Ackmann v. Merchants Mortg. & Trust Corp.

• Decision Date: 03 May 1982
• Docket Number: No. 80SC178,80SC178
• Citation: 645 P.2d 7
• Parties: Mr. and Mrs. Lowell E. ACKMANN, Mr. and Mrs. Noble Arnold, Russell Dashow, Mr. and Mrs. Donald Gregor, Mr. and Mrs. James F. Huntington, Dr. and Mrs. Paul Jacobi, Mr. and Mrs. Linas Jurcys, Mr. and Mrs. Helmut Kanoldt, Mr. and Mrs. William Lundberg, Mr. and Mrs. Fred H. Olander, L. Douglass Piggott, Mr. and Mrs. Harold Schimanski, Mr. and Mrs. Gerald W. Schultz, Mr. and Mrs. Richard Siakel, Mr. and Mrs. Ted Stockfish, Mr. and Mrs. Grant Taylor, Mr. and Mrs. Michael Toll, Mr. and Mrs. Ronald Vargason, Mr. and Mrs. Fred Weinert, Mr. and Mrs. Roy Kopeikin and Mr. and Mrs. Philip Wangelin, Petitioners, v. MERCHANTS MORTGAGE & TRUST CORPORATION, Respondent.
• Court: Colorado Supreme Court

Page 7

645 P.2d 7

Mr. and Mrs. Lowell E. ACKMANN, Mr. and Mrs. Noble Arnold Russell Dashow, Mr. and Mrs. Donald Gregor, Mr. and Mrs James F. Huntington, Dr. and Mrs. Paul Jacobi, Mr. and Mrs Linas Jurcys, Mr. and Mrs. Helmut Kanoldt, Mr. and Mrs William Lundberg, Mr. and Mrs. Fred H. Olander, L. Douglass Piggott, Mr. and Mrs. Harold Schimanski, Mr. and Mrs. Gerald W. Schultz, Mr. and Mrs. Richard Siakel, Mr. and Mrs. Ted Stockfish, Mr. and Mrs. Grant Taylor, Mr. and Mrs. Michael Toll, Mr. and Mrs. Ronald Vargason, Mr. and Mrs. Fred Weinert, Mr. and Mrs. Roy Kopeikin and Mr. and Mrs. Philip Wangelin, Petitioners, v. MERCHANTS MORTGAGE & TRUST CORPORATION, Respondent.

No. 80SC178.

Supreme Court of Colorado, En Banc.

May 3, 1982.

Rehearing Denied May 24, 1982.

Arthur L. Fine, Denver, Davis, Miner & Barnhill, George F. Galland, Jr., Chicago, Ill., for petitioners.

Davis, Moorhead & Ceriani, P. C., Gary J. Ceriani, Denver, for respondent.

Thomas S. Martin, Acting Asst. U. S. Atty. Gen., Washington, D. C., Joseph F. Dolan, U. S. Atty., for the Dist. of Colo., Denver, Anthony J. Steinmeyer, Mary A. McReynolds, Washington, D. C., for United States as amicus curiae; Peter S. Race, Terrence G. Simpson, U. S. Department of Housing and Urban Development, Washington, D. C., of counsel.

J. D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Mary J. Mullarkey, Sol. Gen., B. Lawrence Theis, First Asst. Atty. Gen., Denver, for the State of Colo. as amicus curiae.

LOHR, Justice.

The plaintiffs were awarded judgment against Merchants Mortgage & Trust Corporation on a jury verdict in Arapahoe County District Court. The judgment cancelled their obligations on promissory notes given in partial payment for lots in the Stagecoach land development project near Steamboat Springs and awarded them damages in the respective principal amounts each had paid on the notes. The Colorado Court of Appeals reversed, holding that the evidence was insufficient to support the plaintiffs' claim that they had been induced to execute the notes by fraudulent concealment of material facts by Woodmoor Corporation, the seller of the lots. Ackmann v. Merchants Mortgage & Trust Corp., Colo.App., 619 P.2d 501 (1980). We granted certiorari and now reverse the decision of the court of appeals because that court applied an incorrect standard in delineating the developer's duty of disclosure.

I.

The present case has a rather complex factual and procedural background. Both must be set forth in some detail in order to understand the issues before this court and our resolution of them.

A. General Factual Background

The present action stems from the financial collapse of Woodmoor Corporation (Woodmoor) in January 1974. Woodmoor was a real estate development company founded in 1963. From its inception until 1970, Woodmoor concentrated on the development of one residential project, initially consisting of approximately 2,000 acres, located in Monument, Colorado, and known as Woodmoor at Monument. In 1970 and 1971, Woodmoor embarked on an ambitious expansion program. It initiated six new projects, including: Woodmoor Mountain, near the initial Monument, Colorado, development; Roxborough Park, 25 miles southwest of downtown Denver; and Stagecoach, a second-home resort community located near Steamboat Springs, Colorado. The Stagecoach project, consisting of approximately 12,000 acres and having an initial estimated development cost of 25 to 35 million dollars, was much larger than Woodmoor's other real estate projects.

Woodmoor encountered serious problems in obtaining adequate financing to develop its projects, and an increasingly critical cash flow problem developed in 1972 and 1973. Faced with rising interest rates, declining sales, and exhaustion of its sources of credit, Woodmoor filed a petition in bankruptcy on January 31, 1974. At various times following Woodmoor's declaration of bankruptcy, individuals who purchased lots at Woodmoor at Monument, Roxborough Park, Woodmoor Mountain, and Stagecoach stopped making payments on the promissory notes they had signed in partial payment for the purchase of their property. The defendant, Merchants Mortgage & Trust Corporation (Merchants), had purchased a number of those notes from Woodmoor in 1972 and 1973. When Merchants insisted upon payment, the plaintiff lot purchasers brought the instant action, seeking invalidation of the notes and other relief.

B. Pre-Trial Proceedings

The plaintiffs' complaint was originally filed on behalf of approximately 80 named plaintiffs and other persons similarly situated. The complaint contained four claims for relief. The first three claims sought affirmative relief from Merchants on the grounds that: (1) Merchants aided Woodmoor in defrauding the plaintiffs in violation of the Colorado Securities Act, section 11-51-101 et seq., C.R.S. 1973; (2) Merchants aided Woodmoor in violating the Interstate Land Sales Full Disclosure Act (ILSFDA), 15 U.S.C. § 1701 et seq.; and (3) Merchants committed common law fraud against the plaintiffs and breached certain asserted contractual and fiduciary obligations to the plaintiffs. The fourth claim for relief averred that Woodmoor's conduct violated the securities laws of Colorado and the United States and the Interstate Land Sales Full Disclosure Act, and constituted common law fraud and breach of contract. It further alleged that Merchants was not a holder in due course of the plaintiffs' promissory notes executed in connection with their transactions with Woodmoor, and that Merchants consequently took the notes subject to the defenses that the plaintiffs could have asserted against Woodmoor. Merchants counterclaimed to collect the full amount of the promissory notes that it had purchased.

For purposes of their complaint the plaintiffs were divided into two classes, A and B. Class A consisted of each plaintiff who had purchased a lot at Stagecoach, Woodmoor at Monument, or Woodmoor Mountain, who had executed a promissory note in connection with the purchase, and whose note had been assigned to Merchants. Class B has no continuing relevance to this appeal and so will not be described. The first three claims for relief were brought on behalf of both classes. The fourth claim for relief was asserted only by Class A.

Subsequently, the named plaintiffs moved for class certification pursuant to C.R.C.P. 23. With respect to the first three claims for relief, the plaintiffs sought certification to represent others similarly situated in Classes A and B. With respect to the fourth claim for relief, the plaintiffs sought certification to represent others in Class A who were in the same situation. The issues were briefed, and on March 7, 1978, the trial court entered an order denying the plaintiffs' motion.

Immediately before trial, the plaintiffs stipulated to a dismissal of their first three claims for relief. Additionally, all plaintiffs connected with Woodmoor projects other than Stagecoach settled their claims before trial and were dismissed. Also dismissed were the claims of all plaintiffs whose Stagecoach promissory notes were not acquired by Merchants. Trial of the remaining issues to a jury of six began on June 5, 1978.

C. The Trial

The now-reduced group of plaintiffs consisted of forty individuals, suing in their individual capacities. At trial, these plaintiffs, pursuant to their fourth claim for relief, asserted three theories for avoiding liability on their notes: (1) violation of the Interstate Land Sales Full Disclosure Act; (2) failure of consideration; and (3) fraudulent concealment of material facts. In support of those claims the plaintiffs presented the following testimony and other evidence.

The plaintiffs purchased lots at Woodmoor's Stagecoach development between June 22, 1972, and September 14, 1973. In each case, the lot consisted of raw land which Woodmoor was to improve by providing roads, water, sewers, and other utilities. In addition, Woodmoor promised the installation of extensive recreational amenities including a golf course, lake, skiing area, swimming pools, and tennis courts.

The plaintiffs presented the testimony of Dale Wheeler, Woodmoor's corporate controller, treasurer, and vice-president of finance from May 1969 to December 1972. Wheeler explained Woodmoor's method of financing its projects. Typically, Woodmoor sold lots in its projects before the promised improvements or amenities were installed. The purchaser made a cash down payment, which was usually 10 percent of the purchase price, and executed a promissory note, secured by a deed of trust on the lot, for the balance. Woodmoor then either borrowed against the note or sold it to a third party. In the case of a sale, Woodmoor usually received about 70 percent of the principal amount of the note. The funds generated in this manner were then used for project development.

While this method of financing had been employed at Woodmoor at Monument with initial success, the results at Stagecoach were less happy. Wheeler testified that in 1971 he expressed concern to Woodmoor's president, Steve Arnold, over Woodmoor's rate of expansion. Wheeler testified that by the fall of 1971, before sales had started at Stagecoach, the cash flow situation was "tight." By the time sales at Stagecoach began in approximately January 1972, Woodmoor had a "very serious cash flow problem."

Until that time, Woodmoor had been borrowing from the Westinghouse Credit Corporation, using lot sale notes as security. However, because of limitations in that line of credit and the rejection of some notes by Westinghouse, Woodmoor began to sell Stagecoach notes to Merchants in early 1972. Woodmoor had sold notes to Merchants in the 1960s in connection with its Monument project, but had turned to borrowing against its notes because of the tax advantages. However, because of its cash flow problems, it decided to resume a substantial volume of note-sale business with...