Tatonka Capital Corp. v. Connelly

          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 (10^th Cir. 2004), but see discussion infra. The burden of proof is on the party seeking reformation to demonstrate the ...