Free Trial Brief - District Court of Colorado - Colorado


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Case 1:03-cv-01973-PSF-MJW

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 03-cv-1973-PSF-MJW (Consolidated with 04-cv-02112-PSF-MJW) THE WALKER GROUP, INC. Plaintiff, v. FIRST LAYER COMMUNICATIONS, INC. and J.E.H. KNUTSON Defendants.

WALKER GROUP'S MEMORANDUM OF LAW REGARDING APPLICATION OF VALUE OF ASSETS RECEIVED BY WALKER GROUP TO REDUCE FIRST LAYER'S DEBT AND AWARD OF PRE- AND POSTJUDGMENT INTEREST AND ATTORNEYS' FEES1

Walker Group loaned First Layer Communications, Inc. a total of $1,013,867.70 and First Layer did not make any scheduled payments on these loans. (Courtroom Minutes, Instruction No. 12 (Oct. 27, 2005)). As the Court instructed, "[t]his amount remains

outstanding unless Defendant Knutson proves by a preponderance of the evidence . . . his affirmative defense that the debt has been completely or partially satisfied." (Id.)
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Pursuant to this Court's instructions, the undersigned counsel for Walker Group attempted to confer with Counsel for Defendant regarding the judgments to be entered against First Layer Communications, Inc. and Mr. Knutson. Walker Group provided to Mr. Knutson, among other things, a number of the cases cited herein. No meaningful response was received from Mr. Knutson. Consequently, Walker Group submits this memorandum in support of its position.

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Defendant's Guaranty, on which the Court entered judgment as a matter of law regarding Defendant's liability for an amount of $500,000, expressly states that it "is a guaranty of payment and not of collection," and therefore can be enforced without regard to the availability of other remedies or the existence of other security. (Guaranty ¶ 3 (Ex. 4)). Pursuant to the Guaranty, Defendant "expressly waives any rights [he] otherwise may have to require [Walker Group] to attempt to recover against [First Layer] or any other Guarantor . . . and/or to realize upon any securities or collateral security which [Walker Group] may hold. . . ." (Id.) The jury concluded that Defendant executed the First Amendment to Guaranty of J.E.H. Knutson, which reaffirmed that Defendant "unconditionally guaranteed . . . full and prompt payment" of all sums due to Walker Group from First Layer. (Courtroom Minutes, Jury Verdict ¶ 1 (Oct. 28, 2005); First Am. to Guaranty of J.E.H. Knutson (Ex. 10)). The First Amendment, executed on May 16, 2001, increased the amount guarantied by Defendant from $500,000 to $600,000, but specifically stated that with the exception of the amount loaned "the terms of the Guaranty remain unchanged, effective and fully enforceable." (First Am. to Guaranty at ¶ 2 (Ex. 9)). Defendant's Second Amendment to Guaranty acknowledged that Walker Group was to loan additional funds in excess of $600,000 to First Layer. The jury concluded that by the Second Amendment Defendant again "unconditionally . . . guaranteed full and prompt payment" of amounts loaned to First Layer, but limited his responsibility for any amounts in excess of $600,000 to an amount equal to his "pro rata capital ownership in First Layer

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Communications, Inc.," which was 29.63 percent. (Oct. 28, 2005 Courtroom Minutes, Jury Verdict ¶¶ 2, 3; see Second Am. to Guaranty of J.E.H. Knutson ¶ 1 (Ex.208)). Like the First Amendment, the Second Amendment specifically stated that with the exception of the amount loaned and the pro rata limitation "the terms of the Guaranty remain unchanged, effective and fully enforceable." (Second Am. to Guaranty at ¶ 2). Finally, with respect to Defendant's affirmative defense that the debt has been completely or partially satisfied, the jury concluded that Walker Group received value from First Layer's assets that were transferred to Walker Group after the default, and that the "outstanding balances of the loan" should be reduced by $173,109.83. (Oct. 28, 2005 Courtroom Minutes, Jury Verdict ¶¶ 4, 5). As discussed below, this amount should be credited against the outstanding amount of the loan, not against the full amount guaranteed by Mr. Knutson. I. ANY VALUE WALKER GROUP RECEIVED AS A RESULT OF THE ASSETS TRANSFERRED FROM FIRST LAYER IS TO BE SUBTRACTED FROM THE TOTAL AMOUNT OWED BY FIRST LAYER, NOT FROM THE CONTRACTUAL LIMIT ON THE GUARANTY In a case strikingly similar to this one, the South Carolina Court of Appeals reversed the lower court's application of proceeds from a foreclosure sale to reduce the guarantor's "contractual limit of liability under the guaranty agreements." S. Bank & Trust Co., v. Harley, 356 S.E.2d 410, 411 (S.C. Ct. App. 1987)2. Like Defendant, the guarantors in

Counsel for Walker Group has been unable to locate any Colorado law as directly on point as the cases cited in Section I of this brief. However, the Colorado courts have interpreted unconditional guaranties that do not require creditors to take any steps before looking to the guarantor for payment, similar to the Guaranty in this case, and have found that such guaranties may result in greater liability for the guarantor than the debtor. First Interstate Bank of Denver, N.A. v. Colcott Partners IV, 833 P.2d 876, 878 (Colo. Ct. App. 1992) (holding guarantor liable for

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Southern Bank and Trust capped their liability, stating it would "not exceed at any one time a total of [$775,000.00]." Id. at 410. Furthermore, like the Guaranty in this case, the

unconditional guaranty at issue in Southern Bank and Trust stated that "liability on the guaranty is direct and immediate, and not conditional or contingent upon Southern's pursuit of any remedies it may have against other securities or liens available to it." Id. Following the debtor's default on the note, real estate that also secured the note was sold and the proceeds were applied to the debt, reducing it to $79,221.77. Id. The lower court found that the guarantor's liability was capped at $775,000.00 and deducted from this figure the $762,416.81 Southern had applied from the foreclosure sale to reduce the debt, resulting in a judgment for $12,583.19. Id. at 411. The Court of Appeals reversed, and held that the proceeds of the foreclosure sale should have been "applied to reduce the debt," not the "contractual limit of liability under the guaranty agreements." Id. at 411 (emphasis in original). The court held that the

"outstanding indebtedness in this case was $79,221.77. Since this figure is well within the maximum amount of the guaranty, the Guarantors are liable, under the terms of the agreements, to pay the full amount." Id. By the very terms of the guaranty agreements, the security thereof is cumulative to any other security Southern may be entitled to pursue. Payment of the deficiency by the Guarantors gives Southern the benefit of the additional and cumulative security represented by the Guaranty agreements. This is the benefit Southern bargained for. If the Guarantors pay the full amount of the deficiency, the debt is not being paid twice; it is merely being paid in full.
deficiency under unconditional guaranty, even though debtor could not be held liable for deficiency because of the nonrecourse nature of note).

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Id.

By reducing the guarantor's contractual limit instead of the debt, the lower court

"rewrote the terms of the contract between Southern and the Guarantors." Id. Thus, to determine the guarantor's liability to the creditor, "the amount recovered by the creditor [as a result of the foreclosure sale] was to be subtracted from the total amount owed by the debtor, not from the contractual limit of the guaranty." Id.; see also Lindell Square Ltd. P'ship v. Savers Fed. Sav. & Loan Ass'n, 766 S.W.2d 41, 47-48 (Ark Ct. App. 1989) (holding that under unconditional guaranty the guarantor's liability becomes fixed upon debtor's default and any foreclosure proceeds should be applied to reduce indebtedness, not guarantor's contractual limit of liability); Tel. Sav. & Loan Ass'n v. Guar. Bank & Trust Co., 385 N.E.2d 97, 102 (Ill. Ct. App. 1978) (holding guarantors liable for deficiency on loan despite fact that, by contract, guarantor's liability ceased when principal amount was reduced to $40,000 and application of foreclosure sale proceeds reduced principal balance on loan to less than $40,000, because guarantors became debtors immediately upon default when loan was outstanding in full); Peoples Fed. Sav. & Loan Ass'n v. Myrtle Beach Ret. Group, Inc., 387 S.E.2d 672, 674 (S.C. 1989) (holding that guarantors who unconditionally guaranteed 25% of the loan amount were liable for 25% of initial loans, not 25% of the balance after foreclosure). The present case is indistinguishable from Southern Bank and Trust. In both cases the guarantors signed unconditional guaranties. In both cases the guarantors eventually capped their liability at a specified amount. And in both cases the guaranty agreements provided for direct liability without recourse to other available remedies, security or

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collateral. By its terms, Defendant Knutson's Guaranty provides security that is cumulative to any other security Walker Group may have received from First Layer. If the value of the assets received from First Layer is deducted from Defendant's contractual limit, rather than First Layer's debt, this Court will effectively rewrite the terms of the Guaranty and Walker Group will not receive the benefit it bargained for. Thus, any value Walker Group received as a result of the assets transferred from First Layer should be subtracted from the total amount owed by First Layer, not from the contractual limit on Defendant Knutson's Guaranty.3 Following the jury's verdict, First Layer's outstanding balance of $1,013,867.70 (plus applicable interest) should be reduced by $173,109.83, leaving a balance of $840,757.87 (plus applicable interest) due under the Promissory Note. Of this amount, Defendant

Knutson guaranteed repayment of $722,628.99. Because the outstanding balance of the loans to First Layer exceeds the limit of Defendant's liability under his personal Guaranty as amended, he is responsible for the full amount guaranteed, $722,628.99.

The Court initially indicated that it would credit both the loan amount and Defendant Knutson's gauranty with the value of the items received by Walker. As discussed above and herein, crediting both woud be error because a guaranty is given "as additional security for the debt supplementing the creditor's security." Tel. Sav. & Loan Ass'n v. Guar. Bank & Trust Co., 385 N.E.2d 97, 101 (Ill. Ct. App. 1978). The Court described this initial intention as a "first-in-first-out" application. A "FIFO" approach would also be inappropriate. In Adidas Distribution Central, Inc. v. Sporting Goods Management, Inc., 583 So. 2d 696 (Fla. Ct. App. 1991), the court noted that Florida "conforms to the [general] rule that, in the absence of an agreement of the parties to the contrary, a court will apply payments to first discharge the oldest portions of a debt." Id. at 697. This is so because "it is equitable to apply payments first to extinguish those debts for which security is most precarious." Id. The first-in-first-out rule worked in Adidas because the oldest portion of the debt accrued before the guarantor signed his guaranty, and therefore also was the debt for which security was the most precarious. Id. But in the present case, the newest portion of the First Layer debt is the portion that remains unsecured. Thus, applying the equitable principal behind the first-in-first-out-rule to the present facts, the value of the assets Walker Group received from First Layer should be applied first to extinguish those debts for which security is most precarious, the unsecured portion of the First Layer debt. As a result, the debt should be reduced, not the contractual limit of Defendant Knutson's guaranty.

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II.

THE JUDGMENT SHOULD PROVIDE FOR PRE- AND POST-JUDGMENT INTEREST The Revolving Convertible Promissory Note executed by First Layer and Walker

Group expressly provides that the rate of interest on the Note is eight percent (8%) per annum. (Promissory Note ¶ 3 (Ex. 2)). This is the same as the legal rate in both Colorado and North Carolina. Colo. Rev. Stat. § 5-12-102(2); N.C. Gen. Stat. § 24-1. Based on the interest rate provision in the Note, Walker Group is entitled to pre-judgment interest on the default judgment against First Layer of $840,757.87 at a rate of 8% from October 10, 2002, the date the Note became due. With respect to the judgment against Defendant Knutson, Walker Group also is entitled to pre-judgment interest at a rate of 8% from July 9, 2003, the date Walker Group demanded payment under the Guaranty. (A copy of the letter demanding payment from Defendant Knutson is attached as Exhibit B to Walker Group's Answer and Counterclaim). Colorado Revised Statute Section 5-12-102(2) provides: When there is no agreement as to the rate thereof, creditors shall be allowed to receive interest at the rate of eight percent per annum compounded annually for all moneys after they become due on any bill, bond, promissory note, or other instrument of writing . . . from the date when the same became due. Defendant Knutson's Guaranty is an "instrument of writing" evidencing moneys due. Walker Group, therefore, is entitled under the statute to pre-judgment interest at a rate of 8% from July 9, 2003.4

To the extent Defendant Knutson argues that this is a breach of contract action and, therefore, pre-judgment interest is governed by Colo. Rev. Stat. § 5-12-102(1)(a), the rate of interest is the same (8%), and accrues from the "date of wrongful withholding," which is July 9, 2003, the date Defendant failed to make payment on demand. Furthermore, courts have held that money owed is "wrongfully withheld" for purposes of pre-judgment interest

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Finally, Walker Group is entitled to an award of post-judgment interest, under 28 U.S.C. § 1961, on the judgments against First Layer and Defendant Knutson.

III.

THE JUDGMENT SHOULD INCLUDE AN AWARD OF WALKER GROUP'S ATTORNEYS' FEES Walker Group is entitled to an award of attorneys' fees pursuant to the Revolving

Convertible Promissory Note, the Guaranty and the Federal Rules of Civil Procedure. With respect to the default judgment entered against First Layer, the Revolving Convertible Promissory Note provides that if First Layer's indebtedness is collected in judicial proceedings or if the Note is placed in attorneys' hands for collection after default, First Layer "agrees to pay, in addition to the principal and interest payable hereunder, reasonable attorneys' fees and costs incurred" by Walker Group. (Promissory Note ¶ 6 (Ex. 2)).

Likewise, with respect to the judgment against Defendant Knutson, the Guaranty agreement states that the "Guarantor will pay all reasonable costs and expenses, including attorneys' fees paid or incurred by [Walker Group], its successors, or assigns, in connection with the enforcement of the [Guarantor's] Obligations." (Guaranty ¶ 3 (Ex. 4)). Walker Group will provide copies of bills, affidavits, and additional briefing on the issue of attorneys' fees at the Court's request and convenience.

when the party breaches the contract by failing to make required payments when due. The statute does not require proof of tortious conduct by the debtor. See Echo Acceptance Corp. v. Household Retails Servs., Inc., 267 F.3d 1068 (D. Colo. 2001); Cooper v. Peoples Bank & Trust Co., 725 P.2d 78 (Colo. Ct. App. 1986).

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CONCLUSSION

For the reasons discussed above, Walker Group is entitled to the entry of a judgment against First Layer in the amount of $840,757.87 plus pre-judgment interest at 8% from October 10, 2002, post-judgment interest, costs and attorneys fees and the entry of a judgment against Mr. Knutson in the amount of $722,628.99 plus pre-judgment interest at 8% from July 9, 2003, post-judgment interest, costs and attorneys fees. Respectfully submitted, this the 7th day of November, 2005.

s/ Richard S. Gottlieb Richard S. Gottlieb Laura A. Greer Kilpatrick Stockton LLP 1001 West Fourth Street Winston-Salem, North Carolina 27101-2400 Telephone: (336) 607-7300 Attorneys for Plaintiff Walker Group, Inc. Joshua Maximon, Esq. The Maximon Law Firm, LLC 12202 Airport Way, Suite 170 Broomfield, Colorado 80021 Telephone: (303) 991-3344

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO CERTIFICATE OF SERVICE (CM/ECF) I hereby certify that on November 7, 2005, I electronically filed the foregoing WALKER GROUP'S MEMORANDUM OF LAW REGARDING APPLICATION OF VALUE OF ASSETS RECEIVED BY WALKER GROUP TO REDUCE FIRST LAYER'S DEBT AND AWARD OF ATTORNEYS' FEES with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email addresses: [email protected] [email protected], and I hereby certify that I have mailed or served the document or paper to the following non CM/ECF participants by first class mail addressed as follows: none.

s/ Richard S. Gottlieb Richard S. Gottlieb Attorney for Plaintiff Walker Group, Inc. Kilpatrick Stockton LLP 1001 West Fourth Street Winston-Salem, North Carolina 27101-2400 Telephone: (336) 607-7300 [email protected]
02560-207219 9012556.3

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