August 18, 2019

Colorado Court of Appeals: Promissory Note is a Security, Therefore Conviction for Securities Fraud Appropriate

The Colorado Court of Appeals issued its opinion in People v. Thompson on Thursday, June 14, 2018.

Securities Fraud—Jury Instruction—Double Jeopardy—Propensity Evidence—Theft—Sentencing.

Defendant was the sole member of SGD Timber Canyon LLC (SGD), which held an interest in 63 undeveloped lots in the Timber Ridge subdivision. The lots went into foreclosure, and in February 2010 SGD filed for bankruptcy. Defendant did not disclose these facts to the Witts, who later loaned defendant $200,000 to acquire a lot in Timber Ridge and another $200,000 for construction of a home on the lot, with the understanding that the loans would be repaid with a profit share of as much as $400,000 when the home was sold to a prequalified buyer. Later, at defendant’s urging, the Witts increased the loan to $2.4 million and converted their investment into a “bridge loan” to defendant, who represented that the proceeds would be used for continued development of Timber Ridge. The parties executed a promissory note and guarantee agreement. The promissory note was secured by defendant’s primary and secondary residences with collateral to convert the 24 lots in Timer Ridge upon closing and final purchase of Timber Ridge.

Defendant used the money on items not related to Timber Ridge and never developed the property there. Defendant defaulted on the note. He eventually repaid the Witts $70,000. Ultimately, the Witts sued defendant but did not recover any further monies from him. A jury found defendant guilty of two counts of securities fraud and one count of theft, and he was sentenced to 12 years in the custody of the Department of Corrections for each of the securities counts, to be served concurrently, and 18 years for the theft conviction, to be served consecutively to the other sentences.

On appeal, defendant claimed that the evidence was insufficient to support his securities fraud convictions because the promissory note and guarantee he provided to the Witts did not constitute a security. The “family resemblance test” applies to determine when a note is a security under the Colorado Securities Act (CSA). Under the family resemblance test, a note is presumed to be a security, but that presumption may be rebutted by a showing that the note strongly resembles other financial instruments. Here, the Witts’ investment, memorialized by the promissory note, was a transaction protected by the CSA and did not strongly resemble the family of transactions that are not securities. The evidence was sufficient to support the securities fraud convictions.

Defendant also argued that the trial court erred by tendering an inaccurate jury instruction regarding the definition of a security. Defendant did not object to the definition of security that was given to the jury, nor did he tender an alternative instruction. The law regarding the definition of a security was not well settled at the time of defendant’s trial, and thus any error in the jury instruction would not have been obvious or plain.

Defendant also claimed that his convictions and sentences for securities fraud violated double jeopardy because they are alternative ways of committing the same offense, and therefore the two counts should be merged. Defendant failed to raise this issue before the trial court. Here, defendant was charged with and convicted of multiplicitous counts of securities fraud because the evidence showed a sale of one security to one investor based on one set of false or misleading statements. But the law was not well-settled concerning the proper unit of prosecution, so there was no plain error.

Defendant further contended that there was insufficient evidence to support his theft conviction. Although the funds were supposed to be used to develop Timber Ridge, defendant used the funds to pay his own attorney fees, to improve the house that his wife continued to occupy at the time of trial, and for other personal expenses. Therefore, there was sufficient evidence to support the conclusion that defendant knowingly obtained the Witts’ money by deception and intended to permanently deprive them of it.

Defendant also argued that the court erred by admitting propensity evidence that defendant had previously attempted to sell a lot in Timber Ridge that he did not own. However, the evidence was logically relevant to prove identity, motive, knowledge, and lack of mistake, and the probative value was not substantially outweighed by the danger of unfair prejudice.

Lastly, defendant argued that his sentence for theft must run concurrently with the concurrent sentences for securities fraud because the crimes are based on identical evidence. Here, different evidence supported each offense, so there was no sentencing error.

The judgment and sentence were affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Promissory Note Void When Issued in Exchange for Leniency in Criminal Trial

The Colorado Court of Appeals issued its opinion in Rademacher v. Becker on Thursday, September 24, 2015.

Settlement Agreement—Promissory Note— Criminal Action—Void Against Public Policy.

Defendant and plaintiff were involved in a 10-year extramarital relationship. During a confrontation, defendant’s wife threw coffee on plaintiff and kicked over the chair she was sitting in. Wife was criminally charged with assault. After negotiating with plaintiff, defendant entered into a settlement wherein plaintiff agreed not to pursue any claims against wife or defendant and to ask the district attorney’s office to offer wife a deferred sentence. In exchange for these promises, defendant executed a $300,000 promissory note payable to plaintiff. At the same meeting where the settlement agreement was signed, plaintiff signed a letter to the district attorney indicating her desire that wife be offered a deferred sentence. Plaintiff later filed suit to enforce the note, and the jury found in favor of plaintiff. Defendant appealed.

An agreement in which money or other valuable consideration is paid in exchange for a crime victim’s efforts to obtain leniency in connection with a criminal charge is void as against Colorado public policy. Here, counsel for both plaintiff and defendant acknowledged that part of the consideration for the settlement payment was the settlement of the pending criminal matter. Because at least part of the consideration for execution of the settlement agreement and promissory note was given in an attempt to hinder or stifle the plenary prosecution against wife, the entire agreement and promissory note are void. The judgment was reversed and the case was remanded to the trial court to dismiss the action.

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

Colorado Court of Appeals: Secured Creditor With Disallowed Claim Against Estate Can Enforce Underlying Security

The Colorado Court of Appeals issued its opinion in Oldham v. Pedrie on Thursday, July 16, 2015.

Real Property—Promissory Note—Deed of Trust—Probate—Notice of Claim—Disallowance—Foreclosure—Novation.

This appeal involves a parcel of land in Teller County first purchased by Lorna Oldham in 1976 from Donald Pedrie in exchange for a promissory note. In 2005, Lorna Oldham signed a second promissory note to replace the first promissory note. In 2007, she died, and Pedrie filed a notice of claim against the Estate of Lorna Oldham for the amount owing on the promissory note. The personal representative disallowed a portion of Pedrie’s claim, Pedrie threatened foreclosure of the property, and the trial court allowed him to proceed with his foreclosure proceedings.

On appeal, the Oldhams and the Estate contended that the 1976 Deed of Trust was extinguished when Pedrie declined to contest the disallowance in the Michigan court. Under the Colorado and Michigan probate codes, the requirement to file a notice of claim in an estate proceeding does not affect or prevent the right of a secured creditor to enforce a mortgage or other liens on estate property. Further, a secured creditor is not required to pursue an unconditional claim that is disallowed. Therefore, a secured creditor’s lien on real property is not extinguished when the creditor presents an unconditional claim against a decedent’s estate but does not pursue a disallowed claim within sixty-three days. The secured creditor may still pursue a foreclosure action to enforce the lien. Therefore, the district court did not err when it found that Pedrie held a valid deed of trust on the Teller County property.

The Oldhams also contended that Pedrie’s 1976 lien on the Teller County property was extinguished under CRS § 38-39-207, either because Pedrie accepted a new promissory note in 2005 that was not secured by a deed of trust or because there was a novation. The record contains unrebutted testimony that the principal plus interest due on the first note was greater than the amount due on the 2005 promissory note. Under these circumstances, the 2005 promissory note did not constitute a novation and did not extinguish the 1976 Deed of Trust.

Finally, the Oldhams contended that the district court erred by not making a finding on the total amount owed on the debt secured by the deed of trust. Pursuant to CRCP 120, the district court was not required to determine the amount remaining on secured debt. The Trial Management Order (TMO), however, required the court to determine the payoff amount. Therefore, the district court erred in not complying with the TMO in this regard. The judgment was affirmed in part and reversed in part, and the case was remanded to the district court to determine the amount owed by the Oldhams on the 1976 Deed of Trust.

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

Frederick Skillern: Real Estate Case Law — Contracts, Purchase and Sale, Transactions (3)

Editor’s note: This is Part 6 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.

frederick-b-skillern

By Frederick B. Skillern

Top Rail Ranch Estates, LLC v. Walker
Colorado Court of Appeals, January 30, 2014
2014 COA 9

Sale of residential lots; claim preclusion; fraud; economic loss rule.

Top Rail Ranch entered into a contract with Walker Development to purchase a subdivision of platted residential lots for $1 million, with $200,000 down, and a promissory note for the balance, secured by a second lien deed of trust which it agreed to subordinate to bank financing with Canon National Bank for the subdivision development. Walker Development then attempted to rezone adjoining property that it owned to Agricultural Forestry, with plans to sell the adjoining parcel to a mining company. Walker told Top Rail’s owner, Jensen, that the rezoning was to facilitate a conservation easement.

At this point, everything fell apart, and it is not over yet. Walker sold the adjoining land to a mining company after the rezoning was approved. When the sale was announced, Top Rail sales to potential homeowners froze. The County reversed the mining company’s zoning approval. Top Rail defaulted on its loan with Canon National, which foreclosed on the subdivision lots. Top Rail could not cure; Walker Development redeemed from its second lien position, acquiring title to all but two of the subdivision lots. The parties sued each other in separate actions, and this consolidated appeal follows.

In the first case, Top Rail sued Walker for fraud, breach of contract, bad faith breach of contract and other claims. Walker Development counterclaimed for breach of the covenants in its deed of trust, seeking to recover damages for $200,000 that it had paid to cure a lien for nonpayment of a water tap. The trial court granted a directed verdict on the counterclaim, on the basis that the Walker Development deed of trust had merged into the Public Trustee’s deed after the Canon National Bank foreclosure, and the jury found for Top Rail on its tort and contract claims, awarding in excess of $1 million.

In the meantime, Walker Development sued Top Rail and its principals on the promissory note given in purchase of the property, and for foreclosure on the two lots not covered by Canon National Bank’s foreclosure. The district court dismissed Walker Developments on the basis of claim preclusion, based on the judgments entered in the first action.

On appeal, the court holds that the district court improperly dismissed Walker Development’s counterclaims in the first action on a motion for directed verdict. Regardless of whether the lien imposed by the Walker Development deed of trust was extinguished by foreclosure of the bank’s senior lien – Walker Development acquired title through its certificate of redemption – the contractual covenants in the deed of trust were not extinguished by the foreclosure. Schwab v. Martin, 165 Colo. 547, 441 P.2d 17, 19 (1968). Walker had a valid claim for the money spent to remove the water tap lien.

The court then holds that the fraud and bad faith breach of contract claims asserted by Top Rail are barred by the economic loss rule. It affirms the judgment on Top Rail’s breach of contract claim ($500,000) is affirmed. The case is then remanded for trial on Walker Development’s counterclaim on the tap lien.

Addressing the second case, Walker Development argues that its claims are not barred by claim preclusion, as its promissory note claims were not compulsory counterclaims in the first action; the counterclaims were only permissive. The appeals court agrees. Adjudication of the claims on the promissory notes would not result in inconsistent verdicts or a deprivation of rights established in the first litigation.

Frederick B. Skillern, Esq., is a director and shareholder with Montgomery Little & Soran, P.C., practicing in real estate and related litigation and appeals. He serves as an expert witness in cases dealing with real estate, professional responsibility and attorney fees, and acts as a mediator and arbitrator in real estate cases. Before joining Montgomery Little in 2003, Fred was in private practice in Denver for 6 years with Carpenter & Klatskin and for 10 years with Isaacson Rosenbaum. He served as a district judge for Colorado’s Eighteenth Judicial District from 2000 through 2002. Fred is a graduate of Dartmouth College, and received his law degree at the University of Colorado in 1976, in another day and time in which the legal job market was simply awful.