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State ex rel. Weiser v. Castle Law Group, LLC

Court of Appeals of Colorado, Fourth Division

April 4, 2019

State of Colorado ex rel. Philip J. Weiser, Attorney General; and Jan M. Zavislan, Administrator, Uniform Consumer Credit Code, Plaintiffs-Appellants and Cross-Appellees,
v.
Castle Law Group, LLC; Lawrence E. Castle; and Caren A. Castle, Defendants-Appellees and Cross-Appellants, and Absolute Posting & Process Services, LLC; Ryan J. O'Connell; Kathleen A. Benton; and RE Records Research, LLC, Defendants-Appellees.

          City and County of Denver District Court No. 14CV32763 Honorable Morris B. Hoffman, Judge.

          Philip J. Weiser, Attorney General, Alissa H. Gardenswartz, Deputy Attorney General, Megan Paris Rundlet, Assistant Solicitor General, Jennifer H. Hunt, First Assistant Attorney General, Mark L. Boehmer, Assistant Attorney General, Denver, Colorado, for Plaintiffs-Appellants and Cross-Appellees.

          Richards Carrington, LLC, Christopher P. Carrington, Denver, Colorado; Law Office of Ruth Moore, P.C., Ruth M. Moore, Conifer, Colorado; Reilly Pozner LLP, Larry Pozner, Denver, Colorado; Pan American Legal Services, LLC, Phillip A. Vaglica, Glendale, Colorado, for Defendants-Appellees and Cross-Appellants Castle Law Group, LLC, Lawrence E. Castle, and Caren A. Castle.

          Senter Goldfarb & Rice, L.L.C., Billy-George Hertzke, Ashley J. DeVerna, Denver, Colorado, for Defendants-Appellees Absolute Posting & Process Services, LLC, Ryan J. O'Connell, and Kathleen A. Benton.

          Vedra Law, LLC, Daniel J. Vedra, Denver, Colorado, for Defendant-Appellee RE Records Research, LLC.

          OPINION

          BERNARD CHIEF JUDGE.

         ¶ 1 Plaintiffs, the State of Colorado and the State's Administrator of the Uniform Commercial Code, brought a civil law enforcement action against defendants (1) Castle Law Group, LLC and its principals, Lawrence E. Castle and Caren A. Castle; (2) Absolute Posting & Process Services, LLC and its principals Ryan J. O'Connell and Kathleen A. Benton; and (3) RE Records Research, LLC. We will refer to the plaintiffs collectively as "the State." (The State also sued a fourth company that is not part of this appeal.)

         ¶ 2 Following a bench trial, the trial court ruled in favor of defendants on all the claims but one. The State appeals the trial court's judgment on its unsuccessful claims. We affirm this part of the judgment.

         ¶ 3 As to the State's one successful claim, the trial court assessed civil penalties against the Castle Law Group, LLC and its principals, which we shall call "the law firm," under the Colorado Consumer Protection Act, section 6-1-105(1)(l), C.R.S. 2018. The law firm filed a cross-appeal challenging this ruling. For the reasons stated below, we reverse this portion of the trial court's judgment and remand to the trial court to vacate the judgment against the law firm.

         I. Background

         ¶ 4 The allegations in this case arise in the context of the subprime mortgage crisis that occurred about a decade ago. During the crisis, homeowners began defaulting in record numbers on their home loans. When a homeowner defaulted, the lender could initiate a foreclosure proceeding through the public trustee. § 38-38-101, C.R.S. 2018. Because of the sheer number of foreclosures during this period, mortgage servicers, acting on behalf of lenders, hired foreclosure law firms using comprehensive retainer agreements. (As is pertinent to this appeal, these mortgage servicers included two quasi-public entities: (1) the Federal National Mortgage Association, or "Fannie Mae"; and (2) the Federal Home Loan Mortgage Corporation, or "Freddie Mac.")

         ¶ 5 Under the retainer agreements at issue in this case, the mortgage servicers would agree to pay the law firm a flat fee for each case, and the law firm would arrange for all the foreclosure legal work, including posting of notices and land title research. The law firm would hire an outside vendor to complete these services. The mortgage servicers would then reimburse the firm for its "actual, necessary, and reasonable" costs for these services, in accordance with Colorado law, section 38-38-107(3)(b), C.R.S. 2018, as well as the homeowners' loan documents, and the retainer agreements.

         ¶ 6 The law firm was the largest foreclosure law firm in Colorado during this period. The State alleged that the law firm exploited this reimbursement system by engaging in a deceptive scheme with Absolute Posting & Process Services, which we shall call "the posting company," and RE Records Research, which we shall call "the title company."

         ¶ 7 The law firm hired the posting company to provide two posting services pertinent to this case. First, in 2009, our legislature passed a law that allowed eligible borrowers to defer a foreclosure and required that the mortgage servicer give notice of the deferral opportunity by posting a notice on the property. Ch. 404, sec. 5, § 38-38-802, 2009 Colo. Sess. Laws 2222-23. Second, in 2010, the legislature passed a bill requiring mortgage servicers to post a notice of the time and date of a foreclosure hearing on the property. Ch. 200, sec. 2, § 38-38-105, 2010 Colo. Sess. Laws 872. The posting company charged $125 for each posting.

         ¶ 8 The law firm hired the title company to do title searches and periodic updates to those searches. The title company charged the law firm $275 for the title search and $75 for an update.

         ¶ 9 Generally, the agreements between the law firm and a mortgage servicer allowed the law firm to hire "affiliated vendors" for posting and title services. But some agreements required the law firm to disclose any financial interest in, or other relationship with, its affiliated vendors. As is relevant to this appeal, the principals of the law firm held a minority interest in RP Holdings Group, which we shall call "the holding company." In 2009, the holding company negotiated an agreement with the posting company under which the holding company received 40% of the posting company's net profits in exchange for cash and stock in the holding company. The law firm never disclosed this interest to its clients.

         ¶ 10 We prepared the following diagram to help the reader understand the relationships among the various individuals and businesses that we have just described.

         (Image Omitted.)

         ¶ 11 In 2014, the State sued the law firm, the posting company, the title company, and their respective principals for making "false or misleading statements of fact concerning the price" of their foreclosure services under section 6-1-105(1)(Z) of the Colorado Consumer Protection Act. We note that this Act is sometimes called the CCPA for short, but, to be more descriptive, we shall refer to it as "the Consumer Act." (The State brought similar claims under the Colorado Fair Debt Collection Practices Act, sections 12-14-101 to -136, C.R.S. 2016, but the trial court found that those claims merely "duplicate[d]" the claims under the Consumer Act.) The State also alleged that the law firm had illegally fixed prices in violation of the Colorado Antitrust Act of 1992, which we shall call "the Antitrust Act." § 6-4-104, C.R.S. 2018.

         ¶ 12 The State contended that the law firm, the title company, and the posting company engaged in a conspiracy that went like this: (1) the law firm conspired with the title company and the posting company to charge a price for services in excess of the market rate; (2) the law firm convinced its clients that the price was the "actual, necessary, and reasonable" cost for those services; (3) the law firm paid those costs to the title company and the posting company, and then passed them along to the servicers, who reimbursed the law firm; and (4) the title company and the posting company shared a portion of the inflated costs with the law firm.

         ¶ 13 The State alleged that this scheme also benefitted, in part, from a second conspiracy, in which the law firm conspired with its largest competitor, Aronowitz & Mecklenburg, which we shall call "the competitor," to set the minimum price for one kind of posting. The allegation continued that, after reaching this agreement with the competitor, the law firm convinced its clients that this pre-set minimum price was the market rate.

         ¶ 14 In January 2016, about one week before the trial was scheduled to begin, the trial court precluded the State from presenting evidence of rates charged by other vendors. State ex rel. Coffman v. Castle Law Group, LLC, 2016 CO 54, ¶ 18 (Castle I). The State wanted to present this evidence to establish a market rate to show that the fees charged by the title company and the posting company were grossly inflated above the average market rate. Id. at ¶ 17. By showing the difference in pricing, the State hoped to prove that the law firm's charges were not "actual, necessary, or reasonable." Id. at ¶¶ 9, 17. If the price was not "actual, necessary, or reasonable," then, as the State contended, the law firm, the title company, and the posting company had engaged in a deceptive statement about the price of the service, which was a practice that the Consumer Act prohibited. Id.

         ¶ 15 But the trial court believed that the market rate evidence was irrelevant. Id. at ¶ 16. Rather, the trial court thought that "[c]harging high prices is not deceptive or unjust, as long as those prices are accurately disclosed." Id. at ¶ 18. In the trial court's opinion, it did not matter what the title company and the posting company charged for their services; it only mattered whether the law firm benefitted by getting a "kickback." Id. The court made it clear in its order that "the only reason [it] did not knock out [the Consumer Act claim] on dispositive motion[] is because [it] read [the State's] complaint to allege that some part of these high prices were kicked back to [the law firm] in a scheme to avoid contractual or regulatory caps on their attorney fees." Id.

         ¶ 16 The State appealed the trial court's exclusion of the market rate evidence by filing an original proceeding under C.A.R. 21. Id. at ¶ 19. The supreme court issued a rule to show cause, and it ordered the trial court to stay the trial pending resolution of the Rule 21 proceeding. Id. at ¶ 20. The supreme court then reversed the trial court.

         ¶ 17 In December 2016 and January 2017, after the trial court's jurisdiction was restored, it held a bench trial that lasted about three weeks. More than twenty witnesses testified, and the court received more than 250 exhibits. The court issued its detailed, ninety-two-page written order in April 2017.

         II. State's Claims

         ¶ 18 The State makes two contentions on appeal. First, it contends that the trial court erred by misapplying the law of the case because it did not follow Castle I. Second, the State maintains that the trial court erred when it did not require two nonparty witnesses to take the witness stand for purposes of invoking their Fifth Amendment rights.

         A. Law of the Case

         ¶ 19 The State asserts that the trial court disregarded the law of the case doctrine, in the form of Castle I, in determining that the posting and the title search charges were "actual" and "reasonable." We disagree.

         1. Preservation

         ¶ 20 The law firm and the title company assert that the State did not preserve this issue for appellate review. (The posting company does not contest preservation.)

         ¶ 21 The State contends that it preserved the issue during its opening statement, argument on its motion for directed verdict, and its closing argument. The law firm and the title company counter that the State never mentioned the supreme court's mandate and that it did not specifically object to the trial court's orders that it believed had contradicted the law of the case.

         ¶ 22 We conclude that the State did enough to preserve the issue. In the portions of the record that the State cites, it tried to express its position on the question of whether the charges were "actual" or "reasonable." We do not think that the State had to mention the mandate to preserve the issue. See Rael v. People, 2017 CO 67, ¶ 17 ("We do not require that parties use 'talismanic language' to preserve an argument for appeal.").

         ¶ 23 We therefore will review any putative error under the harmless error standard. C.R.C.P. 61. We will not reverse unless "the error substantially influenced the verdict or affected the fairness of the trial." Leiting v. Mutha, 58 P.3d 1049, 1053-54 (Colo.App. 2002).

         2. Law of the Case Doctrine

         ¶ 24 The law of the case "doctrine contains two branches, analyzed differently, depending on whether the prior 'law' of the case involved a court's own rulings or the rulings of a higher court." Hardesty v. Pino, 222 P.3d 336, 339 (Colo.App. 2009). We address the latter in this case, which is known as the "mandate rule." Id.

         ¶ 25 "Conclusions of an appellate court on issues presented to it as well as rulings logically necessary to sustain such conclusions become the law of the case." Super Valu Stores, Inc. v. Dist. Court, 906 P.2d 72, 79 (Colo. 1995). A trial court does not have discretion to disregard the binding rulings of an appellate court. Hardesty, 222 P.3d at 340.

         3. The Supreme Court's Mandate

         ¶ 26 We begin by discussing the supreme court's "[c]onclusions [in Castle I] . . . on [the] issues presented to it as well as rulings logically necessary to sustain such conclusions." Super Valu Stores, Inc., 906 P.2d at 79.

         ¶ 27 First, the supreme court rejected, as a matter of law, the trial court's determination that "charging high prices is not deceptive as long as the prices are accurately disclosed." Castle I, ¶ 29. Instead, the supreme court reasoned that disclosure alone does not cure the false claim if "the prices themselves are deceptive." Id. Said another way, the deception - the alleged scheme to inflate prices above the market rate and then to share in the benefits - occurred before the law firm invoiced its clients.

         ¶ 28 Second, the supreme court concluded that the market rate evidence was therefore relevant to determine whether the prices the title company and the posting company charged were "the actual or reasonable costs of such services." Id. at ¶ 30. If the prices the title company and the posting company charged were not "actual" or "reasonable," then they could potentially be part of a "false or misleading statement of fact concerning the price of [that] service[]." § 6-1-105(1)(l). So the court indicated that market rate evidence gave "some reference point by which to measure the actual, necessary, or reasonable cost." Castle I, ¶ 23.

         ¶ 29 Third, the supreme court held that the evidence was also relevant to establish whether the law firm's vendors "also benefitted" from the conspiracy with the law firm. Id. That is, the supreme court rejected the trial court's assumption that there could only be a violation of the Consumer Act if the law firm received kickbacks from its vendors. Rather, the price could still be deceptive, presumably, if only the vendors themselves financially benefitted from the artificially inflated price.

         4. Analysis

         ¶ 30 The State contends that the trial court disregarded the supreme court's opinion when it determined that the prices of the title company and the posting company were "actual" and "reasonable."

         ¶ 31 We pause here momentarily so we may lay some additional groundwork regarding the words "actual," "necessary," and "reasonable." We first note that the trial court and our supreme court refer to phrases such as "actual, necessary, and reasonable"; "actual, necessary, or reasonable"; "actual and reasonable;" and "actual or reasonable" interchangeably and without any clarification as to whether there is a difference among these different arrangements of the terms. In its order, the trial court placed the terms in two separate categories: (1) actual; and (2) necessary and reasonable. And the State bifurcates its argument in a similar way: (1) actual; and (2) reasonable. Because no one has asserted that the word "necessary" conveys some additional indispensable meaning to the terms "actual" and "reasonable," we will confine our discussion to the latter two terms.

         ¶ 32 Our supreme court did not define either "actual" or "reasonable." But the court gave us one important piece of information regarding how we should interpret these words: The State's market rate evidence was intended to give "some reference point by which to measure the actual . . . or reasonable cost." Id. at ¶ 23. So, if the State could prove that the prices charged by the title company and the posting company did not reflect the market rate, then it could establish that they were not the "actual" or "reasonable" costs of those services.

         ¶ 33 Under the State's "actual-and-reasonable theory," it had to first show that the title company and the posting company charged an above-market-rate price. Then, if the State could establish other aspects of its case, such as (1) the law firm conspired with the title company and the posting company to set the high price; and (2) the law firm, the title company, and the posting company shared in the benefits of the high price, then the State could prove that the law firm's charges to its clients were a "false or misleading statement of fact concerning the prices of [its] service." § 6-1-105(1)(l). But, if the State could not establish that the title company and the posting company charged prices above the market rate, then the State's actual-and-reasonable theory could not succeed.

         ¶ 34 With this groundwork, we draw the following conclusions. First, the trial court did not err by rejecting the State's market rate evidence. Second, even if the trial court misinterpreted the supreme court's mandate when it concluded that the costs were "actual," we conclude that it did not commit reversible error. Third, the trial court did not err when it considered Fannie Mae's approval of the charges as evidence that the charges were reasonable. Fourth, the trial court did not improperly consider the State's "kickback theory."

         ¶ 35 Review of a trial court's judgment following a bench trial involves mixed questions of fact and law. Deutsche Bank Tr. Co. Ams. v. Samora, 2013 COA 81, ΒΆ 37. Generally, the court's findings of fact are reviewed for clear error, and the ...


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