Colorado Statute of Limitation Alert Regarding Consumer Home Loans

By Holly R. Shilliday, Managing Partner, Colorado Office, McCarthy & Holthus LLP

In recent months, several Colorado borrowers have filed lawsuits seeking to extinguish deeds of trust on their residences based upon the expiration of the statute of limitation. The fact scenarios involve one or more prior withdrawn foreclosures, repeated loss mitigation efforts and a last payment more than six years prior to the lawsuit. While statute of limitation issues are frequently raised by borrowers in connection with foreclosure hearings pursuant to C.R.C.P. 120, the latest filings can be attributed to one borrower’s success in an unpublished appellate ruling on a motion to dismiss based upon the 1909 Colorado Supreme Court case, Lovell v. Goss, 45 Colo. 304 (Colo. 1909).

In Lovell, the lender filed a deficiency action following the completion of a non-judicial foreclosure. The Colorado Supreme Court, following the minority rule, held the cause of action on the un-matured promissory note accrued on the date of default rather than the date the foreclosure was initiated based upon the mortgagee’s election to start foreclosure proceedings prior to the maturity date of the loan. Lovell at 311-312. Using the default date as the starting point, the action to enforce the note fell outside of the six year time frame to file an action on a note and so the Lovell court ruled the action was time barred.

In order to analyze Lovell, it is necessary to know some basic information regarding the statute of limitations defense in Colorado. The statute of limitation on a promissory note in Colorado is six years. C.R.S. § 13-80-103.5(1)(a). For installment loans, a separate cause of action may be initiated for each payment due. Hassler v. Account Brokers of Larimer County, Inc., 274 P.3d 547, 549 (Colo. 2012). However, if a loan is accelerated, the statute of limitation is triggered at the point of acceleration. Castle Rock Bank v. Team Transit, LLC, 292 P.3d 1077 (Colo. App. 2012). A creditor’s option to accelerate must be made in a clear and unequivocal manner. Hassler v. Account Brokers of Larimer County, Inc., at 553-54, citing Moss v. McDonald, 772 P.2d 626, 628 (Colo. App. 1988). In the absence of a formal notice of acceleration, the commencement of a foreclosure action is sufficient to accelerate the obligation secured by the deed of trust. Kirk v. Kitchens, 49 P.3d 11 (Colo. App. 2002).

There are a number of events and circumstances that will re-start the statute of limitation. A voluntary payment by a borrower before the statute of limitation has run is sufficient to toll or re-start the statute of limitation. Drake v. Tyner, 914 P.2d 519, 522 (Colo. App. 1996). In addition, pursuant to C.R.S. § 13-80-113, an acknowledgment of indebtedness of a promise to pay can also renew the statute of limitation. In limited circumstances, Colorado also recognizes equitable tolling of the statute of limitation based upon the bad conduct of the defendant. Garrett v. Arrowhead Improvement Ass'n, 826 P.2d 850 (Colo. 1992).

Now, counsel for borrowers contend the initiation of a second foreclosure triggers Lovell and requires the Court to analyze the statute of limitation based upon the date the original default occurred (i.e., last payment made) rather than the date of acceleration of the loan (usually the date of the first foreclosure). Accordingly, borrowers are requesting the courts to extinguish the debt and to release the deed of trust on their homes where servicers withdrew a prior foreclosure and initiated a later foreclosure more than six years after the initial default.

Servicers and lenders distinguish Lovell. First, the note in Lovell was for a commercial loan and contained self-executing acceleration language. In addition, the initiation of a second foreclosure is different than filing a deficiency lawsuit on the note. Third, the withdrawal of the first foreclosure (which is required if the foreclosure is not completed within a year) acts to decelerate the loan as evidenced by a new notice of default sent by the servicer which seeks the amounts to cure the loan rather than the entire outstanding indebtedness. Also, borrowers have a right to cure up until the day before a foreclosure sale. Fourth, Lovell should not apply to a foreclosure initiated after the promulgation of federal rules and regulations for servicers by HUD as well as the Consumer Financial Protection Bureau (“CFBP”). See Green Tree Financial Servicing Corp. v. Short, 10 P.3d 721 (Colo. App. 2000) (Court of Appeals distinguished Lovell and found it inapplicable where a statute creates a notice requirement before action may be taken by a creditor). For instance, the CFBP does not allow a servicer to declare a default until the loan is four months in default. In addition, the rules and regulations require a servicer to halt foreclosure activity if a borrower is seeking loss mitigation. Finally, the request of a borrower for loss mitigation (and to stop the foreclosure) should equitably toll the statute of limitation. Public policy should prohibit borrowers from obtaining a windfall when the servicers halted foreclosure activity when the borrowers requested and were considered for loss mitigation.

Based upon the number of cases currently pending, it is likely the issue of whether Lovell is triggered when a subsequent foreclosure is filed will make its way back to the Colorado Supreme Court for consideration. In the meantime, servicers should carefully analyze aged defaults to see what action, if any, can be taken to avoid statute of limitation issues.

Please contact Holly Shilliday, [email protected], should you have further questions or want to learn more about the statute of limitation.

Judicial Limitations on Bankruptcy-Remote Special Purpose Entities

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C., Greenwood Village, CO

Many creditors fear their borrowers filing a bankruptcy petition because of the equitable powers that federal bankruptcy courts have to reorder the affairs of the debtor – usually to the detriment of the creditor. As a result, creditors have come up with several ways of preventing their borrower from filing bankruptcy, or of mitigating the effects of bankruptcy when filed. Many of these are through special purpose entities, usually formed as limited liability companies. In re General Growth Properties, Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009), discussed the method that General Growth Properties used to place its assets in single member LLCs, each with bankruptcy remote provisions requiring that the independent manager (appointed by the creditor of the property held by the SPE), must consider the interests of the creditor before making a bankruptcy filing. On the eve of filing, General Growth Properties replaced all of the independent managers of the SPEs and the new managers approved the bankruptcy filings – even though the SPEs individually were solvent, although the consolidated group was insolvent. The court in General Growth allowed the bankruptcy petitions to proceed.

A New Approach—Equity Kickers

A different approach to avoiding a bankruptcy petition was taken by the creditor in In re Lexington Hospitality Group, LLC, Case No. 17-51568, 2017 WL 4118117 (E.D. Ky. Bankr. Sep. 15, 2017). Lexington Hospitality Group, LLC (“LHG”) is a manager-managed LLC formed under Kentucky law. LHG had borrowed in excess of $6 million from PCG Credit Partners, LLC (“PCG”). The loan was collateralized by a mortgage on real estate and a security interest in all of LHG’s assets. In addition, through a single-member LLC that PCG owned (“Athens”), PCG received a 30% membership interest in LHG (an “equity kicker”). Athens was admitted as a member in an amended and restated operating agreement (“AROA”) entered into contemporaneously with the loan. Among other things, the AROA provided that:

• The equity kicker would terminate upon repayment of the loan;
• LHG could only file bankruptcy with the approval of an “Independent Manager” who could act only with the approval of 75% of the members;
• The Independent Manager was directed “to consider the interests of the Company in acting or otherwise voting, as well as the interests of creditors and the economic interest of Athens;
• All fiduciary obligations or liabilities that might otherwise attach to the Independent Manager were eliminated; and
• Filing for bankruptcy was further restricted to require approval of all of the members and PCG.

Ignoring those restrictions, LHG (acting through its manager) filed for Chapter 11 bankruptcy relief on August 3, 2017. Three days later, PCG filed a motion to dismiss the action on the grounds that the bankruptcy restrictions were not satisfied and, notwithstanding the bankruptcy restrictions, a manager by itself does not have the ability to cause an LLC to file for bankruptcy.

Restrictions Violated Public Policy

The case was decided at the Bankruptcy Court level on September 15, 2017. The court determined that while state law governs whether a business entity is authorized to file a bankruptcy petition, federal law determined whether contractual restrictions on filing a bankruptcy are themselves against public policy and therefore unenforceable. In concluding that the restrictions in this case were unenforceable, that court cited “a strong federal public policy in favor of allowing individuals and entities their right to a fresh start in bankruptcy.” [In so holding, the court cited In re Intervention Energy Holdings, LLC, Case no. 16-11247 (KJC) (Bankr. De. June 3, 2016) and In re Lake Michigan Beach Pottawattamie Resort LLC, Case No. 15bk42427, 2016 WL 1359697 (N.D. Ill. Apr. 5, 2016).] The court went on to find that the contractual bankruptcy restrictions created an absolute waiver of LHG’s right to file bankruptcy and therefore were voidable as being against federal public policy.

The court also discussed whether a manager, acting alone, could (under Kentucky law) put the LLC into bankruptcy. PCG argued that bankruptcy is such an extraordinary transaction that a manager, absent express authority in the operating agreement to do so, does not have the capacity to initiate a bankruptcy filing. Referencing the Kentucky LLC Act which (like Colorado)¹ has an “ordinary course of business requirement”), the court said that while “[f]iling bankruptcy may be outside the ordinary course, [] it is a business decision and is connected to the business affairs of the Company.” Thus, the court found that state law permitted a manager to file a bankruptcy petition on behalf of the LLC notwithstanding the provisions in the operating agreement which were against public policy.

The LHG decision and the decisions cited therein significantly limit the intent of the Colorado LLC Act “to give the maximum effect to the principal of freedom of contract and the enforceability of operating agreements” found in C.R.S. § 7-80-108(4). Given the Colorado focus on the enforceability of operating agreements, we can hope that bankruptcy-remote provisions would be enforceable under Colorado law.

¹ Kentucky Rev. Stat. § 275.165, is similar to C.R.S. § 7-80-401(1). Colorado law provides that, except for an act of the LLC “not in the ordinary course of the business of the” LLC, the majority of the managers of a manager-managed LLC shall make all decisions of the LLC. The Kentucky statute does not require that the managers (when there are more than one) act by majority vote. In Colorado, the agency rights of a manager in § 7-80-405(1)(b) also has an ordinary course of business requirement.

Working Group on Legal Opinions – Fall 2017 Meeting

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C., Greenwood Village, CO

As the representative to the Working Group on Legal Opinions (“WGLO”) appointed by the Business Law Section of the Colorado Bar Association, I attended the WGLO’s conference in New York on October 30–31. Halloween in Manhattan was, shall we say, interesting, with grandsons on the Statue of Liberty, the 9/11 Museum, and a day later the terrorist truck attack.

I have been to WGLO conferences a number of times before, and they are always interesting and informative. The topics and the speakers frequently focus on risk analysis – since the legal opinion is the attorney’s risk, not the client’s risk. Customary practice includes customary diligence (the work that goes into fact-finding for the opinion giver) and customary usage (the way certain words and phrases are used in closing opinions). The best way for the lawyer to reduce the risk of the legal opinion is not to give one. Sometimes this can be justified where the benefit of the opinion to the recipient does not justify the cost to the client.

Outside Counsel Guidelines

The Monday evening dinner discussion is always interesting. This year Randy Curato, Vice President – Loss Prevention Counsel, ALAS, Inc., discussed outside counsel guidelines being imposed on outside counsel by large corporate clients. Municipalities and smaller clients are now doing so as well. Mr. Curato pointed out that many of those guidelines raise concerns in various respects—sometimes in the definition of who the “client” is or what constitutes a conflict, sometimes in the billing guidelines, and sometimes in indemnity provisions. Some of these provisions are simply problematic—firms can agree to them if they choose, but need to be aware of the sweeping obligations they are undertaking. Other provisions, especially the indemnity clauses, can pose a more serious threat. From the perspective of a loss prevention specialist from a large malpractice insurer, Mr. Curato suggests that all firms should be wary of outside counsel guidelines, adopt a procedure on handling them, and ensure that all lawyers forward OCGs and other client-tendered engagement letters to the firm’s general counsel or other designated lawyer for review. At a minimum, firms need to know what they have agreed to; in other cases, firms will want to negotiate or reject certain terms.

Dissolution Consequences

Among the issues discussed but as to which conclusions were not reached was dissolution in the limited liability company (“LLC”) and limited partnership (“LP”) context. Under Colorado law and the corporation acts of the other states, a corporation can only dissolve upon a filing with the Secretary of State or other relevant authority. That is not true for an LLC or LP. Many such agreements provide, for example, that the entity dissolves “upon the sale of its assets.” What is the case where assets are sold in 2010 and the proceeds reinvested in a new business because the management either did not re-read the agreement or determined to ignore the agreement? An LLC or LP in dissolution can only engage in winding up activities — and yet the offending entity is engaged in a new business. Also, the tax code treats a partnership entity as dissolved for tax purposes when there has been a majority ownership change in a 12-month period. How does a dissolution for tax purposes impact the entity for state law purposes? Perhaps not at all.

Electronic Signatures

There was an entire section devoted to electronic signatures and records, and issues that those raise for opinion givers. A question that evoked a significant discussion but no clear answer is where Ben signed an agreement and sent it by email to Alice who was out of town. Alice’s response was, “I cannot print it to sign, but I read it and I agree.” Ben then received a better offer and claimed that Alice’s failure to sign meant that there was no deal. Had Alice consummated the agreement with her email acceptance? What if the agreement had contained no provision specifically authorizing electronic signatures or acceptances?

Attorney Liability and Issues to Consider When Issuing Opinions

Potential lawyer liability is always a focus of these conferences. Consider the case where counsel to the borrower prepared the closing documents for a deal, but one of the closing documents was a UCC-3 termination statement. Unfortunately, the termination statement (which was reviewed by the bank and bank’s counsel) released a $1.2 billion lien (which should have been retained) instead of a $100 million lien (which should have been released). This came to light when the borrower filed bankruptcy and the bank tried to enforce its now terminated lien, and did not have the $100 million lien because that debt had been repaid. In June 2017 the 7th Circuit found that counsel to the borrower had no duties to the lender and thus had no liability. (Oakland Police & Fire Retirement Sys v. Mayer Brown, LLP, 861 F.3d 644.)

As many Colorado lawyers who work with the Delaware General Corporation Law (“DGCL”) know, in 2016 Delaware adopted sections 204 and 205 which allowed for ratification of defective corporate actions. (Colorado does not have a similar provision.). In this dispute, the Delaware Chancery Court found that where the principal shareholder had rejected the act, it was not subject to ratification. (Nguyen v. View, Inc., 2017 WL 2439074)

In Bash v. Textron Fin. Corp., 834 F.3d 651 (6th Cir. 2016), the court found that (in the facts of that case), an amended and restated loan agreement was actually a novation – resulting in the earlier loan being paid off, security interests released, and no new security interested attaching (or even granted) in the new contract. Oops. The case was determined under Ohio law, and involved some fraudulent conveyance issues, as well. The good news is that there were no legal opinions involved, but Textron (the lender) was likely not happy.

A panel member discussed Dobson Bay II D, LLC v. La Sonrisa de Siena, LLC, 393 P.3d 449 (Ariz. 2017) holding that liquidated damages (a 5% late fee) in addition to penalty interest was unenforceable because it was “grossly disproportionate to compensation for identified losses” (consisting of handling and processing late payments and the lender’s loss of use of the funds for a brief period of time). This was an interesting comparison to the recent Colorado case (Ravenstar, LLC v. One Ski Hill Place, LLC, 16SC224) which held that liquidated damages were enforceable when the purchaser of property breached a contract where (among other things) the parties stipulated that the liquidated damages reasonably approximated actual damages which would be difficult to ascertain. (Tobin Kern’s article on this case appeared in the October 2017 CBA Business Law Section Newsletter.)

There was a panel discussion on reverse veil piercing based on the 2017 California Court of Appeals case, Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017)). In 2008 the California Court of Appeals had held that “a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability” because (among other reasons) veil piercing has the potential for harming innocent shareholders and corporate creditors, and judgment creditors should be required to exercise standard judgment collection procedures. (Postal Instant Press v. Assam Corp., 162 Cal.App.4th (2008)). In Curci, however, the husband owned 99% and his wife owned 1% of an LLC that had distributed $178 million in distributions to the two members during a six-year period, but no distributions during the period that the creditor held a charging order for a $7.2 million judgment. In finding that reverse piercing may be available in this case, the Court of Appeals noted that Postal limited its holding to corporations and this was an LLC, creditors of LLC members who acquire the membership interests do not have the same rights (primarily voting and management rights) as creditors acquiring shares of corporate stock, and (perhaps most importantly) in a community property state such as California, there is no “innocent” or “non-culpable” member who might be harmed by piercing. From the legal opinion writer’s perspective, the question raised was whether opinions on liability of members and limited partners cover alter ego or reverse alter ego claims and, if so, is it necessary to make a specific exclusion for those claims? See the discussion of Reverse Veil Piercing in the LLC context in Lidstone and Sparkman, Limited Liability Companies and Partnerships in Colorado (CLE in Colorado 2017) at 7.2.6.

Blockchain Technology

There was an interesting panel discussing blockchain technology – a technology developed for sharing, tracking, and processing large amounts of information. This has benefits in stock trading, the syndicated loan market, and in other places. Delaware, Nevada, Arizona, and Vermont have enacted laws permitting corporate and other entity record-keeping by blockchain, and provides for notice to owners by blockchain transmission. Because of the newness of blockchain technology, the presenters recommended that where blockchain technology was an important part of the transaction (such as in loan syndications), legal opinions should be avoided or significantly qualified because there is no law on the subject.

Guidance for Giving Opinions

Among the interesting new issues coming up is a new report on Limited Partnerships by the TriBar Committee. (For many opinion writers, the TriBar reports, available at the ABA’s Legal Opinion Resource Center, americanbar.org/groups/business_law/migrated/TriBar, form the basis for “customary practice” by which opinions should be judged. Additionally, a number of groups associated with the ABA Business Law Section’s Legal Opinion’s committee and the WGLO have been working for a number of years on the upcoming Statement of Opinion Practices. And, a panel discussed new rules issued by the Public Company Accounting Oversight Board (“PCAOB”) adopting AS 3101. Even when the auditor expresses an unqualified opinion on the client’s financial statements, the auditor will have to disclose critical audit matters (“CAMs”). CAMs are matters that are required to be communicated to the client’s audit committee that relate to accounts or disclosures that are material to the financial statements and that “involved especially challenging, subjective, or complex auditor judgment.” This new requirement may change the auditor’s requirement for the Company’s request to counsel. Nothing, however, has changed counsel’s obligation to respond as expressed in the 1976 ABA statement of policy (published in 31 The Bus. L. 1709 (Apr. 1976)). None of the few amendments to the statements of policy has addressed these issues, either. The ABA Business Law section audit opinion committee Listserv is replete with requests from auditors that go beyond what the 1976 statements contemplate and members are generous with their suggestions and conclusions.

One legal opinion guidance that is continuing in development is the Statement of Opinion Practices being written by a joint committee sponsored by the Working Group on Legal Opinions Foundation and the American Bar Association Business Law Section’s Legal Opinions Committee. While a preliminary draft of this was approved by both the CBA Business Law Section and Real Estate Law Section in April 2017, it has continued to undergo discussion and modification by the joint committee. In addition to the discussion at the WGLO meeting, there have been six telephone conference calls and a comparable number of new drafts circulated. In the legal opinion world, minor wording changes potentially make significant differences in drafting what we hope will be national guidance, and therefore things are moving forward slowly. This was discussed further at the November 17th meeting of the ABA Legal Opinions Committee, but I do not believe that we are looking at a final version for CBA section consideration until 2018. The current draft of the Statement and a version marked to the April 2017 draft have been posted. The CBA Real Estate and Business Law Sections had approved the April 2017, understanding it was a preliminary draft. These are links to both versions for your convenience:

Statement of Opinion Practices – Working Draft

Statement of Opinion Practices – Working Draft, redline version

The next WGLO meeting is scheduled for May 2018.

Business Law Section Activities

CBA-CLE Upcoming Programs

Practitioner’s Guide to Colorado Business Organizations – Advanced Topics – Tomorrow, Nov. 30

All attendees receive the new edition of Practitioner’s Guide to Colorado Business Organizations!
Live Program & Live Webcast
Thursday, Nov. 30, from 8:30 a.m. to 4:40 p.m.
CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

This full day program explores some of the advanced topics discussed in the Practitioner’s Guide to Colorado Business Organizations, including presentations examining less common organizational structures such as cooperatives and public benefit corporations, corporate maintenance and ongoing review, insurance coverage issues, sale of business assets in bankruptcy, and more. All class attendees receive a copy of Practitioner’s Guide to Colorado Business Organizations, 3rd Ed.

Submitted for 8 general CLE credits.

The Recent US Supreme Court Term Plus Ethics, with the Informative and Entertaining Sean Carter, Humorist at Law

Live Program & Live Webcast
Friday, Dec. 15, 9 a.m. – 3:45 p.m.
CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

In this unique presentation, national speaker Sean Carter humorously recaps the significant cases of the most recent term. During this “season,” the court tackled the following hot-button issues: immigration; capital punishment; religious freedom; voting rights; terrorism; and claims of excessive force. Sean will also recap some of the most egregious instances of unethical behavior and demonstrate how the rest of us can avoid more common ethical violations.

Submitted for 6 general CLE credits, including 3 ethics credits.

2017 Ethics 7.0 – Video Replay Denver

All your Ethics credits in one day!
Video Replay
Friday, Dec. 22, 9 a.m. – 4:35 p.m.
CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

Get the latest information on a wide variety of legal ethics and malpractice issues. Gain insights on ethical conduct and best practices, and not so ethical conduct, from managing partners, associates, “lawyers’ lawyers,” and the Court. Learn what to watch for and how to be careful from the malpractice perspective. By day’s end, you will know both the conduct that will gain you respect, and the pitfalls that will jeopardize your practice and prompt grievances and malpractice claims.

Submitted for 7 General CLE credits, including 7 Ethics credits.

CBA-CLE Business Law Homestudies

2017 Business Law Institute: Institute highlights include Case Law, Legislative and Secretary of State Updates; Colorado–s Economic Outlook; Staying out of the In-House Dog House! An In-House Counsel Panel Presentation; Improve Your Skill at the Bargaining Table; and Third Party Legal Opinions and Customary Practice: Offering Advice to One Not Your Client — Learn more
2017 Securities Conference — Learn more
2017 Institute on Advising Nonprofit Organizations — Learn more
Bankruptcy Case Law Update — Learn more
2017 Cannabis Symposium — Learn more
Limited Liability Companies in Colorado — Learn more

View our complete catalog of CLE Homestudies on our website and search by practice area or credits!

Contributions for future newsletters are welcome.
Contact Ed Naylor at [email protected], 303-292-2900.
This newsletter is for information only and does not provide legal advice.