Rocky Mountain High LLC v. Joli A. Lofstedt, for the Estate of Old Town N., LLC (In re Old Town N., LLC), Case No. 12–21164 ABC
| Decision Date | 16 October 2014 |
| Docket Number | Case No. 12–21164 ABC,Adversary No. 13–1025 ABC |
| Citation | 519 B.R. 307 |
| Court | U.S. Bankruptcy Court — District of Colorado |
| Parties | In re: Old Town North, LLC EIN 84–1588948, Debtor. Rocky Mountain High LLC, Plaintiff, v. Joli A. Lofstedt, as Chapter 7 Trustee for the estate of Old Town North, LLC, and Shear Engineering Corporation, Defendants. |
OPINION TEXT STARTS HERE
J. Brian Fletcher, Andrew D. Johnson, Denver, CO, for Defendant Joli A. Lofstedt.
Audris G. Hampton, Broomfield, CO, for Defendant Shear Engineering Corporation.
David J. Pigott, Broomfield, CO, for Defendant Shear Engineering Corporation and Plaintiff.
Findings of Fact, Conclusions of Law, and Ruling
This adversary proceeding concerns adjudication of the respective rights of the holder of a deed of trust, a purported mechanics lienor, and the Chapter 7 bankruptcy trustee in this bankruptcy estate's principal asset. The asset in question is this bankruptcy estate's unsold portion of a mixed-use real estate development known as the Old Town North Subdivision (“OTN”). The project is located in the City of Fort Collins, Colorado, a few blocks north of downtown Fort Collins. The debtor in this case, Old Town North, LLC (the “Debtor”), was the developer of OTN. Debtor's initial work on this project was undertaken in 1998. OTN received final plat approval in June of 2004. Debtor continued for several years with efforts to develop the project and, in 2012, facing financial challenges and a loss of its credit lines, filed Chapter 7 bankruptcy. In August of that year the Debtor converted the case to Chapter 11 reorganization proceedings. After nine months in Chapter 11 without confirmation of a plan of reorganization, this case, on May 28, 2013, was reconverted to Chapter 7.
This litigation was initiated by Public Service Credit Union (“PSCU”) as plaintiff. In September of 2008, PSCU loaned the Debtor $2,750,000 and secured that loan by a deed of trust (the “PSCU Deed of Trust”) that encumbered portions of the OTN Subdivision. PSCU in this suit named the Chapter 7 Trustee and Shear Engineering Corporation (“Shear”) who had filed a mechanics lien statement against portions of the OTN Subdivision. PSCU sought in its amended complaint a determination, as against the Trustee, of which portions of OTN then owned by the Chapter 7 bankruptcy estate are encumbered by PSCU's Deed of Trust. As against Shear, PSCU sought a determination that either the Shear mechanics lien was altogether invalid or, alternatively, junior in priority to the PSCU Deed of Trust.
The Trustee answered PSCU and counterclaimed seeking to avoid the lien of the PSCU Deed of Trust except to the extent it encumbers portions of OTN legally described as Block 1 and Block 6. The Trustee also cross-claimed against Shear, seeking to avoid its mechanics lien as noncompliant with the applicable Colorado mechanics lien statutes. The Trustee also sought to set aside Shear's mechanics lien and recover her fees and costs under Colorado's statute concerning knowing improper recording of mechanics liens.
Shear, in turn, answered PSCU's complaint, counterclaimed, and cross-claimed against the Trustee. Shear sought a determination that its mechanics lien enjoys a first priority position against portions of OTN, legally described in Shear's recorded mechanics lien statement as Block 1, Block 6, Tract JJ, Tract KK, and Tract JJJ.
Shortly before this matter went to trial the posture of the parties and their claims was adjusted by three developments. An entity known as Rocky Mountain High LLC (“RMH”) acquired PSCU's position and substituted in for PSCU as plaintiff in the adversary proceeding.
RMH and Shear settled their differences such that Shear conceded the senior position of the RMH/PSCU Deed of Trust over Shear's mechanics lien, and RMH no longer contested the validity of Shear's “junior” mechanics lien.
Lastly, days before the trial started, RMH sought further to amend the complaint to allege that, although the PSCU Deed of Trust that it now holds omitted parcels JJ, KK, and JJJ from the legal description of what it encumbered, reference to tax parcels covering, inter alia, parcels JJ, KK, and JJJ result in subjecting parcels JJ, KK, and JJJ of the OTN Subdivision to the lien of the RMH/PSCU Deed of Trust. The reference to tax parcels in the RMH/PSCU Deed of Trust appears at the top left corner of page one of the document.
The Court denied RMH's motion to amend the complaint, ruling that the content of the RMH/PSCU Deed of Trust was already front and center as this case was going to trial and that, in any event, Rule 15 would permit RMH to move to conform its pleadings to the evidence at trial. RMH so moved at the close of the evidence, and the motion was granted.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and (b) and 28 U.S.C. §§ 157(a) and (b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (K), and (O), as it concerns, respectively, administration of this Chapter 7 estate; determinations of the validity, extent, and priority of liens against estate property; and proceedings affecting the liquidation of the assets of this bankruptcy estate and adjustments of debtor-creditor relationships.
The parties' respective rights in the real estate that is the subject of their competing claims are governed in significant part by what and when they (or its predecessor in the case of RMH) recorded in the Larimer County real property records. A summary of the undisputed evidence in this regard is as follows:
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[Editor's Note: The preceding image contains the reference for footnote 1].
The principal legal questions this Court must address, based on the evidence before it, are as follows:
— Whether by reason of its reference to “Tax Parcel Numbers” that encompass the land in Tracts JJ, KK, and JJJ, the PSCU/RMH Deed of Trust encumbers those tracts; or, to the contrary, whether any claimed interest by RMH in those tracts is avoidable by the Trustee pursuant to her Bankruptcy Code strong arm powers as a bona fide purchaser, without notice, under 11 U.S.C. § 544(a)(3)?
— Whether the PSCU/RMH Deed of Trust encumbers Tracts JJ and KK by way of subrogation to the lien rights of the now released Baum Engineering & Design, LLC (“Baum”) Deed of Trust that was paid off by PSCU's loan; or, to the contrary, whether any such subrogation rights are cut off by the Trustee's section 544(a)(3) BFP avoiding powers?
— Stated from the Trustee's prospective on these first two issues, does this bankruptcy estate hold the Debtor's interest in the real estate in OTN free of interests of RMH, except RMH's lien against Blocks 1 and 6 which are agreed by all parties to be encumbered by the PSCU/RMH trust deed and not subject to avoidance?
— Whether Shear, under applicable Colorado law, has a valid $119,660.72 mechanics lien encumbering the property described in its lien statement, namely Blocks 1 and 6 and Tracts JJ, KK, and JJJ? If Shear does, the Trustee ascends to the Debtor's ownership of real estate in OTN subject to that lien. If Shear does not, the Trustee is entitled, as successor to the Debtor, to a declaration that Shear's lien is invalid.
— Alternatively, the Court is asked to determine whether the Trustee, as successor to the Debtor's interest in the OTN real property, may invalidate the Shear mechanics lien and recover her legal fees and costs under Colorado's statute that forfeits mechanics lien rights where a lien is knowingly recorded improperly.
The Debtor's efforts to develop OTN as a multi-use project north of Fort Collins, Colorado were initiated more than a decade before it sought bankruptcy relief in May of 2012. In late 1998, under the direction of its owner, Monica Sweere, the Debtor engaged Shear to act as the OTN project engineer. Shear and Ms. Sweere had previously enjoyed a good working relationship. Accordingly, the Debtor and Shear never bothered with a written agreement defining the scope of Shear's work concerning the OTN project and the parties' rights and obligations relating thereto. Instead, they worked together under one or more oral agreements under which Shear performed professional services and simply billed the Debtor or affiliate companies under the common control of Ms. Sweere. All of those bills were paid until bills for Shear's work on three assignments Shear undertook between February 2009 and September 2011. Those are the subjects of Shear's mechanics lien.
Shear's work with the Debtor/developer as OTN project engineer was comprehensive. It entailed regular work on the planning and design of the overall project and overall supervision of design and construction of project infrastructure with the objective of obtaining final plat approval for the development. Shear's project engineer role was that of the central, coordinating professional advisor to the Debtor working with the Debtor and its other development professionals on all aspects of pre-plat approval, design and construction of the project's infrastructure. In such assignments Shear worked with, among others, Debtor's land use planners, surveyors, and soils geologists, as well as experts on water, sewer, drainage, wetlands and other ecological concerns, traffic engineers and construction contractors. This work was referred to in testimony as the project's infrastructure or pre-vertical development phase.
This phase of the OTN development and Shear's task as project engineer culminated in final plat approval by the City of Fort Collins on or about June 11, 2004. Mr. Brian Shear, Shear's principal, testified that work on the entire subdivision continued until it was substantially completed by the first of March 2005. Miscellaneousfollow-up work as overall project engineer continued between March 2005 and...
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