McGillis Inv. Co. v. First Interstate Fin. Utah LLC, Court of Appeals No. 14CA1568

Decision Date13 August 2015
Docket NumberCourt of Appeals No. 14CA1568
Citation370 P.3d 295
Parties MCGILLIS INVESTMENT COMPANY, LLP, Plaintiff–Appellee, v. FIRST INTERSTATE FINANCIAL UTAH LLC, a Utah limited liability company; First Interstate Financial LLC, a Nevada limited liability company; and Paul Thurston, as a manager of First Interstate Financial Utah LLC, as a manager of First Interstate Financial LLC, and as an individual, Defendants–Appellants.
CourtColorado Court of Appeals

Allen & Vellone, P.C., Patrick D. Vellone, Jordan Factor, Denver, Colorado, for PlaintiffAppellee.

Hall & Evans, L.L.C., Andrew D. Ringel, Denver, Colorado, for DefendantsAppellants.

Opinion by JUDGE GRAHAM

¶ 1 Defendants, First Interstate Financial Utah LLC, First Interstate Financial LLP, and Paul Thurston (collectively, FIF), appeal the judgment entered on a jury verdict awarding plaintiff, McGillis Investment Company, LLP (MIC), $1,300,625 and fee simple ownership of sixty-three acres of property located in Kersey, Colorado. We affirm.

I. Background

¶ 2 This appeal follows a long and complicated history, including prior litigation in Utah, an earlier appeal to this court, an eight-day trial, and a series of motions brought before, during, and after the trial and the verdict. A voluminous record, spanning thousands of pages, contains an exhaustive rendition of the facts. Other than to generally summarize the dispute, we will present only those facts necessary to place the background in context. Other facts will be developed as we analyze the particular issues on appeal.

¶ 3 MIC's principal, Richard McGillis, and FIF's principal, Thurston, worked together to finance a multitude of commercial real estate loans between 1995 and 2009. Thurston, who had expertise in the banking industry, would investigate possible loans and make recommendations to MIC. If acceptable, MIC would loan money to the recommended borrower, with MIC receiving interest on the transaction and FIF receiving an origination fee on the loan.

¶ 4 The current dispute surrounds a 2003 loan made by MIC and FIF to Kersey Commercial Park, LLC (Kersey Commercial) for $1,850,000 (the Kersey Loan or the Loan) to purchase approximately sixty-three acres of property in Kersey, Colorado, to develop an industrial park (the Kersey Property or the Property). In September 2003, Larry Carnahan, Thurston's friend and a mortgage broker with New Frontier Bank, contacted FIF about providing financing for the purchase of the Kersey Property. Kersey Commercial, owned equally by Ron Erbes and Fred Allison, who was another mortgage broker at New Frontier Bank, proposed to purchase the Property from Sytech Development for $3,000,000. Carnahan prepared a prospectus that showed over $1,200,000 in commercial presale contracts on the Property and collateral securing the Loan that included "an income-producing commercial real estate property in Laramie, Wyoming valued in excess of $1,000,000." Thurston recommended that MIC finance the Loan.

¶ 5 What MIC did not know was that Carnahan, Allison, and Jonathan and Matthew Sysum (the Sysum brothers), who owned Sytech Development, were involved in a series of transactions of questionable legitimacy surrounding the Kersey Property. For example, Carnahan, who recommended financing the $3,000,000 purchase of the Property, had in fact purchased the Property himself only two years prior for $502,000, at Allison's prompting. Thereafter, for approximately $40,000 (the amount of interest that Carnahan had paid on the notes against the Property while he owned it), Carnahan quitclaimed his interest in the Property to Sytech Development. At the time MIC funded the Kersey Loan, the Property was still encumbered by Carnahan's outstanding $500,000 in loans.

¶ 6 Ron Erbes, co-owner of Kersey Commercial, quitclaimed his home to Jonathan Sysum as collateral for the purchase of the Kersey Property. At that time, the home was encumbered by mortgages of approximately $1,000,000, which Erbes disclosed to Jonathan Sysum when he pledged the collateral. The exact amount Kersey Commercial actually paid at closing cannot be firmly documented.

¶ 7 Kersey Commercial never made a payment on the Loan and was in default by May 2004. Nevertheless, Thurston—on behalf of MIC and FIF—executed a Dry–Up Agreement on July 29, 2004, which sold "one (1) share of the capital stock of the Lower Latham Ditch Company, and one-half (1/2) of a share of the capital stock of the Lower Latham Reservoir Company (hereinafter "Water Rights")" of the Kersey Property to Lower Latham Reservoir Company. In exchange for these water rights, Lower Latham Reservoir Company paid Sytech Development $785,000. Erbes testified that this was done so that Jonathan Sysum would quitclaim Erbes' home back to him.

¶ 8 In October 2004, Thurston held several meetings with Erbes, Allison, Carnahan, Jonathan Sysum, and others involved in the development of the Kersey Property. The meeting minutes reflect that Thurston attempted to work out a solution to get the Kersey Loan current. However, because Kersey Commercial had no current or prospective income, MIC and FIF foreclosed on the Property.

¶ 9 On May 12, 2005, MIC and FIF purchased the Kersey Property at foreclosure for $1,600,000. Thurston, apparently in an attempt to repair his relationship with MIC, offered to sue the appraisers of the Kersey Property and give MIC any proceeds of that litigation after subtracting his legal costs.

¶ 10 On June 6, 2006, FIF sued the appraisers. Thereafter, on November 8, 2006, Thurston approached MIC and asked that MIC execute an assignment of the Property (the Assignment), which it did. The Assignment reads in full:

For good and valuable consideration, McGillis Investments (Assignor) hereby assigns all its rights, title and interest to the property in Kersey, Colorado (Reference "Exhibit A" attached) to First Interstate Financial (Assignee) as of this 8th day of November, 2006.
By granting this assignment, McGillis Investments is foregoing any further claim or interest in said property.

¶ 11 The purpose of the Assignment is in dispute; FIF argues it was to give FIF all interest in the Kersey Property, while MIC argues it was solely to make it possible for FIF to pursue the appraiser litigation. In any event, the evidence adduced at trial showed that until June 2010, both FIF and MIC considered themselves joint owners of the Property, notwithstanding the Assignment. FIF settled the appraiser litigation for $438,500 and remitted the proceeds to MIC.

¶ 12 In February 2009, FIF filed suit against Sytech Development over the Kersey Loan (the Sytech litigation). Whether MIC was aware of this suit is disputed.

¶ 13 After Richard McGillis's son took over MIC in 2008, he examined the relationship between MIC and FIF and concluded that FIF had breached its fiduciary duty to MIC in a variety of transactions. On April 2, 2009, MIC filed suit in Utah against FIF alleging (1) breach of fiduciary duty; (2) fraud; (3) negligent misrepresentation; (4) exploitation of a vulnerable adult; (5) unjust enrichment; (6) injunctive relief; and (7) breach of contract. During the Utah litigation, FIF responded to written discovery and produced documents relating to the Kersey Loan. In October 2010, the jury in the Utah case returned a verdict in MIC's favor for $1,250,000 in unspecified damages.

¶ 14 On October 25, 2010, three days after the Utah jury returned its verdict, FIF recorded the Assignment with the Weld County Clerk and Recorder. FIF then settled the Sytech litigation on November 17, 2010, for $20,000.

¶ 15 On June 1, 2011, MIC filed the current lawsuit against FIF in Weld County. In its complaint, MIC sought (1) quiet title to the Kersey Property and (2) damages for breach of fiduciary duty for FIF's recording the Assignment and settling the Sytech litigation. At trial, MIC further argued it was entitled to damages for breach of fiduciary duty for FIF's execution of the Dry–Up Agreement. MIC also sought damages for unjust enrichment, breach of oral agreement, and constructive trust.

¶ 16 Both parties filed motions for summary judgment. In part, FIF argued that claim preclusion barred MIC from litigating the validity of the Assignment because it should have raised that claim in the Utah lawsuit. The trial court agreed and granted summary judgment in favor of FIF on that issue. As a result, the court also entered judgment in favor of FIF and a decree quieting title to the Kersey Property in FIF.

¶ 17 MIC appealed. A division of this court, in McGillis Investment Company, L.L.P. v. First Interstate Financial Utah, LLC, (Colo. App. No. 12CA1634, 2013 WL 2364643, May 30, 2013)

(not published pursuant to C.A.R. 35(f) ) (MIC I ), affirmed the judgment in part and reversed it in part and vacated the decree quieting title in FIF. On the issue of claim preclusion, the division concluded that there was "a genuine issue of material fact as to whether MIC knew or should have known that there was a dispute concerning the Assignment's validity or the ownership of the Property when it filed its Utah action," and, therefore, reversed the summary judgment and remanded the case for further proceedings. Id. at slip op. at 11–12.

¶ 18 On remand, the case proceeded to trial. FIF filed two motions in limine seeking to exclude the Sysum brothers' testimony because, during discovery, they had invoked their Fifth Amendment privilege against self-incrimination. Ultimately, the trial court allowed MIC to call both Sysum brothers, who again both invoked their Fifth Amendment privilege, and gave the jury an adverse inference instruction regarding only Jonathan Sysum's invocation.

¶ 19 The jury returned a verdict in favor of MIC for $1,300,625. It concluded in a set of special interrogatories that the Assignment was not intended to transfer ownership of the Property and that MIC owned one hundred percent of the Property. Thereafter, the trial court entered judgment in favor of MIC and a decree quieting title of the Property...

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