New Rules For Business and Real Estate Litigation in Denver Metro Area

Posted by Dimitri Adloff on January 31, 2012

On January 1, 2012, the Colorado Civil Access Pilot Project (“CAPP”) took effect, imposing new procedural rules for certain types of business disputes in Denver, Jefferson, Gilpin, Adams and Arapahoe Counties.  CAPP aims to decrease the costs of litigation and to help cases move through the legal system at a faster pace.  It is still too early to tell whether CAPP will accomplish its stated goals, but it will undoubtedly change the process for resolving commercial real estate disputes in the Denver metro area. 

denver courthouse.jpgWith certain exceptions, CAPP is mandatory for most commercial business disputes.  The following is a brief description of some of CAPP’s most important changes:

Pleadings.  CAPP requires plaintiffs to include more substantive details in their complaints and defendants to deny such allegations with specificity.  The goal is to reduce the number of contested issues at the outset of the litigation process so that parties can streamline their cases and reduce discovery expenses.

Disclosures.  Under CAPP the deadline for a defendant to answer a complaint begins to run from the date of service of plaintiff’s initial disclosures.  This dramatically changes the standard rules of civil procedure which require the parties to simultaneously exchange disclosures thirty days after all pleadings have been served.  This means that a plaintiff will need to do more work at the outset of a case to organize relevant documents and to identify individuals with knowledge of relevant facts.  CAPP also makes changes to the contents of the initial disclosures themselves by requiring parties to make disclosure of information, whether it is supportive or harmful.

Active Case Management.  Under CAPP, the judge initially assigned to a case will remain assigned until final resolution.  CAPP also requires judges to undertake a more active role in the case by holding an initial case management conference and by continuing to monitor the case as it moves forward.

Experts.  CAPP limits each party to one expert per issue, imposes new requirements for expert reports, prohibits expert depositions, and limits the expert’s testimony at trial to what is in the expert’s report.  In this way, CAPP hopes to curb the litigation costs associated with experts.  CAPP is silent on the question of what constitutes an “issue,” and this may be an area of dispute in applying the new rules.

Limitations on Extensions of Time.  Under the standard rules of civil procedure, requests for extensions of time are usually granted as a matter of course.  Under CAPP, however, such requests will be automatically denied absent extraordinary circumstances.  Also, a motion to dismiss the complaint, filed by a defendant, will no longer stay that defendant’s deadline for filing an answer.

Photo by mediafury (Flickr)

Arbitration Provisions in Real Estate Contracts

Posted by Dimitri Adloff on April 12, 2011

With early signs of an economic recovery, developers, investors, and lenders have cautiously started exploring new deals. With new deals come new contracts, and with new contracts it is important to take another look at some of the "standard" provisions to which many of us have grown accustomed.  One such provision which has become standard in many real estate and lending contracts is the mandatory arbitration provision.  Instead of treating it as an afterthought, parties to the contract should carefully consider whether arbitration makes sense for them.

To begin, it is important to understand some of the potentially beneficial characteristics of arbitration:

  • In an arbitration the parties have the ability to agree on an arbitrator, rather than having a judge assigned to their case at random;
  • While arbitration files remain confidential, court records are generally open to the public unless specifically filed under seal;
  • In an arbitration, the parties can set the discovery and procedural rules ahead of time instead of being bound by the rules of civil procedure (though blindly choosing standard arbitration rules could result in a process at least as expensive as a court proceeding without the tried and true benefits of standard discovery practices); and
  • A binding arbitration provision might allow a large institutional party dealing with many customers to avoid class action law suits.

That said, arbitration comes with a cost. In an arbitration, the parties are responsible for paying the hourly rate of the arbitrator and certain default arbitration rules might even require the use of three arbitrators for high-dollar disputes (regardless of the complexity). Additionally, some arbitration firms charge heavy administrative fees. Therefore, depending on the dollar amounts involved, arbitration might not make sense. 

One final point to consider is that the court system might be better suited for certain types of disputes.  Many courts have special rules and procedures for evictions, suits on promissory notes, and replevins.  In these cases it will likely be much easier to go through the courts rather than trying to reinvent the wheel in an arbitration.

Therefore, prior to including an arbitration provision it is important to consider both the characteristics of arbitration as well as the nature of the parties' deal. This will allow the parties to make an informed decision about whether arbitration is the best option for them. If it is, then it becomes vital to craft the arbitration provision carefully so that the ground rules for the arbitration are in place before a dispute arises.

The Medical Marijuana Business Down the Street Stinks

Posted by Bill Kyriagis on February 27, 2011

Medical marijuana businesses, including grow operations and dispensaries, can now be found in many communities throughout Colorado.  The establishment and proliferation of such businesses has presented a number of issues for their neighbors. 

One issue: marijuana stinks.  It has a very strong odor, even before it is smoked. 

Odor emanating from medical marijuana businesses has led to complaints from neighbors, who are typically other businesses.  These businesses and their customers may find the strong marijuana smell that periodically permeates their neighborhoods offensive, or simply overwhelming.  The question then becomes how to deal with the problem.

Colorado’s Medical Marijuana Code, C.R.S. § 12-43.3-101 et seq. (the “Code”) does not directly address or regulate odors coming from medical marijuana businesses, and it does not appear that the proposed state regulations to implement Code will address odors either. 

Accordingly, if neighbors have complaints about odors emanating from medical marijuana businesses, they will either have to hope that local regulation addresses the issue, or be resigned to remedies under the law of nuisance. 

The Boulder Daily Camera recently ran an article addressing the City of Boulder’s regulation of odors from medical marijuana businesses. There have apparently been a number of complaints of wafting smells of marijuana, and the City is investigating.

Under Boulder’s medical marijuana regulations, “[a] medical marijuana business shall be properly ventilated to filter the odor from marijuana so that the odor cannot be detected by a person with a normal sense of smell at the exterior of the medical marijuana business or at any adjoining use or property.”  Boulder Municipal Code, § 6-14-8(h).  Violations can result in a loss of a license, and/or a fine of up to $1,000 per violation. 

According to the Daily Camera, it is difficult for medical marijuana businesses to comply with the requirement, and expensive equipment is needed to mitigate odors.  Medical marijuana businesses have also complained that the requirement is unfair, given that a great many other businesses are allowed to let odors leave their properties without consequence.  (Walking past a pizza parlor, you can often smell the umistakable mix of baking bread and garlic).  However, it appears that the City is intent on trying to enforce its requirement.  As indicated, businesses have a strong incentive to comply, as they risk having their businesses shut down if they do not.

Given Boulder’s odor regulation, neighbors of medical marijuana businesses in Boulder are probably far better off than those in other local jurisdictions that do not have similar requirements.  Without a code provision addressing odors, complaining neighbors would likely only have remedies in the law of nuisance.  While a nuisance suit could result in an injunction, thus cutting off the problem, bringing such a suit would be quite expensive and time consuming for the complaining neighbor.  In contrast, pursuing relief through local code enforcement would likely solve the problem more quickly, and would be carried out primarily at the expense of the local government. 

Colorado’s new licensing scheme for medical marijuana businesses under the Code goes into effect on July 1, 2011.  Local jurisdictions throughout Colorado are still in the process of updating their regulations to conform to this dual state/local licensing system.  As they do, it will be interesting to see if other jurisdictions will attempt to regulate odors as Boulder has.    

 

More to Consider on the Colorado Trust Fund and Mechanics' Lien Statutes

Posted by Dimitri Adloff on February 01, 2011

A few months ago, I wrote about a recent Colorado Court of Appeals decision that gave a broad interpretation to the Colorado Trust Fund Statute.  That decision highlighted the importance of maintaining strict accounting practices and segregating funds for each separate construction project.  As a follow up to that post, I would like to highlight a particular accounting practice that has the potential to create liability under the Trust Fund Statue while also invalidating mechanics’ liens filed by subcontractors.

construction tunnel.jpgGeneral contractors often use the same supplier or subcontractor on multiple projects.  Sometimes a newer project will pay out much quicker than an older project, whether because of construction issues that need to be resolved or delays in payment from the property owner.  In these situations some contractors decide to enter into arrangements with their subcontractors whereby invoices get paid based on aging rather than on a project by project basis.  This might be because neither the contractors nor the subs like to show past due accounts payable/receivable on their financial statements, or maybe the subcontracts provide for steep interest payments on past due invoices.

Whatever the motivation, the contractor and the sub often view this practice as harmless.  However, upon closer scrutiny, these types of arrangements can become disastrous for both contractors and subcontractors.  For example, if an older project never pays out as expected and the contractor is left with a shortage of funds, then that contractor will likely face liability under the Trust Fund Statute (to a property owner and/or other subcontractors) for diverting funds from one project to pay for the expenses of another. 

Meanwhile, the subcontractor whose invoices were paid based on aging, rather than on a project by project basis, is likely to have some unpaid invoices.  In such a case a subcontractor would usually protect itself by filing a mechanics’ lien against the property for which it did work and did not get paid.  However, this subcontractor will have a difficult time enforcing a mechanics’ lien for the newer “unpaid” invoices because it in fact already got paid with funds from that very project – those funds were simply misapplied to an older invoice for a different project.

While it can be tempting to maintain informal accounting practices with long standing and trusted subcontractors or suppliers, both sides need to ensure that they properly account for all funds so as not to run afoul of the Colorado Trust Fund and Mechanics’ Lien statutes.

Photo by laffy4k (Flickr)

Supreme Court Will Not Review Judgment Against Boulder County in Church Case

Posted by Dimitri Adloff on January 14, 2011

The Supreme Court on Monday refused to consider a constitutional challenge to the Religious Land Use and Institutionalized Persons Act (RLUIPA), leaving intact a federal jury’s verdicts that Boulder County, Colorado had violated three separate provisions of the statute in its processing and denial of a 2004 special use application filed by Rocky Mountain Christian Church of Niwot, Colorado.

Following a trial in November of 2008, the jury found that the county treated the church unfairly in the land use process compared to a similarly situated secular school, imposed a substantial burden on the church’s exercise of religion, and unreasonably limited the ability of churches to locate within the county.  Based upon the verdicts, the district court then entered an injunction directing the county to approve the church’s 2004 application to expand its Niwot facility which is used both as a church and a school.

The Tenth Circuit upheld the jury verdicts and injunction in July of 2010.  The Supreme Court denied the county’s petition for certiorari, meaning it will not review the Tenth Circuit’s decision.  In two separate decisions, the church has also been awarded approximately $1,450,000 for attorneys’ fees incurred by its trial counsel, Otten, Johnson, Robinson, Neff & Ragonetti, P.C. of Denver, and The Becket Fund for Religious Liberty, a Washington D.C. based law firm, as well as its lead appellate counsel, Williams & Connolly LLP of Washington, D.C.

Alan Ahlgrim, Lead Pastor of the church, said “We’re grateful that the legal process is now done and we have been vindicated by yet a third court.”  He noted that during the application process the church had spent countless hours and great sums of money trying to comply with the county’s requirements and to address concerns of the church’s neighbors.  “The expanded facility will be a benefit both for the congregation and the entire Niwot community,” he said.

Kevin Baine of Williams & Connolly said he was not surprised by the Supreme Court’s decision not to review the case because “both lower courts had upheld the jury’s finding that the church had been treated less favorably than a secular school in the same position.”  According to Tom Macdonald of the Otten Johnson firm, the jury heard extensive evidence comparing the county’s treatment of the applications filed by the church and the Alexander Dawson School, which was also located on land with the same zoning and comprehensive plan designations as the church’s property and which received approval of an expansion similar in size to total project size sought by the church and that included a gymnasium of roughly the same size as the church requested.

Macdonald said the unreasonable limitation verdict was based upon evidence that the county made it more difficult for churches to operate in the county, had effectively left few sites for church construction and had told a synagogue it could have only 100 seats because the county did not want any more mega churches.  The substantial burden claim was based upon evidence that space constraints had inhibited the church’s growth and outreach to new members in a number of ways, he said.

RLUIPA was passed unanimously by both houses of Congress and signed into law by President Clinton in 2000.  “This case demonstrates the ongoing need for civil rights laws like RLUIPA that protect people of all faiths,” according to Eric Rassbach of the Becket Fund.  “It is also a testimony to the American commitment to religious freedom for all,” he said.

For additional information contact Tom Macdonald (303-575-7520; mac@ottenjohnson.com); Kevin Baine, (202-434-5010; kbaine@wc.com); or Eric Rassbach (202-349-7214; erassbach@becketfund.org).

Contractors Beware: Trust Fund Statute Receives Broad Interpretation

Posted by Dimitri Adloff on November 23, 2010

As Jamie C. Belgum reported in the Colorado Bar Association’s Business Law Newsletter, the Colorado Court of Appeals recently decided a case that gives broad interpretation to the Colorado Trust Fund Statute, C.R.S. § 38-22-127.

The Trust Fund Statute requires contractors to hold funds they receive for a project in trust for the payment of subcontractors.  That means if a contractor receives a disbursement from a construction loan or a payment from a home purchaser, the contractor has to use that money to pay subcontractors before paying any general business expenses.

construction - small.jpgThe question presented in AC Excavating, Inc. v. Yale is whether the Trust Fund Statute reaches a manager’s voluntary monetary contribution to his own construction company.  Mr. Yale loaned $157,500.00 to his construction company, Antelope Development, LLC, whose sole project was the construction of a retention pond for a golf course community.  Yale directed Antelope’s use of the funds to pay general business expenses, including interest on municipal bonds that secured Yale’s loan.  AC Excavating, a subcontractor, sued Yale under the Trust Fund Statute for misapplying the funds he himself contributed.

The Court took a broad reading of the statute saying that it reached all funds disbursed irrespective of the intent of the disburser.  The Court further held that since Antelope had only one bank account and one project it was clear that the funds were “for the construction project” for which AC Excavating did work.  Putting aside the question of whether the Court accurately interpreted the statutory language, there is still some hope for owners/managers seeking to recapitalize their construction company without subjecting themselves to trust fund liability:

  • Contractors should set up separate banking accounts for each project into which they can deposit disbursements made specifically for that project.  A subcontractor should only be paid from the account for the project for which that subcontractor did work.
  • A separate account should also be maintained for general business expenses (i.e., office materials, equipment leases, rent, pay-roll, and marketing).  Owners should deposit infusions of capital into the general business account when they plan on using such capital to pay general business expenses.
  • Any money left over in a project account after all subs have been paid can then be transferred to the general business account to pay general expenses and profits.

With cash flow tight it is easy to rationalize moving money around to help a struggling project, but to avoid liability under the Trust Fund Statute (which is often non-dischargeable in bankruptcy) contractors must maintain strict accounting practices.  Still, with ever broader interpretations of the Trust Fund Statute contractors can never be entirely safe from liability.

Photo from The Library of Congress (Flickr)

Commercial/Retail Eviction Basics - Part 1: Approaches for Dealing with a Struggling Tenant

Posted by Bill Kyriagis on November 22, 2010

For landlords, a late or missed rent payment might be the first sign that one of its tenants’ businesses is struggling or even failing.  In this economy, a landlord facing this kind of situation should keep certain things in mind in order to minimize potential lost revenue and expense.  

Quick action is critical in this economyforrent.jpg

It is important for landlords to ensure that they understand the struggling tenant's situation, and be able to quickly react.  If the tenant is in default for nonpayment of rent because its business is failing, a prompt eviction is typically appropriate.  Especially now, quick action in these cases is critical, since the passage of time may make it much more difficult for the landlord to recover its damages.  If the tenant’s business has failed, there will likely be little to recover from the tenant entity.  Additionally, if the only guarantors are the tenant’s principals, they will very likely also be facing precarious personal financial situations, making it difficult to recover from them.  Moreover, the longer the landlord waits to evict, the longer it will delay the landlord's efforts to try to find a new, paying tenant.

Sometimes, eviction is not the best option

While it is appropriate in the case of a tenant with a failing (or failed) business for the landlord to quickly evict the tenant and attempt to re-let the premises, other situations may call for a more measured approach.  In some circumstances, the tenant's business may simply be suffering a temporary setback, which the parties can often address through communication.  In other cases, the tenant’s business may be facing a permanent decrease in activity and resulting decrease in revenue.  Sometimes, this leaves a tenant unable to afford its rent payments. 

If the tenant's business could remain viable if it were paying a lower rent, it may be in the landlord’s interest to consider restructuring the lease.  This is especially true for tenants with leases that were entered into prior to the economic downturn, since these leases may provide for a rental rate that is significantly higher than current market rates.  Considering that the tenant is "locked-in" at a high rent rate, some landlords may be inherently reluctant to even consider decreasing the tenant's rent.  However, there are at least two reasons why it might be appropriate to restructure a lease for a tenant who, in absence of a rent reduction, will default and vacate the premises.  First, if the tenant is forced to vacate the premises, it may cause the tenant to fold completely, precluding it from generating any revenue.  This carries with it the risk that the landlord’s collection of damages will be very difficult.  Second, if a judgment based on the higher rate will be very difficult to collect, and if current market rates are significantly below what is provided for in the lease, the landlord may have little to lose by agreeing to decrease the lease rental rate to the current market rate.  Any new tenant would only be willing to pay current market rates, and keeping the existing tenant in place after restructuring the lease may allow the landlord to keep a paying tenant in the premises without having to go through a potentially long vacancy period.   

Obviously, the right approach will ultimately depend on the circumstances, and it is often helpful, even at the early stages, to involve an attorney with experience in landlord/tenant disputes and evictions to help the landlord best protect its interests.  For example, lease amendments and concessions should be carefully documented to ensure that the landlord does not inadvertently waive any of its rights, and it may be appropriate to address a number of contingencies when dealing with these situations. 

Regardless of the landlord’s chosen course of conduct, it is clear that, in the difficult leasing market we are currently experiencing, it is important for landlords to be very diligent at the first signs of problems with their tenants.  If a landlord does nothing in the face of months of unpaid rent, it may already be too late for the tenant's business to survive, and the landlord will have missed out on months of time during which it could have marketed the premises to potential new tenants.   

This is the first part in a series in this blog on commercial/retail evictions.  In the next part, I will discuss the basic procedures for evictions under Colorado's unlawful detainer statute. 

Photo courtesy of http://passionatephoto.com

 

Noise from Wind Farms May Create Nuisance

Posted by Dimitri Adloff on October 27, 2010

Several weeks ago The New York Times ran an article about noise and vibrations caused by wind turbines.  The article noted that excessive noise has led to complaints and even lawsuits from neighboring landowners.  This shows that while new wind turbine designs are quieter and safer than earlier models, operators of wind turbines (as well as those who lease land to them) still need to remain cognizant of possible nuisance claims that can be brought by neighboring landowners.

Wind Turbine small.jpgTo prevail on a nuisance claim, a neighboring landowner needs to show that the wind turbines substantially interfere with the use and enjoyment of his or her property.  This can be a difficult and fact intensive proposition, especially since courts tend to consider the social utility of the complained of use. 

However, the risks are substantial: a prevailing landowner may be entitled to recover money damages for dimunition of property values or even an injunction that restricts the continued operation of the wind turbines.

Developers and landowners might consider the following ways to avoid potential nuisance claims:

  • Carefully compare potential wind farm sites.  Rural and open spaces far away from residential developments are best.
  • Examine the feasibility of negotiating and obtaining advance waivers from adjoining landowners before beginning construction.  Maybe a neighbor would be willing to waive a nuisance claim for something as simple as having a say in the color or placement of the wind turbines.
  • Assess the cost-effectiveness of operating the wind turbines at a slower rate or only during certain hours of the day.
  • Inquire about insurance plans that cover nuisance claims.

Wind energy is important, both for the economy and the environment.  Care needs to be taken to minimize the risk of nuisance claims derailing the industry's continued growth.

Photo by the russians are here (Flickr)