Martinez v. Affordable Housing Network

• Decision Date: 20 May 2004
• Docket Number: No. 01CA2189., No. 01CA2188, No. 01CA2185, No. 01CA1669
• Citation: 109 P.3d 983
• Parties: Marvin L. MARTINEZ and Jorene M. Martinez, Plaintiffs-Appellants and Cross-Appellees, and Underhill & Underhill, P.C., Attorney-Appellant, v. AFFORDABLE HOUSING NETWORK, INC., Senior Entrepreneurs Foundation, E.W. Brossman, and Tom Skaggs, Defendants and Cross-Appellants, and Troco, Inc. and Eldon Strong, Defendants-Appellees.
• Court: Colorado Court of Appeals

109 P.3d 983

Marvin L. MARTINEZ and Jorene M. Martinez, Plaintiffs-Appellants and Cross-Appellees, and Underhill & Underhill, P.C., Attorney-Appellant, v. AFFORDABLE HOUSING NETWORK, INC., Senior Entrepreneurs Foundation, E.W. Brossman, and Tom Skaggs, Defendants and Cross-Appellants, and Troco, Inc. and Eldon Strong, Defendants-Appellees.

Nos. 01CA1669, 01CA2185, 01CA2188, 01CA2189.

Colorado Court of Appeals, Div. A.

May 20, 2004.

Certiorari Granted March 21, 2005.¹

Underhill Law Firm, P.C., Joanne P. Underhill, Dana M. Arvin, Greenwood Village, Colorado, for Plaintiffs-Appellants and Cross-Appellees and Attorney-Appellant.

Wollins & Hellman, P.C., Michael J. Axelrad, Denver, Colorado, for Defendants-Cross-Appellants Affordable Housing Network, Inc., and Senior Entrepreneurs Foundation and E.W. Brossman.

Robert Stuart McCormick, Fort Collins, Colorado, for Defendants-Cross-Appellants Tom Skaggs.

Laff Stein Campbell Tucker & Delaney, LLP, Darrel L. Campbell, Greenwood Village, Colorado, for Defendants-Appellees.

Opinion by Chief Judge DAVIDSON.

In this action involving fraud in the nature of equity skimming, plaintiffs, Marvin L. Martinez and Jorene M. Martinez, appeal from the trial court's entry of a judgment quieting title in favor of defendants Troco, Inc. and Eldon Strong. Defendants Affordable Housing Network, Inc. (AHN), Senior Entrepreneurs Foundation, E.W. Brossman, and Tom Skaggs (AHN defendants) cross-appeal from the judgment and award of damages entered after a jury trial in favor of plaintiffs. In a separate action, which has been consolidated with this appeal, plaintiffs' counsel, Underhill & Underhill, P.C., appeals from the trial's court order entering contempt sanctions against it. We affirm the judgment except as to the award of damages, vacate the contempt order, and remand for entry of a corrected judgment.

Faced with impending foreclosure of their property, plaintiffs met with Skaggs, a representative of AHN. Based in part upon Skaggs's false assertions regarding the nonprofit status of AHN, plaintiffs entered into an option agreement with AHN under which AHN would cure plaintiffs' default on the property. As part of this option agreement, plaintiffs delivered a quitclaim deed to AHN. Plaintiffs were told that AHN would attempt to find refinancing for their home and that the deed was for "protection" to be used only in the event that AHN was unable to obtain refinancing for them.

Despite being required to do so under the terms of the option agreement, AHN failed to place the deed in escrow and failed to properly exercise the option.

AHN recorded the deed from plaintiffs and sold the property to Troco and Eldon Strong as tenants in common. Also contrary to the terms of the option agreement, AHN failed to satisfy the existing mortgages when the property was sold.

Plaintiffs filed this action asserting claims against the AHN defendants for (1) violation of the Colorado Organized Crime Control Act (COCCA), § 18-17-104, C.R.S.2003, based on the predicate act of civil theft; (2) breach of contract; (3) concealment, misrepresentation, or fraud; (4) unjust enrichment; (5) violation of the Uniform Consumer Credit Code (UCCC), § 5-1-101, et seq., C.R.S.2003; and (6) violation of the Colorado Consumer Protection Act (CCPA), § 6-1-101, et seq., C.R.S.2003. Plaintiffs also sought rescission of both the option agreement and the quitclaim deed to AHN, seeking to quiet title in their favor against all defendants.

The court granted summary judgment in favor of the AHN defendants on the UCCC claim. At the close of plaintiffs' evidence, the court determined that plaintiffs had abandoned their claim for rescission, dismissed that claim, and quieted title to the property in favor of Troco and Strong, alternatively reasoning that Troco and Strong were bona fide purchasers.

The jury returned separate verdicts against the AHN defendants as follows: (1) on the fraud claim, $512,260, including damages of $412,000 for fraudulent recording; (2) on the CCPA claim, $247,700; (3) on the COCCA claim, $247,700; (4) on the unjust enrichment claim, an advisory verdict of $367,200; and (5) for punitive damages, $1,500,000. The jury also returned a verdict against AHN and Senior Entrepreneurs Foundation for $247,700 on the breach of contract claim.

Finding that the damages awards other than the fraud award were duplicative because they were based on the "same operative facts" as the fraud, the trial court remitted the nonfraud damage awards. Additionally, the court concluded that an award of punitive damages was duplicative of the trebling required for the CCPA claim and remitted the punitive damages award.

I. Quiet Title

Plaintiffs assert the trial court erred in quieting title in Troco and Strong on two grounds. Specifically, plaintiffs contend that their claim for rescission was improperly dismissed and, alternatively, that the property should have been returned pursuant to § 18-4-405, C.R.S.2003, the civil theft statute. We disagree.

A. Rescission

The trial court found that plaintiffs had never tendered or offered to tender to AHN the $9,020 AHN paid to plaintiffs' lender on plaintiffs' behalf. Thus, the court determined that plaintiffs had abandoned their right to rescind the agreement. We agree that the dismissal of plaintiffs' rescission claim was proper on this basis.

A party asserting fraudulent inducement of a contract must elect whether to rescind or affirm the agreement. Alien, Inc. v. Futterman, 924 P.2d 1063 (Colo.App.1995); Altergott v. Yeager, 37 Colo.App. 23, 28, 543 P.2d 1293, 1297 (1975) ("By an unbroken line of cases our courts have held that one defrauded has either the right to affirm the contract and sue for damages, or rescind the contract and sue for return of the money paid....").

This election can be manifested in three ways. First, the defrauded party may inform the other party that it is canceling the agreement. In doing so, the defrauded party must tender back, or offer to tender back, to the other party any benefit received pursuant to the agreement. Tisdel v. Cent. Savings Bank & Trust Co., 90 Colo. 114, 130, 6 P.2d 912, 917 (1931) ("When one is induced through false and fraudulent representations to enter into an agreement, upon discovery thereof, he [may] rescind, in which event he must tender back that which he has received...."); Rubie Combination Gold Mining Co. v. Princess Alice Gold Mining Co., 31 Colo. 158, 161, 71 P. 1121, 1122 (1903) (In an action seeking cancellation of a deed, an "unbroken line of authorities" indicates that it "was incumbent upon plaintiff ... to place defendant in the status quo...."); see Bennett v. Coors Brewing Co., 189 F.3d 1221 (10th Cir.1999) (applying Colorado law to preclude rescission claim based on fraud when no tender had been made). After rescinding the agreement and tendering back any benefit received, a defrauded party may bring suit for restoration to receive back any benefit conferred upon the other party. This remedy was historically known as rescission at law. See Savers Fed. Savings & Loan Ass'n v. First Fed. Savings & Loan Ass'n, 298 Ark. 472, 768 S.W.2d 536 (1989); D. Dobbs, Law of Remedies § 4.8, at 673-74 (2d ed.1993).

Second, the defrauded party may affirm the agreement. Typically, this affirmation is accomplished when the defrauded party takes action consistent with the continued vitality of the agreement. See, e.g., Gladden v. Guyer, 162 Colo. 451, 426 P.2d 953 (1967); Wark v. Bopp, 119 Colo. 12, 199 P.2d 892 (1948). In such an instance, a party cannot seek rescission and is limited to an action for damages arising out of the fraud. Tisdel v. Cent. Savings Bank & Trust Co., supra, 90 Colo. at 130, 6 P.2d at 917 (Upon discovery of the fraud, the party "may affirm the agreement, and maintain his action in damages for deceit."); see also Shappirio v. Goldberg, 192 U.S. 232, 242, 24 S.Ct. 259, 261, 48 L.Ed. 419 (1904) ("If [a defrauded party] continues to treat the property as his own the right of rescission is gone, and the party will be held bound by the contract.").

Third, a defrauded party who has neither informed the other party of its intention to rescind nor taken acts affirming the agreement may instead, if otherwise timely, file a claim for judicial rescission of the agreement. This action is in equity and proceeds under a theory of equitable rescission. See Knaebel v. Heiner, 663 P.2d 551 (Alaska 1983); Dobbs, supra, § 4.8, at 675-77.

A plaintiff seeking equitable rescission need not have tendered back anything received pursuant to the agreement prior to the commencement of a lawsuit. Nevertheless, in its pleadings, the defrauded party must, at a minimum, indicate that it is prepared to tender back any benefit received under the agreement. This indication is required because, for a trial court to "do equity" when canceling an agreement, the defrauded party must have the ability to return anything it had received pursuant to that agreement. Cahill v. Readon, 85 Colo. 9, 15, 273 P. 653, 656 (1928) ("It is claimed that there was no sufficient tender of rescission, but in Colorado the general tender of equity in the complaint is enough."); Treat v. Schmidt, 69 Colo. 190, 194, 193 P. 666, 668 (1920) (In an action for rescission of a deed, "tender in the complaint was sufficient."); see also Gerbaz v. Hulsey, 132 Colo. 359, 364, 288 P.2d 357, 359 (1955) (Failure to "plead an intention to restore plaintiffs to status quo" prevented rescission.).

Although the court here did not determine whether plaintiffs had affirmed the agreement through their actions, it found, with record support, that plaintiffs neither canceled the agreement prior to the lawsuit nor offered to repay the $9,020. Moreover, plaintiffs' pleadings, even liberally construed, do not contain any assertions that plaintiffs were willing or able to return the $9,020. Furthermore, the record indicates that plaintiffs made no offer during trial to...