WHAT TO DO IF YOUR PROPERTY IS LANDLOCKED

A recent Colorado Supreme Court Case, Bly v. Story, 09SC189 (Oct. 18, 2010), is instructive to landowners who find themselves without access to their property. In the Bly case, the plaintiffs, the Storys, owned a 45 acre parcel in Western Jefferson County that was accessed by a road traversing the property of the defendants, the Blys. The Storys discovered that they had no legal right to use the road and commenced a private condemnation action to obtain legal access.

Article II, Section 14 of the Colorado Constitution prohibits the taking of private property for private use "unless by consent of the owner" or "except for private ways of necessity," among other exceptions. The procedure for commencing a private condemnation proceeding is set forth in Section 38-1-102 of the Colorado Revised Statutes.

Unable to reach an agreement with the Blys, the Storys filed a petition in the district court to establish an access easement over the existing road pursuant to the Colorado Constitution and C.R.S. sec. 38-1-102. The district court granted the Storys petition and awarded the Blys $3,300 for the easement and $9,200 for damages to the residue.

On appeal, the Blys asserted that the trial court erred in denying their motion to dismiss because the Storys failed to adequately describe the easement in their petition, and also that the trial court erred in not presenting evidence to the jury regarding the construction cost of the road for purposes of valuing the easement.

The Supreme Court, in upholding the trial court's decision, stated that Colorado law does not require the petitioner to provide a legal description of the property in the petition and that the Storys' general description of the dimension and location of the easement (i.e. 20 foot easement across the existing dirt road) was sufficient. Further, the Court stated that the Storys were not required to specify in detail the intended use of the condemned property and that the Storys' general statement that the easement was sought "to provide access to [their] landlocked property in order to permit the use and enjoyment of [their] property" was sufficient.

As to the issue of presenting the construction cost valuation method to the jury, the Supreme Court held that the trial court did not abuse its discretion in denying that evidence, but such evidence is admissible.

Post By: Brent W. Houston, Esq.

CONTRACT ASSUMPTION DEFENSE -- ABSOLUTE BAR TO BANKRUPTCY AVOIDANCE POWERS

After filing for chapter 11 bankruptcy, the debtor in possession has the option of either assuming or terminating "executory contracts," meaning contracts having future performance obligations. To assume an executory contract, the debtor must first cure all outstanding defaults and provide adequate assurance of future performance. 11 U.S.C. sec. 365(b).

The U.S. Bankruptcy Court for the District of Colorado has affirmed that, once an executory contract is assumed, payments made under the contract cannot be avoided as "preferences." In re Centrix Financial, LLC, Bankr. Case No. 06-16403 (June 15, 2010). In general, payments made by the debtor within 90 days before filing a bankruptcy petition (one year if made to an insider) on account of a pre-existing debt and made while the debtor was insolvent can be avoided as "preferences," meaning the debtor in possession or bankrutpcy trustee may assert a claim against the recipient to recover amounts paid by the debtor prior to filing for bankruptcy. 11. U.S.C. sec. 547.

In addition to holding that payments made on an assumed contract cannot be avoided as preferences, the Bankruptcy Court held that all payments made under the assumed contract were unavoidable, even though only part of the services provided for in the contract were to continue post-petition. In other words, the whole integrated contract was assumed, not just the parts the debtor wanted to keep.

In the Centrix case, the debtor entered into one contract with the defendant for postage metering and mailing services and a second contract for professional services. The debtor intended to assume only the second contract, and the liquidating trustee appointed by the court attempted to avoid as preferences the payments made with respect to the postage metering and mailing services contract . The defendant successfully argued that the two contracts were in fact one integrated contract, because in the second contract's integration clause, the first contract was incorporated in and made a part of the second contract. The court held that the entire integrated contract was assumed, not merely the part intended to be assumed by the debtor.

Posted By: Brent W. Houston, Esq.

MECHANICS' LIENS: BONDING AROUND LIEN DOES NOT CURE FAILURE TO RECORD LIS PENDENS

Under Colorado law, in order to preserve mechanics' lien rights, a mechanics' lien claimant must commence an action to enforce the mechanics' lien and record a lis pendens within six months after completion of the project. C.R.S. sec. 38-22-110. The general contractor or owner of the property against which a mechanics' lien is recorded may obtain the release of the mechanics' lien by filing with the court a surety bond or other undertaking (e.g., a letter of credit) in the amount of 150% of the lien claim and costs allowed to date. C.R.S. sec. 38-22-131.

The Colorado Court of Appeals recently upheld the dismissal of a mechanics' lien foreclosure action because the plaintiff failed to record a lis pendens within the statutory six-month period, even though trial court ordered the release of the mechanics' lien following submission of a surety bond by the general contractor. Weize Company, LLC v. Colorado Regional Construction, Inc., 09CA1369 (June 10, 2010). The plaintiff acknowledged that it did not record a lis pendens but argued that filing a lis pendens was "superfluous" because proceeding against the bond would not affect title to the property, and therefore not recording a lis pendens did not interfere with the statute's purpose of making titles to real property "more safe, secure and marketable." The Court of Appeals, in rejecting this argument, stated that "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.'" Id. at 18, quoting, C.R.S. sec. 38-22-129(5). This rationale confuses the type of bond at issue. C.R.S. sec. 38-22-129(5) applies to performance and payment bonds, not lien release bonds. Also, the lien release bond statute plainly states that the lien is released and the property is discharged from the action to foreclose such lien. C.R.S. sec. 38-22-132. No exception like that provided for payment and performance bonds is specified for lien release bonds.

The Court of Appeals concluded that the legislature did not intend to provide any exception to the lis pendens requirement and found no case implying any such exception. This strict construction may cause problems with clearing mechanics' liens via lien release bonds, because the lis pendens makes the property unmarketable. Until the Supreme Court or General Assembly weighs in on this issue, the lien claimant will need to record a lis pendens whether or not a lien release bond was recorded prior to commencement of the foreclosure action. This will cause the general contractor and/or property owner to have to take the additional step of obtaining an order releasing the lis pendens.

Posted By: Brent W. Houston, Esq.

Colorado's New Commercial Real Estate Brokers Commission Security Act

The newly enacted Commercial Real Estate Brokers Commission Security Act, H.B. 10-1288, creates a statutory lien in favor of Colorado real estate brokers for commissions earned in connection with leasing of commercial real estate. The lien, however, does not attached until the broker procures a tenant for the property or otherwise earns the commission, a notice of intent to record a notice of lien is served upon the owner of the property, the broker makes a good faith attempt to obtain a settlement through mediation, and the broker records a notice of lien between thirty days after the notice of intent was served and ninety days after the tenant takes possession of the leased property or after the compensation is due, whichever is later. C.R.S. sec. 38-22.5-106.

At least thirty days before recording a notice of lien with the clerk and recorder of the county in which the property is located, the commercial real estate broker must serve a notice of intent to record a notice of lien upon the owner of the property by personal service or certified mail, return receipt requested. C.R.S. sec. 38-22.5-104(1). Also, after recording the notice of lien, the broker must provide the owner with a copy of the notice of lien by personal service or certified mail, return receipt requested, otherwise the lien is valid for only ten days after it is recorded. C.R.S. sec. 38-22.5-107(1). An action to foreclose the lien must be commenced within six months after recording of the notice of lien. C.R.S. sec. 38-22.5-107(2).

The Colorado Commercial Real Estate Brokers Commission Security Act takes effect on August 11, 2010, unless a referendum against the act is timely filed.

Post By: Brent W. Houston, Esq.

Revival of Colorado Judgment Lien Based on Foreign Judgment

The Colorado Supreme Court recently held that, in order to revive a judgment lien recorded in Colorado based on a foreign judgment domesticated in Colorado pursuant to the Uniform Foreign Enforcement of Judgments Act, C.R.S. secs. 13-53-101 et seq., the judgment creditor must revive both the foreign judgment in the jurisdiction in which it was originally issued and the domesticated foreign judgment in Colorado before filing a transcript of the revived domesticated judgment in the county where the orginal transcript was recorded. Wells Fargo Bank, N.A., v. Kopfman, 08SC783 (March 15, 2010).

In this case, the judgment creditor attempted to revive a judgment lien based on a foreign judgment domesticated in Colorado by simply reviving the foreign judgment in Arizona, where it was originally issued, and recording an affidavit of renewal in the county in which the original transcript of judgment for the domesticated judgment was recorded. The trial court ruled that the judgment lien was properly extend. The Court of Appeals reversed, and the Supreme Court granted certiorari and affirmed.

Under Colorado law, a judgment lien is valid for a period of six years after entry of judgment, and may be revived prior to expiration of the six-year period by reviving the judgment "as provided by law" and recording a transcript of such revived judgment in the county in which the original judgment was record. C.R.S. sec. 13-52-102(1). With respect to foreign judgments, "the six-year period begins to run from the date the foreign court entered the original judgment. " Kopfman, supra, p. 10.

The Supreme Court held that, when read together with C.R.C.P. 54(h), which provides the procedure for reviving a judgment, and the Uniform Enforcement of Foreign Judgments Act, the term "as provided by law" in C.R.S. sec. 13-52-102(1) requires that the judgment be revived first in the original foreign jurisdiction and then in the jurisdiction in Colorado in which it was domesticated.

Posted By: Brent W. Houston, Esq.

YOUR OLD SHED IS ON YOUR NEIGHBOR'S PROPERTY - WHAT HAPPENS?

The Colorado Court of Appeals recently ruled on a case involving the rights of neighboring land owners with respect to a metal shed used and maintained by one neighbor ("Shed Owner") on the land of the other neighbor ("Land Owner") for many years. Hunter v. Mansell, 09CA0799 (Colo. Ct. App., March 4, 2010).

The shed in question was constructed in 1974 by Shed Owner's predecessor in title. Shed Owner purchased the property in 2001, and at the time of purchase, was informed by the seller that the shed encroached on Land Owner's property. In 2006, Land Owner filed a trespass action against Shed Owner seeking removal of the shed. Shed Owner countered with a claim alleging she was the owner of the land on which the shed was located by adverse possession.

On the adverse possession claim, the trial court ruled that Shed Owner did not own the shed site because Shed Owner's predecessor disclosed to Shed Owner that the shed encroached on Land Owner's property, and, therefore, Shed Owner could not "tack" the previous owner's adverse possession period for purposes of the 18-year period prescribed by statute.

Under Colorado law, a person who has been in exclusive and uninterrupted possession of another person's real property for at least 18 years and the possession has been actual, adverse, hostile, and under a claim of right, such person becomes the owner of such property by adverse possession. C.R.S. sec. 38-41-101. For purposes of calculating the 18-year period, a current owner may add or "tack" continuous adverse possession by prior owners.

The trial court held that the disclosure of the encroachment constituted a disclaimer of any "claim of right" to the disputed strip of property on which the shed stood. The Court of Appeals rejected this analysis because the 18-year statutory period had already expired when the "disclaimer" took place. It stated that "[u]pon expiration of the statutory period, ownership vests in the person adversely possessing and it can be transferred only by deed, not by a disclaimer." Hunter, supra, at 12. Notwithstanding, the Court of Appeals upheld the trial court's dismissal of Shed Owner's adverse posession claim because possession of the property was not "hostile" for the statutory period. The Court found that Shed Owner's possession of the disputed strip was initially permissive, and therefore not hostile, because the evidence showed that Shed Owner's predecessor entered into a lease of the disputed strip within the first 18 years after the shed was constructed, thereby terminating any adverse possession.

Regarding Land Owner's trespass claim, the trial court's remedy was to give the Shed Owner the choice of leasing the disputed property indefinitely for one dollar per month or purchasing the disputed property for an appraised value. The Court of Appeals reverse the trial court's remedies and remanded for entry of a mandatory injunction requiring the removal of the shed from Land Owner's property. Although not necessary to its ruling, the Court rejected the notation that a court could award a trespasser the right to purchase property from the owner of that property.

The general rule is that removal is the appropriate remedy for trespass of this type. However, exceptions have been made where the encroachment is slight or harmless (e.g. a commercial building encroaching by a couple of inches) and/or the expense of removal greatly outweighs the damage suffered by the plaintiff (e.g. removing two inches from a commercial building compared to the value to plaintiff of those two inches of land). See Golden Press v. Rylands, 235 P.2d 592 (1951). In such cases, the court may fashion other appropriate awards (e.g. damages related to the value of the lost property).

In Hunter, the Court of Appeals held that removal of the shed was not sufficiently costly to warrant breaking from the general rule favoring an injunction for mandatory removal, particularly where the majority of the costs cited by Shed Owner were related to improves to the shed incurred after Shed Owner acquired the property with knowledge of the encroachment.

Posted By: Brent W. Houston, Esq.

EXCULPATORY AGREEMENT RELEASING MANUFACTURER FROM STRICT PRODUCTS LIABILITY CLAIMS VIOLATES PUBLIC POLICY

The Colorado Supreme Court has ruled that an exculpatory agreement releasing a manufacturer from strict products liability claims violates public policy and is void. Boles v. Sun Ergoline, Inc., 08SC970 (Feb. 8, 2010).

Boles was injured while using a tanning booth manufactured by Sun Ergoline, Inc. ("Sun"). She file suit against Sun, asserting a products liability claim for personal injury. The trial court ruled that Boles's claim was barred because she signed a general release of liability prior to using the tanning both. The court of appeals affirmed.

The Colorado Supreme Court reversed and held that, although an exculpatory agreement may insulate a party from liability for its own simple negligence (See, Jones v. Dressel, 623 P.2d 370 (Colo. 1981)(sets forth four factors to be considered in determining whether a release of simple negligence should be enforced)), a release of liability for strict products liability, claims for which having been allowed due to public policy concerns over the inequitable relationship between manufacturers and consumers,violates public policy and is void.

Posted By: Brent W. Houston, Esq.

COLO. CT. OF APPEALS RULES ON RIGHTS OF CREDITORS AGAINST MANAGERS AND MEMBERS OF INSOLVENT LLCS

In Colborne Corp. v. Weinstein, 09CA0724 (Colo. App. Jan. 21, 2010), the Colorado Court of Appeals ruled that creditors of a Colorado limited liability company (LLC) had standing to sue the LLC's managers who authorized and its members who accepted unlawful distributions from the insolvent LLC.

Under the Colorado Business Corporation Act, C.R.S. sec. 7-101-101 et seq., and Colorado case law, corporate directors are liable to the corporation for unlawful distributions, and officers and directors of insolvent corporations have limited fiduciary duties to the corporation's creditors. Pursuant to this statutory and common law, Colorado courts have recognized that corporate creditors have the right to sue directors for distributions authorized while the corporation was insolvent or that render the corporation insolvent.

In Colborne Corp., the Court determined that the judicial decisions permitting corporate creditors to sue directors for unlawful distributions should be applied to LLCs. Following those decisions, the Court ruled that managers of an LLC have limited fiduciary duties to the LLC's creditors when the LLC is insolvent. These limited fiduciary duties only require the managers to avoid favoring their own interests over those of the creditors. The Court further ruled that creditors of an LLC could recover from the members for unlawful distributions received by them.

Posted By: Brent W. Houston, Esq.

ETHICS REMINDER FROM THE COLORADO U.S. DISTRICT COURT

In a recently published decision, McClelland v. Blazin' Wings, Inc., Case No. 09-cv-01580-CMA-BNB (Dec, 29, 2009), the United States District Court for the District of Colorado gave Colorado attorneys a valuable reminder that their professional responsibilities extent to actions of their agents.

In McClelland, the attorneys for the plaintiff engaged a private investigator to gather facts regarding the case, which arose out of a bar fight at a Buffalo Wild Wings restaurant. The investigator interviewed the bartender on duty on the night in question, but make several mistakes from an ethical perspective: (1) he did not disclose to the bartender that he was working on behalf of the plaintiff; (2) he did not obtain the permission of the defendant's counsel before interviewing the bartender, an employee of the defendant, regarding the circumstances of the fight; and (3) he tape recorded the interview without disclosing that fact to the bartender.

The Court found that plaintiff's counsel committed three ethical violations stemming from the investigator's interview of the bartender. The investigator's conduct is attributed to plaintiff's counsel under Rule 8.4(a) of the Colorado Rules of Professional Conduct ("CRPC"), which prohibits a lawyer from violating the rules "through the acts of another" and attributes the misconduct of an agent to the supervising lawyers.

First, plaintiff's counsel violated CRPC 4.2, which prohibits communicating with an opposing party when that party is represented by counsel, when the investigator contact the bartender, an employee of defendant, without the permission of defendant's counsel. See, Colorado Formal Ethics Opinion 69.

Second, plaintiff's counsel violated CRPC 4.1, which prohibits making a false statement of or failing to disclose a material fact to a third person, when the investigator failed to disclose that he worked for the plaintiff and that the purpose of the interview was to gather facts for the plaintiff in the lawsuit.

Third, plaintiff's counsel violated CRPC 8.4(c), which prohibits "conduct involving dishonesty, fraud, deceit, or misrepresentation," when the investigator recorded the interview without notice or consent. See, Colorado Formal Ethics Opinion 112.

The Court's remedy was to preclude the use of interview in connection with pretrial discovery, but did not preclude the plaintiff from developing the same information in a proper manner.

Although the penalty was not terribly severe in the context of the plaintiff's case, the ruling is certainly a wake up call for attorneys to properly educate and control non-lawyers engaged to work on their cases.

Posted By: Brent W. Houston, Esq.