First Citizens Bank v. United States Bankruptcy Court for the District of Colorado

FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
November 6, 2015
Blaine F. Bates
NOT FOR PUBLICATION Clerk
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE MATTHEW EDWARD BAP No.CO-14-063
AUTTERSON, BAP No.CO-14-064
Debtor.
GL3B TRUST II and GL3B Bankr. No.13-30184
PARTNERS LIMITED LLP, Chapter 11
Appellants,
v. OPINION *
FIRST CITIZENS BANK & TRUST
COMPANY and MATTHEW
EDWARD AUTTERSON,
Appellees.
Appeal from the United States Bankruptcy Court
for the District of Colorado
Before CORNISH, NUGENT, and SOMERS, Bankruptcy Judges.
SOMERS, Bankruptcy Judge.
This case involves an objection by creditor and appellee, First Citizens Bank
& Trust Co. (“Bank”), to certain debts that the debtor, Matthew Edward Autterson
(“Autterson”), scheduled as uncontested claims of appellants GL3B Trust II (the
“Trust”) and GL3B Partners Limited, LLP (the “Partnership”). Autterson created
and controlled both the Trust and the Partnership at all relevant times, and
*
This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, and
issue preclusion. 10th Cir. BAP L.R. 8018-6.
Autterson joined in the defense of the claims. The Bank objected that the claims
had been scheduled and would be allowed for more than Autterson actually owed,
to the prejudice of the other unsecured creditors. Following a two-day trial, the
bankruptcy court granted the Bank’s objection, in part, allowing but reducing the
amount of the Trust and Partnership claims by approximately 26%.
I. BACKGROUND
In 2001, Autterson was a sophisticated and successful businessman who had
just sold a trust company for a substantial profit. He hired a number of advisors to
help him manage his accumulated assets in such a way as to minimize the impact
of income and estate taxes on them. As a result of his tax and estate planning,
Autterson created various legal entities, including both the Partnership and the
Trust. The Partnership was created in October 2001 as a Colorado limited liability
partnership. 1 Autterson has always acted as the Partnership’s general and
managing partner, though the partnership agreement was amended in 2013 to make
the Trust an additional general partner. 2 The Partnership’s limited partners as of
the petition date were GL3B Trust I and GL3B GRAT, both of which are also
controlled by Autterson. 3
As noted by the bankruptcy court, each of the Autterson entities maintained
separate legal identities since their inception and have satisfied the standards for
treatment as such. Moreover, Autterson’s dealings with these entities have always
been carefully and appropriately documented, and money transfers from the
Partnership and Trust to Autterson have always been treated as loans. Based on
1
Agreement of Limited Partnership of GL3B Partners Limited LLP in
Appellants’ GL3B Trust II and GL3B Partners Limited LLP Appendix for
Appellants’ Opening Brief (“Appx”) at 104-44.
2
Id. at 142.
3
Autterson’s brother, Mark Autterson, is the designated trustee of
Autterson’s two trust entities, GL3B Trust I and GL3B Trust II (the appellants in
this case). However, there was no dispute at trial that the trust entities were
“controlled” by Autterson.
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this course of dealing, the bankruptcy court concluded, as do we, that the
Partnership and Trust loans to Autterson are legitimate unsecured debts, entitled to
be treated as such in Autterson’s bankruptcy case. But what Autterson owed on
these obligations as a matter of non-bankruptcy law is another matter. 4 The Trust
and the Partnerships attempted to “gross up” their claims by strictly enforcing note
terms that the debtor (who controlled the entities) routinely disregarded. The terms
of the agreements cannot be enforced or disregarded by the “parties” according to
their convenience, especially when doing so places the debtor’s other unsecured
creditors at a disadvantage.
A. The Trust Note
In 2003, Autterson borrowed $2 million from the Partnership. The
promissory note given to the Partnership by Autterson in return for the loan
provided for repayment in fifteen equal payments of approximately $206,000,
beginning in 2004 and continuing through 2018, annually. The note provided for
interest on the principal in the amount of 6.00%, compounded annually, and a
default rate of 12.00%, to be imposed on the date of a default. 5 In 2006, the
Partnership divided up this debt and distributed it to its partners, pro rata, based on
each partner’s percentage interest in the Partnership.
The amount of the debt at the time of division was $2,336,595, including
accrued but unpaid non-default interest. 6 Despite the loan’s default status at that
time, the divided sum did not include any default interest. The partners’ shares
were: (1) $530,314 to Autterson (22.7%); (2) $894,121 to GL3B GRAT (38.3%);
4
See 11 U.S.C. § 502(b).
5
Promissory Note, dated May 19, 2003, in Appx at 67-68.
6
Agreement Respecting Distribution of Promissory Note (“Distribution
Agreement”) in Appx at 70-71. By the time the Distribution Agreement was
executed, in January 2006, Autterson should have made the May 2004 and May
2005 payments. His failure to do so was an “Event of Default” under the terms of
the underlying note, the occurrence of which triggered imposition of the default
interest rate.
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(3) $254,806 to GL3B Trust I (10.9%); and (4) $657,354 to the Trust (28.1%). The
amount designated to go to Autterson was immediately cancelled. 7 Also, the
amount designated to the GL3B Trust I was used to offset an even larger amount
owed by that entity to Autterson. 8 Thus, only the GL3B GRAT and Trust portions
remained post-division.
Autterson signed a note for the Trust’s portion of the debt (the “2006 Note”
or the “Trust Note”), which is one of the three claims at issue in this appeal. The
2006 Note carried a non-default interest rate of 4.48%, which accrued annually,
and a 12% default interest rate. The note terms specified that all principal and
interest became due and payable in full on January 15, 2015. 9 Prepayments of
principal could be made at any time, without penalty, and any prepayments would
be applied first to accrued interest and then to principal. Autterson made a total of
fourteen payments attributed to the 2006 Note, beginning approximately four
months after its issuance, and ending in December 2013. 10 For each year from
2006 to 2010, these twice-yearly prepayments totaled $9,380. 11 In 2011 through
2013, Autterson made annual payments in the amount of $4,460 each.
In his bankruptcy schedules, Autterson listed the 2006 Note as an
uncontested debt in the amount of $933,393. At trial, the Trust claimed
$857,648.60 was due on the 2006 Note as of the date Autterson filed his petition.
However, the bankruptcy court concluded that, as the Trust had failed to prove
7
Id. at 70.
8
Id.9
Promissory Note, dated January 16, 2006, in Appx at 65-66.
10
See Trial Ex., 5 in Appx at 101-03. Because no payments were required by
the terms of the 2006 Note until 2015, that note was the only one of the three
notes at issue in this appeal that was not in default when Autterson filed his
petition.
11
Autterson testified he made these payments to the Trust so that it could use
the funds to make premium payments that were due for insurance on his life. Oct.
27, 2014 Trial Transcript (“Trans. 1”), 44-45 in Appx at 1040-41.
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entitlement to any interest on the 2006 Note principal, its claim was allowed for
principal only, in the amount of $597,074.
B. The Partnership Notes
1. The 2008 Note
The Partnership held two promissory notes from Autterson when he filed his
petition. The first was executed in 2008 (the “2008 Note”) and was in exchange
for Autterson’s purchase of a residence owned by the Partnership. The home,
located on Radcliffe Avenue, in Cherry Hills Village, Colorado (the “Residence”),
was purchased by the Partnership in June 2005 for $1,875,000. 12 Autterson moved
into the Residence within a few months of the Partnership’s 2005 purchase of it,
and lived there rent and mortgage free until he purchased it from the Partnership in
2008. 13 According to Autterson, he purchased the Residence in 2008, based on his
counsel’s recommendation that he either pay rent or purchase the property so that
his use of it would be considered a bona fide “arm’s length” transaction between
related parties. 14 Autterson was required by a divorce settlement to pay his ex-
wife’s mortgage on her home, and decided to pay off that mortgage rather than
making payments on it. In order to obtain the $1.25 million loan needed to do so,
Autterson would have to provide that lender with collateral, which meant he
needed to take ownership of the Residence. 15
12
Special Warranty Deed in Appx at 147. Autterson testified the Partnership
also spent approximately $350,000 on improvements to the Residence between its
purchase in 2005 and its sale to Autterson in 2008. Trans. 1, 54-55 in Appx at
1050-51.
13
Trans. 1, 118-19 in Appx at 1114-15.
14
Id. at 1126.
15
Id. at 1126-28. As the Partnership did not secure the 2008 Note with a
mortgage on the Residence, Autterson had its entire value available to use as
collateral for other loans.
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The face, or principal, amount of the 2008 Note was $2,219,359.19, and it
carried a 2.87% non-default interest rate, and a 12% default rate. 16 Interest was to
accrue and be paid annually on the first eight anniversaries of its execution, and
principal was to be repaid in full on the day before the ninth anniversary. 17
Autterson paid the accrued interest, in the amount of $63,695.61, on the first
anniversary of the 2008 Note, which was in April 2009. 18 However, he paid only
approximately 25% of the accrued interest in 2010, the second anniversary of the
2008 Note, and made no payments on it after that. 19
In his bankruptcy schedules, Autterson listed the 2008 Note as an
uncontested debt. At trial, the Partnership claimed $3,449,340 was due on the
2008 Note as of the date Autterson filed his petition. 18 However, the bankruptcy
court concluded that the Partnership had failed to prove entitlement to default
interest under the 2008 Note and allowed the Partnership’s claim, including
principal and non-default interest, in the amount of $2,517,299.68.
2. The 2010 Note
The second note from Autterson to the Partnership was executed in April
2010 (the “2010 Note” and, together with the 2008 Note, the “Partnership Notes”).
The 2010 Note had a face value of $500,000, and was given in exchange for a
number of advances made to Autterson by the Partnership, both before and after
the note was executed. 19 The 2010 Note carried a 2.7% non-default interest rate, a
12% default rate, and included the same nine anniversary payment terms as the
16
Promissory Note, dated April 1, 2008, in Appx. at 145-46.
17
Id.18
Trial Ex. 11 in Appx at 152-53.
19
Id.18
Trans. 1, 14 in Appx at 1010.
19
In fact, the advances already made by the Partnership to Autterson prior to
his execution of the 2010 Note were well in excess of that Note’s face value.
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2008 Note. 20 Approximately three months after the 2010 Note was signed,
Autterson paid the Partnership $466,123.19 on the 2010 Note, using proceeds from
his sale of the Residence to third parties. 21 Previously, Autterson had purchased a
new residence, located on Lafayette Street in Cherry Hills Village (the “Lafayette
House”), which he listed on a September 30, 2010 personal financial statement as
having a value of $3.7 million and a mortgage of more than $2.53 million. 22 The
Partnership made a total of thirteen advances, from April 1, 2010 to December 6,
2013, to Autterson that were included in the principal balance of the 2010 Note. 23
The advances totaled $1,955,000. 24 The first of those advances, in the amount of
$1,050,000 was for a down payment on the Lafayette House. 25 Approximately
$400,000 of the advances were used by Autterson to modify an outstanding loan to
various Communicom entities, for which Autterson was a guarantor. 26 The
remaining proceeds were spent on capital improvements to the Lafayette House. 27
Autterson filed his Chapter 11 bankruptcy petition on December 9, 2013. In
his schedules, he listed $5,850,000 as an uncontested total amount due under the
Partnership Notes. At trial, the Partnership claimed $1,907,193.33 was owed on
20
Promissory Note, dated April 1, 2010, in Appx at 154-55.
21
Trial Ex. 14, Statement of Settlement, “Sellers” in Appx at 157.
22
Autterson Financial Statement, September 30, 2010, in Appx at 981-82.
23
Summary of Advances Under April 1, 2010 Note in Appx at 156.
24
Id. (this amount was reduced to $1,488,876.81 by Autterson’s single
payment of $446,123.19).
25
Trans. 1, 88-89 in Appx at 1084-85. This advance was taken by Autterson
on the very same day that he only partially made the required accrued interest
payment on the 2008 Note, by which he had purchased his former home.
26
Id. at 1085. See also, Guaranty Agreement (Autterson) in Appx at 987-93.
27
Trans. 1, 89 in Appx at 1085.
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the 2010 Note, for a lesser total of $5,356,533.33 for both Partnership Notes. 28 The
bankruptcy court determined that the 2010 Note was effectively “an open account
advance line of credit where [the Partnership] failed to prove that it is owed
interest.” 29 The bankruptcy court allowed the Partnership’s claim on the 2010 Note
in the amount of $1,488,876.81, consisting of all advances, less Autterson’s one
payment.
II. APPELLATE JURISDICTION
This Court has jurisdiction to hear timely filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
unless one of the parties elects to have the district court hear the appeal. 30 The
bankruptcy court’s orders on appellants’ claims, as well as its judgment on those
orders, were entered on November 18, 2014, and an order establishing the amount
of a claim against the bankruptcy estate is final for purposes of appeal. 31
Appellants timely filed their notices of appeal on December 1, 2014, and no party
elected to have the appeal heard by the district court. 32 Therefore, this Court has
valid appellate jurisdiction.
III. ISSUE AND STANDARD OF REVIEW
Whether the bankruptcy court erred by denying recovery of interest
specified in the Trust and Partnership Notes.
28
Trans. 1, 15 in Appx at 1011.
29
Transcript of Bankruptcy Court Ruling (“Ruling Trans.”), November 14,
2014, 23-24 in Appx at 1347-48.
30
28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002; 10th Cir.
BAP L.R. 8001-3.
31
In re Miller, 284 B.R. 734, 736 (10th Cir. BAP 2002) (order disposing of
objection to claim is a final order for purposes of appeal).
32
Pursuant to Fed. R. Bankr. P. 8002(a), a party seeking to appeal an order
must file a notice of appeal from that order within fourteen days of its entry on
the docket.
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Our discussion of this issue involves the applicability of the concepts of
waiver and parol evidence. These concepts require that both factual and legal
issues be considered. A conclusion regarding applicability of the parol evidence
rule is primarily a legal issue that is reviewed on appeal de novo. 33 However,
waiver is primarily a factual issue that is reviewed for clear error. 34
IV. DISCUSSION
A. Bankruptcy Court Ruling
Although the bankruptcy court did an excellent job of pulling the evidence
presented at trial into an understandable narrative, it did not express a specific
legal rationale for its legal conclusions. Nonetheless, this Court believes that the
basis for the bankruptcy court’s ruling may be gleaned from its oral findings and,
even if not, an appellate court may affirm a trial court’s decision on any basis that
is supported by the record. 35 The bankruptcy court’s ruling repeatedly emphasized
the parties’ “course of conduct.” The conduct the court described, which was all
subsequent to execution of each Note, established that the parties repeatedly
ignored the express terms of the Notes over the course of several years. Such
conduct may be determined to be a waiver of those terms, whether or not the
bankruptcy court used that specific term. Thus, this Court interprets the
bankruptcy court’s fact findings to establish that the parties’ course of conduct
with respect to each Note indicated that strict compliance with the Notes’
provisions would not be enforced. Specifically, the Partnership waived its right to
charge default interest on the 2008 and 2010 Notes, and failed to prove its claim
for non-default interest under the 2010 Note. The Trust, which was not entitled to
33
Soc’y of Lloyd’s v. Bennett, 182 F. App'x 840, 845 (10th Cir. 2006).
34
Healy v. Cox Commc’ns, Inc. (In re Cox Enters., Inc.), 790 F.3d 1112,
1115-16 (10th Cir. 2015) (conclusion of waiver is reviewed de novo, but facts
underlying that conclusion are reviewed for clear error).
35
See Eller v. Trans Union, LLC, 739 F.3d 467, 476 (10th Cir. 2013)
(appellate court may affirm on any ground adequately supported by the record).
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default interest on the 2006 Note since payment on that Note was not due until
after Autterson filed his bankruptcy petition, similarly failed to prove its claim for
non-default interest.
B. Waiver
It is well established that contract rights may be waived. 36 In Colorado, the
elements necessary to effect a waiver of contract terms are:
In general, a party may waive a contract provision where the party is
entitled to assert a particular right, knows the right exists, but
intentionally abandons that right. Waiver may be express or implied,
such as when a party engages in conduct which manifests an intent to
relinquish37the right or privilege, or acts inconsistently with its
assertion.
Moreover, the Colorado Court of Appeals has held that a written contract may be
modified by oral agreement, even if the contract expressly forbids such
modifications. 38 That court also held that:
[A]n express provision in a written agreement may be waived, either
expressly or by implication. Such a waiver may be implied if a party
engages in conduct which manifests an intent to relinquish the right or
privilege or acts inconsistently with its assertion. And, the question of
waiver is a question of fact . . . . 39
Conduct that implies a waiver must be clear and unambiguous in order to be
effective:
Waiver is the intentional relinquishment of a known right or privilege.
A waiver may be explicit, as when a party orally or in writing
abandons an existing right or privilege; or it may be implied, as, for
example, when a party engages in conduct which manifests an intent
to relinquish the right or privilege, or acts inconsistently with its
assertion. Although an intent to waive a benefit may be implied by
36
In re Cox Enters., Inc., 790 F.3d at 1115.
37
Tarco, Inc. v. Conifer Metro. Dist., 316 P.3d 82, 89 (Colo. App. 2013)
(internal citations and quotation marks omitted).
38
James H. Moore & Assoc. Realty, Inc. v. Arrowhead at Vail, 892 P.2d 367,
372 (Colo. App. 1994).
39
Id. (citations omitted).
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conduct, the conduct itself should be free from ambiguity and clearly
manifest the intention not to assert the benefit. 40
These concepts apply to the present facts. As Autterson is both the borrower
and his lenders’ representative, no communication whatsoever between the
“parties” was the norm. Autterson, when acting on behalf of the Partnership or the
Trust, did not issue default notifications to himself, nor did he directly express an
intent to waive the Notes’ provisions. Instead, after signing standard agreements
on behalf of both parties, he simply paid or did not pay his obligations as he saw
fit. In fact, Autterson claimed not even to realize that the Partnership Notes were
in default until he was preparing to file his personal bankruptcy. 41 Nonetheless, his
conduct on both sides of the transactions can hardly be interpreted in any other
way than as a waiver of the express terms of the written agreements. Autterson
paid interest only if, and when, it suited his interests.
The bankruptcy court emphasized the inter-relatedness of Autterson and the
Partnership and Trust in its ruling, stating:
While the trust and partnership have maintained their separate formal
legal identities for many years they have both been fully controlled by
Mr. Autterson. They have both engaged in transactions with him,
involving substantial dollars in property which could not be
characterized as arms’ length. Several transactions involve Mr.
Autterson calling the tune on both sides of the table, having little
resemblance to transactions where each side of the deal is looking out
for its own interests. . . . The partnership advanced funds to Mr.
Autterson with little regard to his capacity or intent to repay the
funds. 42
This unity of interest between the parties is precisely why the Bank objected to the
Partnership and Trust claims, arguing the advances to Autterson were equity
payments due to lack of any creditor/debtor relationship. Although the bankruptcy
40
Dep't of Health v. Donahue, 690 P.2d 243, 247 (Colo. 1984) (internal
citations omitted).
41
See, e.g., Trans. 1, 65 in Appx at 1061.
42
Ruling Trans., 7-8 in Appx at 1331-32.
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court at least partially agreed with this sentiment, it nonetheless refused to
invalidate any of the principal of the Notes, stating:
The evidence of the parties’ course of dealings carries the day. The
Court concludes that the trust and the partnership claims are in fact
debts of this Debtor. They have never been treated otherwise. The
non-arm's length dealings of affiliates does not itself mean that the
debt should be treated as equity where the formalities of a
debtor/creditor relationship have been honored. 43
This conclusion, from which the Bank did not appeal, resulted in an award in
excess of $9 million to the Partnership and Trust. Had the bankruptcy court
concluded that the unity of interest between the parties rendered their agreements
illusory and unenforceable, there would have been no award of principal at all.
Instead, the bankruptcy court determined the Notes’ interest terms were ambiguous
and, therefore, subject to interpretation in light of the parties’ conduct. The
Colorado Court of Appeals has affirmed a trial court’s refusal to award pre-
judgment interest on the amount due under a promissory note, using the doctrine of
waiver, stating:
Waiver of a contract term occurs when a party to the contract is
entitled to assert a particular right, knows the right exists, but
intentionally abandons that right.
Here, although the promissory note called for interest at the rate
of ten percent per annum, [creditor’s] internal records showed that all
of the [borrower’s] payments were credited to principal. And, all of
the statements [creditor] sent indicated that only a principal balance
was due. Moreover, when the deed of trust was executed, the amount
due reflected that all credits for payments made had been applied to
principal, and no claim for interest was then made. In our view,
evidence of these actions supports the trial court’s finding that
[creditor] waived its right to collect the prejudgment interest to which
it otherwise would have been entitled. 44
43
Id. at 1336.
44
Ebrahimi v. E.F. Hutton & Co., 794 P.2d 1015, 1019 (Colo. App. 1989)
(citation omitted). Significantly, there was no transfer of consideration between
the unrelated parties in Ebrahimi in exchange for this waiver, nor any contention
that such was required.
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The factual findings the bankruptcy court made regarding intent to waive
interest are supported by the record on appeal. 45 Some of the evidence the court
relied on included: (1) the 2006 Note represents the Trust’s pro rata share of a
previous debt owed by Autterson to the Partnership, including only regular accrued
interest, even though the previous loan was in default at the time and therefore
subject to default rate interest; (2) Autterson prepared several financial statements
for the Bank and others that suggest he considered the amounts due under the
Partnership and Trust Notes did not include interest; 46 (3) Michael Winterscheidt,
the accountant for Autterson, the Trust, and the Partnership, did not calculate the
amounts due under the Notes until Autterson was preparing to file bankruptcy; (4)
Mr. Winterscheidt inflated the amounts Autterson owed by prematurely triggering
interest accrual whenever a payment was made so that the payment would be
applied to interest rather than principal, which violated the Notes’ provisions that
principal could be prepaid without penalty and that interest only accrued annually;
(5) default interest had not been charged on the Partnership Notes despite their
having been in default for years; (6) although the 2006 Note did not require
payment until 2015, advances Autterson made to fund the Trust’s annual life
insurance premiums were credited to that Note, but only in preparation for
Autterson’s bankruptcy filings; (7) the face value of the 2010 Note bore no
relationship to the amounts advanced to Autterson up to its execution; and (8) in
45
An appellate court must review trial findings in a light most favorable to
the prevailing party and, when trial was to the court rather than a jury, those
findings are “presumptively correct.” Cowles v. Dow Keith Oil & Gas, Inc., 752
F.2d 508, 510-11 (10th Cir. 1985).
46
Appellants argued at trial that Autterson’s personal financial statements
should not bind the Trust or Partnership. In the view of the bankruptcy court, that
argument was “too cute.” We agree. Where an individual completely controls a
business entity, particularly ones he established and funded, the line between
individual and business identities is blurred. Autterson acted at all times in a
manner he deemed beneficial to himself and his related entities. We see no
reason to differentiate between his personal and his business conduct when even
he did not do so.
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general, the parties did not act as if the terms of the notes controlled their dealings.
From these and other facts, the court concluded that “the parties’ course of dealing
[regarding the 2010 Note was] so far removed from the [N]ote terms, that the
[N]ote itself reveals little or nothing about what is owed.” 47
The bankruptcy court found only with respect to the Partnership’s 2008 Note
related to sale of the Residence did the parties’ course of dealing “bear[] any
resemblance to the terms of the note.” However, as no default interest was charged
on that loan despite Autterson’s repeated failures to make the required payments,
the court determined that the balance due on that note did not include default rate
interest. Thus, the allowable amount of the claim based on the 2010 Note was
calculated by simply subtracting applied payments from the relevant advances.
Finally, the bankruptcy court denied all interest on the 2006 Note, finding both that
“not a single interest payment was made in accordance with the note’s terms in
over six years,” and that the trustee, Autterson’s brother, didn’t even know how to
treat the payments that were made. 48 Thus, the claim based on the 2006 Note was
also allowed in the amount of principal minus credits for insurance premium
payments made by Autterson.
In its brief on appeal, Bank asserts, apparently for the first time, that the
parties “modified” the Notes’ interest provisions through their conduct. Appellants
assert that the Bank’s failure to rely on the legal concept of contract modification
in the bankruptcy court, together with the bankruptcy court’s failure to expressly
base its decision on that ground, should preclude this Court’s consideration of that
issue as well. However, since an appellate court may affirm on an entirely
different basis than the one relied on by the bankruptcy court, the principle that an
argument not made in the trial court may not be made on appeal typically applies
47
Ruling Trans., 23 in Appx at 1347.
48
Id. at 1348.
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only to appellants. 49 Thus, appellate courts are not at liberty to reverse on grounds
not presented to the trial court, with the exception of lack of subject matter
jurisdiction. 50 In any event, this Court’s decision is based on waiver rather than
modification.
Besides arguing that the modification issue should not be considered on
appeal, appellants attack applicability of modification to the facts on several
grounds. First, they deny that any of the conduct in which they engaged can be
considered “clear and unambiguous” evidence of intent to waive interest. 51 This
denial is self-serving and of little weight. The bankruptcy court considered many
facts to support an inference that interest, particularly default interest, would not
be charged. The fact that Autterson claims he “didn’t know” he was in default on
the Notes until preparing his filings for bankruptcy is fairly compelling evidence
that no one was treating the express terms of the Notes as binding. Autterson’s
testimony to the effect that he always intended to repay the Notes, and that neither
the Trust nor the Partnership ever waived interest, does not outweigh the fact that
interest was never charged. 52
Appellants also assert that a contract modification requires additional
consideration, and none was forthcoming from Autterson that would support the
waiver of interest by the Note holders. Thus, the concepts of contract waiver,
modification, and estoppel with respect to agreements are related and somewhat
intertwined, and may sometimes, but not always, be used interchangeably. Relying
49
See In re Nestlen, 441 B.R. 135, 141 (10th Cir. BAP 2010) (quoting Griess
v. Colorado, 841 F.2d 1042, 1047 (10th Cir. 1988)).
50
See Rademacher v. Ass’n of Soil Conservation Dist. Med. Benefit Plan, 11
F.3d 1567, 1571 (10th Cir. 1993) (appellate court may consider matters not raised
below in unusual circumstances, such as issues regarding jurisdiction).
51
Appellant’s Reply Br. at 6.
52
Trans. 1, 2006 Note, 48, 2008 Note, 71, 2010 Note, 92 in Appx at 1044,
1066, 1088.
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on Corbin on Contracts, the New Mexico Supreme Court clarified the distinctions
between the concepts, stating:
The law of waiver as discussed by Professor Corbin and our own cases
suggests several possible situations: (1) actual waiver, either express
or implied in fact, not supported by consideration, which may be
retracted in the absence of detrimental reliance; (2) modification,
which is not subject to retraction, based upon mutual agreement to
waive certain obligations or conditions and the exchange of
consideration; or (3) waiver by estoppel based upon either an actual
waiver or certain “expressions or conduct” where the reliance of the
opposite party and his change of position justifies the inhibition to
assert the obligation or condition. 53
What the record before this Court demonstrates is waiver by the Partnership and
the Trust of their respective rights to hold Autterson in default and to charge him
interest on his loans. According to Professor Corbin, waiver of a contractual right
requires no additional consideration. In Colorado, waiver of a default “may be
shown by accepting payment after default, by accepting payment after giving
notice of an election to accelerate, or by mere inaction.” 54
In this case, each of the Notes included the following terms:
Default. An event of default (“Event of Default”) shall occur if
Borrower fails to make any principal or interest payment when due.
Upon the occurrence of an Event of Default, interest shall be payable
at a rate of 12% per annum from the date of the Event of Default. . . .
Miscellaneous. (a) Presentment, 55notice of dishonor, and protest are
hereby waived by Borrower . . . .
Although the Notes neither required the Partnership or the Trust to declare a
default nor to exercise an option to apply default interest, that does not rule out
waiver of the default interest provision. Nor does lack of additional consideration
preclude waiver.
53
J.R. Hale Contracting Co. v. United New Mexico Bank, 799 P.2d 581, 586
(N.M. 1990).
54
Goodwin v. Dist. Court, 779 P.2d 837, 843-44 (Colo. 1989)(en
banc)(emphasis added).
55
2006 Note, 2008 Note, & 2010 Note in Appx at 65, 145, 154.
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None of the Notes in this case were ever declared to be in default, nor was
Autterson ever directed to make missed payments. The terms of each of the Notes
were ignored until Autterson was preparing his bankruptcy filings. For example,
the 2006 Note did not require scheduled payments, but payment in full was
required on or before January 15, 2015. In preparation for bankruptcy, Autterson
asked his accountant (who was also the accountant for both the Trust and the
Partnership) to determine what was owed on each Note. The accountant applied all
of Autterson’s life insurance payments to the 2006 Note, even though no payments
were due on that Note. In fact, the accountant applied insurance premium
payments made after April 1, 2010 (when the 2008 Note was technically in
default), as credits to the 2006 Note. Similarly, the 2010 Note was technically in
default as of April 1, 2011, yet the Partnership continued to advance significant
amounts of money on that Note until December 2013, shortly before Autterson
filed his bankruptcy petition. This fact led the bankruptcy court to note that the
Partnership had “advanced funds to Mr. Autterson with little regard to his capacity
or intent to repay the funds.” 56 We agree.
Each of these transactions was effectuated on behalf of both parties by
Autterson, and only documented by the Notes themselves. Few actual payments
were made in accordance with the terms of the Notes, and what were construed to
be payments were not actually “applied” to a particular Note until it suited
Autterson’s needs to do so. Autterson was always aware of the implications of his
transactions, as well as the effect of his impending bankruptcy on both himself and
his wholly-controlled entities. Only when preparing his bankruptcy filings, he
asserts, did he even realize the 2008 and 2010 Notes were in default, yet he assured
the bankruptcy court on behalf of the Partnership and the Trust that “they” never
waived his defaults or had any intention of not charging him interest. This is
56
Ruling Trans., 8 in Appx at 1332.
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patently without merit. Being on all sides of these transactions, Autterson must be
charged with knowledge of the terms of the Notes, that he had made or missed
payments, and of the events and effects of default on both obligor and obligee. He
chose not to make required payments and to forego the enforcement of penalties.
Indeed, he chose to keep advancing Partnership funds to himself with full
knowledge that the Note under which the advances accrued was already in default.
He cannot now avoid the consequences of his conduct by simply asserting that he
didn’t know. His conduct, on his own behalf and on behalf of his entities, plainly
and definitively indicates that there was no intention to enforce the default
provisions of the Notes. In addition, Autterson’s decision to ignore the terms of
the 2006 and 2010 Notes for years made it impossible for the Trust and the
Partnership to prove a case for interest at all. There was no contemporaneous
application of credits, no payments that corresponded to the terms of the Notes,
and clearly no intent to do more than simply repay the principal on those Notes.
Autterson did not even calculate or indicate the interest that was owed on the Notes
for his personal financial statements. We therefore conclude that the appellate
record supports the bankruptcy court’s decision to disallow the interest portion of
the obligees’ claims.
C. Parol Evidence Rule
Appellants assert that the bankruptcy court violated the parol evidence rule
by finding the Notes’ terms to be ambiguous, and then considering the parties’
conduct in order to determine their intent with respect the contract terms. The
parol evidence rule provides that extrinsic (or “parol”) evidence may not be used to
interpret the intent of a written agreement unless the agreement is “ambiguous.” 57
57
See, e.g., Gagne v. Gagne, 338 P.3d 1152, 1163 (Colo. App. 2014)
(extraneous evidence may only be admitted to prove intent when there are
ambiguous contract terms); Gorsuch, Ltd., B.C. v. Wells Fargo Nat. Bank Ass’n,
771 F.3d 1230, 1238 (10th Cir. 2014) (courts may only consider extrinsic
(continued...)
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Thus, clear and unambiguous contract terms may not be altered by evidence that
suggests a different intent. The rule, however, only excludes evidence of “prior or
contemporaneous oral agreements,” and therefore, does not alter the long-standing
rule that parties may waive or alter the terms of their agreements by their conduct
after the agreement is in place. 58 Thus, the parol evidence rule does not apply to
evidence that establishes “a modification or termination of even an integrated
agreement.” 59
Although the bankruptcy court did determine the Partnership and Trust Note
terms to be ambiguous, it did so only in disagreement with testimony by
appellants’ accountant to the effect that he had calculated the amounts due on each
Note as “prescribed by the clear and unambiguous terms” of the Notes. 60 The court
simply disagreed. It did not rule that the parol evidence rule was inapplicable, nor
did it consider prior or contemporaneous evidence to determine the parties’ intent
when the Notes were executed. Rather, it considered conduct subsequent to
execution of the Notes in reaching the conclusion that, whatever the parties’ initial
intent had been, strict compliance with the Notes’ terms would not be enforced.
Where the parties’ subsequent conduct indicated that default was not an issue and
57
(...continued)
evidence to determine intent when written documents are ambiguous) (applying
Colorado law).
58
11 Williston on Contracts § 33:1 (4th ed.) (emphasis added) (“The parol
evidence rule is a substantive rule of law that prohibits the admission of evidence
of prior or contemporaneous oral agreements, or prior written agreements, whose
effect is to add to, vary, modify, or contradict the terms of a writing which the
parties intend to be a final, complete, and exclusive statement of their
agreement.”).
59
11 Williston on Contracts § 33:14 (4th ed.); see also, Exchange Nat’l Bank
v. Sparkman, 554 P.2d 1090, 1093 (Colo. 1976) (parol evidence rule does not
preclude modification of a contract by conduct); S. Colo. MRI, Ltd. v. Med-
Alliance, Inc., 166 F.3d 1094, 1099 (10th Cir. 1999) (contract may be modified or
waived in whole or part by the parties’ subsequent words and actions).
60
Ruling Trans., 19 in Appx at 1343.
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default interest would not be applied, that conduct indicated an intent to waive
provisions of the Notes to which they had previously agreed. In addition, their
conduct indicated that application of any interest under any Note would be decided
on a case-by-case (or note-by-note) basis. As this decision has already discussed,
the bankruptcy court’s findings with respect to intent are supported by the evidence
and, are therefore, not clearly erroneous. Moreover, consideration of conduct
subsequent to execution of an agreement to determine intent at that time does not
violate the parol evidence rule. 58
V. CONCLUSION
The record supports a finding that the interest provisions of the Trust and
Partnership Notes were intentionally waived by the parties’ conduct subsequent to
execution of the Notes. Therefore, the bankruptcy court’s reduction of interest
allowed under the Notes is AFFIRMED.
58
See Ziegler v. Hendrickson, 528 P.2d 400, 403 (Colo. App. 1974) (parol
evidence rule does not exclude conversations after execution of agreement that
show waiver the terms); In re Cont’l Res. Corp., 799 F.2d 622, 626 (10th Cir.
1986) (An “exception to the parol evidence rule is when there has been a
subsequent alteration or modification of the terms of a contract.”).
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