Watson v. Cal–three Llc

• Decision Date: 14 April 2011
• Docket Number: No. 06CA1542.,06CA1542.
• Citation: 254 P.3d 1189
• Parties: John WATSON and Local Service Corporation, Plaintiffs–Appellants,v.CAL–THREE, LLC, a Colorado limited liability company, Defendant–Appellee.
• Court: Colorado Court of Appeals

254 P.3d 1189

John WATSON and Local Service Corporation, Plaintiffs–Appellants,

v.CAL–THREE, LLC, a Colorado limited liability company, Defendant–Appellee.

No. 06CA1542.

Colorado Court of Appeals, Div. IV.

April 14, 2011.

Law Office of Beth L. Krulewitch, P.C., Beth L. Krulewitch, Denver, Colorado, for Plaintiffs–Appellants.Allen & Vellone, P.C., Patrick D. Vellone, Jennifer E. Schlatter, Denver, Colorado, for Defendant–Appellee.Opinion by Judge CASEBOLT.

In this dispute involving a real estate development, plaintiffs, John Watson and his closely-held entity, Local Service Corporation (collectively, Watson), appeal the judgment awarding compensatory and punitive damages in favor of defendant, Cal–Three, LLC (Cal–Three), upon its counterclaims. We affirm in part, vacate in part, and remand for a new trial on damages.

This case arises from a real estate project initiated by Brandon Park, LLC (Brandon Park). In 1999, Brandon Park borrowed money from First United Bank (FUB) to develop and construct townhomes in the project. In return, FUB obtained a first deed of trust. Watson agreed to guarantee repayment of the loan in exchange for a fee to be paid from the project's proceeds.

Calahan Construction Company (whose principal is Gordon Calahan) was the general contractor for the first phase of the project. When Brandon Park began having problems paying Calahan and others, Calahan initiated an action against it.

In June 2002, the parties mediated the dispute between Calahan and Brandon Park, resulting in the execution of a number of connected settlement agreements that resolved all issues. In one agreement, Brandon Park transferred all its rights in the project to Cal–Three, an entity formed by Gordon Calahan for the express purpose of becoming the owner and developer of the project.

Watson was not a party to that lawsuit but attended the mediation, was heavily involved in the negotiations and subsequent preparation of the modification and settlement agreements, and agreed to accept a reduced guarantor fee from the project. The agreements established a new fee due to Watson and a repayment plan for FUB and all other creditors, to be funded by the sale of completed townhomes.

In August 2002, Watson sent a notice to Cal–Three asserting that it was in default of the new agreements for failing to pay the outstanding balance on the FUB loan, failing to pay real estate taxes and homeowners association dues, failing to cure and resolve mechanics' liens, failing to obtain a construction loan, and failing to preserve and maintain the premises. Cal–Three did not respond to this notice.

On or about October 24, 2002, a sale of a completed townhome was scheduled to close. Watson sent a payoff letter to the title company in connection with the closing. Because the title company had asked Watson for the payoff amount for that one unit but Watson responded with a payoff amount for the entire project, the closing did not occur.

One day later, Watson commenced this action seeking a receiver, and one was appointed. In December 2002, having paid the remaining balance owed to FUB, Watson filed an action pursuant to C.R.C.P. 120 to foreclose the deed of trust. Cal–Three did not appear in the C.R.C.P. 120 action.

At the foreclosure sale in February 2003, Watson successfully bid on the property. The redemption period expired, and title to the property was transferred to Watson, who sold the remaining three completed townhome units in the project for $414,326.55 and the remaining raw land for $783,000.

Cal–Three eventually filed an answer and counterclaims in this, the receivership action, including claims for tortious interference with contract, breach of contract, and breach of the covenant of good faith and fair dealing. Watson responded to the counterclaims and included an affirmative defense of failure to mitigate damages.

Following a bench trial, the court ruled in favor of Cal–Three on its breach of contract and covenant of good faith claims. The court concluded that Cal–Three had not been in default on any obligation when Watson had sent the August 2002 letter. The court found that Cal–Three had been damaged in the amount of the profits realized by Watson—$414,326.55 resulting from the sales of the three existing townhomes, and $783,000 resulting from Watson's sale of the remaining raw land. The trial court also awarded Cal–Three $50,000 in punitive damages for what it found to be Watson's willful and wanton behavior.

After this appeal was filed and at issue, Watson and Local Service Corporation filed petitions in bankruptcy. Approximately three years later, the parties jointly petitioned for relief from the automatic stay, which the bankruptcy court granted.

I.

Watson asserts that the failure of the trial judge sua sponte to disqualify herself before entering judgment requires reversal. Specifically, Watson asserts that the trial judge should have recused herself because, before entering judgment, she sent a letter of complaint concerning Watson, an inactive attorney, to the Colorado Supreme Court Office of Attorney Regulation Counsel. Under the circumstances present here, we disagree.

The trial court's determination on a motion for disqualification is discretionary and will not be reversed absent an abuse of discretion. Spring Creek Ranchers Ass'n v. McNichols, 165 P.3d 244, 245 (Colo.2007). An abuse of discretion occurs only when the trial court's decision is manifestly arbitrary, unreasonable, or unfair. First Horizon Merchant Services, Inc. v. Wellspring Capital Management, LLC, 166 P.3d 166, 179 (Colo.App.2007).

A judge must be free of all taint of bias and partiality. People v. Dist. Court, 192 Colo. 503, 507, 560 P.2d 828, 831 (1977). To this end, under the Colorado Code of Judicial Conduct in effect at the time of trial, a judge should disqualify himself or herself whenever the judge's impartiality might reasonably be questioned. C.J.C. 3(C)(1).

What a judge learns in his or her judicial capacity is a proper basis for judicial observation, and the use of such information does not require disqualification. Smith v. Dist. Court, 629 P.2d 1055, 1056 (Colo.1981). Thus, a judge is not recusable for bias or prejudice that is based on the facts and circumstances of the case, even where, upon completion of the evidence, the court is exceedingly ill disposed toward a party. Liteky v. United States, 510 U.S. 540, 550–51, 114 S.Ct. 1147, 127 L.Ed.2d 474 (1994). Even an opinion as to the guilt or innocence of a criminal defendant is generally not a basis for disqualification. Walker v. People, 126 Colo. 135, 145, 248 P.2d 287, 293 (1952). “Impartiality is not gullibility. Disinterestedness does not mean child-like innocence. If the judge did not form judgments of the actors in those court-house dramas called trials, he [or she] could never render decisions.” In re J.P. Linahan, Inc., 138 F.2d 650, 654 (2d Cir.1943).

C.R.C.P. 251.4 states that “[a] judge has a duty to report unprofessional conduct by an attorney to Regulation Counsel pursuant to Canon 3(B)(3) of the Colorado Code of Judicial Conduct.” Canon 3(B)(3), as in effect at the time of trial, required a judge to “take or initiate appropriate disciplinary measures against a judge or lawyer for unprofessional conduct of which the judge may become aware.”

Here, the trial court entered a sequestration order for all witnesses at the beginning of trial. During trial, it came to the court's attention, and the court found, that Watson had violated the order by sending a facsimile recounting trial testimony to a witness who was scheduled to, and did, testify.

After the court took the case under advisement following completion of the trial, but several days before issuing findings of fact and conclusions of law, the trial judge reported what she believed to be Watson's unethical conduct to the Office of Attorney Regulation Counsel. Several months after the final judgment was issued in this case, Watson received a letter from Regulation Counsel informing him that the trial judge had reported his behavior “in accordance with her duty under C.R.C.P. 251.4” and that his conduct was under investigation.

While the better practice would have been for the court either to inform Watson of her report before entering judgment or wait to report any unethical behavior until after entry of judgment, we nevertheless do not perceive that disqualification before entering judgment was required under these circumstances. Despite the fact that Watson's license to practice law was suspended in 1994 and never reinstated, he remained subject to the Rules of Professional Conduct. People v. Jamrozek, 921 P.2d 725, 726 (Colo.1996). In reporting what she believed to be unprofessional conduct by Watson, the judge acted in accordance with her duties.

Moreover, even assuming that Watson's violation of the sequestration order resulted in “prejudice” against him on the part of the trial judge—a finding that we do not make here—the trial judge would have acquired any such “prejudice” from the circumstances of the case and the facts she learned during the proceedings. Therefore, any “prejudice” on her part would not constitute an improper prejudgment of the case of the type requiring recusal. See Liteky, 510 U.S. at 550–51, 114 S.Ct. 1147; Smith, 629 P.2d at 1056.

Watson asserts that, in response to a motion he filed after the judgment was entered and based on the report to Attorney Regulation Counsel, the trial judge recused herself. However, that recusal does not, in our view, require a different result in this appeal.

The critical inquiry is whether the trial judge was required to recuse before entering the judgment, and her determination to actually recuse several months after judgment, without providing any explanation and when only attorney fees remained to be resolved, does not speak to that issue. Recusal provides prospective relief; it does not necessarily invalidate orders previously...