Colorado Law Letter

INDEMNIFYING YOUR LANDLORD FOR ITS OWN NEGLIGENCE

2011-05-17T14:19:00.007-06:00

A recent Colorado Supreme Court case, Constable v. Northglenn, LLC, Case No. 09CS1063 (March 21, 2011), is instructive on why it is important for a tenant to fully understand the indemnification provisions in his or her lease.

In the Constable case, a woman who slipped and fell on ice in a shopping center parking lot sued the owner of the shopping center, Northglenn, LLC, for negligence. Northglenn, LLC in turn filed an indemnity claim against Constable, a tenant in the shopping center, under Constable's lease.

The indemnity provision in Constable's lease required Constable to indemnify Northglenn, LLC for injuries sustained in Constable's space or elsewhere in the shopping center if the person was present in the shopping center for the purpose of visiting Constable's space. The indemnity provision also provided that Constable had no indemnification obligation if the harm resulted from Northglenn, LLC's own gross negligence or intentional torts.

The trial court held that indemnity was unenforceable because it purported to make Constable responsible for the parking lot, which was in the exclusive control of Northglenn, LLC, and that it did not clearly define the injuries that would trigger the indemnification obligations of Constable.

The Court of Appeals reversed, concluding that the indemnity provision made it clear that the parties intended that Constable indemnify Northglenn, LLC for injuries sustained in the parking lot by Constable's customers, whether or not the injuries resulted from Northglenn, LLC's own negligence.

The Supreme Court upheld the Court of Appeals ruling, finding that the indemnity provision was not void as against public policy by requiring Constable to indemnify Northglenn, LLC for its own negligence. The Supreme Court recognized that it is against public policy to enforce an agreement indemnifying an actor for his or her own "intentional or willful wrongful acts," but that an agreement indemnifying a party against liability for his or her own negligence is enforceable if the agreement contains "a clear and unequivocal expression that the parties intended that result."

The indemnity language in Constable did not specifically state that the indemnity applied to claims resulting from Northglenn, LLC's own negligence. The Supreme Court found that the language in the indemnity covering "any and all"claims, and the specific exclusion of gross negligence and intentional torts, was a sufficiently clear expression of the parties' intent that Constable would indemnify Northglenn, LLC for its own negligence.

It is not uncommon for a landlord to require indemnity for claims arising out of the use of the premises, even where the claims arise out of landlord's own negligence. It is less common for the provision to require indemnification for causes of action arising outside of the premises where the plaintiff is not an agent, employee or contractor of the tenant.

From a tenant's perspective, because of the lack of control over customers and over common areas of the shopping center, an indemnity provision like that in the Constable case should be carefully considered and negotiated out of the less if possible.

From a landlord's perspective, if the tenant agrees on a provision like that in the Constable case it would be advisable to specifically state in the indemnity provision that it applies to "any and all" claims, whether or not based on the landlord's negligence.

Posted By: Brent W. Houston, Esq.

WHAT TO DO IF YOUR PROPERTY IS LANDLOCKED

2010-11-09T11:34:00.002-07:00

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

2010-08-25T14:35:00.005-06:00

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

2010-06-14T11:41:00.007-06:00

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

2010-05-24T14:54:00.006-06:00

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

2010-03-16T11:39:00.002-06:00

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?

2010-03-08T16:24:00.006-07:00

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

2010-02-08T16:26:00.004-07:00

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

2010-02-01T10:08:00.006-07:00

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

2010-01-05T15:45:00.003-07:00

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.

ECONOMIC LOSS RULE BARS THEFT CLAIM

2009-12-16T11:05:00.003-07:00

In Makoto USA, Inc., v. Russell, 08CA1372 (Nov. 25, 2009), the Colorado Court of Appeals ruled that the economic loss rule barred plaintiff's civil theft claim because it was inextricably intertwined with plaintiff's breach of contract claim.

In Makoto, plaintiff asserted claims of breach of contract and civil theft against the defendants arising out of plaintiff's purchase of defendants' business. Among the purchased assets was a utility patent, which, unbeknownst to the plaintiff, was unenforceable because the defendants had failed to make certain maintenance payments. The purchase agreement between the parties required plaintiff to pay defendants annual installments of $50,000 in satisfaction of the purchase price. Upon learning of the unenforceable patent, plaintiff ceased making payments and filed its action for breach of contract and civil theft.

The issue on appeal was whether the civil theft claim under Colorado's stolen property statute, Section 18-4-405, C.R.S. 2009, which provides for treble damages and attorneys fees, was barred by the economic loss rule. The Court of Appeals held that the civil theft claim was predicated on the existence of a breach of the contract, and therefore the economic loss rule barred recovery for civil theft.

The economic loss rule provides that "a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such breach absent an independent duty of care under tort law." Id. For there to be a cognizable independent duty, "(1) the duty must arise from a source other than the relevant contract, and (2) the duty must not be a duty also imposed by the contract." Id.

The Makoto Court found that the civil theft claim was wholly dependent on the plaintiff's contract claim. The relief sought in the two claims were the same, and the theft claim could not have been proven without first proving that defendants also breached the contract. "Had defendants complied with the their reciprocal contractual duties, plaintiff would have no colorable claim that defendants 'stole' a contractual payment." Id. The Court further found that the legislature did not intend the stolen property statute be used to expand contractual remedies.

Posted By: Brent W. Houston, Esq.

ARBITRATORS NOT REQUIRED TO EXPLAIN AWARDS

2009-12-14T15:37:00.005-07:00

The Colorado Court of Appeals has ruled "as a matter of Colorado law that arbitrators are not required to explain their reasons for issuing awards authorized by an agreement." Treadwell v. Village Homes of Colorado, Inc., 08CA0304 (Nov. 25, 2009). "Absent an affirmative showing of invalidity, arbitration awards may not be set aside for want of explanation (or ... remand for explanation)." Id.(internal quotations omitted). "'A mere ambiguity in the opinion accompanying an award, which permits the inference that the arbitrator may have exceeded his authority, is not a reason for refusing to enforce the award.'" Id. (quoting United Steel Workers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598 (S. Ct. 1960).

In the Treadwell case, the defendant, Village Homes, appealed the district court's confirmation of the arbitrator's award of attorneys' fees, costs, and post- and pre-judgment interest in favor of the plaintiffs. The arbitration provision contained in the sales contract provided for award of attorneys' fees and expenses to the prevailing party "upon a showing of egregious conduct." Id. The arbitrator awarded the plaintiffs $525,000 in damages and close to $300,000 in attorneys' fees, costs, and pre-judgment interest, but made no written findings. On appeal, Village Homes argued that the arbitrator exceeded its powers with respect to the award of attorneys' fees, costs and interest. The Court of Appeals disagreed.

The Court of Appeals ruled that the award of attorneys fees and costs in this case involved the merits of the dispute, because the arbitration clause provide for attorneys' fees and costs for egregious conduct, and not whether the arbitrator was empowered to make such award. Further, the merits of dispute are not subject to judicial review, and an arbitrator's award cannot be overturned simply because the arbitrator did not explain the reasoning for the award.

The Court of Appeals noted that parties can require the arbitrator to issue written "findings," and in that instance, the arbitrator's failure to issue findings would exceed the arbitrator's powers. However, the merits of the case shown in the findings would not be subject to judicial review. Only whether the award was within the powers of the arbitrator would be reviewable.

Posted By: Brent W. Houston, Esq.

COLORADO COURT OF APPEALS RULES ON SCOPE OF HEALTH CARE PROXY

2009-12-09T14:36:00.002-07:00

Sections 15-18.5-103 and 15-18.5-104, C.R.S. 2009, provide for appointment of a person to act as a health care proxy to make medical treatment and health care benefit decisions on behalf of an incapacitated person. The Colorado Court of Appeals recently ruled that a decedent's estate was not bound by an arbitration provision contained in nursing home admission documents signed by the decendent's health care proxy. Estate of Lujan v. Life Care Centers of America, d/b/a Evergreen Nursing Home, Case No. 08CA2367 (Nov. 25, 2009).

The Court ruled that the person appointed as the decedent's health care proxy did not have the authority to enter into an arbitration agreement because a decision to arbitrate is not a "medical treatment decision," and therefore the the estate was not bound by the arbitration agreement contained in the admission documents. Id. Note that the issue of whether an agreement to arbitrate is a "health care benefit decision" was resolved in the negative at the trial court level and was not raised on appeal.

The Court agreed that the decision to admit an incapacited person to a nursing home facility may fall with the definition of "medical treatment decision," but concluded that the General Assembly intended that this term be construed narrowly. In support of this conclusion, the Court pointed to Section 13-64-403(7), C.R.S. 2009, which provides that a health care provider cannot condition provision of medical care services on the patient's signing an arbitration agreement, and to Section 13-64-403(1), C.R.S. 2009, which requires arbitration agreements to be entered into voluntarily by the patient.

The Court further concluded that because of the incapacitated person's inherent lack of choice in appointment of the proxy "the health care proxy's authority should be viewed as a last resort and should be strictly limited to those decisions that are necessary to preserve a patient's health and well-being and that the patient would likely make were he or she able to do so." Id.

Posted By: Brent W. Houston, Esq.

PARTITIONING COLORADO REAL ESTATE: HOW TO FORCE A SALE

2009-11-11T12:53:00.002-07:00

Any party with an interest in real property can force a partition. But, partition in kind (physical partition) is favored over a forced sale. A Colorado district court may only direct the sale of property which is subject to being partitioned under limited circumstances. See 4 Thompson on Real Property § 38.04 , (David Thomas ed. 1994). To force a sale a party must have a court appointed commissioner (one or more) report to the Court and have the Court find that “partition of the property cannot be made without manifest prejudice to the rights of any interested party.” C. R. S. § 38-28-107 [emphasis added]. Only in that event does the Court have the power to direct a public sale. Id. But, what is “manifest prejudice” and how do you prove it?

“Manifest prejudice” is directly addressed in Young Properties v. Wolflick, 87 P.3d 235, 238 (Colo. App. 2003), which states:

"No Colorado court has defined 'manifest prejudice' in the context of a partition action. However, other jurisdictions require a showing of 'great prejudice' before partition by sale may be ordered. In our view 'great prejudice' is equivalent to 'manifest prejudice.' See Webster’s Third New International Dictionary 1375 (1986) (defining “manifest” as capable of being readily and instantly perceived, obvious, overt). In those other jurisdictions, great prejudice has been shown when either (1) the physical characteristics of the land make it impracticable to divide into equal parts; or (2) the value of the whole is materially greater than the sum of its parts. See Ashley v. Baker, 867 P.2d 792, 796 (Alaska 1994) (test for prejudice is whether combined value of the shares would be materially less than the whole); Wilcox v. Willard Shopping Ctr. Assocs., 208 Conn. 318, 544 A.2d 1207 (1988) (partition in kind of shopping center held to be impracticable); Boltz v. Boltz, 133 Wis.2d 278, 282, 395 N.W.2d 605, 607 (Ct. App. 1986); Thompson on Real Property, supra. We agree with those decisions. [Emphasis added.]"

Thus, if you can show that the physical characteristics of the land make it impracticable to divide into two equal parts or that the value of the whole is materially greater than the sum of any parts that could be created by physical partition, you should obtain an order forcing a public sale.

Physical Characteristics Making It Impracticable to Divide Property Into Equal Parts

Disparities in such factors as topography, slopes, views, drainage, access, water zones, sewage disposal, or existing utilities may make it impracticable to physically divide the property without substantial prejudice to anyone. The law also allows for creative, but logical arguments about properties based on their location. For instance one can argue the absence of an approved site-specific development plan for property whose location makes its highest and best use a residential neighborhood community makes physical partition inherently speculative and prejudicial. This conclusion flows from the inability of owners to reasonably calculate future development costs or revenues without the vested rights which arise by operation of law upon governmental approval of a site specific development plan. See, C.R.S. § 24-68-101, et seq.

Value of the Whole Materially Greater Than the Sum of Parts

Certain land is more valuable as a whole than when divided into smaller parcels. This is true when various physical features (water, views, road access, drainage) must exist together to create higher value. For property slated for residential neighborhood community development, land use planning and engineering experts may be able to demonstrate the entire acreage has a greater net value than would the sum of the net values of parcels resulting from physical partition. This conclusion obtains when smaller parcels would be created that either cannot be developed or for which additional Special Districts, engineering, planning, and legal costs would decrease net value substantially. Thus, when certain properties are subject to being partitioned physically, a party may be able to show the separate costs for soil evaluations, water and sewer engineering studies, and the other various aspects of engineering and community planning required would be duplicated or substantially increased.

In conclusion, either one of two factors alone may justify a finding that a property cannot be partitioned without manifest to any interested party. One factor is that the physical characteristics make it impracticable to divide into parts. The other factor is that the value as a whole is greater than the sum of the values of the parts to result from partition.

Posted By: Wesley B. Howard, Esq.

Homebuyer Tax Credit Extended and Liberalized

2009-11-11T11:20:00.002-07:00

The popular tax credit available to first-time homebuyers was extended and liberalized by enactment of the "Worker, Homeownership, and Business Assistance Act of 2009" (H.R. 3548) on November 6, 2009.

The top credit for qualifying first-time home purchases is $8,000 ($4,000 for a married person filing separately) or 10% of the residence's purchase price, whichever is less.

The first-time homebuyer credit is extended to apply to a principal residence purchased before May 1, 2010, and also applies to a principal residence purchased before July 1, 2010, pursuant to a written contract entered into prior to May 1, 2010.

In addition to first-time homebuyers, the credit may be claimed by a homeowner who is a "long-term resident," which means a person who maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the person purchases the subsequent residence. There is no requirement that the current home be sold in order to qualify for the credit, but the new residence must become the homeowner's principal residence. The maximum credit for aqualifying existing homeowner is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

For purchases after November 6, 2009, the homebuyer credit phases out at higher modified AGI levels. For individuals, the phaseout range is between $125,000 and $145,000, and for persons filing joint returns, the range is between $225,000 and $245,000.

There also is a new price cap for the credit. For purchases after November 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. Importantly, there is no phaseout. If the purchase price exceeds $800,000 by any amount, the entire credit is lost.

The new law includes several new anti-abuse rules. These include: (1) beginning with the 2010 tax returns, settlement statements for the qualifying residence must be attached to the taxpayer's returns; (2) for purchases after November 6, 2009, the taxpayer must be at least 18 as of the date of purchase; (3) for purchases after November 6, 2009, the taxpayer cannot be a person who can be claimed as a dependent by another person for the tax year of purchase; and (4) certain related-party restrictions.

Posted By: Brent W. Houston, Esq.

Colorado Court of Appeals Rules on Piercing Corporate Veil

2009-10-29T13:06:00.003-06:00

In a newly published decision, McCallum Family LLC v. Winger, Case No. 09CA0212 (Colo. App. Oct. 29, 2009), the Colorado Court of Appeals ruled on several interesting issues related to "piercing the corporate veil." In general, a corporation or other legal entity is treated as a legal "person" or entity separate and apart from its owners and managers. This rule protects owners and managers of an entity from personal liability for the entity's debts. This protection or "veil," however, may be pierced in extraordinary circumstances, and under those circumstances, owners and managers of an entity may be held liable for liabilities of the entity.

There is a three part test under Colorado law to determine whether it is appropriate to pierce the corporate veil. First, the court determines whether the "corporate entity is the 'alter ego' of the person or entity in issue." Second, the court determines whether the use of the entity form was "used to perpetrate a fraud or defeat a rightful claim." Finally, the court considers "whether an equitable result will be achieved by disregarding the [entity] form and holding a shareholder or other insider personally liable for the acts of the business entity."

Courts consider a number of factors in determining whether an entity is an alter ego of an owner or manager, including, without limitation, commingling of funds and assets, inadequate corporate records, thin capitalization, and disregard for legal formalities.

In Winger, the Court applied the alter ego test to Marc Winger even though he had no formal ownership in the entity and held no formal office in the entity, like officer or director. The evidence showed that Marc Winger essentially functioned as an owner of the entity and was the primary manager of its business. The Court held that "an individual who acts as a de facto shareholder, officer, or director may be treated as an equitable owner and held to be the alter ego of a corporation."

The second prong of the veil-piercing test requires a showing that the entity was "used to perpetrate a fraud or defeat a rightful claim." The Court further defined this rule by stating that the conduct does not need to be directed at the plaintiff-creditor, but rather "the creditor seeking to pierce the veil must show an effect on its lawful rigths as a creditor resulting from abuse of the corporate form." In Winger, the requisite effect was established through evidence that the defendants removed all funds from the corporation, leaving no funds to satisfy the debt owed to the plaintiff.

With respect to the final prong of the veil-piercing test, the court must determine whether an equitable result will be achieved by piercing the corporate veil and holding the owner or manager in question liable for the acts of the entity. As to this determination, the Court deferred to the trial court's discretion.

Another interesting issue raised in Winger was whether officers of a corporation owe fiduciary duties to creditors when the corporation is insolvent. Colorado cases have held that officers and directors of insolvent corporations do owe fiduciary duties to creditors. The Court questioned whether this common law rule was overturned by the amendment of C.R.S. 7-108-401(5) in 2006, which section provides that a "director or officer of a corporation, in the performance of duties in that capacity, shall not have any fiduciary duty to any creditor of the corporation arising only from the status as a creditor." The Court did not decide on this issue, but perhaps raised it for future consideration by the General Assembly or the Supreme Court.

Posted By: Brent W. Houston, Esq.

Colorado Supreme Court Rules on Adverse Possession of Parking Space

2009-10-13T14:12:00.005-06:00

The Colorado Supreme Court recently ruled that an entity claiming title to a parking space in a condominium community by adverse possession under color of title could not sell the space free from the transfer restrictions in the condominium declaration. B.B. & C. Partnership, v. The Edelweiss Condominium Assoc'n, Case no. 08SC394 (Colo. S.Ct., October 13, 2009).

This case involved a parking space located in the Edelweiss Condominiums in Vail, referred to as "parking space 21." In 1976, BB&C purported to purchase parking space 21 from a former owner of a condominium unit, receiving a warranty deed to the space which provided, in pertinent part, that the conveyance was "subject to the terms, covenants, conditions, easements, restrictions, uses, limitations and obligations set forth in [the]Declaration" governing the condominium. The condo declaration restricted sale of parking spaces to other condo owners. BB&C was not a condo owner.

After obtaining the deed for parking space 21, an employee of BB&C parked his car in the space for a period of more than 20 years, during which time BB&C paid all taxes, maintenance fees, and insurances fees. In 2003, BB&C attempted to sell parking space 21 to a third-party non-condominium owner, but the condo association blocked BB&C's access to the space -- access being through a locked gate. BB&C filed a quiet title action claiming unrestricted fee simple ownership of parking space 21 by adverse possession under color of title pursuant to C.R.S. sec. 38-41-108.

C.R.S. 38-41-108 provides that person who is in possession of land for seven successive years, under color of title, made in good faith, and during that time pays taxes assessed on the land shall be adjudged the owner of the land "to the extent and according to the purport of his paper title." "Color of title" means title evidenced by a written document purporting to convey title to real property, but which fails to do so because of some defect.

The Supreme Court ruled that BB&C could obtain a quiet title judgment recognizing its ownership of parking space 21 if it proves its claim at the trial court level, but it is not entitled to a judgment for unrestricted fee simple ownership, title would be subject to the transfer restrictions in the condo declaration. It reasoned that parking space 21 was a limited common element of the condominium community subject to the restrictions contained in the condo declaration, and therefore the person from whom BB&C purported to purchase the space did not have unrestricted title, rather such title was subject to the condo declaration restrictions. Also, the "paper title" received by BB&C specifically provided that it was subject to the condo declaration. As a result, if BB&C successfully proves its quiet title claim, then its title will likewise be subject to the transfer restrictions contained in the condo declaration, effectively limiting the units sale to other condo owners.

Posted By: Brent W. Houston, Esq.

Englewood Sign Code Regulating Wall Murals Held Unconstitutional

2009-10-09T11:04:00.005-06:00

The Colorado Court of Appeals recently held that the City of Englewood's sign code regulating wall murals was an unconstitutional prior restrain on protected free speech. Mahoney v. City of Englewood, Case No. 08CA1505 (Colo. App, Oct. 1, 2009). Prior restraint in this context means regulation of protected speech prior to the time such speech is to occur.

The case involved murals painted on a building located in Englewood's "South Broadway Sign Area." In that area, murals are permitted under Englewood's sign code, but are subject to prior approval by the city manager. See, EMC sec. 16-6-13.K. The approval process is where the Court of Appeals found fault.

Englewood's sign code had no specific approval period for the city manager's final decision on an application for a mural permit. The Court of Appeals concluded that the lack of a definite time period created a risk of indefinitely suppressing permissible speech. It then held that, to pass constitution scrutiny, the "review procedure must require the city manager to decide whether to issue a permit within a brief, specified time period ... and there must be the possibility of prompt judicial review in the event the permit is erroneously denied."

Posted By: Brent W. Houston, Esq.

MISAPPROPRIATION OF TRADE SECRETS -- ACCRUAL OF STATUTE OF LIMITATIONS

2009-09-17T10:10:00.003-06:00

Under Colorado law, an action for misappropriation of a trade secret must be commenced within "three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered." C.R.S. sec. 7-74-107. Further, "a continuing misappropriation constitutes a single claim." Id.

In a newly published case, the Colorado Court of Appeals was faced with the following question with respect to accrual of this statute of limitations: "Where a plaintiff alleges more than one misappropriation of a trade secret or related trade secrets by the same party, is there a single accrual date coinciding with the first misappropriation, or are there separate accrual dates coinciding with the dates of each misappropriation?" Gognat v. Ellsworth, Case Nos. 08CA1158 & 08CA1745 (Colo App., Sept. 17, 2009). The Court held that the statute provides for a single accrual date where there are multiple misappropriations of a single trade secret or of multiple, related trade secrets, and not separate accrual dates for each of the misappropriations. The Court reasoned that the statutes explicit rejection of the "continuing violation" theory "evidences a clear legislative intent that multiple misrepresentations by the same party be treated as 'a single claim' for accrual purposes." Id.

In the Gognat case, the plantiff alleged that the defendants misappropriated a method for identifying and developing oil and natural gas reserves in western Kentucky. Shortly after acquiring this information from the plaintiff, the defendants began acquiring leases in a particular area in western Kentucky, referred to in the case as the "first area." Some time later, the defendants began acquiring leases in a different area in western Kentucky, referred to as the "second area." The Court concluded that the plaintiff had knowledge of the leases in the first area in or before 1999, and despite the fact that the plaintiff alleged to have become aware of the leases in the second area in 2005, the statute of limitations as to all claims of misappropriation accrued from the earlier date. Therefore, because the plaintiff's action was commenced in 2005, well after expiration of the three-year statute of limitations, the Court upheld the trial court's dismissal of the misappropriation claims based on the statute of limitations.

Posted By: Brent W. Houston, Esq.

TEXAS S. CT. HOLDS THAT VIOLATING "AS SOON AS PRACTICABLE" CLAIM NOTICE REQUIREMENT IN D&O POLICY DOES NOT VOID COVERAGE

2009-09-15T09:42:00.002-06:00

On March 27, 2009, the Texas Supreme Court issued a major ruling dealing with policy language applicable to many directors and officers’ liability insurance contracts. Many directors and officers (“D&O”) liability insurance contracts contain a requirement that the insurer must give written notice of any claim made during the policy period (or some related time period) “as soon as practicable”. Many policies refer to this “notice of claim” provision as a condition precedent to the insured’s rights under the policy. Normally, “conditions precedent” are events which must occur in order for a party’s rights to come into being.

Despite similar language in the policy at issue before the Texas Supreme Court, that court held in Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Company, 52 Tex.Sup.Ct.J. 475 in favor of an insured who waited more than a year to report a claim. The parties admitted that the claim was not reported “as soon as practicable”. However, the Texas Supreme Court held that in the absence of prejudice to the insurer, “a claim which was reported within a claims cutoff period established in a claims-made policy was timely, even though it was not reported as soon as practicable.”

The Texas court reasoned that in claims-made policies, a notice provision requiring that a claim be reported to the insurer during the policy period defines the scope of coverage and failure can thus prevent coverage. The court reasoned that by this means a policy provides a certain date after which an insurer knows it is no longer liable under the policy. In contrast, a provision that a claim be reported “as soon as practicable” affects the insured’s duty to cooperate in assisting the insurer to investigate, set reserves, and participate in negotiations with the party asserting the claim against the insured. Thus, unless the insurer is prejudiced by notice which is not made as soon as practicable, there is no reason to negate coverage for late but non-prejudicial notice.

It is important to note that this holding deals with claims-made policies, not occurrence policies. Claims-made policy state that coverage is afforded during the policy period for claims made during the policy period. Thus, coverage is retroactive to dates before the policy period but not prospective coverage. In contrast, an occurrence policy provides unlimited prospective coverage, and no retroactive coverage. Most D&O policies and professional malpractice policies are claims-made policies, while CGL (commercial general liability) policies are occurrence policies.

In 2001, the Colorado Supreme Court adopted the notice-prejudice rule in Colorado as it applies to uninsured motorist (UIM) cases. In a lengthy opinion, the Colorado Supreme Court analyzed the evolution of the notice-prejudice rule throughout the country. In changing the rule the court observed that Colorado was one of only two states whose supreme court had considered the issue within the past twenty (20) years and not required a showing of prejudice to void coverage where notice is given late. The Colorado court observed that an insurer is prejudiced by delayed notice only when this delay compromises its ability to investigate or defend the claim. Clementi v. Nationwide Mutual Fire Insurance Company, 16 P.3d 223 (Colo. 2001). Under the Clementi rule, courts use a two-step process in late notice cases. First the courts determine whether the notice was untimely and the delay unreasonable. Second they determine whether the delay prejudiced the insurer. The insurer has the burden of proving it was prejudiced.

In 2005 the Colorado Supreme Court held that the notice-prejudice rule applies to liability policies as well. See Friedland v. Travelers Indemnity Co., 105 P.3d 639 (2005). Friedland dealt with a notice that was given after the insured had defended and settled its liability case. For such post-settlement notice cases, the court adopted a presumption of prejudice in favor of the insurer, placing the burden on the insured to show that the late notice did not prejudice the insurer.
Presumably, the Colorado Supreme Court would apply the notice-prejudice rule to a directors and officers’ liability policy, following Friedland. See, e.g., Board of Directors, Metro Wastewater Reclamation District v. National Union Fire Insurance Company of Pittsburg, PA, 105 P.3d 653 (Colo. 2005) (case sought advisory opinion and did not present actual case or controversy, where Wastewater Reclamation District had solicited a policy but had no intent of entering into it and filed case to obtain a declaratory judgment for future guidance).

Posted By: Wesley B. Howard, Esq.

Assignability of Attorneys Fees Claim Under Colorado Law

2009-09-03T09:40:00.002-06:00

The Colorado Court of Appeals rules that an attorneys' fees claim is assignable as a matter of law. Regency Realty Investors, LLC, v. Cleary Fire Protection, Inc. (Colo. Ct. App. No. 08CA1650, Sept. 3, 2009). The appeal concerned the assignability of a claim under an attorneys' fees shifting clause in a contract, a previously unresolved issue in Colorado. Typically, an attorneys' fees shifting clause provides that the prevailing party in an action between the contracting parties is entitled to an award of attorneys' fees.

In general, a claim is assignable under Colorado law if it "survives the death of the person originally entitled to assert the claim," and the claim does not arise from a matter of "personal trust or confidence, or personal services." Kruse v. McKenna, 178 P.3d 1198, 1200 (Colo. 2008); Roberts v. Holland & Hart, 857 P.2d 492, 495 (Colo. App. 1993). Under Colorado law, only claims for libel and slander do not survive a persons death. C.R.S. sec. 13-20-101(1).

In Regency, the Court reasoned that an attorneys' fee claim is not a matter of personal trust or confidence (e.g. a legal malpractice claim) and is not a claim for specific performance of personal services, and therefore conluded that a claim for attorneys' fees is assignable under Colorado law.

Posted By: Brent W. Houston, Esq.

No Insurance Coverage for Intentional Assault or False Imprisonment; Different Claims and Proof in Trial Court May Have Led to Different Result

2009-08-26T10:27:00.000-06:00

In July 2009, the Colorado Court of Appeals held on an issue of first impression that under a commercial general liability policy an intentional assault by employee was not an “occurrence” which triggered coverage, even though the injury, from the perspective of the victim, may not have been “intended.” Mountain States Mutual Casualty Co. v. Hauser, ___P.3d ___, 2009 WL 2182600 (Colo. App. 2009). The case was brought by a former restaurant employee who had obtained a default judgment against the restaurant corporation (“policyholder”) for negligent hiring, negligent supervision and negligent retention of a manager who had allegedly assaulted her. The former employee had then sued the insurer, which sought and obtained a declaratory judgment that no coverage existed.

The Court of Appeals first analyzed the issues under Coverage A, Bodily Injury and Property Damage Liability. The court noted this provided indemnity coverage to the policyholder for sums it becomes legally obligated to pay as damages because of bodily injury to which the insurance applied. The insurance applied to “bodily injury” only if caused by an “occurrence.” Thus, the court analyzed whether a sexual assault by a restaurant manager who was negligently hired by the policyholder was an “occurrence.” The court held there was no “occurrence” because the conduct was not “accidental.”

The Court of Appeals then analyzed coverage under Coverage B, Personal and Advertising Injury Liability. Coverage B provides coverage for sums the insured becomes legally obligated to pay as damages because of personal and advertising injury to which the coverage applies. The policy defines “personal and advertising injury” as “injury, including consequential ‘bodily injury,’ resulting from ... [f]alse arrest, detention or imprisonment.” The plaintiffs had argued that the victim’s hiding in a restaurant bathroom during the events leading to her assault fit within this definition.

However, the Court of Appeals found the district court had not made a finding of false imprisonment, but only held the evidence supported claims of negligence, negligent hiring, supervision, and negligent retention against the policyholder. The Court of Appeals held that, because there was no finding of false imprisonment or damages awarded for that tort, the insurer need not indemnify for damages actually awarded. The ruling leaves open the question of whether an insurer might be liable for damages for false imprisonment awarded in a case which pleaded and proved both false imprisonment against the manager and respondeat superior liability for the policyholder.

Post by Wesley B. Howard, Esq.

What To Do on Appeal When a Trial or Hearing Transcript is Unavailable

2009-08-25T10:15:00.002-06:00

In July 2009, the Colorado Court of Appeals for the first time ruled on what an appellant must show to gain a new trial based on a missing or inadequate transcript of the trial proceedings. In Knoll v. Allstate Fire and Casualty Ins., ___ P.3d ____, 2009 WL 2182592 (Colo.App.2009) the court applied a three part test announced and followed in several federal and foreign state cases, but never before applied in Colorado. The test requires an appellant to: 1) make a specific allegation of error; 2) show the defect in the record materially affects the appellate court’s ability to review the alleged error; and 3) show a C.R.E. 10(c) proceeding has failed or would fail to produce an adequate substitute for the evidence.

Rule 10 (c) tells an appellant what to do if no proceeding transcript is available. It provides that the appellant may prepare and serve a statement of the evidence or proceedings from the best available means, including his or her recollection. The appellee may then serve objections or proposed amendments.The trial court then settles and approves the matter, and the court clerk includes the resulting statement in the record on appeal.

The Kroll court clarified that, when the record cannot be so reconstructed, a new trial may be ordered “in the interest of substantial justice.” Citing Pierpoint v. Akin, 76 Colo. 478, 479, 232 P. 682, 682 (1925). The appellant must show that a proper reconstruction effort failed, making a new trial necessary. Otherwise, no error will appear and the case will be affirmed.

Post by Wesley B. Howard, Esq.

New Clear Limits on Federal Jurisdiction for Compelling Arbitration

2009-08-18T09:36:00.000-06:00

In March 2009 the United States Supreme Court ruled 5-4 that unless federal-question jurisdiction exists based on the complaint in the underlying litigation, federal courts cannot compel arbitration when petitioned under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4. Vaden v. Discover Bank, 552 U.S. ____, ____, 129 S. Ct. 1262, 173 L. Ed. 2d 206 (2009). The Court also held that federal courts may “look through” the petition to determine whether there is federal subject-matter jurisdiction. However, it is the complaint, not counterclaims, which establishes whether or not such jurisdiction exists, said the Vaden court. (Complaints, even though predicated on state law claims, may be recharacterized to arise under federal law if the governing law is exclusively federal. The same is not true for counterclaims.) The holding that federal courts may “look through” the petition seeking to compel arbitration abrogated rulings by the Fifth, Sixth, Seventh, and Eleventh circuits to the contrary.

The Vaden court’s ruling on the “look through” issue was unanimous, but its determination that the complaint controls was made on the narrowest of margins, 5 to 4. The dissent would have federal courts examine the controversy below framed by the petition to compel arbitration in order to determine whether federal courts would have jurisdiction over the subject matter. In Vaden the bnk’s petition asserted that federal law preempted Vaden’s state law counterclaims. The bank thus argued that the counterclaims should be recharacterized as arising under federal law. The bank thus claimed the right to a federal court order compelling arbitration, since federal jurisdiction existed predicated on Federal Deposit Insurance Act provisions governing interest rates. The bank had obtained a federal district court order compelling arbitration and affirmance by the Fourth Circuit. The four Vaden court dissenters would have found federal subject matter jurisdiction, allowing the federal district court to compel arbitration of Vaden’s counterclaims.

This Supreme Court decision will restrict federal courts examining petitions to compel arbitration of disputes brought in state or federal courts to examining the complaint initiating the litigation sought to be stayed, along with the petition. State court, in many instances, will be the forum of choice for parties seeking to compel arbitration.

Post by Wesley B. Howard, Esq.

EMPLOYEE V. INDEPENDENT CONTRACTOR - NEW PENALTIES FOR EMPLOYERS

2009-08-03T15:49:00.001-06:00

Colorado employers have additional incentive to correctly classify their workers. House Bill 09-1310, effective June 2, 2009, authorizes the Colorado Department of Labor and Employment to investigate complaints about employers misclassifying employees as independent contractors, and permits the imposition of fines and penalties on employers found to have misclassified employees with willful disregard for the law. An employer may be fined up to $5,000 per misclassified employee for the first misclassification with willful disregard. In the event of a subsequent misclassification, the employer is subject to a fine of up to $25,000 per misclassified employee with willful disregard and to being barred from state contracts for up to two years.

The new law also establishes a framework for employers to obtain a nonbinding advisory opinion concerning whether to classify an individual as an employee for purposes of the Colorado Employment Security Act.

Post By Brent W. Houston, Esq.

HIGHEST COURT HOLDS FEDERAL ARBITRATION ACT PROVISIONS EXCLUSIVE

2009-07-28T15:25:00.000-06:00

The United States Supreme Court has held that two sections of the Federal Arbitration Act (“the Act”) provide the exclusive grounds for vacating or modifying an arbitration award on an expedited basis under the Act. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U. S. ___, 128 S. Ct. 1396, 1403 (2008). The Court noted that agreements seeking to expand or change those exclusive grounds are unenforceable. However, it left open the question of whether federal courts’ authority to manage litigation permitted the District Court of Oregon to vacate an arbitration award for manifestly disregarding the law when the parties had agreed it could apply such a standard and the court had entered an order approving that agreement.

Although scores of federal court decisions over the years have referred “manifest disregard of the law” as a potential ground to vacate an arbitration award, the Supreme Court noted the Act does not so state. The Court found Congress intended that only the four grounds stated in § 10(a) of the Act permit a federal district court to vacate an award. Those grounds are: (1) award “procured by corruption, fraud or undue means”; (2) where one or more arbitrator was evidently partial or corrupt; (3) arbitrators “guilty of misconduct” in refusing to postpone, to hear evidence, or “of any other misbehavior by which the rights of any party have been prejudiced”; and (4) arbitrators exceeded their powers or “so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” See Title 9 U. S. C. § 10 (2000 ed.). The Court also found that three grounds stated in § 11 of the Act constitute the exclusive grounds for modifying or correcting an award. Those grounds are: (1) an evident material miscalculation of figures or mistake describing a person, thing or property; (2) arbitrators awarding on a matter not submitted to them yet affecting the merits of the submitted matter; and (3) imperfection in the form of the award. See 9 U. S. C. § 11.

Hall Street resolved a split in the federal circuit courts over whether these statutory grounds were exclusive when the parties take what the Court called the “FAA shortcut to confirm, vacate, or modify an award”. See 9 U. S. C. § 9. The court noted that the Tenth Circuit Court of Appeals, which includes Colorado, had held previously that parties may not contract for expanded judicial review. See Bowen v. Amoco Pipeline Co., 254 F. 3d 925, 936 (10th Cir. 2001). But see Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir.2001). However, four other federal circuit courts had held otherwise and a fifth had agreed with those four in an unpublished opinion. Hall Street thus provides certainty for parties whose arbitration awards are subject to challenge under the Act (provided that the agreement is subject to the Act, for instance as one “involving commerce.”) (9 U. S. C. § 2.) However, the Court noted that it was not saying that the Act excludes “more searching review based on authority outside the statute.” Hall Street, 128 S. Ct. at 1406. Parties may, in appropriate circumstances contemplate enforcement of arbitration awards under state statutes or common law where they might argue for a different type of judicial review.

One panel of the Colorado Court of Appeals previously declined to apply the “manifest disregard” standard for determining whether an arbitration award should be vacated. See Coors Brewing Co. v. Cabo, 114 P.3d 60 (Colo. App. 2004) (discussing treatment of manifest disregard of the law in the Federal Circuits). Another very recent Colorado Court of Appeals decision, citing Sheldon, has observed that many courts applying the Act have referred to judicially created reasons for vacating an arbitration award, including an arbitrator’s “manifest disregard of the law.” Ahluwalia v. QFA Royalties, LLC, ___P. 3d ___, 2009 WL 262466 (Colo. App. 2009) (petition for certiorari pending, 2009 S. C. 230). It remains to be seen whether the Colorado Supreme Court will accept certiorari of the Ahluwalia decision in light of the United States Supreme Court decision in Hall Street.

The sweep of the Act in extremely broad, since it applies to all contract “involving commerce.” Thus, it arguably covers each and every commercial contract containing an arbitration provision. This would include commercial leases, employment agreements, contracts for the sale of goods and services, and purchase and sale agreements of many and varied types. When the Act applies, state and federal courts alike, under Hall Street, are limited to the statutorily listed grounds for vacating or for modifying or correcting an arbitration award upon application by a party. Hall Street is now the ultimate authority on whether parties are free to contractually alter those statutory grounds. However, many arbitration provisions alter or add to such grounds in contracts “involving commerce”.

The moral of this story is that the law evolves, creating certainty, but able lawyers have proved over the years that “where there is a will, there is a way” to protect and advocate creatively for their clients. Parties and their counsel have proved zealous by seeking to enforce the provisions they have drafted and previously agreed upon, including standards for enforcing awards. Hall Street is most likely not the last word in the age old prize fight. “In this corner we have the challenger, battling to achieve finality by expeditiously resolving commercial disputes through arbitration. And in the other corner, we have the reigning champion, fighting to guaranty fair application of substantive legal rules and principles. May the best person win!”

Post By Wesley B. Howard, Esq.

DENVER'S NEW ZONING CODE

2009-07-27T13:51:00.000-06:00

The City and County of Denver is in the final stages of its comprehensive overhaul of Denver's zoning code. A draft of the new code and new map is available here. Currently, Denver's zoning code task force is conducting public meetings in neighborhoods throughout the city regarding the new code. The remaining meeting dates and neighborhoods are referenced here. Following this public review and comment period, the new code will go to the Planning Board and City Council for discussion, public hearings and adoption.

COVENANTS NOT TO COMPETE -- "MANAGEMENT PERSONNEL"

2009-07-24T11:50:00.000-06:00

In Colorado, covenants not to compete are void as a matter of public policy except in a few limited circumstances. C.R.S. sec. 8-2-113(2). One of the exceptions is for "executive and management personnel and officers and employees who constitute professional staff to executive and management personnel." However, there is no statutory definition of "management personnel," and the Colorado courts have not provided clear guidance for who is "management personnel."

A recent Colorado Court of Appeals decision, DISH Network Corp. v. Altomari, Case No. 08CA1741 (June 25, 2009), has shed some light on the management level and authority a person must possess for him or her to be deemed "management personnel" for purposes of this exception. Altomari was a "mid-level manager" at DISH Newtork having "supervisory authority over fifty out of DISH's 22,000 employees" and some decision-making authority. The trial court concluded that Altomari was not "management personnel" because he was not a "key person at the heart of the business." The Court of Appeals rejected the trial court's narrow interpretation of the statute and ruled that the covenant not to compete was not void and could be applied to Altomari. The Court reasoned that the common meaning of the word "management" is not so limited as to include only the top level of management of a company and that excluding persons who "direct, control, and supervise" other employees within a company inappropriately narrows the statutory language and is inconsistent with the plain meaning of term.

Note that the Court of Appeals' opinion has not been released for publication, and therefore a petition for rehearing or a petition for cert. to the Colorado Supreme Court may be pending. Stay tuned!

Post By Brent W. Houston, Esq.

Colorado Prohibits Insurers from Unreasonably Delaying or Denying Benefits

2009-07-23T09:52:00.000-06:00

Since June 2008, Colorado has prohibited insurers from unreasonably delaying or denying benefits to policy holders and has provided additional remedies of an award of attorney fees and damages of double the amount of covered benefits. The law does not apply to worker’s compensation, title or life insurance. The statutes (C.R.S. §§ 10-3-1115 and 1116) also prohibit giving discretion to the insurer, plan administrator, or claim administrator to interpret the terms of health or disability policies, contracts, or plans issued in Colorado. Insurance policies, contracts or plans must provide that health, life, or disability benefit claimants, who have been denied and exhausted administrative remedies, are entitled to bring their claims before juries. On the whole these new statues provide a powerful incentive to insurers to adjust claims promptly and fairly and a potent weapon for policy-holders whose claims are unreasonably delayed or denied.

POSTED BY: WESLEY B. HOWARD, ESQ.

NEW RESERVE STUDY POLICY REQUIREMENTS FOR COLORADO HOAS

2009-07-22T09:59:00.000-06:00

Effective August 5, 2009, pursuant to House Bill 09-1359, owner's associations governed by the "Colorado Common Interest Ownership Act" must adopt policies, procedures, and rules and regulations concerning: when the association has a reserve study prepared for the portions of the community maintained, repaired, replaced, and improved by the association; whether there is funding plan in place; project sources of funding for reserves; and whether the reserve study is based on a physical and financial analysis. The legislation provides that "an internal reserve study is sufficient," which can be interpreted to mean that the association is not obligated to engage professionals to perform the reserve study. Although engaging professionals is not required, it is a prudent practice under most circumstances.

In a nutshell, a reserve study is forecast of the timing and costs of maintenance, repair, and replacement of those portions of the community for which the association is responsible. Typically, a reserve study consists of an inventory and condition assessment of the common components, and estimates of the useful life and value of each component. This information, viewed in conjunction with the level of existing reserves, if any, is used to develop a funding plan. In most cases, the funding plan will provide for regular reserve assessments to fund all or a portion of the projected costs.

Posted By Brent W. Houston, Esq.