United States District Court, D. Colorado
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Marcia
S. Krieger Senior United States District Judge
THIS
MATTER comes before the Court for findings of fact
and conclusions of law following a two-day bench trial on
December 5 and 6, 2018, [1] along with post-trial submissions
(#129, 130) from the parties.
JURISDICTION
The
Court exercises jurisdiction pursuant to 18 U.S.C.
§1332.
FACTS
After
consideration of the evidence presented, the Court makes the
following findings of fact.
Between
approximately 1998 and 2013, Mr. Connelly served as the Chief
Executive Office of Mosaica Education
(“Mosaica”), a business that built and operated
charter schools around the world. In 2007, Tatonka Capital
Corporation (“Tatonka”) agreed to lend funds to
Mosaica pursuant to the terms of a Revolver Loan and Security
Agreement (“the Revolver”), essentially a line of
credit secured by Mosaica's assets. The terms of the
Revolver are complex and Mosaica's repayment obligations
were highly variable depending on its cashflow. At a minimum,
however, Mosaica was obligated to make monthly payments of
accumulated interests on the sums remaining outstanding in
the Revolver. For several years thereafter, Mosaica variously
drew upon or made payments in accordance with the Revolver.
By
2013, Mosaica owed approximately $4.7 million on the
Revolver. Mosaica continued to request additional funds from
Tatonka, but by this point in time, Tatonka was of the
opinion that Mosaica had “outstripped [its] borrowing
capacity” relative to the value of its collateral. The
record also reflects that Tatonka itself was experiencing a
degree of cashflow problems, such that it was concerned that
lending additional funds to Mosaica might affect its
abilities to meet its commitments to other borrowers.
Accordingly, Tatonka agreed to make certain “short-term
advances” to Mosaica, in exchange for Mosaica's
officers, [2] including Mr. Connelly, personally
guaranteeing repayment of Mosaica's debts. The
officers' guarantees are reflected in the form of a
series of written Guaranty Agreements, and the meaning and
intent of those agreements are at the core of the dispute in
this case. The precise terms of the short-term advances are
somewhat unclear from the record - the Guaranty Agreements
seem to indicate that the short-term advances are made on and
payable according to the same terms as the Revolver itself,
but, as discussed below, there is some evidence that suggests
that the short-term advances might mature and become
repayable more quickly than other debts under the Revolver
would.
The
parties agree that Mosaica took out the first short-term
advance, in the sum of $618, 000, on February 7, 2013. On
that same date, Mr. Connelly signed a Guaranty Agreement,
which provides:
To induce [Tatonka] to make loans to [Mosaica] upon the terms
and subject to the conditions in the [Revolver] and for other
good and valuable consideration . . . Michael Connelly hereby
agrees as follows:
1. Guaranty: [Mr. Connelly] hereby, personally and
unconditionally, (i) guarantees the due and punctual payment
and performance of each of the Obligations of [Mosaica] under
the [Revolver]. . . and (ii) agrees to indemnify, reimburse,
and hold [Tatonka] harmless from any actual liability . . .
suffered or incurred by [Tatonka] . . . resulting from,
arising in connection with, or related to the transactions
contemplated by the [Revolver].
2. Limitation: Notwithstanding any other provision
in this Guaranty . . . [Mr. Connelly's] aggregate
liability arising under this Guaranty . . . shall be limited
to $ 618, 000.
Thereafter,
Mosica took out six more short-term advances, borrowing $500,
000 in March 2013; $300, 000 in April 2013; $750, 000 in
early May 2013; approximately $1.6 million in late May 2013;
and $600, 000 in August 2013, for a total of $4.369 million.
In exchange for each advance, Mr. Connelly signed a separate
Guaranty Agreement, each containing identical language as set
forth above, the agreements differing only in the amount
recited in the “Limitation” paragraph - each
agreement's Limitation paragraph matched the amount being
advanced by Tatonka in connection with that particular
advance.
It is
undisputed that Mosaica made at least $4.369 million in
payments to Tatonka after February 7, 2013, and it is
generally agreed by the parties that, to the extent that
unique terms governed the repayment of the short-term
advances, Mosaica fully complied with those terms. However,
Mosaica failed to meaningfully reduce the total balance of
the Revolver, and by 2014, it had fallen into default.
Mosaica was forced into receivership proceedings in the
Northern District of Georgia in or about 2015. In a June 2015
order, that court supervising the receivership concluded that
Mosaica's debt under the Revolver was slightly more than
$7.7 million. Mosaica was ultimately liquidated and,
following the sale of its assets, it remained indebted to
Tatonka in the sum of approximately $5 million.
Tatonka
then turned to Mr. Connelly's guarantee of Mosaica's
debt. Mr. Connelly took the position that, although the
Guaranty Agreements purported to have him guarantee
“each of the Obligations” of Mosaica (up to the
total amount of the cumulative Guaranty Agreements), the
parties' true intention was only to have Mr. Connelly
guarantee Mosaica's repayment of the particular
short-term advances. Because those advances were repaid, Mr.
Connelly argues, his guarantees were discharged and he owes
nothing to Tatonka. Tatonka contends that the Guaranty
Agreements, as written, require Mr. Connelly to personally
repay $4.369 million of Mosaica's remaining unpaid debt.
ANALYSIS
Tatonka
asserts a single claim for breach of contract under Colorado
law against Mr. Connolly, based on his failure to pay the
amounts owed by Mosaica. Mr. Connelly asserts two affirmative
defenses 1) the doctrine of mutual mistake - that the
language of the Guaranty Agreements does not reflect the
parties' mutual intentions regarding the transaction,
warranting reformation - and 2) the doctrine applicable to a
unilateral mistake.
A.
Breach of contract
The
Court begins with Tatonka's substantive claim for relief.
To establish a claim for breach of contract under Colorado
law, Tatonka must show: (i) that an enforceable contract
existed with Mr. Connelly, (ii) that Tatonka performed its
obligations under the contract or that its performance was
excused, (iii) Mr. Connelly did not perform his obligations,
and (iv) Tatonka suffered an injury as a result. Western
Distributing Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo.
1992).
Putting
aside Mr. Connelly's affirmative defenses, there is no
meaningful dispute[3] that the Guaranty Agreements are binding
contracts between Tatonka and Mr. Connelly. Similarly, there
is no dispute that Tatonka performed as called for by the
agreements by loaning the specified sums to Mosaica.
Mr.
Connelly contends, however, that Tatonka has not established
that he failed to perform his obligations under the
agreements because “Tatonka has not claimed - much less
proven - that any amount is owed under the Revolver.”
The evidence is to the contrary. Carol Hansen, Tatonka's
President, testified that by the conclusion of the
receivership proceedings, “approximately $5 million was
still owed to Tatonka” by Mosaica. Tatonka also
admitted Exhibit 36, its own accounting records of
Mosaica's debt, to support this assertion. That assertion
is also consistent with the court's findings in the
receivership case that Mosaica owed Tatonka some $7 million
dollars under the Revolver as of 2015 (before certain Mosaica
assets were sold to satisfy some of this debt). In its
closing argument, Tatonka fixed that figure at $4.312
million.[4] Mr. Connelly presented no evidence to the
contrary.
Accordingly,
the Court finds that Mosaica remains obligated to Tatonka in
the sum of $4.312 million, the lowest figure urged by
Tatonka. By operation of the Guaranty Agreements, Mr.
Connelly was obligated to repay “each of the
Obligations of [Mosaica] under the [Revolver], ” and it
is undisputed that he has not done so. There is no dispute
that Tatonka was injured by Mr. Connelly's
non-performance. Thus, Tatonka has established its breach of
contract claim against Mr. Connelly.
B.
Affirmative Defense - Mutual mistake
Mr.
Connelly's primary argument is that, notwithstanding the
express language of the Guaranty Agreements, “the
intent of the parties was that [the guarantors] would jointly
ensure that Mosaica repaid the short-term advances
when due.”[5] He seeks reformation of the Guarantee
Agreements to conform to that understanding, and with such
reformation a finding that he has not breached their terms.
Under
Colorado law, when there is a mutual mistake of fact
- i.e. where both parties' understanding of
their agreement is contrary to the terms of a written
instrument due to a drafting error, reformation of the
written agreement to match the parties' intention is
appropriate. See Segelke v. Kilmer, 360 P.2d 423,
426 (Colo. 1961). But if only one party misunderstood the
effect of the written instrument - that is, where the mistake
was unilateral - reformation is inappropriate and
the contract is enforced according to its terms. Griego
v. Kekkeler, 543 P.2d 729, 730 (Colo.App. 1975);
Shoels v. Kelbold, 375 F.3d 1054, 1066
(10th Cir. 2004), but see discussion
infra. The burden of proof is on the party seeking
reformation to demonstrate the ...