Type of Lawsuit: Appeal of denied bill of costs obtaining supersedeas LC.
Topics: Abuse of Process; Breach of Contract; Statutory Interpretation; Supersedeas Bond
Parties: • Plaintiffs/Appellants/Applicants/Judgment Debtors – George and Amy Tracy • Defendants/Respondents/Judgment Creditors – David and Amy Surofchek
Underlying Action: Property dispute between residential neighbors.
LCs: Multiple supersedeas credits; no practice rules or choice of law mentioned.
Decision: The Court of Appeals of Colorado, Brown, Yun and Jones, JJ., reversed and remanded.
Rationale: Trial court erred as a matter of law that costs in obtaining supersedeas letters of credit were not recoverable by judgment debtor under Colorado procedural rules following partial reversal of decision on appeal; reasonableness of costs are a matter for trial court.
Factual Summary:
When purchasing a home next to George and Amy Tracy (Plaintiffs), David and Amy Surofchek (Defendants) began renovating a bordering fence. A dispute arose concerning ownership over a corner of the property where the fence ran. This dispute which allegedly witnessed “unneighborly behavior” caused Defendants to pay Plaintiffs USD 15,000 in exchange for a quitclaim deed and settlement regarding the property. Nevertheless, Plaintiffs sued Defendants for claims of trespass, conversion, destruction of property and violation of relevant homeowners’ association covenants. Defendants counterclaimed for breach of the settlement agreement and abuse of process.
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Case Referenced: Centrifugal Casting Mach. Co. v. Am. Bank & Trust Co., 966 F.2d 1348 (10th Cir. 1992) [USA] (explaining letter of credit structure).
A jury decided in favor of Defendants and awarded USD 208,542 on the counterclaim for breach of contract, and USD 950,000 for abuse of process. The court entered judgment of USD 1,169,251.55 in favor of Defendants (including prejudgment interest). Plaintiffs later moved for a stay of execution pending appeal, proposing a USD 1,448,178 letter of credit. Defendants did not oppose the motion, and the trial court granted the same. Although the LC ostensibly covered the full judgment, Plaintiffs only appealed the order which concerned abuse of process. There was no mention of the issuing bank, choice of law or practice rules. During pendency of the appeal, Plaintiffs posted two more LCs for USD 13,386.94 and USD 15,809, respectively “to account for amendments to the judgment and costs pending appeal.” Plaintiffs later provided three replacement letters of credit to the court after the others expired. The appellate court used the term “renewed”; the original credits were valid for one year.
An appellate court reversed the abuse of process judgment, finding an erroneous jury instruction, and remanded the claim for a new trial. Thereafter, Plaintiffs submitted a bill of costs at trial incurred during appeal, seeking USD 30,367.89 regarding “premiums paid for letters of credit/supersedeas bond.” Defendants objected, claiming the relevant Colorado statute did not “authorize an award of borrowing expenses incurred in obtaining a line of credit to secure a letter of credit”.[[1]] The claimed costs were also “unreasonable and excessive”, unproven, and were associated with a judgment that was not challenged on appeal, i.e. the breach of contract award. The trial court denied Plaintiffs’ request, primarily on the basis that the abuse of process claim was still pending. However, the Judge also stated that C.A.R. Rule 39(c)(1)(C), which provides for recovery of costs for “premiums paid for a supersedeas or other bond to preserve rights pending appeal”, did not extend to “the award of costs associated with obtaining a letter of credit or the borrowing expenses of obtaining a loan.”
Defendants later voluntarily dismissed their abuse of process counterclaim. In response, Plaintiffs filed a renewed bill of costs. The trial court (presided over by a different Judge), awarded Plaintiffs USD 34,772.09, including LC costs. Defendants responded, informing that the prior Judge refused to award such costs, a point that Plaintiffs allegedly did not bring to the attention of the new Judge. Despite counterarguments by Plaintiffs, the trial court “changed course, denying the request for the costs of the letters of credit based on the previous [J]udge’s reasoning.” Plaintiffs appealed. The Court of Appeals of Colorado, Brown, Yun and Jones, JJ., reversed and remanded.
Analysis:
The appeal constituted a question of first impression for the Colorado courts, i.e. whether the trial court abused its discretion in denying the request for “an award of the costs of the letters of credit.”[[2]] While awards of costs (or denial thereof) are generally reviewed for abuse of discretion, legal conclusions are reviewed de novo. Thus, the appellate court turned to the plain and ordinary meaning of the statute’s text. Were Plaintiffs’ costs in obtaining the LCs “premiums paid for…other bond[s]” to preserve their right of appeal? The trial court ruled the costs were akin to “borrowing expenses for lines of credit used to secure the letters of credit.”
The appellate court disagreed. Citing common definitions, the court noted “premium” means the costs for purchasing insurance; in this context, the costs of obtaining supersedeas letters of credit were “premiums” because they were “the cost of a guarantee of payment by a third party of a potential loss occasioned by a specified contingency – affirmance of the judgment on appeal.” While the Appellate Rules offered no guidance on “other bond[s]”, the Colorado Rules of Civil Procedure, Rule 121 (section 1-23(2)(a) & (9)) provide that LCs are “bonds” for supersedeas purposes. The appellate court also cited decisions applying the analogous Federal Rules of Civil Procedure wherein courts regularly allow recovery of costs associated with obtaining a supersedeas LC when a judgment debtor is successful on appeal.
Addressing the mechanisms of LCs, the appellate court observed the “significant differences between a fee paid for a letter of credit used to secure a judgment pending appeal and borrowing costs of an ordinary loan.” While a judgment debtor may obtain a loan and hold proceeds in the event a judgment is reversed, a judgment creditor receiving an LC as beneficiary gains a “guaranteed” means of payment. Moreover, a judgment debtor-LC applicant pays LC fees to the issuing bank regardless if payment if ever demanded. The appellate court clarified that “reasonable cost[s] of a letter of credit used in lieu of a supersedeas bond … [are] recoverable”, not any cost so associated.
The court rejected remaining arguments offered by Defendants, principally because their reversal of the denied bill of costs was due to an error of law at trial; both the original Judge and replaced Judge (due to a retirement) had misconstrued the relevant statute. Also rejected, however, was Plaintiffs’ request for all of the requested LC costs. “Reasonableness” of costs would be an issue on remand, and Defendants raised legitimate grounds to question some of the costs sought by Plaintiffs: “the letters of credit secured the entirety of the judgment even though the [Plaintiffs] appealed only a portion of the judgment and the [Plaintiffs] should have obtained multi-year letters of credit.” The trial court was permitted to collect additional evidence to resolve the matter.
[[1]]: Namely, the Colorado Rules of Appellate Procedure (C.A.R.), Rule 39(c)(1)(C) (Costs on Appeal Taxable in the Trial Court).
[[2]]: Put differently, “whether the reasonable cost of a letter of credit provided in lieu of a supersedeas bond pending appeal is recoverable under C.A.R. 39(c)(1)(C).”
