Rhino Fund, Lllp v. Hutchins, No. 06CA1172.

• Decision Date: 26 June 2008
• Docket Number: No. 06CA1172.
• Parties: RHINO FUND, LLLP, Third-Party Plaintiff-Appellee, v. Michael W. HUTCHINS, Third-Party Defendant-Appellant.
• Court: Colorado Court of Appeals

215 P.3d 1186

RHINO FUND, LLLP, Third-Party Plaintiff-Appellee, v. Michael W. HUTCHINS, Third-Party Defendant-Appellant.

No. 06CA1172.

Colorado Court of Appeals, Div. I.

June 26, 2008.

As Modified on Denial of Rehearing December 24, 2008.

Certiorari Dismissed March 17, 2009.

Sander, Ingebretsen & Parish, P.C., Daniel F. Wake, Denver, Colorado, for Third-Party Plaintiff-Appellee.

Walter H. Sargent, P.C., Walter H. Sargent, Colorado Springs, Colorado, for Third-Party Defendant-Appellant.

Opinion by Judge ROTHENBERG.

Michael W. Hutchins appeals a judgment of the trial court, following a bench trial, finding him personally liable to The Rhino Fund, LLLP for conversion and civil theft. We affirm.

I. Background

Rhino is a private investment management company. It describes itself as a private "fund of funds" that invests in hedge funds and other "market neutral" investments and reports that it typically invests in the funds and activities of between twelve and fifteen outside investment managers. A hedge fund is "an investment vehicle in which sophisticated institutions and individuals of high net worth pool investments," and its core business is "to earn high returns for investors." Long Term Capital Holdings v. United States, 330 F.Supp.2d 122, 129 n. 5 (D.Conn. 2004), aff'd, 150 Fed.Appx. 40, 2005 WL 2365336 (2d Cir.2005).

This lawsuit arose as the result of three agreements entered into between Rhino and All Terrain Property Funds, LP, a business that acquired nonperforming loans (NPLs) at a discount and attempted to sell or collect on them at a profit. The owners of most of the various All Terrain entities were limited liability companies owned by Hutchins's wife and his children. All were managed by Hutchins, and he also managed the day-to-day operations of All Terrain. Charles Berling was responsible for acquiring, managing, and disposing of All Terrain's real property, and David Pavek was its legal counsel.

In 2003, All Terrain wanted to initiate a new fund (the All Terrain fund) and approached Rhino about investing in it. Rhino and All Terrain executed three documents describing the transaction: an Investor Agreement, a Collateral Assignment of Net Proceeds Agreement, and a Promissory Note. Rhino agreed to lend $1.25 million and, as collateral, All Terrain pledged the proceeds from six specific NPLs that were in the process of collection to secure repayment of Rhino's $1.25 million. According to All Terrain's written estimates, the value of those six collateral assets was at least $1.6 million. The Collateral Assignment of Net Proceeds Agreement identified the six specific assets in a Schedule of Collateral that was pledged by All Terrain to secure repayment of Rhino's loan.

Section 1.1 of the Collateral Assignment was entitled "Pledge of Collateral" and provided, as relevant here, that "Assignors [who were multiple All Terrain entities] hereby convey their rights, title, and interest to [Rhino] with respect to the Proceeds derived from the collection of Collateral to the extent sufficient to repay [Rhino] both the principal and interest owed to it based upon the Note." Section 1.1 also provided that the Assignors would "assign the proceeds of the Collateral ... to the Assignee to act as security for the Assignee's investment in" All Terrain (the collateral proceeds).

The Promissory Note stated that "security for this Promissory Note is governed by that certain Collateral Assignment of Net Proceeds ... [and] is to be construed in connection with the Collateral Assignment as well as the Investor Agreement." The Promissory Note also established an escrow account for the benefit of Rhino. It required that all "proceeds" from the six NPLs that were collected by All Terrain be placed in an escrow account, and that "[i]f there are less than sufficient funds in the escrow account in the event of the need for repayment [to Rhino], all proceeds in the account shall be paid to [Rhino], and interest shall continue to accrue, until such times as the remaining accounts receivable are collected and placed into the escrow account." Rhino also received an option to convert the loan into equity in All Terrain's start-up fund, which had to be exercised within one year.

In 2004, Rhino learned that All Terrain had begun to liquidate the assets referred to in the Schedule of Collateral, but that the proceeds from All Terrain's collections had not been placed in an escrow account and had been used for other purposes. Indeed, Rhino learned that contrary to All Terrain's written representations, All Terrain had never opened an escrow account. When Rhino contacted Hutchins about this, he took the position that the $1.25 million that Rhino had paid was equity in All Terrain and not debt.

Because the parties disagreed regarding the proper characterization of Rhino's financial contribution, All Terrain filed this action seeking a declaratory judgment. Rhino counterclaimed against All Terrain, seeking repayment of the $1.25 million plus interest. It also filed a third-party complaint against Hutchins, Pavek, and Berling for conversion, civil theft, and securities fraud. Pavek and Berling entered into settlement agreements with Rhino and are not parties to this appeal.

The trial court granted Rhino's motion for partial summary judgment, concluding All Terrain was liable for $1,691,125 plus interest for breach of the promissory note, and for at least $712,055 for breach of the Collateral Agreement. All Terrain has not appealed that judgment.

Following a bench trial, and as relevant here, the trial court rejected Rhino's claim that Hutchins was the alter ego of All Terrain. However, the court found him personally liable under the civil theft statute for diverting $200,000 from proceeds that were to be escrowed and for the conversion of $714,951. The court also assessed treble damages against him and awarded Rhino its costs and attorney fees.

II. Hutchins's Personal Liability

Hutchins contends the trial court erred in finding him personally liable to Rhino for conversion and civil theft. He maintains that under Section 15 of the parties' Investor Agreement, All Terrain and Rhino waived any personal liability of the other company's employees or officers under or in connection with the Investor Agreement. We agree the plain language of Section 15 purports to bar Rhino's action. But we further conclude that, on the particular facts presented, this provision does not insulate Hutchins from personal liability for his intentional torts of conversion and civil theft.

Contract interpretation is a question of law that is reviewed de novo, and an appellate court need not defer to a lower tribunal's interpretation of the contract. Ad Two, Inc. v. City & County of Denver, 9 P.3d 373, 376 (Colo.2000). When a contract is unambiguous, the court must give effect to the contract as written unless the contract is voidable on grounds such as mistake, fraud, duress, undue influence, or the like, or unless the result would be an absurdity. Ringquist v. Wall Custom Homes, LLC, 176 P.3d 846, 849 (Colo.App.2007).

A. The Contract Is Not Ambiguous

In determining whether a provision in a contract is ambiguous, the instrument's language must be examined and construed in harmony with the plain and generally accepted meanings of the words used, and reference must be made to all the contract's provisions. A contract is ambiguous when it is reasonably susceptible of more than one meaning. Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1314 (Colo.1984); see ADT Sec. Servs., Inc. v. Premier Home Prot., Inc., 181 P.3d 288, 296 (Colo.App.2007).

Neither Rhino nor Hutchins has contended the three agreements are ambiguous. The trial court concluded the three contracts should be read together, and "[w]hen read together, the documents are unambiguous." We agree with that conclusion.

B. Did Rhino Make a Loan?

The trial court also found the funds Rhino had paid to All Terrain constituted a loan and not the purchase of an equity interest. The court stated: "The plain language of the Promissory Note makes clear that Rhino's funds were a loan to All Terrain unless Rhino exercised its right within the following twelve months to convert that loan into a purchase of equity in All Terrain (the Ownership Option)."

We agree and uphold the trial court's conclusion that, under the plain language of the agreements, the funds that Rhino paid to All Terrain constituted a loan.

C. Does Section 15 Violate Public Policy?

The trial court next addressed Hutchins's argument that Section 15 of the Investor Agreement barred Rhino from seeking damages against him personally. That provision states:

Limitations: No present or future advisor, trustee, director, officer, partner, attorney, employee, shareholder or agent of [Rhino or All Terrain], or any partner in any of them shall have any personal liability, directly or indirectly, under or in connection with this Agreement or any agreement made or entered into in connection with this Agreement and [Rhino and All Terrain] and their successors and assigns hereby waive any and all such personal liability.

The trial court concluded: "Section 15 of the Investor Agreement does not prevent Rhino from asserting its claim for conversion. That section only contemplate[s] a limitation of remedies if the collateral proceeds were properly applied to repayment of Rhino's loan." The court alternatively concluded that Section 15 of the Investor Agreement also violates public policy and is unenforceable to the extent it purports to bar Rhino from asserting a claim for conversion, and the court cited Restatement (Second) of Contracts § 195 (1981) in support of its conclusion. We agree with the court's alternative conclusion.

Rhino and All Terrain clearly sought to insulate their agents, officers, and shareholders from any personal liability, "directly or indirectly, under or in connection with [the Investor Agreement] or any agreement...