April 18, 2019

Tenth Circuit: Where Property Held By Trust Was For Benefit of Taxpayer, Foreclosure Of Tax Lien Proper

The Tenth Circuit Court of Appeals published its opinion in United States v. Tingey on Wednesday, May 29, 2013.

The district court permitted the government to foreclose on federal tax liens on a ski cabin (the Ski Cabin) titled in the name of the D.E. Brown Family Trust (Family Trust), whose beneficiaries were Douglas Brown’s wife and children. The taxes were owed by Douglas Brown (Brown) and his wife (together, the Browns), not the trust, but the court found that the Browns were the beneficial owners of the cabin because Brown had a purchase-money resulting trust (PMRT) arising from his having purchased the cabin and then conveyed it to the Family Trust. The district court also held that under federal law, the Family Trust held legal title to the cabin as nominee for the Browns. The trustee of the Family Trust, Robert Tingey, appealed.

Tingey first argued that that the government waived the right to assert that the Browns held the beneficial interest in the cabin. Tingey based his waiver argument on a stipulated order in Brown’s criminal securities-fraud case, which required that the proceeds of certain stock held by the Family Trust be forfeited to the United States as restitution, but lifted any further restraint on remaining trust property. Tingey argued that the government knew of the Family Trust’s claim to the cabin at the time of the stipulation. The Tenth Circuit held that even if “the government was fully aware of the Family Trust’s claims to the cabin, its agreement to the stipulated order did not waive its rights to pursue a tax claim. The order said nothing about tax liability or who had beneficial interests in the Ski Cabin.”

Tingey next argued that the district court erred in concluding that the Family Trust held the cabin in a PMRT for Brown’s benefit. The Tenth Circuit agreed with the district court that clearly Brown paid the purchase price for the cabin before legal title transferred to the Family Trust, thus meeting a threshold requirement for a PMRT.

The court also rejected Tingey’s argument that when an express trust holds legal title, a resulting trust is not possible.

Tingey challenged the district court’s ruling that the government demonstrated by clear and convincing evidence the final requirement for finding a PMRT, that Brown intended to retain the beneficial interest in the Ski Cabin. Brown made note payments out of personal funds, used the property without the trustee’s knowledge, rented the cabin out without the trustee’s involvement, and performed maintenance on the cabin. Additionally, the testimony of Tingey established that Brown set up the trust to shield the cabin from his creditors. The court affirmed the district court’s holding that the Ski Cabin was held by the Family Trust in a PMRT for the benefit of Brown.

Tenth Circuit: Federal Court Abstains from Interfering in Protracted State Court Litigation

The Tenth Circuit issued its opinion in Osguthorpe v. Ascutah, Inc. on Tuesday, January 15, 2013.

Some time ago, this lawsuit began in Utah state court regarding the development of Wolf Mountain Resorts. Since then, the litigation has not so much developed as it has metastasized: parties have proliferated, claims have collided, and issues have become intimately entangled. Eventually, one of the frustrated suitors looked to the federal courts for relief, asking for a stay of all state-court proceedings and an order compelling arbitration of the state-court claims. The federal district court declined to do so, dismissed the case, and awarded attorney’s fees to the prevailing party.

This appeal asks whether the federal district court correctly determined that the federal court should stay out of the still-unfolding state-court controversy.

The Tenth Circuit concluded that the Supreme Court’s Colorado River doctrine, see Colorado River Water Conservation District v. United States, 424 U.S. 800, 817-21 (1976), was controlling law in this case.  Under the Colorado River doctrine, as a general rule, the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction. But, at times, reasons of wise judicial administration must weigh in favor of permitting the dismissal of a federal suit due to the presence of a concurrent state proceeding. The Tenth Circuit held that Colorado River doctrine wisely counseled its abstention from duplicative interference with the exceptionally protracted state proceedings present here. A federal court should not shy away from contemporaneously exercising concurrent jurisdiction with a state court in the ordinary course of things. But this is no ordinary case. The Utah state court had already overseen years of intensive litigation before the federal court’s jurisdiction was invoked.

On Utah’s motion for attorney’s fees, the Court was concerned about the lack of specific factual findings by the federal district court in support of its decision to award those fees.

Accordingly, the Tenth Circuit AFFIRMED the district court’s dismissal and DISMISSED AS MOOT the interlocutory appeal of the district court’s order denying the motion to compel arbitration and for a stay of the state-court proceedings. In addition, the Court VACATED the district court’s award of attorney’s fees and REMANDED the matter to the district court for detailed findings of fact sufficient to afford meaningful appellate review of its award.

Coworking: A New Means For Startup Real Estate

Joel Jacobson_pictureWhen deciding on commercial real estate, new entrepreneurs and solo attorneys should consider coworking as a viable real estate model. Coworking presents the opportunity for individuals from diverse fields to work daily or monthly in a shared, commercial environment at a reasonable price despite being employed by different industries or companies. Unlike some traditional commercial arrangements, one need not commit to a term of several years. Lawyers should know that coworking is an exciting and attractive real estate arrangement that brings together quality, low cost, and flexible exit options. This is a trend on the rise in Colorado uniting individuals in small businesses.

Recently, I began spending time at one such space in Denver – Creative Density.  This space is not only populated by technology entrepreneurs and free-lance website developers, but also attorneys and writers. At its core, coworking is not only about shared office space, but also about fostering a collaborative community. The less experienced and boot-strapped entrepreneurial client may be best advised to consider real estate that takes into account shared community, price sensitivity, and flexibility surrounding lease terms in the event that the business does not succeed. When asked why attorneys should care about coworking, the owner of Creative Density, Craig Baute said, “When advising clients on starting a business, coworking is an excellent way for them to reduce risk, expenses, and grow their network and skill set. Since it is a flexible option it grows with them and starts at a much lower rate compared to other office solutions for small businesses.”

Further, attorneys starting their own solo practice should consider this type of real estate arrangement for themselves if concerned about location, price-point, or future growth. Coworking is a flexible option that can quickly respond to new law practice dynamics and aid client development along the way. Mr. Baute agrees, noting that “lawyers have been sharing offices for years to lower costs, but this is a way to get to work with people outside of the industry, expand your network, and learn new valuable skills.” Similarly, a recent piece from the Harvard Business Review highlighted an attorney successfully utilizing a coworking arrangement to develop his new company. The attorney founded a business offering a transparent way to disclose legal terms within the social media context and was quite satisfied with coworking because the arrangement presented “ultra-flexibility and low overhead.”

It is important for Colorado attorneys to be aware of the coworking real estate model when advising entrepreneurial clients or considering a solo practice. To understand a client’s real estate desires, a lawyer must assess the client’s financials, business savvy, and likelihood of success. Coworking presents an arrangement that is affordable, permits one to quickly build out a diverse social network, and is flexible. Such a model can potentially lead to new clients, new investors, or new resources to aid in completing work. These characteristics certainly increase the probability of business success. In sum, coworking should be considered because the arrangement hits the mark of affordable pricing and early exit options.

Joel Jacobson is a Contracts and Operations Associate with H.B. Stubbs Company, LCC – a national design and fabrication firm headquartered near Detroit, MI for exhibits displayed by technology and automotive companies. He focuses on contracts, employment law, and a variety of non-legal business issues. Joel serves on the Executive Council of the Denver Bar Association Young Lawyers Division and has an interest in topics impacting start-up companies in the Denver entrepreneurial community. He can be reached by email at jmjacobson1@gmail.com or on Twitter @J_m_Jacobson.

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.

Colorado Real Estate Commission Forms Effective January 1, 2013 (Revised)

The Colorado Real Estate Commission amended several forms in 2012, which are effective January 1, 2013 and mandatory for use by licensed real estate brokers. The forms are available as PDFs that may be downloaded from a zip file on the Colorado Real Estate Commission website.

The forms with a January 1, 2013 effective date are:

  • AE 41-9-12 – “Agreement to Amend/Extend Contract”
  • CBS1-9-12 – “Contract to Buy and Sell Real Estate (Residential)”
  • CBS2-9-12 – “Contract to Buy and Sell Real Estate (Income – Residential)”
  • CBS3-9-12 – “Contract to Buy and Sell Real Estate (Commercial)”
  • CBS4-9-12 – “Contract to Buy and Sell Real Estate (Land)”
  • CBSF1-9-12 – “Contract to Buy and Sell Real Estate (Colorado Foreclosure Protection Act)”
  • CL8-9-12 – “Closing Instructions”
  • CP40-9-12 – “Counterproposal”
  • EBA53-10-12 – “Exclusive Brokerage Listing Addendum to Listing Contract”
  • EM9-9-12 – “Earnest Money Receipt”
  • GD31-9-12 – “Green Disclosure (Energy)”
  • LB36-10-12 – “Licensee Buy-Out Addendum to Contract to Buy and Sell Real Estate”
  • LC50-9-12 – “Exclusive Right-to-Sell Listing Contract”
  • LP45-9-12 – “Lead-Based Paint Disclosure (Sales)”
  • LP46-9-12 – “Lead-Based Paint Disclosure (Rentals)”
  • NTC43-10-12 – “Inspection Objection”
  • NTC43R-10-12 – “Inspection Resolution”
  • NTT44-9-12 – “Notice to Terminate”
  • RA33-9-12 – “Residential Addendum to Contract to Buy and Sell Real Estate”

These forms and all other Colorado Real Estate Commission forms may be downloaded from the Colorado Real Estate Commission website.

Amendment 64 Passed in Colorado: Now What?

On Tuesday, November 6, 2012, Colorado voters approved Amendment 64, and Washington state voters approved Initiative 502. In enacting these ballot measures, Colorado and Washington become the first states in the country to decriminalize marijuana outside of the medical marijuana context.

What does Amendment 64 mean for Colorado?

Amendment 64 has two basic parts: (1) within certain defined parameters, it decriminalizes adult possession, use and cultivation of marijuana for recreational purposes; and (2) creates a framework for the establishment of a regulated and taxed retail marijuana industry, which would include cultivation, marijuana-infused products manufacturing, and retail sales. Respectively, these can be described as the “decriminalization,” and “regulation” components of Amendment 64.

As an initial matter, it is important to note that Amendment 64 does not affect the federal prohibition on marijuana. Marijuana remains illegal for all purposes at the federal level, and possession of any amount can lead to serious federal civil and criminal penalties. Thus, it will still be a federal crime for adults in Colorado to possess, cultivate, or distribute marijuana. Indeed, Colorado law would be irrelevant, and likely inadmissible, in a federal criminal prosecution or asset forfeiture proceeding arising from federal marijuana charges.

The status of federal marijuana law will have a significant impact on what happens in Colorado, but the effect of the conflict between Colorado and federal law will likely play out differently with respect to different components of Amendment 64. Decriminalization will go into effect as soon as the results of the election are made official (which could take several weeks). At that time, Colorado law enforcement authorities will no longer be able to arrest or prosecute adults possessing small amounts of marijuana, or growing up to six plants for personal use, provided they are otherwise acting in compliance with the requirements of Amendment 64. Accordingly, though it is inaccurate to say that marijuana is “legal” in Colorado in light of continued federal prohibition, as a practical matter, Amendment 64 largely eliminates the risk that any adult acting within the limits of the amendment would be arrested or convicted of marijuana crimes in Colorado. There are simply not enough federal law enforcement authorities on the ground in Colorado to deter adult recreational use of marijuana, and federal authorities cannot force Colorado authorities to enforce federal law. This reduced practical risk of prosecution will certainly have an effect on people’s behavior, and there is likely little that federal authorities will be able to do to meaningfully enforce marijuana prohibition as it relates to adult personal use of the drug.

Regulation, however, is likely a different matter, and its success hinges greatly on the federal attitude and approach toward the creation of the first state-regulated recreational marijuana market in the country. Because of federal forfeiture laws, the implications of regulation will be of particular concern to real estate owners, landlords and real estate lenders who may be faced with the opportunities to provide industrial and retail space to this new industry. In a future post, I will discuss some of the real estate-related issues that will arise from regulation.

The critical period will be the next year or so, while the state enacts regulations, and possibly statutes, to control a newly created recreational marijuana industry. Implementing regulations are supposed to be approved by July of 2013, and it would likely be late 2013 or early 2014 before licenses would be issued to new marijuana businesses. Thereafter, licensed businesses would be able to cultivate marijuana, produce marijuana-infused products, and sell marijuana to persons 21 and over at retail stores. Until then, Colorado adults will have the benefit of decriminalization, and will be able to grow their own without violating Colorado law, but will not be able to purchase marijuana at a retail establishment for recreational use, nor will marijuana be taxed.

Given the uncertain federal reaction to Amendment 64, it remains to be seen whether such a regulated marijuana industry will even get off the ground in Colorado. Whereas federal efforts to mitigate personal marijuana use would likely be futile in light of state-level decriminalization, federal authorities would have very effective tools at their disposal if they were inclined to prevent the establishment of a regulated and taxed recreational marijuana market in Colorado.

As a legal matter, it is well-established that state law changes to marijuana laws have no effect on federal marijuana laws, and nothing prevents federal authorities from prosecuting what might appear to be otherwise law-abiding marijuana businesses. This power is already on display in the context of medical marijuana in Colorado. Colorado’s existing medical marijuana industry currently survives solely due to Department of Justice and the United States Attorney for Colorado’s restrained exercise of prosecutorial discretion. These federal authorities have generally not taken any action against licensed medical marijuana operations that are in compliance with Colorado’s extensive medical marijuana industry regulatory regime. However, earlier this year, the Colorado U.S. Attorney’s Office made a determination that its restraint in exercising its prosecutorial discretion would only go so far. Specifically, Colorado U.S. Attorney John Walsh has determined that his office will not tolerate the continued operation of medical marijuana businesses located near schools. Since the decision, his office has been successful in systematically shutting down such businesses merely by making threats of criminal prosecution and asset forfeiture.

In the circumstances, it is entirely reasonable to question whether federal authorities will allow the development of a regulated market for marijuana outside of the medical context. If national or Colorado-based federal authorities decide to draw a line in the sand on this issue, it could set up a significant conflict. Alternatively, if Colorado’s medical marijuana experience is any guide, federal authorities may decide to simply weigh in at the margins, thereby constraining the retail recreational marijuana industry in Colorado, without entirely foreclosing its development.

Colorado’s governor appears to recognize this distinction between the effect of decriminalization and regulation. Following the announcement of the voters’ approval of Amendment 64, Governor Hickenlooper made a statement strongly affirming Colorado’s intent to push forward with decriminalization, while expressing skepticism about the prospects for regulation:

I think the federal government is probably going to come down just like in prohibition–you can’t do it by state by state–but I think at the very minimum we should work aggressively to decriminalize it; make sure kids don’t get felony records. I mean, the voters–the voters are pretty clear what they feel and what they want, so within the limits of federal law and whatever the federal government will permit, we have to figure out what’s a–how are we going to go forward.

He continued, acknowledging the difficulties involved in regulation of marijuana:

If the federal government says its going to be illegal and they’re going to prosecute, we don’t have much of a voice there. We’re not going–we’re not going to secede from the union. But, we do recognize that the public has spoken loudly and we’re going to communicate that to our friends in Washington.”

It will be very interesting to see how this plays out over the next weeks and months.

Bill Kyriagis represents business and real estate clients in litigation, bankruptcy and land use matters. In the land use context, Bill counsels clients on a variety of local government issues, including posturing land use matters for potential litigation and pursuing claims when necessary. Bill has also developed expertise regarding the issues faced by landlords and  property owners related to Colorado’s medical marijuana industry. Bill has worked on a number of pro bono cases, including a successful First Amendment challenge to local government land use regulations, and assisting tenants in landlord/tenant disputes. Bill contributes to his firm’s blog, where this post originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Second Judicial District Makes Changes to Rule 120 Motion Hearing Dates

The Denver District Court in the Second Judicial District has announced a change to the foreclosure hearing procedures regarding CRCP Rule 120 – “Orders Authorizing Sales Under Powers.”

Effective with all motions for orders authorizing sale filed on or after June 1, 2011, the selected hearing date shall occur on a Tuesday or Thursday at 8:30 am.

Contact (720) 865-8301 for further information about the change to Rule 120.

Real Estate Commission Releases New Website for Approved 2011 Contract Forms

The DORA Division of Real Estate’s Commission has changed the website where approved real estate contract forms are posted. Pursuant to Commission Rule F-7, real estate brokers are required to use Commission-approved forms in appropriate transactions or circumstances in which a relevant form is applicable.

The new website can be found here.

Currently, all forms are available in Adobe Acrobat format. Select forms are available in a writeable format; all forms will be available in the writeable format by February 28, 2011.

The 2010 contract forms can still be accessed in the archives.

Timothy Gordon: Lis Pendens Still Required, Even If Mechanics’ Lien Is Bonded

Today, in Weize Company, LLC v. Martz Supply Co., 09CA1369 (Colo. App. June 10, 2010), a division of the Colorado Court of Appeals held that a subcontractor suing to enforce its rights to a mechanics’ lien that has been substituted by a bond and thus discharged must still record a lis pendens. So, according to the Court of Appeals, bonding over a mechanics’ lien will not clear title, despite the clear language of the statute.

Prime contractor Colorado Regional Construction, Inc. (“CRC”), subcontracted with Weize Company, LLC (“Weize”). CCR failed to pay Weize for the work that Weize completed, so Weize recorded a mechanics lien and commenced a lawsuit. Weize’s supplier, Martz Supply Co. (“Martz”), also recorded a lien and joined in the lawsuit.

Weize filed its lawsuit in December of 2007. “Before year end, CRC substituted bonds for the liens and the court ordered the liens released.” Probably because the mechanics’ liens were released, neither Weize nor Martz recorded a lis pendens. The trial court entered a directed verdict in CCR’s favor as to the lien claims for failure to record a lis pendens, and the Court of Appeals affirmed. This author assumes that Weize and Martz were attempting to enforce their rights against the bond, and not foreclose their previously-discharged liens. When a lien is substituted, the lien claimant may bring an action against the bond (C.R.S. § 38-22-133), but the cause of action is essentially the same as a claim to foreclose a lien. Mountain Ranch Corp. v. Amalgam Enters., Inc., 143 P.3d 1065, 1068 (Colo. App. 2005).

In holding that a lis pendens still must be recorded even though a mechanics’ lien substitution bond had been approved and the liens discharged, the Court of Appeals in Weize relied on the plain languge of Section 38-22-110, which provides that:

No lien claimed by virtue of this article . . . shall hold the property longer than six months after the last work or labor is performed . . . unless an action has been commenced within that time to enforce the same, and unless also a notice stating that such action has been commenced is filed for record within that time in the office of the county clerk and recorder of the county in which said property is situate. (Emphasis by Court of Appeals).

There are some academic and practical problems with the Court’s decision.

Once a lien has been discharged, the lien is no longer “hold[ing] the property”. Instead, “upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien . . . .” C.R.S. § 38-22-132 (emphasis added).

Recording a lis pendens seems completely contrary to the intent of the lien substitution provisions in the mechanics’ lien statute. The clear purpose for bonding a mechanics’ lien, as stated right in the statute itself, is to “release[ the property] from the lien and from any action brought to foreclose such lien.” C.R.S. § 38-22-132. Yet a “lis pendens notice effectively renders title unmarketable and prevents its transfer until the litigation is resolved or the notice is expunged.” Pierce v. Francis, 194 P.3d 505, 508 (Colo. App. 2008), citing Kerns v. Kerns, 53 P.3d 1157, 1164 n.6 (Colo. 2002).

In fact, it seems improper to record a lis pendens once the mechanics’ lien has been discharged. A lis pendens can only be recorded when “relief is claimed affecting the title to real property . . . .” C.R.S. § 38-35-110(1). Once a mechanics’ lien has been discharged, the bond becomes substituted security, and there is no longer any claim affecting real property.

upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien and from any action brought to enforce such lien, and the bond or undertaking shall be substituted. . . . [T]he certificate of release [issued by the clerk] shall show that the property has been released from the lien and from any action brought to foreclose such lien.

C.R.S. § 38-22-132 (emphasis added). Thus, once the bond is approved, there can be no action to enforce the mechanics’ lien, and therefore no action affecting title to real property. As such, pursuant to Section 38-35-110(1), no lis pendens should be recorded.

The Court of Appeals, without referencing Section 38-22-132, reasoned that the bonding of the lien does not completely free up title. In doing so, however, the Court of Appeals relied on a section of the mechanics’ lien statute dealing with payment bonds, not substitution bonds. According to the Court:

despite bonding, the validity of a lien would still be of concern to a person interested in title to the liened property because the surety could become insolvent. In that event, “any lien claimant shall be entitled to enforce such lien claim in the same manner as if no bond had been filed.” § 38-22-129(5). Hence, if a lis pendens was not required, its absence could mislead a person seeking to obtain an interest in the liened property into concluding that even if the surety became insolvent, the property was not subject to a lien foreclosure action because the claimant here failed to [record a lis pendens].

Again, the Court’s reasoning is confusing, Once a mechanics’ lien substitution bond is approved and recorded, the property indeed is no longer subject to a lien foreclosure action. Instead of a mechanics’ lien foreclosure lawsuit, the former lien claimant can maintain an action upon the bond or undertaking. C.R.S. § 38-22-133.

Additionally, Section 38-22-129(5), which the Court of Appeals quotes above, applies only to situations where a general contractor obtains a payment bond prior to commencing work, and the payment bond surety becomes insolvent. Ironically, earlier in the opinion, the Court of Appeals clearly distinguishes payment bonds from lien release bonds in addressing CRC’s trust fund defense.

Weize also argued that having to record a lis pendens after a lien has been released would put it at risk of violating the spurious lien statute. The Court of Appeals rejected the argument, reasoning that “a lis pendens ‘provided for by specific Colorado . . . statute’ is excepted from the definition of a spurious lien.” The Court’s reasoning ignores the holding in Pierce v. Francis, 194 P.3d 505 (Colo. App. 2008), where a different division of the Court of Appeals specifically held that a notice of lis pendens is not exempted from the spurious lien statute. Specifically, the Court in Pierce held that “because a notice of lis pendens can be a spurious document, it falls under the spurious lien statute.” Id. at 508. Now in dicta, the Court in Weize suggests that a lis pendens is excepted from the spurious lien statute, thus creating a split of authority.

In addition to putting Weize at risk under the spurious lien statute, recording a lis pendens where there is no claim affecting title to real property could put Weize at risk for a slander of title claim by the property owner. Fountain v. Mojo, 687 P.2d 496, 500-01 (Colo. App. 1984) (improper filing of lis pendens can amount to tort of slander of title).

The holding in Weize may cause serious problems for property owners who want to free title from mechanics’ liens. As the appellate courts in Colorado have acknowledged, the recording of a lis pendens effectively renders title unmarketable. The reason a property owner bonds over a lien, or requires its general contractor to bond over a lien, is to free up title. That’s in fact what the statute says. But now, in light of Weize, bonding over a mechanics’ lien will no longer free up title, since the lien claimant will be required to record a lis pendens once an action is filed.

Timothy Gordon blogs at Holland & Hart’s Construction Law in Colorado and this post originally appeared here on June 10, 2010. Gordon is one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction LawClick here to read all posts by this author.

Click here for more Construction Law Updates.

Legislation: Governor Signs Consumer Protection Bills

On Wednesday, Governor Ritter signed consumer protection bills HB 10-1249 and SB 10-155 (audio available here).

HB 10-1249 (.pdf) speeds the sale of foreclosed properties by reducing the number of days for a sale.

SB 10-155 (.pdf) puts requirements on gift card issuers to protect consumers by banning retailers, restaurants and others from selling gift cards that have any type of service or maintenance fee. Gift card issuers must also redeem the card, upon request, if the remaining value is $5 or less.