.

Rule 16(b)(8)—Proposed Deadlines for Amendments. This provision moves the date for amending pleadings and adding parties up to two weeks from the deadline in prior Rule 16(b)(8). However, if this deadline is unnecessary or can be moved sooner to the case management conference, that fact should be addressed in this portion of the proposed order. The justification for fifteen weeks following the at-issue date is: seven weeks for the case management conference, five weeks for the first set of discovery responses, and three weeks to prepare any amendments. Of course, nothing prevents parties from taking depositions to investigate this subject following the case management conference or requesting expedited written discovery responses related to this issue. Parties should be prepared for the possibility that the court may not believe that much time is needed and may expedite this deadline to keep the case moving.

Rule 16(b)(9)—Disclosures. The parties’ initial disclosures under Rule 26(a)(1) are due twenty-eight days following the at-issue date—that is, three weeks before the case management conference deadline. The proposed order must state when those disclosures were actually made and when the documents were produced. Because parties sometimes disagree on whether the disclosures are complete, this proposed order requests that any objections to the other parties’ disclosures be addressed here. This way, there is a significant likelihood that the judge can rule on those issues at the case management conference without further delay. Indeed, Rule 26(a)(1) specifically prohibits filing motions objecting to allegedly inadequate disclosures prior to the case management conference. This is required because the adequacy of disclosures normally can be more easily addressed in person at the case management conference at the same time the court is considering issues of proportionality.

Rule 16(b)(10)—Computation and Discovery Relating to Damages. Rule 26(a)(1)(C) requires (and has for years) disclosure of categories of damages, a computation of damages, and supporting documents. That requirement is not changed in the New Rules. However, experience has shown that frequently claimants will assert that they have not been able to establish those calculations or to have gathered the supporting documents. Because this information is often crucial to resolving the case through settlement discussions, this new provision demands at least that if the disclosures have not been made, the claiming party must explain why it was unable to provide the disclosures as required and when it expects that it can produce those disclosures and documents. If the court believes the delay does not result from inability to provide the damages or that the delay is too distant, it may well shorten those time limits when it issues the case management order.

Rule 16(b)(11)—Discovery Limits and Schedule. This provision essentially incorporates the presumptive limits on discovery contained in Rule 26(b)(2), although it expressly permits parties to request more or less discovery and allows the court to either increase or decrease those limits after considering the proportionality factors in Rule 26(b)(1). Parties should expect to be asked to support any changes in discovery when they attend the case management conference. The changes in authorized discovery may not only impact numbers of deponents or allowed hours of depositions, but might also limit the number of interrogatories, requests to produce documents, or requests for admissions. Before attending the case management conference, parties should think about what specific written discovery they might want, especially interrogatories and requests for admission, because some judges and lawyers believe that such discovery is often unproductive or not proportional.

This provision also establishes that discovery may not commence until the case management order is served. This delay is incorporated to allow the court to expand or limit discovery before the parties begin under possibly erroneous assumptions as to what discovery will be allowed or limited. Likewise, the deadline for discovery is set for not later than forty-nine days before trial—a date the court can alter if appropriate.

A provision relating to discovery limits allows the court to consider limits on awardable costs. For example, a court might include in the order that it will not allow recovery of videotape charges for depositions, travel costs for out-of-state depositions of relatively unimportant witnesses, or travel costs for the depositions that could be taken telephonically. The parties can consider how badly they really need that discovery.

Rule 16(b)(12)—Subjects for Expert Testimony. This subsection asks the parties to identify subject areas for anticipated expert testimony both for retained experts and for percipient witnesses of facts who may also be asked to provide opinion testimony (such as the investigating police officer, the attending physician, or a party’s accountant). If parties on one side of a case are seeking more than one retained expert per subject, they must show the good cause for them, consistent with proportionality. (A case for negligent heart surgery may justify more experts than a case for negligent setting of a broken arm.) Sometimes, parties on one side of the case may have different perspectives and need additional experts, which this provision allows. For example, plaintiffs in medical malpractice cases may sue hospitals, nurses, and doctors, each of whom may want to have available expert testimony as to why they are not liable but other defendants might be. The same problem can be routinely expected in building defect cases.

Rule 16(b)(13)—Proposed Deadlines for Expert Disclosures. Expert disclosures are to be made within the time limits established in Rule 26(a)(2)(C), unless some different date is set in this subsection. For example, it might be expeditious for discovery to focus on liability at the outset and, therefore, to have liability experts provide their disclosures early so parties can attempt to settle or so the court could consider summary judgment on that issue before the parties undergo the entire panoply of discovery.

Rule 16(b)(14)—Oral Discovery Motions. A significant number of judges have found that requiring discovery disputes to be presented on short notice and orally is much faster, cheaper, and more efficient than using an extended written motion briefing schedule and then plowing through dozens of pages of briefs.[22] Other judges require that motions be written and fully briefed. Because of the substantial potential savings in time and expense of oral motions, it was felt desirable to bring this issue to everyone’s attention and to have the judge advise the lawyers of the judge’s practice in this respect. If the lawyers are not already aware of the court’s procedures, they should leave unmarked the choice of “(does)(does not) require discovery motions to be presented orally” in the proposed order. The judge can then mark out the inappropriate one or may insert a more extensive description of the judge’s desires concerning discovery motions.

Rule 16(b)(15)—Electronically Stored Information. The federal courts have tended to impose exhaustive and frequently onerous requirements on parties with respect to preservation, production, and handling of electronically stored information (ESI).[23] The Colorado Civil Rules Committee on the other hand has been reluctant to impose specific requirements on all Colorado cases primarily because more than 50% of the civil cases seek relief of under $100,000 and very few seek as much as $1 million. Thus, while cases will almost inevitably have some information that is in the form of ESI, a large proportion of those cases in Colorado courts will not involve unusual amounts of relevant ESI, and parties acting in good faith can normally find it easy to agree on and produce that information.

Where, however, it appears early in the case that a significant amount of the discoverable ESI will be involved, the parties must discuss, attempt to resolve, and report in the proposed order (1) issues of any search terms that should be used; (2) production, preservation, and restoration of ESI; (3) the form of production (for example, native format, with or without metadata, etc.); and, if significant, (4) an estimate of the related cost of such production. Here, as in many aspects of litigation, genuine cooperation and communication among counsel can save thousands of dollars, weeks or months of time, and substantial brain damage to all concerned. This provision does not attempt to draw a sharp line between whether and when such details are to be included, because this decision must be made on a case-by-case basis. Whatever is decided, the parties should expect to be asked about it by the judge at the case management conference.

Even if discovery of ESI is relatively simple and noncontroversial, it is important to address this topic soon after the case is at issue so the parties can understand what problems, if any, might be anticipated. Even an agreement that the parties will work together and do not need special provisions can smooth the way for better cooperation, less time, and less expense.

Rule 16(b)(16)—Trial Date and Length of Trial. The parties should discuss and report on their sense as to when they expect to complete discovery, as well as the expected length of the trial itself. In most cases, the parties should expect that the court will set a trial date during the case management conference. However, some courts decline to set trial dates until the completion of discovery or some other date further into the case preparation. This provision allows for both situations. Still, most judges expect that the case will be tried on the first trial date, so parties should not count on easy or automatic extensions of a trial date.

Rule 16(b)(17)—Other Appropriate Matters. This portion of the report is simply a catch-all for other issues unique to the particular case.

Rule 16(b)(18)—Entry of Case Management Order. Once the proposed order is prepared for filing, lead counsel are to approve and sign it before filing. After the case management conference and after reviewing and making any changes the court deems necessary or appropriate, the court shall sign the document, at which time it will become the official case management order and will bind the parties thereafter, unless modified pursuant to Rule 16(e).

Rule 16(c)—Pretrial Motions

The provisions of the prior Rule 16(c) (modified case management orders) are completely deleted because that section related to modifications of presumptive case management orders, which have been repealed. Modification of those orders is now moot. In its place, the provisions of former Rule 16(b)(9) have been moved verbatim to Rule 16(c). Thus, the need to file pretrial motions and motionsin limine thirty-five days before trial, summary judgment motions ninety-one days before trial, and challenges to the admissibility of expert testimony seventy days before trial remain intact.

Rule 16(d)—Case Management Conferences

Again, because the prior version of this section related to resolution of disputed modified case management orders, or specially requested case management conferences, this section has been completely rewritten and is now a focal point of the effort to bring early, active judicial case management to the forefront of civil litigation. The impetus for this change was from several sources. The ACTL Final Report states:

We believe that pretrial conferences should be held early and that in those conferences courts should identify pleading and discovery issues, specify when they should be addressed and resolved, describe the types of limited discovery that will be permitted and set a timetable for completion. We also believe the conferences are important for a speedy and efficient resolution of the litigation because they allow the court to set directions and guidelines early in the case.[24]

This conclusion was bolstered by the interviews with outstanding trial judges, virtually all of whom use in-person, initial case management conferences.[25]

Similarly, an amendment to Federal Rule 16(b) strikes the prior reference to scheduling conferences (the federal term for case management conferences) being held by “telephone, mail, or other means.” Although the text of the federal rule suggests that scheduling conferences are to be conducted in person, the accompanying Committee Note urges that the conference be held “in person, by telephone or by more sophisticated electronic means,” anticipating video conferences.[26] The Note adds that a “scheduling conference is more effective if the court and parties engage in direct simultaneous communication.”[27]

Colorado Rule 16(d)(1) requires that the case management conference be held no later than forty-nine days (seven weeks) after the case is at issue. There is no prohibition on the court setting an earlier conference or on the parties seeking an earlier date from the court.

Rule 16(d)(2) provides that lead counsel for the parties and any unrepresented parties are to be present at the case management conference in person, unless allowed by the court to attend by telephone or video conference, if available. That subsection calls for parties to be prepared to “discuss the proposed order, issues requiring resolution and any special circumstances of the case.” Experienced judges who have previously used in-person case management conferences suggest that there are a number of matters that can be discussed and clarified to create case preparation procedures that are in fact just, speedy, and inexpensive.[28]

Rule 16(d)(3) provides the one exception for personal case management conferences. Where all parties are represented by counsel and counsel agree, they may submit a request to the court to dispense with a case management conference. This does not, however, dispense with the need to prepare and file a proposed order. The court can grant the request if (1) there appear to be no unusual issues that might be better dealt with by the court early in the case; (2) counsel appear to be working together collegially; and (3) the proposed order appears to be consistent with the best interests of the parties and is proportional to the needs of the case. It is expected that it will be the smaller cases and those with fewer factual and legal issues for which courts will more likely dispense with the case management conferences. Counsel can clearly aid their request if they can demonstrate by a clear, concise, and limited proposed order that they are—and are likely to continue to be—working together in the spirit of obtaining a just, speedy, and inexpensive resolution.

Rule 16(e)—Amendment of Case Management Orders

All amendments to case management orders, whether for extension of deadlines or otherwise, must be supported by specific showings of good cause for the timing of the request and for its necessity. If applicable, the showing of good cause needs to address the provisions of Rule 26(b)(2)(F), describing factors for determining good cause, discussed below. Although this amended rule is essentially the same as the prior version of this rule, because the details of the new case management orders are more extensive, there may be more need to request amendments. If counsel agree to changes that do not affect the court (for example, they agree to take depositions two weeks before trial), the parties must assume that if the agreement is breached by one of the parties, the court will refuse to enforce the agreement and will look askance at counsel willing to act inconsistently with the case management order.

Richard P. Holme is senior of counsel in the Trial Group at Davis Graham & Stubbs LLP. He is a member of the Colorado Supreme Court Standing Committee on Civil Rules and was chair of its Improving Access to Justice Subcommittee, which drafted the proposed changes—(303) 892-7340, richard.holme@dgslaw.com. He has also been a member of the ACTL Joint Task Force since 2010, and was involved in the latter stages of the Joint Project of the ACTL and the IAALS. This article expresses the author’s views and does not endeavor to represent all the views of the Civil Rules Committee or the Supreme Court.

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.

NOTES

[1] See CRCP 1(b).

[2] The Subcommittee members included Rules Committee members: Court of Appeals Judge Michael H. Berger (Committee Chair); Richard P. Holme (Subcommittee Chair); David R. DeMuro; Judge Lisa Hamilton-Fieldman; Judge Ann B. Frick; Thomas K. Kane; Richard W. Laugesen; David C. Little; Professor Christopher B. Mueller; Teresa T. Tate; Judge John R. Webb; and Judge Christopher C. Zenisek. Outside members of the subcommittee were Judge Herbert L. Stern, III; Judge E. Eric Elliff; Gordon (Skip) W. Netzorg; and John R. Rodman.

[3] See Holme, “Proposed New Pretrial Rules for Civil Cases—Part I: A New Paradigm,” 43 The Colorado Lawyer 43 (April 2015), www.cobar.org/tcl/tcl_articles.cfm?articleid=8860.

[4] See id. at 46-47. Following publication of Part I: A New Paradigm, on April 29, 2015, the U.S. Supreme Court approved the amendments and submitted them to Congress, which could change them, but has only done so on one prior occasion. See online.iaals.du.edu/2015/05/04/supreme-court-adopts-amendments-to-the-federal-rules-of-civil-procedure.

[5] See Holme supra note 3 at 47-48 (description of CAPP).

[6] The Denver Superior Court was a civil court with a jurisdictional limit of $5,000. It was abolished in 1986.

[7] Memorandum from Judge David Campbell to Judge Jeffrey Sutton re Proposed Amendments to the Federal Rules of Civil Procedure B-2 (June 14, 2014), available from the author.

[8] Id. at B-2 to B-3.

[9] Holme, supra note 3 at 48.

[10] American College of Trial Lawyers/Institute for the Advancement of the American Legal System (ACTL/IAALS), “Working Smarter Not Harder: How Excellent Judges Manage Cases” (2014) (“Working Smarter”), iaals.du.edu/images/wygwam/documents/publications/Working_Smarter_Not_Harder.pdf.

[11] See, e.g., id. at Appendix D.

[12] Rule 16(b) and 16(d)(1).

[13] See ACTL/IAALS, supra note 10 at 7.

[14] Pilot Project Rule (PPR) 7.1.

[15] PPR 7.1 to 7.2.

[16] PPR 8.1 to 8.4.

[17] PPR 8.5.

[18] See Gerety and Cornett, “IAALS, Momentum for Change: The Impact of the Colorado Civil Access Pilot Project” (Oct. 2014) (CAPP Final Report), iaals.du.edu/images/wygwam/documents/publications/Momentum_for_Change_CAPP_Final_Report.pdf. The CAPP Final Report was preceded by a preliminary report: Gerety and Cornett, “IAALS, Preliminary Findings on the Colorado Civil Access Pilot Project” (April 2014), iaals.du.edu/images/wygwam/documents/publications/Preliminary_Findings_on_CAPP.pdf.

[19] CAPP Final Report, supra note 18 at 23.

[20] Id. at 24.

[21] PPR 7.1 to 7.2; and PPR Appendix B.

[22] See Holme, “‘No Written Discovery Motions’ Technique Reduces Delays, Costs, and Judges’ Workloads,” 42 The Colorado Lawyer 65 (March 2013), www.cobar.org/tcl/tcl_articles.cfm?articleid=7995. See also ACTL/IAALS, supra note 10 at 21-22.

[23] See, e.g., FRCP 26(f)(3)(C); Zubulake v. UBS Warburg LLC, 217 FRD 309 (S.D.N.Y. 2003); U.S. District Court for the District of Kansas, “Guidelines for Cases Involving Electronically Stored Information,” www.ksd.uscourts.gov/guidelines-for-esi.

[24] ACTL/IAALS, “Final Report on the Joint Project of the American College of Trial Lawyers Task Force on Discovery and the Institute for the Advancement of the American Legal System” 2 (rev. ed., 2009), iaals.du.edu/images/wygwam/documents/publications/ACTL-IAALS_Final_Report_rev_8-4-10.pdf.

[25] See ACTL/IAALS supra note 10 at 10-20.

[26] 2014 Rules Report at 19 (May 2014), available from the author.

[27] Id.

[28] See, e.g., 2015 Comment to CRCP 16(d). See also ACTL/IAALS, supra note 10 at 10-20 and Appendix D; Prince, “A New Model for Civil Case Management: Efficiency Through Intrinsic Engagement,” 5 Court Review 174, 189-92 (2014).

Tenth Circuit: CEA Allows Nationwide Service of Process for Receivers Pursuing Receivership Property

The Tenth Circuit Court of Appeals issued its opinion in Klein v. Cornelius on Wednesday, May 27, 2015.

R. Wayne Klein was appointed receiver of Winsome Investment Trust, a business entity whose founder, Robert J. Andres, caused it to illegally distribute funds as part of a Ponzi scheme. William Cornelius and his Houston law firm, Cornelius & Salhab, received some of the illegally obtained funds as payment for a New Hampshire criminal defense representation of one of Andres’ friends. Klein, as receiver, brought suit against Cornelius in Utah federal court to void the fraudulent transfer to Cornelius for approximately $90,000 in legal fees. The Utah court granted summary judgment to Klein, and Cornelius appealed, raising several points of error.

The Tenth Circuit first addressed Cornelius’ three jurisdictional challenges. Cornelius first argued the Commodity Exchange Act (CEA) does not authorize a receiver to bring state fraudulent transfer claims in federal court against a third-party recipient of Ponzi scheme funds. The Tenth Circuit found that the CEA authorizes the Commodities Futures Trading Commission (CFTC) to bring civil actions in federal court to enjoin violations of the CEA, and does not prohibit a receiver from pursuing state law claims in federal court. The Tenth Circuit concluded the district court had subject matter jurisdiction to resolve Klein’s Uniform Fraudulent Transfer Act (UFTA) claims on Winsome’s behalf.

Cornelius next challenged standing, arguing Klein lacked standing to bring a UFTA claim because Winsome itself could not bring such a claim. Cornelius reasoned that because Winsome was unincorporated and under Andres’ control, it was an alter ego for Andres and therefore had no authority to sue in its own right. Although he conceded Klein could sue as a receiver for Andres, the Tenth Circuit disagreed with Cornelius’ contention that Winsome could not sue in its own right. The Tenth Circuit found that as a business entity abused as part of a Ponzi scheme, Winsome became a defrauded creditor. The Tenth Circuit found that Winsome was its own entity under Utah law and therefore Klein had standing to pursue the UFTA claim.

Cornelius also argued the district court lacked personal jurisdiction because he did not have sufficient contacts with Utah and because he was not properly served with a complaint. The Tenth Circuit first found the CEA allowed nationwide service of process for receivers pursuing receivership property. The Tenth Circuit next looked at Cornelius’ argument that he had minimum contacts with Utah, and found that in federal question cases where nationwide service of process invokes jurisdiction, the defendant must establish that the chosen forum burdens the defendant with “constitutionally significant inconvenience.” Because Cornelius made no jurisdiction arguments other than the minimum contact argument, the Tenth Circuit found no error in the district court’s determination that it had jurisdiction. Cornelius also argued that in personam jurisdiction was inappropriate and only in rem jurisdiction would apply, but the Tenth Circuit disagreed, finding personal jurisdiction applied under the particular statutory scheme.

Next, Cornelius argued three points of error regarding the district court’s application of UFTA: (1) Texas law applies, (2) the transfer was not fraudulent, and (3) regardless, Klein’s claim is barred by the statute of limitations. The Tenth Circuit addressed each argument in turn. Because the relevant provisions of Texas law use the same language as Utah, the Tenth Circuit found Cornelius’ first argument of no practical significance. Next, the Tenth Circuit found that because Ponzi schemes are inherently insolvent, there is a presumption that transfers from such entities involve an intent to defraud. Cornelius argued that neither he nor the criminal defendant he represented knew of the Ponzi scheme, but the Tenth Circuit noted that nothing in the UFTA requires a transferee to have knowledge of the fraud. The Tenth Circuit also declined to adopt Cornelius’ assertion that he provided “reasonably equivalent value” for his payment, noting that his legal services conferred no benefit on Winsome and the payments to Cornelius only served to diminish its net worth.

Finally, the Tenth Circuit addressed the statute of limitations argument. Claims alleging actual intent to defraud under the UFTA must be brought within four years of when the transfer was made or one year after the transfer could reasonably have been discovered. Klein brought suit against Cornelius in December 2011. The payments to Cornelius for his legal services were made between September 2006 and July 2007, and Cornelius argued the suit was untimely because it was brought well after the four year statute of limitations had expired. However, Klein was appointed as receiver in January 2011, and he could not have reasonably discovered the fraud until his appointment. The Tenth Circuit found the claim was timely since it was brought within one year of Klein’s appointment as receiver.

The district court’s grant of summary judgment to Klein was affirmed.