First National Bank of Durango v. Lyons

Citations: 349 P.3d 1161; 2015 COA 19; 2015 Colo. App. LEXIS 293; 2015 WL 795034Docket: Court of Appeals No. 13CA1907

Court: Colorado Court of Appeals; February 25, 2015; Colorado; State Appellate Court

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The district court denied the motion by defendants Williams S. Lyons, Jr. and Williams S. Lyons, III to dismiss a securities fraud case for lack of subject matter jurisdiction. The Lyons argued that claims under the Colorado Securities Act (CSA) were barred by the Colorado Governmental Immunity Act (CGIA) due to the plaintiffs, four banks, not providing timely notice to the District. The court ruled that the CGIA does not apply to CSA claims and denied the motion. On appeal, the key issue was whether the Banks' claims under the CSA could be classified as tort claims under the CGIA. The appellate court concluded that the Banks' claims could indeed lie in tort, thus reversing the lower court's decision and remanding for further proceedings on the motion to dismiss.

The facts revealed that the Lyons were involved with the Lincoln Creek Metropolitan District, which issued bonds for the development of Lincoln Creek Village. The Banks purchased $4.13 million in bonds to finance this project but later alleged that the Lyons and others misrepresented material facts during the bond issuance process, leading to their claims of securities fraud. The Banks sought recovery based on violations of the CSA, citing untrue statements and omissions related to the bonds. The Lyons claimed governmental immunity and asserted that the Banks' failure to notify the District barred their claims based on the CGIA.

The district court denied the motion to dismiss, determining that claims under the Colorado Governmental Immunity Act (CGIA) do not pertain to tort law, thus negating the need for statutory notice. The Lyons filed an interlocutory appeal, centering on whether the Banks' claims against them are tort-based or could be considered as such, and whether the relevant acts occurred in the Lyons' official capacity as public employees for the District. The CGIA provides public employees with immunity from liability for tort-related claims arising from actions performed within their job scope, unless the actions were willful and wanton. The Lyons qualify as public employees under the CGIA, which requires written notice of claims to the public entity employing the employee before any lawsuit can be initiated. Failure to provide this notice bars the action permanently. The Banks did not provide the necessary notice; therefore, if the CGIA applies, their claims against the Lyons should be dismissed for lack of subject matter jurisdiction, specifically concerning actions taken in their public roles. The determination of whether a claim lies in tort is based on the factual basis of the claim and the nature of the alleged injury, rather than the claim's form or requested relief.

A court must evaluate the nature of the injury in a claim to determine if it arises from tortious conduct or a breach of duty recognized in tort law, as well as whether the relief sought compensates for that injury. This assessment is conducted case-by-case, examining pleadings and undisputed evidence. In the current case, the Banks' claims under the CSA are deemed tortious, as they allege reliance on false statements from the defendants leading to financial loss, mirroring a common law fraud claim. Colorado courts have established that claims based on reliance on misrepresentations lie in tort for CGIA purposes. The Robinson case illustrates this, where misrepresentations by the Colorado State Lottery induced purchases of scratch tickets, leading to a tort claim despite potential contractual breaches. Similarly, in Board of County Commissioners v. DeLozier, a claim for negligent misrepresentation was recognized as lying in tort. The Banks contend that the Conners decision, which stated claims under the Colorado Civil Rights Act (CRA) do not lie in tort for CGIA purposes, challenges the tort nature of their CSA claims. Conners determined that CRA claims focus on eliminating discrimination rather than compensating individuals for injuries, thus falling outside the CGIA's definition of tort claims. The CRA's relief forms, including back pay, are considered equitable and non-compensatory, reinforcing that CRA actions do not seek compensatory damages for personal injuries and are not classified as tort claims under the CGIA.

The Banks contend that their claims for statutory relief (rescission) are inherently equitable, similar to the Conners case, and that the CSA's purpose is to restore an injured party to their original status through restitution rather than damages. However, the CGIA does not differentiate between statutory and common law torts, making the nature of the claims irrelevant. The Colorado Supreme Court, in Robinson, dismissed the argument that equitable claims are not tort claims simply because they do not seek compensatory damages. The court clarified that the type of relief sought serves primarily to clarify the nature of the underlying tortious injury. 

Unlike Conners, where the CRA claim lacked common law tort or contract origins, the current case presents a tortious injury, indicating that the analysis of relief requested is less critical. The relief labeled as rescission effectively mirrors damages for the Banks' reliance on the defendants' misrepresentations. Moreover, rescission against the Lyons is not feasible since the bonds were issued by the District, with the Lyons not directly receiving the proceeds. The common law remedy of rescission necessitates the return of what was received, which here would involve canceling the bonds and refunding the purchase price, a process not applicable to the Lyons. 

The Banks' argument regarding the liability of sellers, based on Pinter v. Dahl, is insufficient to equate the sought rescission with common law equitable remedies. The federal securities statute allows for damages that can resemble rescission, but it differs significantly from common law equity, reinforcing that the Banks are pursuing damages rather than equitable relief.

The claim in question arises from tortious conduct, as indicated by the nature of the injury and the relief sought, which aligns with damages typically pursued in tort claims. The Banks argue that, similar to the Colorado Securities Act (CSA), the primary purpose of the Colorado Revised Statutes (CRA) is to protect investors rather than to compensate individuals, but this argument is deemed misplaced since the injury is rooted in tortious conduct, eliminating the need for a detailed analysis of the statutory framework. The CSA explicitly allows for actual damages in cases of fraudulent securities transactions, contradicting the Banks' assertion that the CSA does not provide for individual compensation. 

The Banks further contend that their CSA claims cannot be equated to tort claims due to significant differences, presenting three main points: (1) Unlike common law negligence claims, a CSA claim does not require proof of negligence, only material misrepresentation, thereby shifting the burden to the defendant; (2) Tort principles like contributory negligence and comparative fault do not apply to CSA claims; (3) Claims of secondary liability under section 11-51-604(5) lack tort counterparts. However, these arguments are rejected, as the central premise—that a claim must be capable of being framed as a common-law tort to fall under the Colorado Governmental Immunity Act (CGIA)—is flawed. The supreme court maintains that CGIA coverage is determined by the source and nature of the liability, not solely by the ability to recast a claim as a common-law tort.

The Banks' claims are based on the defendants' alleged tortious conduct, making the distinction between claims under the Colorado Securities Act (CSA) and common law tort claims irrelevant. The Banks argue that their CSA claims do not require proof of negligence, but this is countered by the CSA provisions that mandate proof of recklessness or intent to defraud for liability under section 11-51-604(8). The Banks have alleged such intent in their complaint. Furthermore, the existence of various torts beyond negligence, such as misrepresentation, supports the tortious nature of the Banks' claims. Under the Colorado Governmental Immunity Act (CGIA), the focus is on whether the injury stems from tortious conduct, not on whether all elements of a specific tort are present. A recognized duty in tort law prohibits deliberate concealment or misrepresentation of material facts, thus making claims of fraud or misrepresentation likely tort claims under the CGIA.

The Banks are also mistaken in their belief that liability in tort does not arise from mere control over a tortfeasor. The doctrine of respondeat superior holds employers vicariously liable for their employees' torts committed within the scope of employment, which is a tort action. The court rejects the Banks' assertion that their CSA claims cannot lie in tort for CGIA purposes, despite differences from traditional tort claims. Lastly, although the Banks reference federal and state court rulings that suggest certain statutory claims are not tort-based, the cited case primarily pertains to tort immunity for municipalities and offers little relevant insight into the applicability of statutory governmental immunity concerning state securities statutes.

Out-of-state cases cited by the Banks do not address governmental immunity but focus on whether a statutory securities fraud claim is classified as a tort. Liability under section 12(2) and similar Maryland statutes is not based in tort law, preventing parties from seeking contribution as joint tortfeasors. Even if section 11-51-604 is considered analogous to section 12(2) and not a tort claim, this does not affect whether the Banks' CSA claims are tort claims under the Colorado Governmental Immunity Act (CGIA). The key issue is whether the claims stem from tortious conduct or breach of duty recognized in tort law, which has been affirmed. Consequently, the Banks' CSA claims against the Lyons are deemed tort claims for CGIA purposes.

The CGIA requires statutory notice for claims alleging injury from a public employee's act or omission occurring during official duties, regardless of whether the act is willful or wanton. The Banks argue that the Lyons acted as private developers, not in their public employment capacity, thus claiming the notice requirement does not apply. Conversely, the Lyons assert that notice is mandatory under the CGIA for any tort-related claims. The statute clearly states that notice is required for actions against public employees if the claims arise from acts during their employment. The Lyons reference Middleton v. Hartman to support their position; however, that case pertains to claims against public employees for willful and wanton conduct and does not address the applicability of the notice requirement when the acts are alleged to be outside the scope of employment.

The Lyons contend that even if notice is only required for claims involving an employee's actions within their employment scope, the court should not determine whether the Banks' claims fall within this category. The district court's sole decision was related to whether the Banks' claims under the Colorado Securities Act (CSA) are tort claims. The appellate court agrees that this issue is partly factual and remands the case for the district court to assess whether the claims against the Lyons pertain to acts within their public employment or outside it. The court must ascertain if the actions causing the Banks' injuries occurred during the performance of the Lyons' duties as District employees, referencing C.R.S. § 24-10-118(1).

The court elaborates that determining if an employee's act falls within their employment scope requires examining the totality of circumstances. An act is within scope if it is incidental to the employment and relates to the employer's business. Claims against the Lyons will be dismissed for lack of subject matter jurisdiction if based on actions during their official duties. Conversely, if claims arise from the Lyons' conduct as private developers, the Colorado Governmental Immunity Act (CGIA) does not apply, and statutory notice is unnecessary.

The rationale for public employee immunity is to prevent discouragement in providing essential public services. Since acts outside the employment scope do not invoke this concern, the Lyons are not protected under the CGIA for actions as private developers. Thus, the court retains subject matter jurisdiction over claims based on misstatements made in that capacity. 

The appellate court reverses the district court's order denying the Lyons' motion to dismiss and remands for further proceedings. Additionally, while the Banks initially filed claims for negligent misrepresentation, fraud, and civil conspiracy based on the same facts as the CSA claims, they assert these were voluntarily withdrawn. Although no formal withdrawal appears in the record, the court accepts the concession. Lastly, the complaint alleges that the Lyons either controlled the District or knew of its violations related to the sale of bonds, implicating potential control person and aiding and abetting liability.