April 21, 2019

Colorado Court of Appeals: Contractual Covenants in Deed of Trust Not Extinguished in Foreclosure

The Colorado Court of Appeals issued its opinion in Top Rail Ranch Estates, LLC v. Walker and Walker Development Co. v. Top Rail Ranch Estates, LLC on Thursday, January 30, 2014.

Issue of First Impression—Motions for Directed Verdict—Doctrine of Claim Preclusion—Pursuit of Same Claim in Two Actions—Fraud—Economic Loss Rule—CRCP 59(a)(4)—Attorney Fees.

Top Rail Real Estates, LLC (Top Rail) entered into a contract with Walker Development Company to purchase a subdivision of platted residential lots. Top Rail paid $200,000 of the purchase price in cash, and executed a promissory note payable for the balance of $1 million. After Walker Development’s failed attempt to change the zoning to sell a portion of the property to a mining company, Top Rail was unable to sell lots in the subdivision, and it halted construction activities. Top Rail stopped making payments on its loan from the bank, and the bank foreclosed on its deed of trust. The parties sued each other in separate actions, and this appeal followed.

Walker Development argued in the first action that the court erred in granting the motion for directed verdict and dismissing its counterclaim. Regardless of whether the lien imposed by the deed of trust was extinguished by foreclosure of the bank’s senior lien, the contractual covenants in the deed of trust were not extinguished by the foreclosure. Therefore, the trial court erred in directing a verdict against Walker Development on its counterclaim.

Ronald Walker and Walker Development also argued that the trial court erred in denying their motion for directed verdict on the fraud claims asserted by Top Rail and Christopher Jenkins. The economic loss rule applied to bar the fraud claims asserted by Top Rail and Jenkins because the relief sought was the same as that sought for breach of contract and breach of the covenant of good faith and fair dealing.

The Court of Appeals agreed that the trial court erred in its calculation of prejudgment interest. The award should have been based on the $500,000 damages award in the final judgment entered by the trial court, and not on the $567,000 damages awarded by the jury.

Walker Development also contended that the trial court improperly granted summary judgment for Top Rail and Jenkins in the second action, based on its ruling that claim preclusion barred Walker Development’s claims. The doctrine of claim preclusion does not bar claims that were permissive counterclaims in a prior action, where the adjudication of those claims would not result in inconsistent judgments or a deprivation of rights established by the first judgment. Here, allowing Walker Development’s claims to be adjudicated in the second action did not nullify the judgment in the first action or impair any rights established by it, nor did inconsistent judgments result. Accordingly, the trial court erred in granting summary judgment against Walker Development based on claim preclusion.

On cross-appeal from the second action, Top Rail and Jenkins argued that the trial court erred in denying their CRCP 59(a)(4) motion for cancellation of the promissory notes, release of the deed of trust, and release of the notice of lis pendens. The Court disagreed. The trial court did not abuse its discretion in determining that it would be inequitable to require Walker Development to file an additional bond on top of the $1.3 million bond that it had already posted in the first action. The judgment was affirmed in part and reversed in part, and the case was remanded with directions.

Summary and full case available here.

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