July 18, 2019

Colorado Supreme Court: CUFTA Limitations Period May Be Tolled by Express Agreement

The Colorado Supreme Court issued its opinion in Lewis v. Taylor on Monday, June 20, 2016.

Uniform Fraudulent Transfer Act—Limitation of Actions—Agreements Tolling Limitation.

Under the Colorado Uniform Fraudulent Transfer Act (CUFTA), CRS §§ 38-8-101 to -112, any action to avoid an intentionally fraudulent transfer is extinguished if not brought within four years after the transfer was made or, if later, within one year after the transfer was or could reasonably have been discovered. Here, the Supreme Court held that these time limitations may be tolled by express agreement. Because the parties to this case signed a tolling agreement, and petitioner’s CUFTA claims were properly brought within the tolling period, the Court concluded that his claims were timely filed and were not barred by CUFTA’s limitations period. Therefore, the Court reversed the judgment of the Court of Appeals.

Summary provided courtesy of The Colorado Lawyer.

Colorado Supreme Court: Litigation Finance Companies are Lenders for UCCC Purposes

The Colorado Supreme Court issued its opinion in Oasis Legal Finance Group, LLC v. Coffman on Monday, November 16, 2015.

Uniform Consumer Credit Code—Litigation Finance Transactions—Loans.

The Supreme Court held that litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making “loans” subject to Colorado’s Uniform Consumer Credit Code even if the plaintiffs do not have an obligation to repay any deficiency if the litigation proceeds are ultimately less than the amount due. These transactions create debt, or an obligation to repay, that grows with the passage of time. The court of appeals’ judgment was affirmed.

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

Colorado Court of Appeals: Partial Subordination Approach to Lien Priority Best Reflects Colorado Law

The Colorado Court of Appeals issued its opinion in Tomar Development, Inc. v. Friend on Thursday, June 4, 2015.

Lien—Subordination Agreement—Partial Subordination Approach.

The Friend family sold its ranch to Friend Ranch Investors Group (FRIG) to develop it into a resort-style golf course community. In 2010, FRIG conveyed the property to Mulligan, LLC, and at that time, the relevant order of priority was (1) Colorado Capital Bank’s (CCB) senior lien; (2) Tomar Development (Tomar); (3) the Damyanoviches; (4) the Friends; and (5) CCB’s junior lien. Bent Tree, Mulligan, and CCB then entered into a subordination agreement whereby CCB’s senior lien became subordinate to CCB’s junior lien. Neither Tomar, the Damyanoviches, nor the Friends was involved in or an intended beneficiary of the subordination agreement. CCB’s senior lien was never released. Bent Tree then foreclosed on CCB’s senior lien and, in November 2010, Bent Tree bought the property at a public trustee’s foreclosure sale for approximately $11,800. Tomar, the Friends, and the Damyanoviches filed claims, each of which sought declaratory judgments as to the priority of their interests, which were dismissed by the trial court under CRCP 12(b)(5).

On appeal, Tomar, the Friends, and the Damyanoviches argued that the trial court erred in applying the partial subordination approach to the subordination of liens. The partial subordination approach applies when the most senior lienholder (A) agrees to subordinate his interest to the most junior lienholder (C) without consulting the intermediary lienholders (B). Under this approach, when A subordinates to C, C becomes the most senior lienholder, but only to the extent of A’s original lien. Under this partial subordination approach, B is not affected by the agreement between A and C, to which it was not privy. Colorado adopts the partial subordination approach, and it was properly applied in this case. Accordingly, the trial court did not err in dismissing Tomar’s, the Damyanoviches’, and the Friends’ claims seeking a declaratory judgment that each of their interests was senior to all other interests.

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

Tenth Circuit: Class Certification Appropriate Where Common Issues Predominate Over Individualized Claims

The Tenth Circuit Court of Appeals issued its opinion in CGC Holding Co. LLC v. Broad & Cassel on Monday, December 8, 2014.

In this RICO class action interlocutory appeal, defendants contest the district court’s class certification. Plaintiff class representatives CGC Holding Co., LLC, Harlem Algonquin, LLC, and James Medick, on behalf of the proposed class, assert that a group of lenders led by Sandy Hutchens conspired to create a scheme to defraud borrowers by requiring up-front fees for loan commitments the lenders never intended to fulfill. Plaintiffs also allege the lenders fraudulently concealed Hutchens’ criminal past through the use of pseudonyms, and had they known about his financial history they would not have taken part in the financial transactions that caused them to lose their up-front fees.

In 2004, Hutchens pleaded guilty in Canada to financial fraud charges similar to those at issue here. Following his conviction, he changed his name and assumed various aliases. Plaintiffs claim Hutchens operated a scheme in which a potential borrower, typically a distressed “do-or-die” borrower, would submit a loan application to one of several issuing entities through a loan broker. The lending entity would issue a loan commitment requiring non-refundable up-front fees, also requiring the borrower to meet certain eligibility requirements. If the borrower failed to meet an eligibility requirement, the lending entity would terminate the loan application. Plaintiffs contend this was a subterfuge intended to scam the borrowers out of the non-refundable up-front fees, without any intention or ability to fund the loan. Hutchens contends the loans were legitimately terminated for failure to meet the eligibility requirements. However, his accountant testified that by the end of 2009 Hutchens and his entities had received over $8 million in up-front fees and had lent less than $500,000.

Plaintiffs also contend that Hutchens and his cohorts concealed Hutchens’ criminal past through the use of aliases and false addresses, and but for these omissions and misrepresentations, no borrower would have participated in the loan scheme. Plaintiffs named several persons and entities as co-conspirators with Hutchens, including his wife and daughter, five issuing entities, Hutchens’ attorney Alvin Meisels, and Broad and Cassel, a Florida law firm that represented several of the defendants during the relevant time period.

Plaintiffs conceded they lacked standing to pursue their claims against Broad and Cassel, and the Tenth Circuit reversed and remanded on this issue. However, the Tenth Circuit affirmed the district court’s grant of F.R.C.P. 23 class certification. Defendants contend the district court erred in finding that common issues predominated over individual ones in the class certification. The Tenth Circuit reviewed for abuse of discretion and found none. The Tenth Circuit found no reasonable dispute that plaintiffs met the threshold requirements of Rule 23(a), and evaluated solely for whether common issues predominated under the class type listed in Rule 23(b)(3).

After evaluating the prerequisites of a civil RICO claim, the Tenth Circuit discussed plaintiffs’ requirement to prove that a link existed between defendants’ actions and the class injury. Plaintiffs must prove a causal connection between defendants’ misrepresentation and and plaintiffs’ reliance on that misrepresentation. In the context of a class action, the plaintiffs must show that the reliance is susceptible to generalized proof. In the instant case, the evidence of class members’ payments for loan commitments is sufficient to show reliance on defendants’ promise to provide loan funds. The fact of payment of the up-front fee is common to the entire class. The Tenth Circuit also found that superiority was proven as to the class action’s preference over individualized actions.

Defendant Meisel also raised the question of whether the district court had subject matter jurisdiction over the Canadian defendant entities. The Tenth Circuit declined to consider the question, finding it exceeded the scope of Rule 23(f) review and instead was a merits issue. The Tenth Circuit similarly declined to consider several other issues raised by defendants, finding their review limited to the scope of Rule 23(f) and disfavoring interlocutory review of other issues.

The district court’s class certification was reversed and remanded as to Broad and Cassel, and was affirmed as to all other defendants.

Credit Unions Now Able to Offer Federally Insured Attorney Trust Accounts

On December 18, 2014, President Barack Obama signed into law H.R. 3468, “Credit Union Share Insurance Fund Parity Act.” This Act allows credit unions to federally insure attorney trust accounts to the maximum amount allowed under the Share Insurance Fund.

The Act requires the National Credit Union Administration Board to provide pass-through share insurance to shares of any interest in a lawyer’s IOLTA account. Previously, credit unions were not able to insure these accounts at the same levels as banks because not all clients were members of the credit union, creating a competitive disadvantage for credit unions with attorney trust accounts.

 

Tenth Circuit: Damages Award on Default Judgment Upheld in Complex Litigation

The Tenth Circuit Court of Appeals issued its opinion in Niemi v. Lasshofer on Tuesday, November 4, 2014.

John Niemi, along with co-plaintiffs Robert Naegele, III, and Jesper Parnevik, was working on a large-scale development project in Breckenridge, Colorado, known as the Fairmont Breckenridge. Azco, LLC and Azco II, LLC, as well as Mesatex, LLC – companies run by Niemi, collectively known as the Azco entities – were the purchasers of the properties for the Fairmont. Based on the success of Phase I of the project, Niemi and the co-investors sought $200-$220 million in financing for Phase II. Defendants Lasshofer and Michael Burgess represented that they could provide financing for Phase II, but required the investors to agree to stop looking for other financing and to provide a $180,000 loan commitment fee. The investors agreed and wired the money. Following an extensive due diligence process, plaintiffs provided an additional $2 million “upfront collateral deposit” to Lasshofer and Burgess. The loan proceeds never materialized, despite repeated assurances from Burgess and Lasshofer that the funds were coming, and eventually Burgess was indicted on criminal fraud charges and sentenced to 180 months’ imprisonment. As part of his plea bargain, Burgess indicated that the funds from the investors were deposited in an account belonging to Innovatis Asset Management, SA (IAM), a company associated with Lasshofer. Burgess implicated Lasshofer as his co-defendant and stated that IAM was continuing to defraud investors. Even after Burgess’s arrest, Lasshofer continued to assure the investors that their funds were coming, but no money ever materialized.

The three investors met to discuss how they would recover from the fraud, and during the conversation Niemi, acting on behalf of the Azco entities, expressly assigned all causes of action and claims to Parnevik, Naegle, and himself. The three filed a Verified Complaint in April 2012, initiating the lawsuit and identifying the various parties and their relationships. The amended complaint filed in July 2012 alleged 17 claims for relief, including a claim under the Colorado Organized Crime Control Act (COCCA) against the Lasshofer defendants and a common law fraud claim against all defendants. In March 2012, the district court issued a TRO to guard against dissipation of the Lasshofer defendants’ assets, and in June 2012 the court issued a preliminary injunction, effectively freezing the worldwide assets of the Lasshofer defendants. After a hearing in March 2013, the court found the Lasshofer defendants to be in contempt of its June 2012 preliminary injunction. In a joint filing between the investors and the Lasshofer defendants, the Lasshofer defendants declared they would no longer devote resources to the case at the district court level, would not participate in discovery, and would not answer Plaintiffs’ amended complaint. The district court eventually entered default judgment against the Lasshofer defendants and awarded over $61 million to the plaintiffs, trebled to $185 million. Lasshofer appealed.

Prior to reaching the merits, the Tenth Circuit had to resolve issues related to its authority to decide the appeal. Plaintiffs had requested the Tenth Circuit to employ the “fugitive disentitlement doctrine” to dismiss the Lasshofer defendants’ appeal. The Tenth Circuit could find no circumstances that would warrant application of the doctrine. Plaintiffs also contend that the Lasshofer defendants must post a bond on the default judgment before appealing, but the Tenth Circuit disagreed, finding that would be sharply at odds with the rules of procedure. Since all issues were ripe due to the district court’s dismissal of claims with prejudice, the Tenth Circuit evaluated the merits of the appeal.

First, the Lasshofer defendants raised several issues related to the district court’s authority to hear the case. They contended (1) Plaintiffs lacked standing to bring their claims, and the district court thus lacked subject matter jurisdiction, (2) the court lacked personal jurisdiction over the Lasshofer defendants, and (3) venue was not proper in the District of Colorado. The Tenth Circuit first addressed the standing claim. Defendants argued that the plaintiffs were not proper parties, because the loan agreement listed Azco as the borrower. However, after reviewing the record, the Tenth Circuit was satisfied that plaintiffs possessed proper standing to bring their claims. The defendants argued that the Loan Agreement barred transfer of the right to sue, but the district court held, and the Tenth Circuit agreed, that the Loan Agreement was a tool of defendants’ broader fraudulent enterprise, and therefore its terms were void and unenforceable.

The Tenth Circuit likewise disposed of defendants’ arguments that the court lacked personal jurisdiction over them. Plaintiffs had many connections to Colorado, and although the Loan Agreement specified jurisdiction was proper in the District of New York, the defendants contended they would have disputed New York jurisdiction also. Therefore, the U.S. District Court for the District of Colorado was the proper venue for the claims. The court also concluded that sufficient minimum contacts existed to confer personal jurisdiction over Lasshofer.

Finally, defendants argued several errors in the determination of damages. The Tenth Circuit reviewed the record and found no error in the court’s calculation. After entry of default judgment, the court requested that plaintiffs present evidence regarding their damages. Plaintiffs presented two different damages calculations, based on two different methods of arriving at the damages amount, that were nearly identical in the total amount. The district court chose the actual damages and trebled it. There was no error in its decision.

The Tenth Circuit denied plaintiffs’ motion to dismiss based on the fugitive entitlement doctrine, denied defendants’ motion to file a surreply based on that motion, denied plaintiffs’ motion to require defendants to post a bond, and denied the requests to award fees and costs. The district court’s award of damages was affirmed, except to the extent it applied to one defendant that did not exist at the time of the controversy. The Tenth Circuit ordered the district court to vacate its order of contempt. The case was remanded for further proceedings.

Tenth Circuit: Contract’s No Third-Party Beneficiary Provision Effectively Barred Claims of Third-Party Beneficiary Entities

The Tenth Circuit Court of Appeals issued its opinion in Gorsuch Ltd., B.C. v. Wells Fargo National Bank Association on Tuesday, November 4, 2014.

Renie and David Gorsuch founded Gorsuch, Ltd., a retail store, in 1962, and subsequently founded Gorsuch, Limited at Aspen and  Gorsuch, Limited at Keystone to operate additional retail stores. They founded Gorsuch Cooper to own the property from which Gorsuch, Ltd. at Aspen operates its business. The three child entities are collectively known as the Gorsuch Entities. In 2008, Gorsuch, Ltd. obtained a $14 million line of credit from Wells Fargo, and the credit agreement explicitly contained a no third-party beneficiary (NTPB) provision. When Gorsuch’s retail sales were lower than expected in 2009, Wells Fargo suspended the line of credit. Gorsuch Ltd. and the Gorsuch Entities brought suit against Wells Fargo for damages in state court, but Wells Fargo removed to federal court for diversity jurisdiction. Wells Fargo moved to dismiss the Gorsuch Entities’ third-party beneficiary claims due to the NTPB provision.

The district court determined the Gorsuch Entities were impermissible third-party beneficiaries and held the NTPB provision precluded them from seeking relief. The district court dismissed the Gorsuch Entities, granted Wells Fargo’s motion to dismiss the third-party claims, stayed the proceeding while Wells Fargo and Gorsuch, Ltd. proceeded to arbitration, and administratively closed the case without prejudice. Gorsuch, Ltd. moved to amend the complaint to include the Gorsuch Entities, but the district court denied the motion since the case was administratively closed and no one had petitioned to reopen it. Gorsuch, Ltd. eventually petitioned to reopen the case, but later withdrew the motion as it arbitrated its claims. After the district court’s deadline for reopening passed, it dismissed the case without prejudice. Gorsuch, Ltd. subsequently moved to reopen the case, which was granted, and moved for the court to confirm the arbitration award and file a third amended complaint along with the Gorsuch Entities. The district court affirmed the arbitration award, concluding Gorsuch, Ltd.’s involvement in the case. A magistrate judge filed a minute order clarifying that Gorsuch, Ltd. was the only proper plaintiff in the case, and the district court judge agreed, finding that the Gorsuch Entities had been dismissed from the litigation and had not shown good cause to file the third amended complaint. The Gorsuch Entities filed a timely appeal.

On appeal, the Tenth Circuit, applying Colorado law, found that (1) the district court correctly dismissed the Gorsuch Entities, and (2) properly denied their motion to amend. The Tenth Circuit found the Gorsuch Entities were not permissive assignees under the contract with Wells Fargo, and in fact were barred from bringing claims by the contract’s NTPB provision. Although Wells Fargo understood the business relationship between Gorsuch, Ltd. and the Gorsuch Entities, the contract expressly prohibited litigation from the Gorsuch Entities, therefore the district court’s dismissal of the Entities’ claims was correct. The Gorsuch Entities asserted that the district court gave improper weight to the NTPB provision, but there was no evidence in writing that the Entities were permissible third-party beneficiaries under the contract.

The Tenth Circuit also found that the district court correctly denied the Gorsuch Entities’ motion to amend the complaint. They were dismissed as parties in November 2011, and their July 2013 motion to amend was both untimely and showed no good cause to amend the complaint. Because the Gorsuch Entities lacked good cause for the delay in filing their amended complaint, the district court’s dismissal was proper.

The Tenth Circuit affirmed the district court’s dismissal of the Gorsuch Entities as parties and denial of their motion to amend.

Tenth Circuit: Plaintiffs Failed to Establish Statutory Standing Under Colorado State Law

The Tenth Circuit Court of Appeals published its opinion in Niemi v. Lasshofer on Friday, September 6, 2013.

John Niemi and his investors set out to build a luxury ski condominium complex in Breckenridge, Colorado, in two phases, working through a set of companies controlled by Mesatex. But traditional financing proved hard to find: after completing the first phase of development they found no bank willing to loan the $220 million needed to finish the project. So they looked for alternative sources.

They found Michael Burgess. Mr. Burgess claimed to represent a European investor, Erwin Lasshofer, who Burgess said had $250 million to loan. All Mesatex had to do was to pay a $180,000 commitment fee and provide another $2 million as a collateral deposit.  This Mesatex did, but the promised loan never materialized. Mr. Burgess found himself in federal prison serving time for fraud and money laundering.

The investors brought this lawsuit alleging that the lost loan ruined Mesatex’s business, caused it millions in lost profits, and sent its properties into foreclosure. But neither Mesatex nor any of its subsidiaries was included as a party to this lawsuit. Instead, the suit named only Mesatex’s investors as plaintiffs.

The district court granted the plaintiffs’ motion for a preliminary injunction, effectively freezing the worldwide assets of Mr. Lasshofer and the corporate defendants and ordering them to deposit $2.18 million in escrow pending a final judgment. It is this interlocutory order Mr. Lasshofer and the corporate defendants asked the Tenth Circuit to undo.

However, it was Mesatex that sought the loan, signed the loan application, and received the loan commitment. It was Mesatex’s subsidiaries that signed the loan agreement and its amendment, paid the loan fees, and advanced the loan collateral. It was those companies, too, that owned the Breckenridge properties and whose business allegedly suffered when the loan failed to materialize. Yet neither Mesatex nor any of its subsidiaries was named as a plaintiff in this lawsuit. Accordingly, plaintiffs lacked standing to proceed under Colorado state law, let alone to win a preliminary injunction.

Plaintiffs argued that they invested in Mesatex and its subsidiaries; they stressed, too, that they guaranteed some of the corporations’ loans. But it is long settled law that a shareholder or guarantor lacks standing to assert RICO claims when their losses are only derivative of a corporation’s when the individuals’ losses come about only because of the firm’s loss. And despite being challenged to do so in this appeal, the plaintiffs did not identify any direct and personal injury they suffered.

Accordingly, the preliminary injunction was VACATED and the case was REMANDED for further proceedings consistent with this opinion.