WILLIAM J. MARTÍNEZ, District Judge.
This matter is before the Court on the Defendant Cherry Creek South Metropolitan District No. 2's et al. ("Defendants") Joint Motion for Summary Judgment ("Motion"). (ECF No. 165.) Plaintiff Stroh Ranch Development, LLC ("Plaintiff" or "SRD") has filed a Response, (ECF No. 184) and Defendants have filed a Reply. (ECF 196.) At the Court's request, the parties filed Schematics and Chronologies outlining the contract and equitable claims. (ECF Nos. 217-218 and ECF Nos. 219-222.) The Plaintiff's Schematic is illustrative and appended to this Order as Schedule A. In addition to these materials, the parties filed supplemental briefing for Oral Argument that was heard on February 25, 2013. (ECF Nos. 226-227.)
Having reviewed and considered the extensive written and oral arguments made by the parties, the Court denies Defendants' Motion for Summary Judgment. Denial of summary judgment is ordered only to the extent that it applies to the interpretation of the Reimbursement Agreements, and to the related issue of the implied covenant of good faith and fair dealing. The Court holds that extrinsic evidence is required to inform and discern the intent and reasonable expectations of the parties with respect to the Reimbursement Agreements. (ECF No. 165.) The Court makes no findings with respect to the Reserved Powers Doctrine; nor on the issues related to notice and breach of contract.
The case is complex because of its multiple contract, equitable and constitutional claims. Due to the private/public divide in which the claims are set, the case presents questions of first impression in the District of Colorado. This context has been well-documented. See Janice G. Local Government Contracts: Escaping from the Governmental/Proprietary Maze, 75 Iowa L.Rev. 277, 290-299 (1990).
Notwithstanding this, what lies at the core of this dispute is reimbursement monies—i.e. an advance made by Plaintiff to
To resolve the instant Motion, a central issue involves interpretation of the Reimbursement Agreements. The battle lines drawn over interpretation are primarily directed at the Discretionary Clause (Section 1) and Covenant Clause (Section 4), respectively. (ECF No. 165-15 at 2.) The parties have competing interpretations of how these clauses should be construed. Based on Defendants' position, many of Plaintiff's contract claims `rise and fall' on whether these clauses can be construed as a matter of law based on Defendants' preferred position. Resolving the interpretation issue effectively resolves Defendants' Motion. It is for this reason why the Court addresses this issue, coupled with related issue of good faith and fair dealing.
Summary judgment is warranted under Rule 56(a) of the Federal Rules of Civil Procedure when "the movant shows that there is no genuine dispute as to any material fact, and the movant is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is "material" if under the relevant substantive law it is essential to proper disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir.2001). An issue is "genuine" if the facts are such that they might lead a reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, 119 F.3d 837, 839 (10th Cir.1997). A court must resolve factual ambiguities in favor of the nonmoving party, thus favoring the right to a trial. Houston v. Nat'l Gen. Ins. Co., 817 F.2d 83, 85 (10th Cir.1987); Bausman v. Interstate Brands Corp., 252 F.3d 1111, 1115 (10th Cir.2001)
In a contract case, a motion for summary judgment allows for contract interpretation as a matter of law. Lake Durango Water Co., Inc. v. Pub. Utils. Comm'n, 67 P.3d 12, 20 (Colo.2003). If, however, a contract is determined to be ambiguous, as here, the meaning of its terms are generally an issue of fact to be determined in the "same manner" as other factual disputes. East Ridge of Fort Collins, LLC v. Larimer and Weld Irr. Co., 109 P.3d 969, 974 (Colo.2005); Dorman v. Petrol Aspen, Inc., 914 P.2d 909, 912 (Colo. 1996). As such, and before a moving party can attack a contract claim on summary judgment, the moving party must first show that the contract is unambiguous and can be construed as a matter of law. If not, interpretation becomes a question of fact requiring extrinsic evidence to clarify the meaning of the contract. Id.
Once the matter raises a "genuine issue" of fact, this effectively defeats a motion for summary judgment. That is precisely the outcome here as extrinsic evidence is required
The Court must view the facts in the light most favorable to Plaintiff. McBeth v. Himes, 598 F.3d 708, 715 (10th Cir. 2010). Facts relevant to the instant Motion are extensive—they can be summarized as follows:
Plaintiff SRD is a limited liability company authorized to do business under the laws of the State of Colorado. (ECF No. 165 at 7.) Gary Hunter is the manager of SRD, and his job responsibilities have included managing and developing property in Colorado. (Id.) Prior to December 2004, SRD was the owner and developer of a real estate project in Douglas County, Colorado, known at various times as "Stroh Ranch," and/or "SunMarke." (Id.)
Defendants Cherry Creek South Metropolitan Districts Nos. 2-11 (collectively, the "Districts") are special districts organized pursuant to Title 32 of the Colorado Revised Statutes. (Id.) Typically, a special district provides "infrastructure and services to a specific area, with the cost being borne by the property owners and residents of the area." (ECF 165-1 at 8.) Once formed, a special district is governed by an elected board of directors, in whom rests the authority to manage and supervise all the business and affairs of the special district. (Id.) Defendants Kurt Wolter, Kimberly Jensen, Greg Mcllvain, Mark Eames, Greg Epp, and Billy Harris are all individuals who serve, or have served, as members for the Board of Directors for the Districts between January 1, 2005 to present (collectively, the "Directors"). (ECF No. 165 at 8.)
Defendant Pivotal Group, Inc. ("PGI") is an Arizona corporation, with its principal place of business in Phoenix, Arizona. (Id.) Defendant Pivotal Parker Investments, LLC, a/k/a Parker Investments 2009, L.L.C., ("PPI") is a Delaware limited liability company authorized to do business in the State of Colorado, with its principal place of business in Scottsdale, Arizona. Defendant Pivotal Colorado II, LLC ("PCII") is a Delaware limited liability company authorized to do business in the State of Colorado, with its principal place of business in Scottsdale, Arizona. These defendant-entities are referred to as the "Pivotal Buyers." Defendant North Parker Investments, LLC ("NPI") is an Arizona limited liability company authorized to do business in the State of Colorado. (Id.)
As of 1999, District 2 covered a five-acre parcel of land at the northwest corner of the property that later became SunMarke. (Id.) In or about December 2003, District 2 was expanded to include additional property, bringing the total acreage of District 2
On or about December 19, 2003, SRD and District 2 executed a Reimbursement Resolution ("Reimbursement Resolution"). The Reimbursement Resolution memorialized District 2's intent to reimburse SRD for expenditures made by SRD on behalf of District 2 for capital, operations, maintenance costs, and construction of public improvements. (Id.) The Reimbursement Resolution did not specify the amount of expenditures that SRD had made on behalf of District 2 (and for which District 2 was to repay). Instead, the Reimbursement Resolution stated that any reimbursement of construction, operations, and maintenance costs would be subject to review and approval by the "District Accountant." (Id.) The Reimbursement Resolution stated that District 2 would use the "proceeds from bonds issued in the future, if any, or other available funds of the District" to reimburse SRD "from time to time." (Id.)
In November 2004, Districts 3-11 were created. (ECF No. 165 at 8.) These Districts are defined as quasi-municipal entities or Special Districts. Following the creation of the additional Districts, the boundaries of District 2 were changed, and Districts 3-11 were arrayed over the property previously included within the boundaries of District 2, such that all property that had been excluded from District 2 was placed within the boundaries of another district—i.e. the boundaries of Districts 2-11 did not overlap. (Id.) Cindi Rodriguez and Pam English became members of each of the Board of Directors for Districts 2-11, along with Gary Hunter. (Id.)
In connection with the creation of Districts 2-11, the Town of Parker approved a Consolidated Service Plan ("CSP") in September 2004 that governed the activities of the Districts. (Id.) The CSP for the Districts contemplated that the financial obligations of the Districts would be payable from taxes collected on real property and included an estimate of the value of taxable property within the Districts. (ECF 184 at 14.) Within the Districts, there were more than 2,000 acres of taxable land as of December 2004. (Id.) The estimated value of all taxable property within the Districts was then anticipated to be approximately $2,226,264,486. (Id.)
The CSP defines District 3 as the Service District; and Districts 2, and 4-11 as the Financing Districts. (Id. at 15.) As such, District 3 has the authority to issue debt and advance funds to pay expenses on behalf of another District. (Id.) Under the CSP, District 3, the Service District, has limited taxing boundaries. The Financing Districts (i.e., District 2 and Districts 4-11) are responsible for producing all of the tax revenue and other revenue for payment of all of the costs of repayment of monies owed. (Id.)
The CSP thus sets forth that the primary source of revenue to repay the financial obligations of the Districts (which were initially borne by the Developer) as property tax revenue. (Id. at 16) The CSP also provides for modifications to the Districts' boundaries of the District with prior approval of the Town of Parker. (Id.)
In anticipation of the sale of the Sun-Marke property, Hunter approached the Boards of Directors for Districts 2-11 regarding entering into agreements that would provide for the reimbursement by Districts 2-11 of expenditures that SRD had made on behalf of District 2. (ECF No. 165 at 11.) These steps are well summarized in the Schematic in Schedule A.
On or about November 16, 2004, Reynolds Henrie & Associates, P.C. ("Reynolds Henrie") was contacted for the purpose of spreading the costs of SRD's expenditures among all the Districts and to prepare a report reflecting these expenditures. (ECF No. 165 at 12.)
On December 1, 2004, Reynolds Henrie tendered its final report, identified as "Schedule of Developer Advances" ("Reynolds Henrie Report"). (Id.) The Reynolds Henrie Report allocated $3,507,817.65 between Districts 2-11 (the "Reimbursement Amount"). The Reynolds Henrie Report described its allocation methodology as follows: "We reviewed the schedule of market values for each district as prepared by management and calculated each district's pro rata share. We applied these percentages to those expenditures which had not been charged directly to a district. District No. 2 was the only district with expenditures charged directly." (Id.) In addition, in preparing Reynolds Henrie Report, the accountant stated that he "read the Consolidated Service Plan for Districts 2-11." (ECF No. 165-15 at 6.)
In or about December 2004, a series of reimbursement agreements were drafted between SRD and each of the Districts (collectively, the "Reimbursement Agreements," and each a "Reimbursement Agreement"). Gary Hunter received drafts of the Reimbursement Agreements on December 5, 2004. (ECF No. 165 at 13.) Shortly thereafter, the Boards of Directors for the Districts scheduled a meeting for December 6, 2004 at 10:30 a.m., but recessed and scheduled their meeting to reconvene on December 8, 2004. (Id.) At that meeting, each of the Directors approved the Reimbursement Agreements. (Id.) Each of the Reimbursement Agreements incorporated the Reynolds Henrie Report. (Id.) The clauses relevant to each Reimbursement Agreement are addressed below.
The essential clauses from the Reimbursement Agreements are addressed as follows:
(See generally, ECF No. 165-16.)
Under Colorado law, the purpose of contract interpretation is to ascertain the intent of the parties by ensuring that contracts are construed "consistently with the well-established principles of interpretation." East Ridge, 109 P.3d at 973. As a starting point, courts examine the contractual "terms and attempt to determine the parties intent" therein. Id. See also Level 3 Communications, LLC v. Liebert Corp., 535 F.3d 1146, 1154 (10th Cir.2008);
When construing a contract, courts must not "view clauses or phrases in isolation." East Ridge, 109 P.3d at 974-75. This principle guards against a reading of the contract that would "yield an absurd result"—and run inconsistent with the purpose of the contract. Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789, 793 (Colo.App.2001). Courts must examine the contract as a whole and attempt to determine the intent by reference to all of the contract's terms and provisions. Liebert, 535 F.3d at 1154; East Ridge., 109 P.3d at 973;
Whether a written contract is ambiguous is a question of law. Id. When a contractual term "unambiguously resolves the parties' dispute, the interpreting court's task is over" because "in the absence of an ambiguity a written contract cannot be varied by extrinsic evidence." Id. A contract is ambiguous "if it is fairly susceptible" to more than one interpretation. Id. See also East Ridge, 109 P.3d at 974-75. In determining whether an ambiguity exists, the court may look to the meaning of words with "reference to all contractual provisions and the nature of the transaction which forms the contract's subject matter." In re Marriage of Thomason, 802 P.2d 1189 (Colo.App.1990); May v. United States, 756 P.2d 362, 369 (Colo.1988) (en banc).
As here, and when ambiguity does exist, the meaning of a term is generally an issue of fact that may be determined by extrinsic evidence pertinent to the transaction—including the parties' conduct under the agreement and their conduct before the controversy arose. Liebert, 535 F.3d at 1154.
In order to determine whether the contract is ambiguous "extrinsic evidence may also be conditionally admitted" in the context of a motion for summary judgment. East Ridge, 109 P.3d at 974; Lobato v. Taylor, 71 P.3d 938, 947 (Colo.2002) (en banc). Specifically, under Colorado law, extrinsic evidence may be relied upon in two different forms. First, a court can look to extrinsic evidence that may reveal ambiguities by conditionally admitting evidence for the purposes of determining an ambiguity. Second, extrinsic evidence may be examined if a document is ambiguous on its face—i.e., extrinsic evidence is required to ascertain the intent, expectations of the parties and the circumstances that surrounded the formation of the contracts. Id.
To succeed on summary judgment, Defendants must show that the Reimbursement Agreements are unambiguous as a matter of law. Defendants must also demonstrate that the agreements can be construed without need for extrinsic evidence going to the parties' intent. Beavert, 963 F.2d 1342, 1345-6.
The central dispute regarding interpretation lies with the Covenant Clause. That Clause provides:
(ECF No. 165-16 at 2.)
To support their preferred position, Defendants contend that the phrase—"any financial obligation—should be construed restrictively because the Covenant Clause is "written in absolute, uncompromising terms, that leave no room for exceptions." (ECF No. 165 at 22.) They contend that the Covenant Clause "paralyzes the Districts and prevents them from performing any governmental functions" because it "prohibits the Districts from incurring any financial obligation payable from any District moneys whatsoever." (Id.) This interpretation, Defendants submit, means that the Districts: (1) cannot have employees, (2) cannot buy paper, and (3) cannot maintain offices, among other things. (Id.) Defendants contend that the Districts are restricted in both their operational and discretionary expenses. (Id.)
For the reasons that follow, Defendants' textual approach to the phrase "any financial obligation" is misplaced; ever more so when the phrase is viewed in light of the entire agreement. May, 756 P.2d at 369.
First, Defendants' interpretation is devoid of context. Id. It takes a literal approach and fails to appreciate a central canon of interpretation that a court must construe the entire agreement—not just words in isolation. Id. Were the Court to adopt Defendants' interpretation, it would mean that the Districts cannot purchase paper, nor hire employees. In other words, the Districts could not operate, as there are no resources to do so because their hands are effectively tied by the Covenant Clause. This interpretation is absurd. Atmel, 30 P.3d at 793. Defendants' interpretation seeks to slice three words out of the entire agreement, and then rely on those words as the predicate for the parties' intent. Contracts are not interpreted this way. May, 756 P.2d at 369.
The fact that restrictions on the `purchase of paper' were not referred to by Defendants in their supplemental brief is also telling. It suggests that Defendants became wary of its rigid reading of the Covenant Clause-and then sought to place distance between it and a more reasonable reading of the clause based on context. But Defendants cannot have it both ways. Either Defendants' interpretation is absurd (and rejected), or Defendants have distanced themselves from their initial interpretation of the Covenant Clause. Either of these alternatives would suggest that the Covenant Clause is subject to a reasonable interpretation beyond that offered by Defendants. As such, and to the extent that Defendants' Motion for Summary Judgement is based on either of these alternatives, the Motion is denied. Liebert, 535 F.3d at 1154 (A contract is ambiguous "if it is fairly susceptible to more than one interpretation.")
The inconsistency between the Covenant Clause and the Discretionary Clause lies in the tension that the latter purportedly provides the Districts with discretion to issue bonds without restriction; while the former purportedly restricts this same discretion to the extent that the Districts can only issue bonds after Plaintiff is first reimbursed. The Court finds that this inconsistency provides a hurdle for Defendants' Motion because it presents an ambiguity that is difficult to reconcile without more evidence of the parties' intent. The ambiguity, on the face of the document, is such that it can only lead to the conclusion that Defendants' Motion for Summary Judgement must be denied as a matter of law. Liebert, 535 F.3d at 1154.
This conclusion is further fortified by what was said at oral argument. When confronted with the inconsistency during oral argument, Defendants' Counsel sought to have it reconciled by reading the Discretionary Clause to mean that it provided the Districts with "unfettered discretion" to reimburse Plaintiff (or not). When asked by the Court whether this meant that Plaintiff might possibly "never be paid off", Defendants' counsel responded: "Effectively, yes. Your Honor." (emphasis added.)
Notwithstanding the plain language of the Discretionary Clause that provides that it is the "District's intent to reimburse"—let alone the lingering good faith obligations that exist in all commercial contracts—Defendants' counsel explained the position by reference to the fact that Reimbursement Agreements were intentionally drafted with discretionary language in mind. That is, counsel said that the discretionary language (the so-called "soft language") was intentionally used to circumvent "certain prohibitions, constitutional and statutory, in Colorado law." Among other examples, TABOR was referred to, which is further exemplified by the following submission by counsel:
But in making this submission, Defendants tacitly concede that the Court must examine statutory and constitutional prohibitions so as to properly construe the Reimbursement Agreements. Because of this, it follows that the Court (or jury) must then consider how the parties objectively read these prohibitions—and drafted around them—in order to "cushion" the language and ensure the validity of the Reimbursement Agreements. This begs the question: how can these enquiries be undertaken without looking to extrinsic evidence? Further, how can the Court, in a summary judgment context, assess materials and evidence that exists outside the four corners of a contract? These questions
Accordingly, because extrinsic evidence is required to construe the Reimbursement Agreements, the Court must deny the Motion since Defendants' interpretation cannot be adopted as a matter of law. See Residential Mktg., 933 F.2d 546, 548 (stating that extrinsic evidence may be relied upon as a "tie-breaker" to "disambiguate the contract.")
Third, Defendants' interpretation runs contrary to interpretive principle: noscitur a sociis—that is, a word is known by the company it keeps. Gustafson v. Alloyd Co., 513 U.S. 561, 575, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). The principle finds its origins in commonsense and a contextual reading of a legal document. Alioto v. Hoiles, 341 Fed.Appx. 433, 440 n. 12 (10th Cir.2009) (stating that noscitur a sociis is "antiquated way of saying what common sense tells us to be true.")
Here, the operative phrase in the Covenant Clause is "any financial obligation." When asked by the Court to address whether the operative phrase should be read in conformity with the specific examples listed in the Covenant Clause, Defendants' counsel merely addressed those words that followed the operative phrase—not the words that preceded it. These words include: "bond, note, reimbursement agreement, or other debt." With the exception of the phrase `other debt', the remaining words in the Covenant Clause provide clear examples of the types of financial obligations that the Districts could enter into, which would trigger reimbursement. That is, the Court finds that the words that precede the operative phrase tend to restrain its meaning and suggest that the Covenant Clause should be read to mean financial obligations akin to bonds, notes and reimbursement agreements. ESI, Inc., 61 F.Supp.2d at 75 (holding that words grouped in a list should be given related meaning.)
This seems a more sensible reading of the Covenant Clause. It also points against Defendants' preferred interpretation; and points towards a finding that another reasonable interpretation of the Covenant Clause must exist. East Ridge, 109 P.3d at 973 (stating that if a contract is determined to be ambiguous because it is fairly susceptible to two interpretations, the meaning of its terms are generally an issue of fact to be determined in the "same manner as other disputed factual issues.")
Accordingly, and to the extent that Defendants' Motion is founded on a broad interpretation of the Covenant Clause, the Motion for Summary Judgment is denied.
The Court, in addition, finds that a review of Plaintiff's preferred interpretation confirms the following: (1) that Defendants' interpretation should be rejected, (2) that there is, at a minimum, an ambiguity in the Reimbursement Agreements as a matter of law because Plaintiff's position provides a reasonable interpretation of the clauses that differs to that of Defendants', and (3) that summary judgment should be denied. Liebert., 535 F.3d at 1154. See also GenCorp, Inc. v. American Intern. Underwriters, 178 F.3d 804, 819 (6th Cir. 1999) (discussing ambiguity in the "in the summary judgment context", and noting that the "nonmoving party must present" a theory to support a "reasonable interpretation that differs from the moving party.") Indeed, addressing Plaintiff's interpretation in the summary judgment context squares with the concept of "legal ambiguity",
Here, Plaintiff's interpretation is pitched at two different levels of generality. At one level, Plaintiff rebuts Defendants' position that the Districts have unfettered discretion whether to reimburse Plaintiff SRD (if at all). Plaintiff relies on East Ridge, 109 P.3d at 974 (stating that once "an ambiguity has been determined to exist ... courts must then give effect to the intention of the parties by considering competent evidence bearing upon the construction given to the instrument.")
At a more specific level—and with regard to the Covenant Clause—Plaintiff interprets that clause to mean that SRD is entitled to "priority repayment when the Districts incurred new debt for future undertakings (for e.g., when new bonds were issued or developer reimbursement agreements were entered into)." (ECF No. 227 at 1-2.) Plaintiff contends that the Covenant Clause "does not affect payment of the Districts' operating expenses in the ordinary course, because such expenses are ongoing costs for basic statutory compliance, rather than new financial obligations." (Id.) This interpretation, inter alia, was offered to reconcile the Covenant Clause and the Discretionary Clause.
Turning to the evidence to support Plaintiff's interpretation, Plaintiff first contends that the parties' intent to reimburse is reflected in the very title of the contracts, which is also supported by the language of the clauses therein. The Court agrees. The contracts are titled: "Reimbursement Agreements." (ECF No. 165-16.) The title speaks for itself: if the parties did not wish to provide for reimbursement, why would the title say as much? The title is also complemented by the language in the Discretionary Clause and the No Indebtedness Clause. The opening sentence in each clause states: "It is the Districts Intent to reimburse ..." (Id. at 3, emphasis added). Section 5 of the Reimbursement Agreement also states: "Until the [Plaintiff] has been repaid the Reimbursement Amount, the District shall provide ... the minutes of each meeting." (Id.) Again, this clause evinces an intent that Plaintiff would be reimbursed and that payment was not left to the unfettered discretion of the Districts (or those who controlled them). Liebert, 535 F.3d at 1154.
Second, the parties intent is further demonstrated in the Cessation of Interest Clause. That clause provides that Plaintiff agreed to cease interest on the advance of $3.5mm under the Reimbursement Resolution in return for first priority payment when the Districts, inter alia, issued bonds. Defendants did not dispute this reading of the clause. In effect, it was the quid pro quo of each agreement. It provides objective indicia of the parties' intent; an intent which runs contrary to Defendants' position that reimbursement was left to the unilateral discretionary determination of the Defendant Districts.
Third, and with respect to Plaintiff's more specific interpretation—that the Covenant Clause and Discretionary Clause can be reconciled based on the plain language of the Reimbursement Agreements—the Court finds Plaintiff's argument less persuasive. The reasoning is similar (if not the same) to that stated earlier regarding the inconsistency between the Discretionary Clause and Covenant Clause.
While the Court is not persuaded by Plaintiff's primary position because of the inconsistency, the Court agrees with Plaintiff's alternate position that the inconsistency, at a minimum, "implies an ambiguity."
With respect to (1), Defendants tacitly conceded in oral argument that industry standards play a significant role in the drafting of agreements to reimburse property developers (such as SRD). This has been addressed earlier. Such evidence, coupled with the context on how (and why) the Reimbursement Agreements have been drafted, to circumvent Colorado law prohibitions will be critical to clarifying the tension between the Covenant Clause and the Discretionary Clause.
With respect to (2), Plaintiff placed much emphasis on the importance of the CSP. Based on the facts in the record, the CSP was critical to the formation of the Districts. (ECF 184 at 6-14.) It contemplates the financial obligations of the Districts. Id. The CSP determined how much each District would owe SRD, and how those amounts could be paid on a pro rata basis through taxation. (ECF No. 165-15 at 6; ECF No. 227 at 5-6.) This is summarized in the Reynolds Henrie Report, which provides the break-down of the Reimbursement Amounts. (ECF No. 165-15 at 7.)
Contrary to Defendants' position, the CSP is evidence critical to interpreting the Covenant Clause and the Discretionary Clause. Because of this, the Court finds that review of the CSP is best left for jury determination, which precludes disposition of the instant Motion as a matter of law. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; Liebert, 535 F.3d at 1154 (relying on East Ridge, 109 P.3d at 974-75) (holding that issues of fact may be determined by extrinsic evidence—including the parties' conduct before the controversy arose.
Plaintiff seeks to impose an implied obligation or covenant of good faith and fair dealing upon Defendants in the course of the discharge of their duties under the Reimbursement Agreements. A duty of good faith is used "to effectuate the intentions of the parties or to honor their reasonable expectations." Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995). Cases involving good faith obligations typically involve "arm's-length transactions, often between sophisticated business persons." Id. The relative strength of the party exercising discretion arises from an agreement of the parties to confer control of a contract term on that party. Id. The dependent party is then is left to the good faith of the party in control. Id. The existence of some level of discretion in the contract thus provides the predicate for an implied covenant of good faith and fair dealing. Id.
Although the purpose of the good faith doctrine is to protect the "reasonable expectations of the parties by implying terms into the agreement"—and that good faith is "generally applicable to all contract
Here, Plaintiff argues that an implied covenant arises from the discretionary language in Section 1 of the Reimbursement Agreements (the Discretionary Clause). Plaintiff points to the language in Section 1 to support its position. The section states:
Plaintiff argues that Districts 4-11 breached their duty of good faith and fair dealing by allowing Districts 2 and 3 to enter into Reimbursement Agreements with Pivotal Buyers and pledging their limited revenue to others both before repaying SRD. Plaintiff asserts that a duty of good faith is particularly applicable in dealing with government entities; and that a duty exists in this case because "the public has a right to expect honesty, good faith and fair dealing from its government [entities]." City of Torrington v. AFSCME Council 4, 2002 WL 1840808, 11 (Conn.Sup.2002).
To counter, Defendants assert that the Court should not impose an implied covenant of good faith in this case because the Reimbursement Agreements provide unfettered discretion to the Defendant Districts with regard to whether, if at all, the Plaintiff would ever be reimbursed. Cf. Amoco, 908 P.2d at 498 (citing Big Horn, 852 F.2d at 1267). This argument has been heard before. It lacks merit because of the internal inconsistencies, inter alia, between the Discretionary Clause and the Covenant Clause, making for ambiguity.
Because of this ambiguity, it is impossible to tell objectively from any Reimbursement Agreement when it was breached without further context going to the parties' intent (and reasonable expectations). Put simply, and in the absence of extrinsic evidence, it is difficult in the summary judgment context to know the precise scope of not only the Discretionary Clause, but the good faith obligations that attach to it. Viewing the Discretionary Clause from this perspective, it would seem appropriate for the Court to permit extrinsic evidence to show the "why", "when", "how", and in "what manner" reimbursement would be made by the Districts to SRD—i.e., the precise triggers for when payment would `kick in'. These are matters for jury trial.
Accordingly, the Court finds that extrinsic evidence is required to inform the parties' respective good faith obligations.
Based on the foregoing reasons, the Court DENIES Defendants' Motion for Summary Judgment (ECF No. 165) to the extent that it applies to the interpretation of the Reimbursement Agreements and to the related issue of the implied covenant of good faith and fair dealing. The Court makes no findings with respect to the Reserved Powers Doctrine; nor on the issues related to notice and breach of contract as submitted in Defendants' Motion.
It also runs afoul of the long-standing principle that a contract should be construed to preserve its validity. See Hobbs v. McLean, 117 U.S. 567, 576[, 6 S.Ct. 870, 29 L.Ed. 940] (1886) ("[W]here a contract is fairly open to two constructions—one of which would be lawful, and the other unlawful—the former must be adopted.") See also, Northrop Grumman Computing Sys., Inc. v. United States, 93 Fed.Cl. 144, 150 (2010) (stating that an interpretation of the contract that would contravene a "statute would be disfavored"); Cray Research v. United States, 44 Fed.Cl. 327, 333 (1999) (citing Hobbs); Cooper v. Nth. Pac. Railroad Co., 212 Fed. 533 (1914). ("[I]t is also familiar law that if contracts be fairly open to two constructions, one lawful and one unlawful, the former is to be preferred"); Millen v. Potter, 190 Mich. 262, 273, 157 N.W. 101, 105 (1916) See also U.S. Trust Co. of New York v. New Jersey, 431 U.S. 1, 23[, 97 S.Ct. 1505, 52 L.Ed.2d 92] (1977) (addressing the Reserved Powers Doctrine). It is no surprise that several of the above cases are drawn from the Court of Federal Claims that address cases involving public/private contracts (similar to the one in suit.)
Despite reliance on this clause, and the first sentence reiterating an intent to reimburse, Defendants acknowledged that Section 2 was also drafted with language to circumvent prohibitions under Colorado law (including TABOR). But to construe Section 2, the Court must review those statutes and doctrines in order to determine the meaning of the language in this clause, among other things. These materials are extrinsic to the Reimbursement Agreements. Reference to the prohibitions thus opens the door to extrinsic evidence to clarify the ambiguity; and, at the same time, forecloses any chance of success for Defendants on summary judgment. East Ridge, 109 P.3d at 974. Three further points are worth noting:
(1) While the Court acknowledges that the Section 2 expressly states "absolute discretion to ... reimburse", this same language is not found in the Discretionary Clause (Section 1). It begs the question: why did the parties not put the word "absolute" in the Discretionary Clause itself (seemingly a more apt location for its usage based on the face of the document). This further necessitates the need for extrinsic evidence.
(2) The Covenant Clause is also inconsistent with the Section 2 in so far that it provides the trigger for first priority payment and limits the issuance of bonds, inter alia, by ensuring that the Plaintiff is reimbursed first before such issuance. This is at odds with the No Indebtedness Clause because it provides some limits to the argument that the Districts had unfettered discretion to reimburse SRD.
(3) The constraints on the Districts's discretion (albeit limited) is reflected in Section 3 (Cessation of Interest Clause). On a plain reading of this clause, and without factual input from extrinsic evidence—particularly in circumstances where the parties intended the quid pro quo of the agreement be the cessation of interest for first priority reimbursement payment—it is difficult for the Court to construe the Reimbursement Agreement as a matter of law. Section 3 says one thing; Section 2 purports to say another. Clearly, extrinsic evidence is required as a tie-breaker. See Residential Mktg., 933 F.2d at 548 (referring to the need for extrinsic evidence as a "tie-breaker" to "disambiguate the contract.")
