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HomeMy WebLinkAbout2021-cv-2063-CNS-MEH - City Of Fort Collins V. Open International, Et Al. - 321 - Dfs' Response In Opposition To City's Closing BriefIN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No.: 21-cv-02063-CNS-SBP CITY OF FORT COLLINS, Plaintiff/Counterclaim Defendant, v. OPEN INTERNATIONAL, LLC, Defendant/Counterclaim Plaintiff, and OPEN INVESTMENTS, LLC, Defendant. DEFENDANTS’ RESPONSE IN OPPOSITION TO CITY’S CLOSING BRIEF Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 1 of 13 In this remedial phase of trial, the City asks for an award of legal damages despite electing equitable rescission after the jury trial. See Dkt. 315 (“City Br.”). Damages account for a party’s loss, such as the City’s alleged labor costs, third-party consultant costs, and lost profits. In contrast, rescission is measured by each sides’ gain and imposes “restitution on both sides” by disgorging that gain. EarthInfo, Inc. v. Hydrosphere Res. Consultants, 900 P.2d 113, 118 (Colo. 1995). Here, rescission is simple: Open International received only payments from the City, worth $8,756,659.16, and the City received roughly three years of services and software worth far more than that. In this way, the value of the services and software Open International provided to the City fully offsets the City’s payments. Thus, rescission results in no monetary award. This is not an affirmative defense, and Defendants certainly do not seek affirmative recovery through rescission. Rather, mutual restitution is simply how Colorado effectuates rescission, and Colorado does not include attorneys’ fees in this remedy. Moreover, for the reasons set forth in Defendants’ Rule 52(c) motion and rescission brief, the City waived the right to rescission. Dkt. 314 (“Def. Br.”) at 1-5. Contrary to the City’s claim that it “return[ed] the software” to Open International, the evidence showed the City kept OSF, used it for months after claiming fraud, and even today keeps that software in contractual escrow—all incompatible with rescission. And if rescission isn’t waived, then it removes any basis for a rescission judgment against Open Investments, who received no benefit from the City and whose sole link to the City Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 2 of 13 2 was the rescinded Agreements. Id. at 5-7. In all events, if the Court does not enter judgment against the City, it should not enter a monetary award in the City’s favor. I. RESCISSION ONLY RETURNS THE CONSIDERATION EACH PARTY RECEIVED FROM THE OTHER. The City misapplies rescission, which compels restitution of benefits gained on both sides and which “differs in principle from damages” that compensate a party for its losses. EarthInfo, 900 P.2d at 118; see also Kim v. Sun, 535 B.R. 358, 370 (10th Cir. Bankr. 2015) (rescission “restore[s] the parties to their precontract position” by applying “the return of the money” paid less benefits “received”). The amounts the City seeks for third-party consultants and its own labor costs for the project are reliance, or out-of- pocket, damages. City Br. at 5-8; see Spring Creek Exploration & Prod. Co., LLC v. Hess Bakken Invs. II, LLC, 887 F.3d 1003, 1026 (10th Cir. 2018) (reliance damages “aim to reimburse a party for loss caused by reliance on the contract” (internal citations and quotations omitted)). And the lost net revenues (lost profits) the City expected to earn from future subscribers are expectation, or benefit -of-the-bargain, damages. City Br. at 8-9; see Spring Creek, 887 F. 3d at 1026 (expectation damages put plaintiff in position it would have occupied if defendant performed). Neither category of loss benefitted Defendants, though, so these reliance and expectation damages are not available through the mutual restitution framework that rescission applies. Rocky Mt. Natural Gas, LLC v. Colo. Mt. Junior College Dist., 385 P.3d 848, 854-55 (Colo. App. 2014) (in “equitable remedy” of restitution, no recovery for “detrimental reliance and other factors” because defendant has “no liability in excess of the benefit received”); Kim, 535 B.R. at 370 (holding that rescission does not provide “benefit-of-the-bargain” Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 3 of 13 3 expectation damages); see also Spring Creek, 887 F.3d at 1026 (explaining “reliance damages” and “expectation damages” are “distinct” from “restitution damages”). The City identifies no binding authority to the contrary. While it notes that the appeals court in Rice v. Hilty described a potential rescission award for “capital improvements,” “reasonable value of . . . services,” and “net profit or loss,” the City’s characterization misses the remedy the court was describing: a detailed disgorgement of benefits on both sides. 559 P.2d 725, 727 (Colo. App. 1976). Rice dealt with a contract for a motel property rescinded for the seller’s fraud. The court observed that the buyers already had tendered back the motel so the judgment in their favor had to account for the full purchase price. The court then listed several other benefits each side may have received from the other that needed to be accounted for as part of mutual restitution. From the plaintiff-buyers: the “amount of net profit or loss” they realized while running the motel and the “reasonable rental value of that portion of the property utilized by plaintiffs for their own personal use.” From the defendant-sellers: the “amount of any capital improvements . . . that were a benefit to the motel property” the plaintiffs had returned to them and the “reasonable value of [plaintiffs’] services in managing the motel,” which kept up the motel and generated net profits for the defendants. Id.1 The City’s labor and consultant costs and lost profits did not benefit 1 Similarly, in Gearhart v. Goehner, 701 P.2d 461, 466 (Or. 1985), a buyer returned property to the seller upon rescission of the parties’ agreement. And because the seller received back the property it had conveyed to the buyer, the seller received the benefit of the buyer’s labor and expenditures to improve the property, and had to disgorge that benefit, subject to offset. Id. at 467. For these reasons, Gearhart also does not support the City’s recovery of expenditures that did not benefit Open International. Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 4 of 13 4 Defendants. These are the City’s alleged losses, and they are not recoverable through rescission. The City’s reliance on Restatement (3d) of Restitution § 54 is similarly misplaced. Setting aside that no Colorado court has cited it to contradict the standard set forth above, Restatement § 54 itself acknowledges that rescission “may leave claimant with losses from related expenditures (as distinct from payment of the price) made in reliance on” the contract because compensation for reliance “loss by an award of damages is a remedy different from rescission and restitution.” Cmt. i (emphasis added). Indeed, Restatement § 54 takes the same approach as Rice. It explains that, while each party “compensates the other for loss from related expenditure as justice may require,” § 54(2)(c), “related expenditure” is not a catch-all for each party’s other losses. Rather, as Illustrations 13, 27, and 28 clarify, “other expenditure” refers to conferred benefits that are related to the returned consideration. So, for example, when the buyer of a boat rescinds and returns the boat because the seller fraudulently omitted that the boat was 100 feet underwater, the seller must return the purchase price and pay the buyer’s expenditure to raise the boat, which now benefits the fraudulent seller. But the buyer can’t recover the value of his now-unused boat trailer or the lost net revenue from his now-defunct boat-taxi business. Likewise, when a buyer pays $500,000 for a home and spends another $100,000 on improvements that increase the property value by $85,000, if the buyer later rescinds for fraud and returns the home, she gets to recover the purchase price, plus her investment—measured by her “expenditure”—that now benefits the seller. But she cannot recover her moving costs or Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 5 of 13 5 the lost expectancy from renting the house on Airbnb. Like Colorado law, Restatement § 54 metes out rescission by disgorging benefit, not by covering losses.2 Without a sound legal argument to recover reliance and expectation damages, the City manufactures concessions from Open International’s expert, Mr. Schulman, but the City is only “mischaracterizing [his] report.” Tr. (Nov. 17, 2023) at 94:4-17. He expressly disclaimed any legal opinion that the City could recover a monetary award. Id. at 58:11-17, 127:18-25. He listed figures to address miscalculations in Mr. Seigneur’s report as a matter of financial analysis, not as a conclusion of legal right. Id. at 57:17-58:2, 104:15-21.3 Mr. Schulman corrected faulty math and logic but conceded nothing. The record is clear. The only benefit the City conferred was the payment of $8,756,659.16 to Open International, not $11,328,465 as the City contends.4 City Br. 2 The City’s reliance on foreign authority is also misplaced since other jurisdictions effectuate rescission differently than Colorado does. Compare, e.g., Robinson v. Katz, 610 P.2d 201, 207 (N.M. 1980) (permitting “special” and “consequential” damages with rescission), with Holscher v. Ferry, 280 P.2d 655, 657 (Colo. 1955) (requiring election between “alternative remedies of rescission and of damages”). 3 Further, Mr. Schulman did not opine that the City’s labor costs were correctly calculated or appropriate for rescission or that there was “no need to account for fixed or variable costs.” City Br. at 6. And he omitted analysis of Open International’s fixed and variable costs because, fundamentally, that “concept . . . applies to lost profits” damages, not to rescission. Tr. (Nov. 17, 2023) at 112:1-20. 4 See Am. Compl. (Dkt. 192) ¶¶ 2, 79 (requesting recovery of $8,756,659 paid to Open International); Ex. 694 (list of payments Open International received from the City throughout project); TR (Nov. 1, 2023) at 1775:21-1776:24 (Mr. Corredor); id. at 1871:14-22, 1874:17-21 (Mr. Schulman); TR (Nov. 17, 2023) at 17:20-18:4 (Mr. Seigneur); id. at 60:10-13 (Mr. Schulman). Nor did the evidence show any identifiable benefit that the City’s personnel or consultants conferred on Open International, let alone the value of any such benefit that could be reduced to a judgment. The City’s and its consultants’ work on the project was entirely for the City’s benefit. Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 6 of 13 6 at 1. And Colorado law is clear that this benefit is the cap for calculating the City’s side of rescission’s two-way restitution. The Court should reject the City’s reliance and expectation damages theories. It also should strike the City’s unsolicited interest calculations that were not part of the trial evidence and that are useless before the Court fixes a judgment amount or a prejudgment period.5 For the City’s side of the Court’s mutual-restitution analysis, only $8,756,659.16 should apply. II. EQUITY REQUIRES ACCOUNTING FOR THE CONSIDERATION OPEN INTERNATIONAL GAVE TO THE CITY. Contrary to the City’s contention, Defendants do not seek payment from the City through rescission. EarthInfo, 900 P.2d at 117 (“one should not gain by one’s own wrong” through rescission (citation omitted)). But as the City acknowledges, rescission must “‘restore the conditions existing before the agreement was made.’” City Br. at 2 (quoting Trimble v. Denver, 697 P.2d 716, 723 (Colo. 1985)). Thus, as to Open Investments, if rescission is permitted, no judgment may be sustained against it, since there was no evidence that Open Investments had any link to the City “before the agreement was made” or received any benefit from the City thereafter. Def. Br. at 5-7. As to Open International, rescission requires restitution by both sides. EarthInfo, 900 P.2d at 118. While a defendant may not profit from its wrong, the law is clear that 5 “[I]t is the duty of the court” to apply interest, but only after judgment has been entered. C.R.S. § 13-21-101(1); see also Munoz v. Am. Family Mut. Ins. Co., 425 P.3d 1128, 1129 (Colo. 2018) (holding that time for interest calculation is after “a finding of damages . . . and judgment is entered”). At that point, the parties can confer on the appropriate amount, if any, and provide briefing, if needed . Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 7 of 13 7 “[e]ven the willful wrongdoer should not be made to give up that which is his or her own.” Id. at 120 (quotation, citation, and alteration omitted); see also Restatement § 54 cmt. g (“[T]he fact that the basis of rescission may be . . . fraud . . . does not permit the claimant to recover what has been given without restoring what has been received.”). Here, the City offered no evidence whatsoever to dispute that Open International provided the services that the City paid for, or even to rebut Defendants’ testimony that Open International provided labor services to the City worth far more than the City’s payments. See Def. Br. at 12. Open International earned these amounts not by fraud, but by work the City requested and accepted. The City looks to inapplicable, nonbinding authority to avoid Colorado’s clear rule that rescission must account for the consideration Open International gave to the City. See EarthInfo, 900 P.2d at 118 (“A party seeking to rescind a contract must return the opposite party to the status quo ante.”). For example, Arguelles v. Ridgeway, 827 P.2d 553 (Colo. App. 1991), did not address rescission but determined, in dicta, whether an affirmative defense of setoff could apply against a damages award for fraud. Arguelles not only predates EarthInfo and its progeny, which establish the proper measure of rescission in Colorado, but it also is inapposite since it addresses damages and a separate affirmative defense. Beyond Arguelles, the City relies on foreign authority that has been subsequently vacated, see Roberts v. Sears, Roebuck, & Co., 471 F. Supp. 372 (N.D. Ill. 1979), vacated by 617 F.2d 460, 464 (7th Cir. 1980) (finding improper “second chance to establish past damages despite” plaintiff’s earlier election of rescission), or foreign authority that is inapposite, see Full Tilt Boogie, LLC v. Kep Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 8 of 13 8 Fortune, LLC, 2023 U.S. Dist. LEXIS 49142 (C.D. Cal. Mar. 21, 2023) (applying rescission of franchise agreement in default judgment); PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust, 889 F. Supp. 2d 275 (D.R.I. 2012) (addressing narrow exception to application of rescission remedy for cases of insurance fraud). The City identifies no binding authority to override the Court’s obligation to make “some apportionment” between amounts improperly obtained and those amounts Open International earned, which “should be accounted for and withheld from the disgorgement.” EarthInfo, 900 P.2d at 120. Indeed, the City’s own expert admitted that the City obtained a benefit from Open International that had to be accounted for in a rescission analysis, but then, inexplicably, changed his testimony at trial. Compare Ex. 743 at 13 ¶ 7; id. at 19 ln. 7 (applying more than $1 million offset against the City’s claimed rescission recovery), with TR (Nov. 17, 2023) at 20:1-4 (changing opinion). Open International will not be unjustly enriched by keeping payment for services the City requested and accepted. Rather, stripping Open International of payment for services it admittedly provided would be “plunder,” not “restitution on both sides.” See EarthInfo, 900 P.2d at 118, 120; see also Durango v. Durango Transp., Inc., 807 P.2d 1152, 1154 n.3 (Colo. 1991) (noting affirmance by Court of Appeals of rescission without monetary award because “the amounts paid by the City under the contract were fully offset by the value of services received from [defendant] under the contract”). Accordingly, no monetary award should be included in a judgment of rescission . Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 9 of 13 9 III. THE COURT’S EQUITABLE POWERS DO NOT SUPPORT AN AWARD FEES AND COSTS. Notwithstanding the American Rule, the City asserts that, under Sprague v. Ticonic Nat’l Bank, 307 U.S. 161 (1939), it is entitled to recover all of its costs and attorneys’ fees simply because the Court is applying an equitable remedy. Sprague does not support this outcome, and no such exception to the American Rule exists. The City misreads Sprague. It did not hold that attorneys’ fees and costs are available to do justice in any exceptional case, City Br. at 9; rather, Sprague applied a narrow exception to the American Rule where the “trustee of a fund or property” could recover its “costs, including [its] attorneys’ fees, from the fund or property itself or from the other parties enjoying the benefit.” Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257-58 (1975) (construing Sprague). That is one of the few “judicially fashioned exceptions to the general rule against allowing substantial attorneys’ fees,” and it does not extend to any and all actions in equity. Id. at 259-60; see also Def. Br. at 14 n.5. Rather, Congress has “reserved” the authority to “carve out specific exceptions to” the American Rule “for itself,” Alyeska, 421 U.S. at 269, and it has not “extended any roving authority to the Judiciary to allow counsel fees as costs or otherwise whenever the courts might deem them warranted.” Id. at 259-60 & n.31. While Colorado courts may have “not yet” addressed Sprague, City Br. at 10 n.4, they certainly have applied Alyeska to hold that only exceptions “authorized by statute or allocated in an enforceable contract” permit recovery of attorneys’ fees and costs . See, e.g., TC Equity Invs., LLC v. Vandre, 2016 U.S. Dist. LEXIS 34666, *7 (D. Colo. Mar. 16, 2016) (citing Alyeska, 421 U.S. at 247); see also Fort Lyon Canal Co. v. High Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 10 of 13 10 Plains A&M, LLC, 167 P.3d 726, 727 (Colo. 2007) (same).6 The City does not identify any statutory, contractual, or common law exception to Colorado’s application of the American Rule and, instead, resorts to mischaracterized Rule 408 communications. City Br. at 11. The Court, of course, may not consider those statements and should strike them. There is no basis for a post-judgment award of fees. Nor may the City recover attorneys’ fees and costs7 as a substantive component of a rescission award. An award of fees and costs does not comport with a remedy that disgorges the parties of the benefits they received rather than compensating them for their losses. See EarthInfo, 900 P.2d at 118; see also Oster v. Baack, 351 P.3d 546, 550 (Colo. App. 2015) (fee award “collateral to, and separately appealable from” judgment (quotation and citation omitted)). Absent an express basis to award fees and costs, the Court is not “free to fashion drastic new rules” or “pick and choose among plaintiffs” to grant attorneys’ fees and costs based solely on its equitable powers. Alyeska, 421 U.S at 269. CONCLUSION For the foregoing reasons, if the Court does not enter judgment against the City based on waiver and insufficient evidence against Open Investments, it should not award any monetary relief to the City. 6 For this reason, the City’s reliance on 6th Circuit, Vermont, and Wisconsin authority applying Sprague is irrelevant. 7 The City’s vague argument regarding its “incurred costs” is premature. A bill of costs may be submitted only after judgment. Fed. R. Civ. P. 54. And at that point, the City cannot recover “more than just the category of costs subject to 28 U.S. Code § 1920” simply because this is an equity action. City Br. at 11; see Alyeska, 421 U.S. at 260. Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 11 of 13 11 Dated: December 22, 2023 Respectfully submitted, s/ Paul D. Swanson Paul D. Swanson, pdswanson@hollandhart.com Kevin C. McAdam, kcmcadam@hollandhart.com Alexander D. White, adwhite@hollandhart.com Alexandria E. Pierce, aepierce@hollandhart.com Holland & Hart LLP 555 17th Street, Suite 3200 Denver, Colorado 80202 Telephone: 303-295-8000 Attorneys for Open International, LLC and Open Investments, LLC Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 12 of 13 CERTIFICATE OF SERVICE I hereby certify that on the 22d day of December, 2023, the foregoing was electronically filed with the Clerk of Court using the Court’s electronic filing system and that a copy of the foregoing was sent to all counsel of record via same in compliance with the Federal Rules of Civil Procedure and the Local Rules of this Court. s/ Paul D. Swanson 31077432 Case No. 1:21-cv-02063-CNS-SBP Document 321 filed 12/22/23 USDC Colorado pg 13 of 13