PARTITIONING COLORADO REAL ESTATE: HOW TO FORCE A SALE

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

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

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

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

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

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

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.