Boulder Attorney Beth Klein Looses Her Own Lawsuit

Boulder Attorney Beth Klein Looses Her Own Lawsuit

ORDER OF JUDGMENT

Judgment hereby enters in favor of Plaintiff (Beth Klein)and against Defendant Tiburon Development, LLC for breach of contract in the amount of $1.00. In all other respects, judgment enters in favor of Defendants and against Plaintiffs, dismissing Plaintiffs’ remaining claims, and in favor of Defendant Tiburon Development, LLC on its counterclaim for breach of contract in the amount of $ 2,510.50. Costs are awarded to Defendants. _____________________________________ Accordingly, an award of reasonable attorney’s fees in favor of Defendants and against Plaintiffs Beth Klein, James Klein and Klein/Frank P.C. is appropriate. After reviewing the parties’ submissions, wherein Defendant Tiburon requested fees in the amount of $55,449.75, and Defendant David Sells requested fees in the amount of $54,800, the Court hereby enters judgment for attorney’s fees as follows:

In favor of Defendant Tiburon Development LLC and against Plaintiffs Beth Klein, James Klein and Klein/Frank P.C., jointly and severally, in the amount of $50,000.

In favor of Defendant David Sell and against Beth Klein, James Klein and Klein/Frank P.C., jointly and severally, in the amount of $54,800.

Fees and Costs

DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO 1437 Bannock Street Denver, Colorado 80202

Plaintiffs: BETH KLEIN and JAMES KLEIN

v.

Defendants: TIBURON DEVELOPMENT, LLC, a Colorado Corporation, and DAVID SELL

Case No.: 2013 CV 33733

ORDER DENYING PLAINTIFFS’ VERIFIED MOTION FOR FEES AND COSTS AND GRANTING IN PART THE DEFENDANTS’ SEPARATE MOTIONS FOR ATTORNEY FEES AND COSTS

THIS MATTER is before the Court on three separate Motions for Attorney Fees and Costs: (1) Plaintiffs Beth Klein and James Klein’s Verified Motion for Fees and Costs to be Awarded Pursuant to the Line of Credit; (2) Defendant Tiburon Development, LLC’s Motion for an Award of Attorney Fees and Costs; and (3) Defendant David Sell’s Motion Requesting an Award of Attorney Fees Pursuant to Order of Findings of Fact, Conclusions of Law and Judgment Entered October 15, 2014.

The Court, having reviewed the briefs, the exhibits, the case file and applicable law, and having determined that a hearing is not necessary and would not be helpful to the Court, hereby enters judgment as to all three Motions.

I. Background

Plaintiffs initiated this action on August 26, 2013, presenting claims for a dissolution and accounting of Tiburon Development LLC (“Tiburon”), along with claims for breach of the Line of Credit Agreement (as against Tiburon) and civil theft (as against Tiburon and David Sell, personally). In its Answer, Tiburon presented a counterclaim for breach of contract for Plaintiffs’ unpaid 25% share of Tiburon’s expenses.

The dissolution of Tiburon was accomplished out of Court. The remaining claims and counterclaim went before the Court for a bench trial held August 25-27, 2014. On October 15, 2014, the Court issued its Findings of Fact, Conclusions of Law and Order of Judgment concluding as follows:

Judgment hereby enters in favor of Plaintiffs and against Defendant Tiburon Development, LLC for breach of contract in the amount of $1.00. In all other respects, judgment enters in favor of Defendants and against Plaintiffs, dismissing Plaintiffs’ remaining claims, and in favor of Defendant Tiburon Development, LLC on its counterclaim for breach of contract in the amount of $ 2,510.50.

The Court further awarded costs to the Defendants, but deferred ruling on recovery of attorney fees in accordance with the procedures required by C.R.C.P. 121, §1-22. The various motions for fees and costs were filed thereafter. In the meantime, the case has been on appeal until the Mandate issued on March 28, 2016.

II. Plaintiffs’ Verified Motion for Fees and Costs to be Awarded Pursuant to the Line of Credit

Plaintiffs move for an award of $138,395 in fees and $4,444.51 in costs based upon Covenant 9 of the Line of Credit Agreement, which states:

Should this Note be referred to an attorney for collection, Borrower shall pay all of Lender’s actual costs, fees (including reasonable attorneys’ fees) and expenses resulting from such referral.

Plaintiffs assert that this provision entitles them to an award of fees and costs, regardless of the nominal nature of damages. Under the facts of this case, the Court disagrees.

It is correct that a judgment for nominal damages on one claim does not, in itself, preclude an award of attorney’s fees to the party who has established that the other party breached a contract containing a fee shifting clause. See Dennis I. Spencer Contractor, Inc. v. City of Aurora, 884 P.2d 326, 330-31 (Colo. 1994). However, the instant case is distinguishable. Here, Plaintiffs prevailed on only a small part of a claim that was itself only a very minor part of the litigation. The issue of whether Plaintiffs were entitled to interest on the note—the only aspect of the entire case on which Plaintiffs prevailed—was not contested. The disagreement about the promissory note claim was whether Plaintiffs were entitled to the inflated principal amount they were demanding, and Defendants prevailed on that issue.

In cases where both a claim and counterclaim are sustained, courts have looked to which party, if any, is clearly the prevailing party before assessing fees. Id. at 330-31, n. 11 (citing Illingworth v. Bushong, 656 P.2d 370 (Or. App. 1982); Harris Market Research v. Marshall Mktg. and Communications, Inc., 948 F.2d 1518 (10th Cir. 1991); Miller v. Safeco Title Ins. Co., 758 F.2d 364 (9th Cir. 1985); Wolff & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d 1003 (2d Cir. 1991).

Here, there is no legitimate question about who prevailed. Defendants defeated Plaintiffs’ claims against them (minus $1.00), and prevailed on Tiburon’s counterclaim. More importantly, in practical terms, Defendants withstood Plaintiff’s litigious onslaught and ultimately defeated Plaintiffs’ goal of forcing a buyout of their interests. Collecting unpaid interest on a note was such a trivial part of the case that Plaintiffs did not even bother to present damages evidence with respect to it.

Under the facts of this case, the Court concludes as follows: (1) Plaintiffs were not the prevailing party as to either Defendant in this action; and (2) Plaintiffs’ argument that they are nonetheless entitled to fees and costs under the contractual provision alone is not supported by the facts or the law. Plaintiffs’ Motion for Fees and Costs is, therefore, DENIED.

III. Defendants’ Motions for Attorney Fees and Costs

A. Attorney Fees

Defendants Tiburon and David Sell present separate Motions for attorney fees to be awarded against Plaintiffs Beth Klein, James Klein, and legal counsel Carrie Frank and Klein/Frank P.C., jointly and severally, for violations of C.R.S. § 13-17-102.2 After review of the very extensive case file, including all motions and attached exhibits, the Court finds that Plaintiffs’ conduct in this litigation was sufficiently vexatious, and otherwise improper, to warrant an award of fees in favor of both Defendants and against Plaintiffs Beth Klein, James Klein and Klein/Frank P.C. However, the Court is not sufficiently convinced that liability should extend to Carrie Frank as legal counsel.

C.R.S. § 13-17-102(4) requires the Court to assess attorney fees:

[I]f, upon the motion of any party or the court itself, it finds that an attorney or party brought or defended an action, or any part thereof, that lacked substantial justification or that the action, or any part thereof, was interposed for delay or harassment or if it finds that an attorney or party unnecessarily expanded the proceeding by other improper conduct, including, but not limited to, abuses of discovery procedures available under the Colorado rules of civil procedure or a designation by a defending party under section 13-21-111.5(3) that lacked substantial justification. As used in this article, “lacked substantial justification” means substantially frivolous, substantially groundless, or substantially vexatious.

A finding of vexatious conduct is sufficient to support an award of attorney’s fees under C.R.S. § 13-17-102. Mitchell v. Ryder, 104 P.3d 316, 321 (Colo. App. 2004); Crissy Fowler Lumber Co. v. First Community Industrial Bank, 8 P.3d 531, 535 (Colo. App. 2000). A party’s actions are “vexatious” if a claim is brought or maintained in bad faith. Zivian v. Brooke-Hitching, 28 P.3d 970, 974 (Colo. App. 2001). Bad faith may include conduct that is arbitrary, 4vexatious, abusive, stubbornly litigious, aimed at unwarranted delay, or disrespectful of truth and accuracy. Mitchell v. Ryder, 104 P.3d 316, 321 (citing W. United Realty, Inc. v. Isaacs, 679 P.2d 1063 (Colo.1984)).

Here, the record compels the conclusion that Plaintiffs initiated and pursued this action to pressure their former friends to buy out their interest in Tiburon by burdening them with very high litigation costs, while Plaintiffs were able to represent themselves for the most part.

Plaintiffs and some friends were members of a Colorado limited liability company (Tiburon), which owned stock in a Costa Rican corporation, which in turn owned a vacation home known as Villas Catalinas Unit 5 (“VC5”). After Plaintiffs purchased a second vacation home in Costa Rica, they approached David Sell, one of the LLC’s managers, to request that the other Tiburon members buy out Plaintiffs’ interest. Plaintiffs followed up with an email dated July 26, 2013, in which they effectively demanded payment of $152,000 for their LLC interest and allowed a period of 30 days for the Tiburon members to respond.

It is noteworthy that the LLC Operating Agreement contains no provision giving one Tiburon member the right to compel the other members to buy out his or her interest. Rather, any member who wishes to transfer his or her LLC interest must find a buyer. See Operating Agreement, VI(B). However, Plaintiffs—both of whom are competent lawyers—never attempted to find a buyer for their LLC interest. Instead, on August 26, 2013, when their buyout demand was not met, Plaintiffs filed this suit, primarily to dissolve the LLC. (Based upon email correspondence between the parties, it appears Plaintiffs mistakenly assumed at first that dissolution of the LLC would cause the sale of VC5 and effectively enable them to cash out their interest in the LLC.) Plaintiffs also asserted claims for an accounting, breach of contract and theft as against Tiburon and David Sell, personally, for allegedly “tak[ing] personal property of the Kleins with no intent to return it.” Plaintiffs contended that they had been locked out of VC5, or otherwise deprived of their right to use it, and that a few household items were not returned to them.

After a year of costly litigation, the only assertion on which Plaintiffs prevailed was that an August 7, 2013 calculation of the amount owed to Plaintiffs on the note did not include interest. The calculation was done by David King, a Tiburon member who provided accounting services on a volunteer basis. Plaintiffs’ remaining assertions were found to be without merit. Despite relentlessly contentious litigation on the part of the Plaintiffs, there was a disturbing lack of evidence to support their underlying allegations, and no evidence at all to support the claim against David Sell, personally. The only reasonable inference under the totality of the circumstances is that the civil theft claim was asserted against David Sell, personally, to force Defendants to employ two separate lawyers to defend this case.

On top of pursuing a substantially groundless legal action to force a buyout of their LLC interest, the record establishes that Plaintiffs routinely failed to comply with their duty to confer to resolve disputes, failed to comply with dispute resolution procedures agreed-upon in the parties’ Operating Agreement, and threatened non-parties with Rule 11 sanctions and perjury.This conduct needlessly expanded the proceedings and ran up the other side’s costs—which appears to have been the whole point. Taken together, the Court finds Plaintiffs’ conduct in this litigation—largely taken through and with the willing assistance of Frank/Klein P.C.—was of such nature as to require sanctions under C.R.S. § 13-17-102. Indeed, Plaintiffs engaged in virtually every kind of sanction-worthy conduct enumerated in the statute over the course of this case, including bringing claims that lacked substantial justification or were interposed for delay or harassment, and unnecessarily expanding the proceedings by improper conduct.

This liability, however, will not extend to Carrie Frank as legal counsel. Simply put, this case was driven by Beth and James Klein, established and highly successful Colorado attorneys. Beth Klein was lead counsel at trial, and signed the majority of pleadings. The Court does not have enough information to conclude that Ms. Frank’s conduct in the litigation was worthy of sanction.

Accordingly, an award of reasonable attorney’s fees in favor of Defendants and against Plaintiffs Beth Klein, James Klein and Klein/Frank P.C. is appropriate. After reviewing the parties’ submissions, wherein Defendant Tiburon requested fees in the amount of $55,449.75, and Defendant David Sells requested fees in the amount of $54,800, the Court hereby enters judgment for attorney’s fees as follows:

In favor of Defendant Tiburon Development LLC and against Plaintiffs Beth Klein, James Klein and Klein/Frank P.C., jointly and severally, in the amount of $50,000.

In favor of Defendant David Sell and against Beth Klein, James Klein and Klein/Frank P.C., jointly and severally, in the amount of $54,800.

The Court finds these amounts to be sufficiently established by the record, very reasonable for the quantity and quality of the work done, and warranted for the reasons discussed above.

A. Costs

In the Court’s Findings of Fact, Conclusions of Law and Order of Judgment, issued October 15, 2014, costs were awarded to Defendants as the prevailing parties. After reviewing the Defendants’ Bill of Costs, Plaintiffs’ Combined Response, the case file and applicable law, the Court hereby enters judgment for costs as follows:

In favor of Defendant Tiburon Development LLC and against Plaintiffs Beth Klein and James Klein, jointly and severally, in the total requested amount of $3,789.09.

In favor of Defendant David Sell and against Plaintiffs Beth Klein and James Klein, jointly and severally, in the total requested amount of $1,353.60.

Judgement shall enter accordingly.

Dated this 15th day of October, 2014.

BY THE COURT:

Judge Catherine Lemon District Court Judge

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER OF JUDGMENT

Trial of this matter was to the Court on August 25, 26 and 27, 2014. The claims tried were Plaintiffs’ Second Cause of Action against Tiburon Development, LLC (“Tiburon”) for an accounting, Plaintiffs’ Third Cause of Action against Tiburon for breach of the Line of Credit Agreement, Plaintiffs’ Fourth Cause of Action against Tiburon and David Sell, personally, for civil theft, Tiburon’s Counterclaim for breach of contract for Plaintiffs’ unpaid 25% share of Tiburon’s expenses and both Defendants’ claims for attorney’s fees under §13-17-102, C.R.S. and C.R.C.P. Rule 11. Based upon the evidence presented, the arguments of counsel, and the Court’s review of the applicable law, the Court makes the following Findings of Fact and Conclusions of Law, and enters judgment as set forth below.

FINDINGS OF FACT

James Klein and David Sell had been close friends since their law school days. David Sell was also old friends with David King. In about early 2005, David Sell and his brother, Gary Sell, purchased a beachfront lot in Costa Rica through a company they owned. Shortly thereafter, a Colorado limited liability company, Tiburon, was formed to develop the beachfront lot. The members of Tiburon were David Sell (25%), Gary Sell (25%), Beth Klein and James Klein (25%), and David King and Betty King (25%). They executed an Operating Agreement for Tiburon on March 6, 2005, effective February 20, 2005.

In about July, 2011, the beachfront lot was traded for a nearly completed vacation home in Costa Rica, which the parties referred to as VC5. VC5 was owned by a Costa Rican corporation, Playa y Sol de Catalinas, S.A. (“Playa Y Sol”) and the trade was accomplished by Tiburon trading the company that owned the beachfront lot for all of the stock of Playa y Sol;

Tiburon did not own VC5 directly.

At the time VC5 was acquired, the members entered into an Operating Plan and a Line of Credit Agreement (“LOC” or “LOC Agreement”) to govern how the costs of finishing, furnishing and operating VC5 would be handled going forward.

The basic arrangement was that all costs of furnishing and operating VC5 would be shared by the members equally. The Kleins and Kings agreed to advance a total of $30,000, as the Sells had advanced funds in the past to pay for expenses of developing the beachfront lot, but it was always intended that all members would ultimately share equally in the total cost of finishing, furnishing and operating VC5. It was understood that all members could buy things for VC5, submit their receipts to David King, and be credited for those expenditures in the ultimate equalization of contributions. Things that the members brought to VC5 for their sole use, and not as a contribution to Tiburon, were stored in a locked owners’ closet or otherwise set apart and receipts for those things were not submitted to Mr. King for crediting.

As soon as the members started making decorating decisions, tensions arose and tempers flared. The Court regrets that it must determine where the fault lies for the incivility and destruction of friendships that ensued, but that unpleasant responsibility is thrust upon it because Plaintiffs are claiming that other members drove them out of VC5 with intolerably hostile behavior, thereby taking their access rights to VC5 by theft and relieving them of their obligation to pay 25% of the operating costs of VC5. The testimony on this subject was in sharp conflict and the Court’s determination of the facts in this regard depended largely upon credibility determinations, which were aided by its ability to observe the witnesses and to review for itself the copious email communications among the members. Where the testimony was in conflict, the Court found the testimony of David Sell, David King and Diane King significantly more credible and reliable than the testimony of Plaintiffs, based on their demeanors on the witness stand, the corroboration of their testimony by other documentary and testimonial evidence, and the relative reasonableness and unreasonableness of their testimony, among other things.

The Court finds by a preponderance of the evidence that Beth Klein was the primary cause of the rancor that developed between the Kleins and the other members of Tiburon. From the start, her way of ‘discussing’ decorating choices was to berate and insult anyone who disagreed with her, often in very harsh terms. [Exs. TT and VV, e.g.] She frequently impugned the character as well as the taste of the others, threatened to sue, and even accused them of dishonesty and theft. [Ex. 40, e.g.] James Klein at times made efforts to be a buffer between Beth Klein and the others, suggesting at one point that her late night emails were a bad idea, but he generally backed her, no matter how outrageous her communications. His own emails were usually civil, if condescending. He took the position that, because the Kleins were fronting $15,000 of the expense, they were entitled to make the decorating decisions, and he was extremely insulting, especially to Gary Sell, about the Kleins’ relative wealth and superior taste. [Ex.UU]. A good example of Beth Klein’s extreme conduct, which James Klein supported in his trial testimony, is found in Exhibit VV, a long email sent to all of the other members and to Larry Albright on October 30, 2011, just a few months after VC5 was acquired. Mr. Albright was a realtor in Costa Rica and a friend of Gary and David Sell. Beth Klein testified that he was also a friend of hers. He had been retained to serve as the property manager for VC5. At the time of the email, Mr. Albright was known to be gravely ill and has since died. Most of the email is devoted to attacking David and Gary Sell, but there is a paragraph excoriating Mr. Albright for charging $75 per month more than she thinks he should charge for his property management services, an alleged overcharge amounting to less than $20 per month for the Kleins’ 25% share. For this, she writes to Mr. Albright, in an email to all members:

I have copied Larry Albright on this communication because he need so (sic) to know that 50% of the partners are very angry that we are paying $150 per month for paying 5 bills; that is double what anyone else charges. All other quotes for this service is (sic) $75 per month. Larry, why are you charging us twice the going rate? I respect that you are very ill, but I also respect (sic) you to honor your own legacy. Larry, I expect that you will reduce all bill paying charges to $75 per month retrospectively. If you and the Sells are such great friends, why are you charging us double what everyone else would do?

It is true that Gary Sell wrote some crudely hostile and insulting emails also, but they came later and in response to insults and attacks on his and his brother’s character. [Exs. 2 and 45, e.g.] Somehow, David Sell managed to hold his tongue and remain civil throughout, and it appears that the Kings bowed out of the email correspondence wars early on.

Once VC5 was finished and furnished, the members began using it for personal vacations and it was rented occasionally to other people who were friends and family of members. It was agreed that the members would do their best to get renters, but that renting to the general public would be avoided. Beth Klein became frustrated with what she felt was the other members’ lack of interest and effort in renting VC5. This became another topic of unpleasant email traffic, as did her displeasure with the adequacy of the accounting information about VC5 that was provided by David King, who had volunteered to keep track of the financial information, without compensation, as his busy schedule permitted. Although the Kleins testified at length that they could not get financial information about VC5, despite constant demands for it, they both responded with thanks and praise to the accounting Mr. King emailed everyone on January 6, 2012: “Thank you for doing this work. This is exactly what I have been wanting. Great job!” “Thank you so much for doing this. I’m no expert, but this is great….”

In about September 2012, the Kleins bought another vacation home in Costa Rica, about 20 miles away from VC5, in the town of Tamarindo, but did not tell the other members about it for some months. In December 2012, they went to VC5 and removed much of the personal property they had previously bought for VC5, such as dishes, glassware, tools, a vacuum cleaner, and kitchen utensils. These were things they had submitted for credit and that everyone used when they stayed at VC5. Beth Klein testified that they did not take these things to use at their new home in Tamarindo – it came fully equipped and the things they took from VC5 would have been duplicative. In other words, they did not take these housewares in order to have and use them, but rather to take them away from the others. The Court finds that this was a petty and spiteful act that was intended to be – and was – highly provoking when it was discovered by other members on their next visit to VC5 the following March.

On July 9, 2013, Beth Klein emailed David King about the LOC, alerting him that it was coming due on August 8, 2013. [Ex. SS] She reminded him that interest was 5.25%, and told him that, “the total debt is now $33,150.00.” She stated that the Kleins wanted to “call the LOC on August 8, 2013,” and asked what the Kings’ position on it was. She pointed out that, pursuant to paragraph 6 of the LOC Agreement, if there was inadequate income for Tiburon to pay off the LOC, “all members must equalize their capital accounts and the LOC must be satisfied.” In response to this inquiry, David King prepared an updated accounting, endeavoring to include all contributions that had been made by all members, including the LOC funds, members’ purchases of property for VC5, and members’ payment of operating expenses of VC5. It was provided to all members on about July 20, 2013.

In an email from James Klein dated July 26, 2013, the Kleins set forth several disagreements with the accounting. [Ex. 5] Among other things, they asserted that they were entitled to be paid in full, with interest, on the LOC, without any offsetting reduction for their admitted 25% share of responsibility for amounts that had been paid by the other members. They also asserted that rent paid by the two renters they had generated ($3,564 total) should be credited against their 25% share of operating expenses.

At trial, the Kleins argued that the other members made no efforts to get friends and family to rent VC5, but the Court finds that the other members did make reasonable efforts to do so, and continue to do so to the present time. The acrimony among the members, and a number of problems with the property and the HOA hindered efforts to rent VC5, both by members and by the multiple property managers who were retained by Tiburon over time. The other members did not agree with the Kleins’ criticisms of the accounting, and checks were sent to the Kings and the Kleins on about August 7. 2013, for the amounts that David King determined were owed to them to pay off the LOC and equalize the members’ capital accounts. Also on July 26, 2013, the Kleins proposed that the other members of Tiburon buy out their interest in the LLC for $152,000. They explained, “despite the fact that the Villa is incredible and that it is situated in one of the most beautiful places in the world with the best views in all of Costa Rica, it makes little sense for Beth and I to remain committed to two separate properties in the area. Our hearts are, and I suppose always have been, in Tamarindo.” Their proposal stated that it would remain open for thirty days. The other members did not respond to the buyout offer and the Kleins filed this lawsuit the day after the deadline expired.

At trial, the Kleins attempted to prove that they were driven out of VC5, and ultimately literally locked out of VC5, by the other members of Tiburon. As a result, they argued, they are relieved of their contractual obligation to pay their 25% share of the expenses of VC5 and are also entitled to be paid 25% of the value of VC5 as damages for civil theft of their right of access to VC5. The argument that they were driven out by the hostility of the other members has been addressed above. The Court also finds, as a matter of fact upon conflicting evidence, that the Kleins have not been locked out of VC5, or otherwise deprived of their right to use it for proper purposes.

In late August, 2013, the Kleins were vacationing at their new home in Costa Rica and went to VC5 for the sole stated purpose of removing some more personal property. Many months earlier, but after the Kleins’ last visit to VC5, the lock had been changed from a keyed lock to a keypad lock for convenience and general security purposes, so that the code could be changed frequently and easily. The Kleins assumed that the lock had been changed to lock them out, and the others assumed that the Kleins were going to remove more company owned household goods from VC5. Angry communications ensued, the others refused to give the Kleins the code to enter VC5 at that time, and David Sell suggested they meet soon to resolve matters. The Kleins filed this lawsuit on August 26, 2013, while still in Costa Rica, alleging among other things that they had been locked out of VC5. Shortly thereafter, Dave Sell wrote a letter acknowledging that the Kleins were entitled to use VC5, but not to remove company property from it, and giving them the access code. The evidence was clear that the Kleins had not used, or expressed any interest in using, VC5 since acquiring their other vacation home in Tamarindo in 2012, and that they had told the other members that they would not be using VC5 from then on.

There were discovery disputes during this litigation concerning inspection of VC5 by the Kleins and their experts, which they cite as evidence of their being locked out. The Court does not agree with that characterization. Throughout the litigation, instead of conferring with the other side, the Kleins often demanded that things be done when, where and how they dictated, sometimes on very short notice or with no notice at all. That is what happened with the inspection of VC5. It was the Kleins who insisted that a representative of the defense or a neutral accompany them on their inspection of VC5. They then failed to give notice to the defense before appearing at VC5 for the inspection, at a time when defense counsel was out of town and offline. In the ensuing telephone conference with the Court, the Court ordered that the inspection go ahead at that time, without the defense or a neutral present, in order to get it done. The Court finds that the discovery dispute about the inspection of VC5, which fit a pattern of high-handed conduct in this litigation and in the events that resulted in this litigation, was not evidence of the Kleins being deprived of their right to use VC5.

CONCLUSIONS OF LAW

Breach of the Line of Credit Agreement.

Plaintiffs claim that Tiburon breached the LOC Agreement [Ex. I] in two ways – by failing to pay interest and by reducing the amount paid to Plaintiffs on August 7, 2013, by the amount then owed to Tiburon by Plaintiffs for their share of other expenses.

The LOC Agreement unambiguously provides, “[f]ollowing the first draw upon the Line of Credit the variable outstanding principal balance due on the Line of Credit shall accrue percentage interest at a rate of 5.25% on a per annum basis.” Plaintiffs proved that the calculation by David King that resulted in the August 7, 2013 payment did not include interest. This constituted a breach of the LOC Agreement. However, Plaintiffs failed to prove actual damages for this breach, which leaves the Court no choice but to award them nominal damages of $1.00 on this claim. See Dennis I. Spencer Contractor, Inc. v. City of Aurora, 884 P.2d 326 (Colo. 1994). The evidence showed that the first draw was made on the LOC on or about August 8, 2011, but there was no evidence from which the Court can determine the “variable outstanding principal balance” at any time in order to calculate interest. The LOC Agreement does not entitle Plaintiffs to recover interest on the full amount eventually loaned, calculated from the date of the first draw.

There is no merit to Plaintiffs’ claim that Tiburon breached the LOC Agreement by offsetting the amount they owed

Tiburon at that time against the August 7, 2013 LOC payoff amount. It is a well-settled general principle of law that, “[t]he right of setoff (also called “offset”) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’ Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995), quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 528 (1913). There are three contracts that, together, governed how the members of Tiburon would handle the operation of VC5. All of them contain language that provides for the financial contributions of the members to be equalized; none of them contains language that could be construed to forbid, or even discourage, netting out amounts owed to a member and amounts owed by a member. At trial, Plaintiffs argued that the following language in the Operating Agreement [Ex. G] prevented such offsets:

B. Additional Contributions by Members: The members may agree, from time to time by unanimous vote, to require the payment of additional capital contributions by the members, on or by a mutually agreeable date.

This provision concerning capital calls does not apply in this context, and certainly does not forbid netting out amounts owed by and amounts owed to members. The Operating Agreement specifically provides for reducing members’ capital accounts by their shares of expenses of the LLC:

E. Capital Account Bookkeeping: A capital account shall be set up and maintained on the books of the LLC for each member. It shall reflect each member’s capital contribution to the LLC, increased by each member’s share of profits in the LLC, decreased by each member’s share of losses and expenses of the LLC, and adjusted as required [by tax law].

The Operating Plan [Ex.H), which was prepared and executed simultaneously with the LOC Agreement, provides:

4….in the event at (sic) the LOC is not paid in full within the twenty-four (24) month term, any unpaid amounts may, at the discretion of the Lender and with notice to Borrower, be converted into capital contributions and all members will equalize their capital accounts pursuant to the terms of the LLC’s Operating Agreement.

5. Operating Costs. Each member shall be responsible for twenty-five percent (25%) of the operating costs associated with the Villa….

The LOC Agreement, itself, provides:

5. At any time the Borrower by majority vote of its members may declare the outstanding balance due on the Line of Credit as a Borrower capital contribution and all members of Borrower shall contribute to and equal their capital accounts in accordance with the Borrower’s Operating Agreement whereupon the Line of Credit shall be satisfied in full.

6. If following 24 months from the first draw on the Line of Credit or at any time thereafter the Lender by unanimous consent of the Lender and at Lender’s full discretion determines that there is inadequate rental or other income to service the Line of Credit, Lender may declare with 30 days written notice to Borrower, the balance due on the Line of Credit as a Borrower capital contribution, requiring all Members of the Borrower to contribute to and equal their capital accounts in accordance with the Borrower’s Operating Agreement whereupon the Line of Credit shall be satisfied in full.

When the Kleins and the Kings gave notice that they were calling the LOC as of August 8, 2013, David King prepared an updated accounting [Ex. LL], crediting the Kleins and the Kings with the amounts they had loaned to Tiburon under the LOC Agreement and crediting all of the members with the amounts they had paid to buy things for VC5 and for operating expenses. The Court finds that the accounting prepared by Mr. King was substantially fair and accurate and that any inaccuracies were immaterial. The accounting showed that the Kleins and the Kings had paid more than the Sells. The Kleins had paid $4,686 more and the Kings had paid $5,588 more. The Sells paid the Kleins and the Kings those amounts. The result was that the LOC was paid off (except for interest), and all members’ contributions had been equalized, as called for by the LOC Agreement. Civil Theft Claim – Personal Property.

Plaintiffs claim that Tiburon and David Sell are liable to them for civil theft of certain personal property and of their right to use VC5. The Court finds and concludes that there is no merit to Plaintiffs’ civil theft claims.

In order to recover monetary damages for civil theft under §18-4-405, C.R.S., a plaintiff must prove that he or she is the owner of “property obtained by theft,” and that a defendant is either the “taker” of the property or a “person in possession” of the property, and does not hold it in good faith. In order to prove that property was obtained by theft, a plaintiff must prove that a defendant “knowingly obtains, retains or exercises control over” the property “of another without authorization or by threat or deception” and “intends to deprive the other person permanently of the use or benefit of” the property. See §18-4-401, C.R.S. All of the elements of the statutory crime of theft must be proved, including the two culpable mental states: 1) that the defendant knowingly obtained control over someone else’s property without authorization and 2) that the defendant did so with the intent to permanently deprive the owner of the benefit of the property.

Plaintiffs did not prove any of the elements of their theft claim. Indeed, it fails at the threshold because they did not own the property; Tiburon did. Every item of personal property that Plaintiffs claim was stolen by Defendants was brought to VC5 by Plaintiffs and left there for the use of everyone who stayed there, thereby contributing the property to Tiburon and making Tiburon the owner of the property. There was no serious dispute about these basic facts. Disagreement about how much Plaintiffs should have been credited on Mr. King’s funding summaries did not provide a good faith basis for them to claim that Tiburon had obtained the housewares by theft. The theft claim fails for the additional reasons that defendants did not intend to deprive them of their right to use the property when they were staying at VC5, and that defendants believed the property belonged to Tiburon, so they did not knowingly steal property belonging to another. No evidence at all supported the theft claim against David Sell, personally. Besides all of the deficiencies of the theft claim against Tiburon, the theft claim against Mr. Sell suffered from the additional deficiency that he was never even in possession of the subject property.

The Court finds that all items of personal property contributed by the Kleins, like the items contributed by the other members, were properly credited on David King’s accountings. When mistakes were called to his attention, they were corrected.

Civil Theft Claim – Right to Use VC5.

The Court has found as a matter of fact that Defendants did not drive or lock the Plaintiffs out of VC5 or otherwise deprive them of their rights as members of Tiburon to use VC5. On the contrary, the evidence was clear that the Plaintiffs had told the others that they did not intend to use VC5 after acquiring their new vacation home in Tamarindo, and that they never again tried to do so. Their theft claim also fails under the economic loss rule. Before trebling, the amount they seek to recover on this claim, 25% of the value of VC5, is what they would recover if they were 25% owners of VC5, and could force its sale. But they do not own any interest in VC5. They own a 25% interest in Tiburon, which owned another company, which owned VC5. Under the entity theory of property rights, a member of a Colorado LLC, such as Tiburon, has no interest in property owned by the LLC. See Meyer v. Haskett, 251 P.3d 1287, 1292 (Colo. App. 2010). Under the Operating Agreement, members of Tiburon could sell their interests in Tiburon (subject to certain restrictions), but they had no right to partition, or to force a sale of VC5, and no right to be bought out by the LLC or the other members. The source of the members’ rights to use VC5 is the Operating Plan, and all it says on the subject is, “The Members agree that use of the Villa is for profit and personal use.” At most, Plaintiffs have an ill-defined contract right to use VC5 for their personal use for some unspecified amount of time each year. Accordingly, the civil theft claim relating to it is a tort claim based upon a right that arises solely from a contract and is barred by the economic loss rule. See Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256 (Colo. 2000), and its progeny.

Accounting.

In closing argument, Plaintiffs requested the Court appoint an independent accountant to perform an accounting of Tiburon’s affairs.

The Court has found that the accountings performed by David King, including the last accounting performed shortly before trial, were substantially accurate and sufficient. Thus, it would not be necessary or appropriate for the Court to order another accounting by an outside professional accountant.

Counterclaims.

Tiburon has counterclaimed for amounts owed by Plaintiffs under the Operating Plan for their 25% of Operating Costs that have been incurred since the accounting that equalized all members’ contributions in July of 2013. At trial, Plaintiffs agreed that they were bound by the Operating Plan and were responsible for 25% of the operating costs associated with the villa. At points, however, they seemed to assert that Tiburon lacked standing to bring its Counterclaim for breach of the Operating Plan. The language of the Operating Plan unambiguously makes Tiburon at least an intended third party beneficiary, if not a party. It is titled, “Operating Plan Tiburon Development, LLC, in Regards to Villas Catalina #5, a/k/a Playa y Sol Catalinas, S.A.” The first line says, “This is an Operating Plan for Tiburon Development, LLC (the ‘LLC’), such that the LLC will have a preliminary plan of operation for moving forward with the operation of Villas Catalina #5….” And a major purpose of the Operating Plan is to make the members liable for their quarter share of certain expenses of Tiburon that they would not otherwise be liable for under the Operating Agreement. It is true that there is no signature line for Tiburon on the Operating Plan, but Tiburon is plainly the primary beneficiary of its terms.

The Court agrees that Plaintiffs are liable for their share of “the operating costs associated with the Villa,” but does not agree with Defendants that the attorney’s fees and costs incurred by Tiburon in this litigation can fairly be characterized as “operating costs associated with the Villa.” Therefore, they are expenses of Tiburon for which the members are not liable under the Operating Agreement and the law, absent a unanimous agreement of the members for a capital call. Plaintiffs are liable on Tiburon’s counterclaim for breach of contract in the amount of $ 2,510.50.

Both Defendants seek recovery of their attorney’s fees and costs on the grounds that Plaintiffs’ prosecution of this case was in violation of §13-17-102 C.R.S. and C.R.C.P. Rule 11. The Court is inclined to agree, at least in significant part, based upon the evidence, and the lack of evidence, presented at trial and the relentlessly contentious way Plaintiffs litigated this case. Among other things, Plaintiffs, who did not bear the cost of hiring counsel, appear to have made the litigation unnecessarily expensive for the opposition, which had to hire counsel for both Tiburon and David Sell. However, it is premature to make a final determination, either as to whether fees should be awarded, or as to how much should be awarded, if any, until these questions have been fully presented in accordance with the procedures required by C.R.C.P. 121, §1-22. Defendants shall file any motion they wish to file under that rule within 21 days, Plaintiffs may respond within 14 days thereafter, and Defendants may have 7 days to reply.

By Order dated February 13, 2014, the Court deferred ruling on the sanctions request by Plaintiffs in connection with their Motion to Compel inspection of VC5. Now that the Court has a more thorough understanding of the circumstances involved in that Motion, the Court denies the Plaintiffs’ request for sanctions.

ORDER OF JUDGMENT

Judgment hereby enters in favor of Plaintiff and against Defendant Tiburon Development, LLC for breach of contract in the amount of $1.00. In all other respects, judgment enters in favor of Defendants and against Plaintiffs, dismissing Plaintiffs’ remaining claims, and in favor of Defendant Tiburon Development, LLC on its counterclaim for breach of contract in the amount of $ 2,510.50. Costs are awarded to Defendants.

Dated this 15th day of October, 2014.

BY THE COURT:

Judge Catherine Lemon District Court Judge