Tatonka Capital Corporation v. Connelly et al
Filing
131
FINDINGS OF FACT AND CONCLUSIONS OF LAW by Judge Marcia S. Krieger on 5/20/19. (pglov)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Senior Judge Marcia S. Krieger
Civil Action No. 16-cv-01141-MSK-NYW
TATONKA CAPITAL CORPORATION,
Plaintiff,
v.
MICHAEL CONNELLY,
Defendant.
______________________________________________________________________________
FINDINGS OF FACT AND CONCLUSIONS OF LAW
______________________________________________________________________________
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
Mr. Connolly appeared at the trial pro se, but he is an attorney and the Court treats him as
a represented party.
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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 “shortterm 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.
Claims by Tatonka against Mosaica officers other than Mr. Connelly have been
discharged in those officers’ personal bankruptcies. For purposes of efficiency, the Court will
hereafter ignore the existence of those officers and their guarantees and refer only to Mr.
Connelly.
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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
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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
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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 dispute3 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
Mr. Connelly’s post-trial brief argues that Tatonka’s failure to sign the Guaranty
Agreements amounts to a failure to demonstrate its acceptance of the agreements’ terms. Mr.
Connelly misread the paragraph he relies upon. Paragraph 20 of the agreements expressly
provides that “the failure to deliver an original executed counterpart shall not affect the validity,
enforceability, and binding effect of this Guaranty.”
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The difference between that sum and the $5 million sum in Ms. Hansen’s testimony is
immaterial to the analysis herein.
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[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
parties’ mutual intent, and the evidence must “clearly and unequivocally show that reformation is
appropriate.” Cabs, Inc. v. Hartford Ins. Group, 151 Fed.Appx. 604, 610 (10th Cir. 2005).
Implicit in this understanding is that the short-term indebtedness would be distinct from
the Revolver indebtedness and that Mosaica could and did direct that specific payments be
credited against the short-term indebtedness, rather than the Revolver indebtedness. The Court
discusses the evidence supporting this assumption below.
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Mr. Connelly testified that “at no time did [he] understand that [he was] guaranteeing
anything other than the repayment of that [particular short-term] advance.” He testified that Ms.
Hansen explained that Tatonka needed to ensure that it would be able to meet upcoming
financial obligations to other borrowers as well, so it imposed the guarantees as a condition of
making the short-term advances to ensure that those advances would be repaid promptly.
Notably, Mr. Connelly emphasized that he had previously been a practicing lawyer for 8 years,
in the private equity business for 17 years, and served as Mosaica’s CEO for another 17 years.
Given this experience, it is reasonable to assume that Mr. Connolly was well acquainted with
written contracts and the need to read them carefully before execution, but he offered no
explanation as to why he did not understand the plain language of the Guarantee Agreements or
its failure to contain the terms upon which he thought the parties agreed. Nevertheless, because
there is no evidence that Mr. Connolly ever manifested a different understanding during the
parties’ course of conduct, the Court finds that Mr. Connolly misunderstood the effect of the
plain language of the Guaranty Agreements.
The more difficult question is whether Mr. Connelly has shown that Tatonka shared his
misunderstanding. At trial, three representatives from Tatonka testified about the circumstances
surrounding the short-term advances and the signing of the Guaranty Agreements: Jake Bauers,
Tatonka’s Chief Financial Officer; Ms. Hansen, Tatonka’s President and Chief Executive
Officer; and Eric Gorka, who was the “Account Lead” that worked with Mosaica on Tatonka’s
behalf. A detailed examination of each of their testimonies is warranted.
Mr. Bauers’ testimony
Mr. Bauers testified that he was the Tatonka official responsible for preparing the
Guaranty Agreements and representing Tatonka’s position with regard to them. Mr. Bauers
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testified on cross-examination that he had a single conversation with Mr. Connelly about the
guarantees, in which Mr. Connelly “stated . . . that the guarantees were written incorrectly,” and
that Mr. Bauers responded that he believed they were “written correctly.” The record is unclear
as to what Mr. Connelly meant when he said that the guarantees were “written incorrectly” –
specifically what aspect of the Guarantee Agreements was incorrect.6
(a) Exhibit 58
On the date that Mr. Connolly signed the first guarantee (February 7, 2013), Mr. Bauers
sent him an email ( Exhibit 58) proposing different language for the Guaranty Agreement. In the
e-mail, Mr. Bauers proposes a change in terms of the “Limitations” paragraph in the Guaranty
Agreement that would reduce the amount guaranteed from $618,000 to $308,000 if “the total
outstanding on the [Revolver] is equal to or less than $4,720,000” on a particular date, and would
void the guarantees entirely if the balance on the Revolver fell below $3,285,000 by another
particular date. This proposal appears to have been made in response to certain concerns
expressed by Mr. Connolly, but no witness ever testified about what those concerns were. Mr.
Bauers testified, and Mr. Connelly did not dispute, that Mr. Connolly responded to the e-mail.
Instead, on the same date, Mr. Connolly executed the Guaranty Agreement without modification,
and subsequently signed additional Guaranty Agreements, again without requesting any
modification.
The Court is hard-pressed to draw any firm conclusions from the discussion of Exhibit
58. It is clear that Mr. Bauers and Mr. Connelly had some discussion about the issue of when
The predicate of a question posed by Mr. Connelly when examining Mr. Bauers suggests
that Mr. Connelly contends that the discussion concerned “a possibility that the guarantee might
be argued to survive the repayment of the short-term advances,” but Mr. Bauers denied having
any recall of such a discussion and Mr. Connelly did not address the issue in his own testimony.
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and how the guarantees would expire and the interrelationship of the Revolver and short-term
indebtedness. It is also fair to assume that, based on their own self-interests, Mr. Connelly would
want the guarantees to be limited to the short-term advances and payments applied to such
advances; in contrast, Tatonka would want the guarantees to cover as much of Mosaica’s
accumulated indebtedness as possible. Read with the preceding paragraph in the Guaranty
Agreement, under which Mr. Connolly was obligated to guarantee all of Mosaica’s indebtedness,
the proposed language limited the amount of Mr. Connelly’s guarantee based on the balance of
the Revolver indebtedness. At least one interpretation of this proposed language in the context
of discussions between Mr. Connolly and Mr. Bauers is that Tatonka viewed the proposal as a
concession to Mr. Connolly by reducing his exposure as a guarantor of all of Mosaica’s debt
including the Revolver debt. That interpretation suggests that, consistent with the plain language
of the Guaranty Agreement, Tatonka viewed the guarantees as being applicable to the entirely of
Mosaica’s debt regardless of whether it was owed as a short-term extension or on the Revolver.
Another interpretation might be that Tatonka intended the guarantee to be limited to the shortterm advances and the proposal reduced the amount of the guarantee because the advances were
included in and made a part of the Revolver loan. Unfortunately, the evidence presented does not
confirm either possibility and the Court makes no particular findings regarding the meaning of
Exhibit 58.
(b) Exhibit 51
Mr. Connelly cross-examined Mr. Bauers about Exhibit 51, a March 13, 2013 e-mail
from Rita Chapin, Mosaica’s CFO, to Mr. Bauers. In that e-mail, Ms. Chapin authorizes
Tatonka to credit certain funds in a bank account as a payment on Mosaica’s indebtedness to
Tatonka. Specifically, Ms. Chapin refers to two amounts: “the $308,000 advanced to Mosaica
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on February 7 and the $345,000 advanced to Mosaica on March 8.”7 Ms. Chapin notes that these
payments are “in satisfaction of the guarantees of” Mr. Connelly and the other Mosaica officials.
Mr. Bauers responded to the e-mail by noting that Mosaica also needed to make “the normal
monthly payments as well,” to which Ms. Chapin replied in agreement, but did not comment
upon the “in satisfaction of the guarantees” language in any way. In his testimony, Mr. Bauers
seemed to acknowledge that he understood that Ms. Chapin had a misunderstanding about how
the guarantees worked, but he testified he felt that he “ha[d] no obligation to correct her” and did
not. Similarly, Exhibit 61 is an e-mail from Mr. Connelly to Mr. Bauers, dated April 12, 2013,
authorizing Tatonka to take $300,000 from the bank account “in repayment of [funds] advanced
earlier this week and in satisfaction of [ ] my guarantee thereof.” Mr. Bauers did not respond to
the “satisfaction” language in this e-mail either.
In response to questions posed by the Court, Mr. Bauers testified that there was no way
for Mosaica to apply a particular payment so as to specifically pay off a particular short-term
advance. He explained that the short-term advances “were part of a promissory note” –
apparently, the Revolver -- and that “the advanced sums weren’t their own individual advance.
They were part of a large loan of which the balance could go up with advances and go down with
repayments.” Thus, payments “would have been applied to the aggregate balance of that
[Revolver]” according to a “waterfall” algorithm that would allocate the payment to various
categories such as outstanding balances, interest, and principal. But Mr. Bauers’ testimony on
this point is somewhat in conflict with the e-mails in which Mosaica specifically indicates that it
The Court has some difficulty correlating these amounts to the sums and dates of the
short-term advances otherwise reflected in the Guaranty Agreements themselves. The Court will
assume that the guarantees captured some, but not all, of the lending that Tatonka was doing to
Mosaica at this time.
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is tendering payments to pay off specific short-term advances. This is particularly notable in
Exhibit 51: there, Mosaica authorized a payment of more than $650,000 to Tatonka, purportedly
to pay off specific short-term advances. If Mr. Bauers’ testimony was correct, Tatonka would
take that $650,000 and allocate it to the whole of Mosaica’s various debts according to the
waterfall formula, paying down interest and principal on the Revolver as a whole. But instead,
Mr. Bauers responded by asking Mosaica to make “the normal monthly payment” as well. This
suggests that Mr. Bauers understood and agreed that the $650,000 payment being directed
towards something other than the “normal monthly” obligations of Mosaica under the Revolver,
and that it would not be credited against those “normal monthly” payment amounts.
This and other testimony also suggests that the “short-term advances” were not simply
additions to the balance due on the Revolver – and thus subject to the Revolver’s own repayment
terms and maturity dates -- but rather individual loans with their own unique maturity dates.
Exhibit 60, for example, is an e-mail from Mr. Gorka to Mr. Connelly, discussing “a new $140k
advance today with a shorter maturity date.” If each short-term advance had its own maturity
date, it would be incumbent upon Tatonka to separate those advances from the debt owed under
the Revolver (which would likely have different maturity dates), so as to allow Tatonka to
determine whether a given advance had been repaid as scheduled. It would also be necessary for
Tatonka to determine whether payments were being directed at the Revolver or a specific
advance, contrary to Mr. Bauers’ testimony that Tatonka did not do so. Thus, the Court does not
credit Mr. Bauers’ testimony that the short-term advances and the Revolver were, by necessity,
aggregated and accounted for jointly with all of Mosaica’s other accumulated debt; rather, the
record reflects that Tatonka could and did allocate specific payments towards satisfying the
obligations resulting from specific short-term advances.
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Ms. Hansen’s testimony
Much of Ms. Hansen’s testimony was either duplicative of Mr. Bauers’ testimony or
addressed subjects that are not germane here. However, Ms. Hansen did give some testimony
about Exhibit 56 that supports Tatonka’s position in this matter. In January 2013, Tatonka
prepared versions of the Guaranty Agreements that indicated that the Mosaica officials would be
guaranteeing a total of more that $1.4 million, far above what Tatonka was apparently then
offering as a short-term advance (i.e. the $618,000 advance in February 2013). A Mosaica
official e-mailed Tatonka explaining that these amounts “were obviously incorrect” and
proposed giving a guaranty in the same amount as the short-term advance being contemplated.
Tatonka ultimately agreed. Mr. Connelly interprets this evidence to support his argument that
the guarantees were linked only to the short-term advances. But the Court construes the
evidence to demonstrate something else as well. Ms. Hansen testified that the purpose of
seeking the $1.4 million in guarantees was because Tatonka was “looking for global solutions
[because] the amount that was extended to Mosaica had gone beyond our normal course of
business lending relationship.” In other words, Ms. Hansen’s testimony confirms that as of
January 2013, Tatonka’s intention was to have Mr. Connelly guarantee repayment of some
degree of “antecedent debt” already included in the balance of the Revolver, not simply
guarantee repayment of the short-term advances the parties were discussing. Although Mr.
Connelly objected to a guarantee of that size and Ms. Hansen ultimately agreed to reduce the
guarantee to match the amounts of the short-term advances, this Court does not find that
Tatonka’s goal – further collateralizing the antecedent debt in the Revolver via the Guaranty
Agreements – changed at the same time. In other words, Ms. Hansen’s testimony and Exhibit 56
are consistent with the contention that Tatonka’s intention was always to have the Guaranty
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Agreements secure repayment of the accumulated debt in the Revolver, not just repayment of the
short-term advances.
Mr. Gorka’s testimony
Finally, Mr. Gorka testified that, as of 2013, his recollection was that “the documents had
a threshold or a minimum balance where once something was advanced, it had to be repaid to
that balance and the guarantees would be released” – in other words, that Mosaica’s repayment
of the short-term advances alone would release and void the guarantees. Mr. Gorka also
addressed Exhibit 53, an e-mail he sent to Mr. Connelly in July 2014 where Mr. Gorka stated “I
am confident that there are no personal guarantees from [the Mosaica officials] relating to the
short term advances or other loan documents. [Mr. Bauers] is reviewing the documents to make
certain that they reflect the agreements and that the short term advances have all been paid. I
believe that they have, but just making sure.” Mr. Gorka explained that the e-mail correctly
reflected his understanding of the situation but that Mr. Bauers “was managing that process, I
had been removed from that process and was working on other things. And so . . . I had to talk
to [Mr. Bauers].” In discussing the issue with Mr. Bauers, Mr. Gorka learned that his own
understanding of the guarantees was incorrect. Mr. Gorka conceded that he never contacted any
of the Mosaica officials thereafter to advise them that his (and their) understanding of the
guarantees was incorrect. Indeed, it appears to be undisputed that no one from Tatonka advised
Mr. Connelly or the other Mosaica officials about Tatonka’s belief that the guarantees remained
extant until Tatonka commenced this litigation in 2016.
Mr. Gorka also testified briefly about a conversation he had with Mr. Connelly on
February 7, 2013 about the “approach that [Mr. Bauers] was taking with the guarantees.” Mr.
Gorka testified that Mr. Connelly told him that he was dissatisfied with the language of the
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guarantees. On re-cross, Tatonka’s counsel asked Mr. Gorka about that discussion, specifically
“during this discussion with Mr. Connelly that you had on February 7, did Mr. Connelly express
to you that he understood that there was an issue regarding whether the short-term advances – the
guaranty agreements would be satisfied with repayment only of the short-term advances?” Mr.
Gorka responded “Yes.”
Analysis
Based on these facts, the Court cannot conclude that Mr. Connelly has carried his burden
of showing, by “clear and unequivocal” evidence, that he and Tatonka both had a mistaken
impression as to how the Guaranty Agreements would work. Although Mr. Connelly understood
that the guarantees would be discharged upon payment of the short-term advances, the Court
cannot say – and certainly not by the heightened evidentiary burden Mr. Connelly must carry –
that Tatonka shared that understanding. It may be that Mr. Gorka, who had become Mr.
Connelly’s close friend, shared Mr. Connelly’s perspective about the guarantees, but the
evidence is clear that Mr. Bauers was the designated agent for Tatonka with regard to the
Guaranty Agreements. And for the reasons set forth above, the Court finds that Mr. Bauers did
not share Mr. Connely and Mr. Gorka’s understanding of those agreements. There is sufficient
evidence from both Mr. Bauers and Ms. Hansen to indicate that Tatonka intended the Guaranty
Agreements to apply as written – that is, to guarantee the repayment of antecedent debt on the
Revolver, not simply the repayment of the short-term advances themselves. Ms. Hansen’s
testimony and Exhibit 56 indicate that Tatonka intended the guarantees to secure more than the
amounts of the short-term advances, and nothing in the record suggests that, by agreeing to
change the amounts called for in the guarantees, Tatonka was changing its intention as to what
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indebtedness would be secured by the guarantees. Accordingly, the Court finds against Mr.
Connelly on his defense of mutual mistake.
C. Unilateral mistake
Mr. Connelly argues that, in the absence of a mutual mistake, he is still entitled to
reformation of the Guaranty Agreements under the doctrine of unilateral mistake.
(a) Whether reformation is available for unilateral mistakes
The Colorado Supreme Court has not squarely addressed the question of whether a
contracting party can seek reformation based on a unilateral mistake in the circumstances
presented here. Neither party has requested certification of a question to the Colorado Supreme
Court. Consequently, it is the Court’s obligation to attempt to predict how the Colorado
Supreme Court would rule if presented with the issues in this case. Shoels v. Klebold, 375 F.3d
1054, 1068 (10th Cir. 2004).
It is generally understood that contracts can be reformed based on mutual mistakes, but
that unilateral mistakes do not permit reformation. See e.g. Griego v. Kokkeler, 543 P.2d 729,
730 (Colo.App. 1975). However, on at least three occasions, the Colorado Supreme Court
appears to have acknowledged an exception to that rule: that a unilateral mistake by one party to
a contract can permit reformation if the evidence demonstrates that, at the time the contract was
formed, the non-mistaken party was aware of the mistaken party’s mistake. First, in Jackson
Enterprises, Inc. v. Maguire, 355 P.2d 540, 543 (Colo. 1960), an individual named Carlson
offered to exchange real property she owned in Illinois for the plaintiff’s motel in Colorado. Due
to some confusion, the parties’ written contract listed Carlson’s home as one of the parcels being
exchanged, when, in fact, Carlson intended only to convey certain commercial parcels. The trial
court found the inclusion of the residence in the conveyance to be a mutual mistake and reformed
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the contract. On appeal, the plaintiff argued that it fully intended to obtain the residence, and
that Carlson’s mistake was, at most, a unilateral one. Without specifically resolving the question
of whether the mistake was mutual or unilateral, the Colorado Supreme Court affirmed the
reformation of the contract. It explained that Carlson “brought to the attention of the [plaintiff]
that she had no intention to transfer her home, but the [plaintiff] nevertheless included its legal
description in the deeds it prepared” and which Carlson signed. In such circumstances, the
Supreme Court endorsed the trial court’s application of “the principle that one party cannot
knowingly take advantage of the mistake of the other party to the contract.”
Two decades later, in In re Marriage of Manzo, 659 P.2d 669 (Colo. 1983), the Colorado
Supreme Court considered a property separation agreement in a domestic relations matter. The
husband had agreed to a disposition that granted the wife the first $60,000 from the sale of the
marital home, believing that the property’s sale value was around $140,000. When the house
was actually put up for sale, it was expected to sell for only $100,000. The husband petitioned to
set aside the agreement on the grounds of unconscionability, and the trial court granted that
motion. On appeal, the Supreme Court reversed. The vast majority of the court’s analysis is
focused on the interpretation of statutory provisions regarding unconscionable property
settlement agreements under the Uniform Marriage and Divorce Act and is therefore irrelevant to
the determination herein. The only pertinent portion of Manzo is the court’s passing comment
that “traditionally, a contract may not be rescinded because one party has made a unilateral
mistake as to value unless the other party knew or had reason to know of the error.” Id. at 672
(emphasis added), citing J. Calamari and J. Perillo, Contracts, § 9-27 at 306 (2d Ed. 1977).
Finally, the Colorado Supreme Court decided Powder Horn Constructors, Inc. v. City of
Florence, 754 P.2d 356, 364 & n. 7 (Colo. 1988). There, a municipality that had solicited sealed
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bids for a city construction project. Powder Horn was the lowest bidder on the project by about
$50,000. The day after the bids were opened, the city contacted Powder Horn and informed it
that its calculations included a possible mistake, inviting Powder Horn to review its bid. Powder
Horn did so, and noticed that it had omitted a $66,000 charge from its final calculations. It
advised the city that, due to the mistake, it was withdrawing its bid. However, several days later,
the city accepted the original bid, and when Powder Horn refused to accept the award of the
contract, the city filed suit against it seeking to enforce the bid as tendered (or to cause Powder
Horn to forfeit its bid bond). The trial and appeals courts found that Powder Horn’s mistake was
unilateral, such that the city’s acceptance of the mistaken bid did not warrant reformation in
Powder Horn’s favor. But the Colorado Supreme Court held that “under certain circumstances,
a bidder submitting a bid for a public construction project may be permitted to rescind the bid
prior to its acceptance if it reflects a material mistake of fact,” and that “the exercise of
reasonable care is [not] an appropriate factor upon which to condition this right of rescission.”
754 P.2d at 358-59. Most of the analysis in Powder Horn concerned the peculiar public policy
considerations that relate to mistakes made in the public bidding process. However, in a
footnote, the Supreme Court pondered the Court of Appeals’ characterization of Powder Horn’s
mistake as a “unilateral” one. After musing briefly about whether “the classification of a mistake
as unilateral or mutual” was a particularly helpful one, the court noted that “the Restatement . . .
states that where a mistake of one party occurs as to a basic assumption the contract is voidable
only if enforcement of the contract would be unconscionable or the other party had reason to
know of the mistake.” It noted that these requirements “assist[ ] in ensuring that avoidance of
the contract will not unreasonably disappoint the expectations of the party not causing the
17
mistake.” And it noted that “in this case the evidence indicates the city’s representative was
aware of the probability that a mistake had been made . . . .” Id. at 364 n. 7.
Although at least Manzo and Powder Horn express the concept in non-binding dicta, it
appears to this Court that the Colorado Supreme Court has repeatedly endorsed the notion that a
contracting party’s unilateral mistake about a material fact, coupled with the non-mistaken
party’s awareness of that mistake, can justify reformation of the parties’ contract. Lower courts
applying Colorado law have also acknowledged that same principle, albeit sometimes in dicta as
well. See e.g. Shoels v. Klebold, 375 F.3d 1054, 1068 (10th Cir. 2004) (citing Powder Horn for
the proposition that Colorado law “allows relief only if the mistakenly entered contract was
unconscionable or the defendant knew or had reason to know of the mistake,” but finding that
the non-mistaken party there was not aware of the mistake); Sumerel v. Goodyear Tire & Rubber
Co., 232 P.3d 128, 135-36 (Colo.App. 2009) (stating in dicta – or perhaps as a “hold[ing] in the
alternative” – that a material unilateral mistake by one party, if known to be such by the
opposing party, allows the mistaken party to void the ensuing contract).
The primary case to the contrary is Poly Trucking v. Concentra Heath Services, Inc., 93
P.3d 561, 566 (Colo.App. 2004). There, a commercial truck driver caused an accident after
suffering a seizure. Poly, the trucking firm employing the driver, sued Concentra, the entity that
had certified the truck’s driver as safe, contending that Concentra was responsible for negligence
of its employees, namely the doctors who certified the driver. The parties negotiated a
settlement between Poly and Concentra, but in the course of exchanging drafts of a settlement
agreement, Concentra accidentally omitted language it had previously tendered that released
claims against both itself and its doctors. The final version of the agreement released only Poly’s
claims against Concentra itself. After the settlement was approved, Poly brought suit against the
18
doctors and Concentra sought to have the settlement agreement reformed due to a unilateral
mistake. The trial court reformed the agreement, but the Court of Appeals reversed. It recited
the general rule that reformation due to a unilateral mistake is appropriate where “the other
[party] engaged in fraud or inequitable conduct,” but “where a party’s unilateral mistake is the
result not of fraud, but of its own failure to use due diligence in reading the contract before
signing it, that party will be held to the terms.” Id. at 563. The court agreed that Concentra had
mistakenly failed to ensure that the agreement released its doctors, but found that, according to
the criteria found in Section 551 of the Restatement of Contracts (defining the circumstances in
which a party has a duty to disclose facts to another in a business transaction), Poly had not
committed fraud by failing to inform Concentra of its intent to sue the doctors or the fact that
Concentra had inadvertently omitted the language releasing the doctors from subsequent drafts of
the settlement agreement. The court was particularly persuaded by the facts that the parties were
in an adversarial, not fiduciary, posture and that Poly was only accused of engaging in silence
about Concentra’s error, not that Poly had made any affirmative misleading statement or
otherwise engaged in any inequitable conduct. Although it was unclear whether the court found
that Poly was aware of Concentra’s error at the time, it appeared to believe that such knowledge
would not matter: “Concentra's arguments to the contrary notwithstanding, even if Poly had been
cognizant of Concentra's intent to obtain a release of the doctors, it was for Concentra to protect
its own interests.” Id. at 566. The Court also rejected, as factually distinguishable, Concentra’s
“out-of-state cases for the proposition that inequitable conduct includes knowledge by one party
of another's mistake.” Id.
Based upon this Court’s review of Colorado law, the Court concludes that Poly Trucking
stands as the exception, and that the general line of authority – including three separate
19
statements by the Colorado Supreme Court – reflect the prevailing rule in the state: that a
unilateral mistake can warrant reformation if the other side was aware of that mistake at the time
of contract formation. Among other things, Poly Trucking’s focus on the mistaken party’s
degree of fault or culpability seems to conflict with Powder Horn’s astute observation that “the
very term ‘mistake’ generally connotes some degree of negligent conduct” by the mistaken party
and its conclusion that “the question of the availability of equitable relief from a mistaken
[agreement] should focus primarily on the consequences of the mistake,” not on “the cause of the
mistake.” 745 P.2d at 361-62. Moreover, Poly Trucking gives short shrift to the issue presented
here – whether the non-mistaken party’s knowledge of the mistake bears on the court’s power in
equity to grant reformation. The sole authority that Poly relies upon to reject the notion that
Poly’s knowledge of Concentra’s mistake would be of analytical significance, Ingels v. Ingels,
487 P.2d 812 (Colo.App. 1971), does not address a situation where one party knew of the other’s
mistake. Accordingly, forced to predict how the Colorado Supreme Court would address the
circumstances of this case, this Court concludes that it would adopt the principles endorsed in
Powder Horn and other cases, allowing Mr. Connelly to seek reformation of the Guaranty
Agreements if he demonstrates8 his own unilateral mistake plus Tatonka’s knowledge of that
mistake.
Standards
The Court is aware of no caselaw that clearly apportions and quantifies the burden of
proof in unilateral mistake cases. It appears logical that the burden would be similar to that
imposed in mutual mistake cases – that is, that Mr. Connelly bears the burden of proof and must
establish the pertinent facts by clear and convincing evidence. Accord Jackson Enterprises, 355
P.2d at 542 (noting that reformation is a remedy that requires an “extraordinary showing” of
clear and convincing proof).
8
20
Both Powder Horn and Sumerel endorse the application of principles found at Section
153 of the Restatement (Second) of Contracts (as well as related sections clarifying that rule).
Section 153 provides that “where a mistake of one party at the time a contract was made
as to a basic assumption on which he made the contract has a material effect on the agreed
exchange of performances that is adverse to him, the contract is voidable by him” if two facts are
present. First, the other party (i.e. the plaintiff seeking to enforce the contract) must have “had
reason to know of the mistake.” Second, the plaintiff must “bear[ ] the risk of the mistake” under
the principles in Section 154 of the Restatement. Section 154 states that a party bears the risk of
mistake under various circumstances, the most pertinent here being that the risk may be
“allocated to [that party] by the court on the ground that it is reasonable under the circumstances
to do so.” Comment f to Section 153 notes that it would be “unusual for a party to bear the risk
of a mistake that the other party had reason to know of.”
In circumstances where the non-mistaken party “actually knew” of the mistake, Section
153 directs the Court to several additional provisions of the Restatement, falling within the
general rubric of “Misrepresentation.” Section 161 provides that “a party’s non-disclosure of a
fact known to him is equivalent to an assertion that the fact does not exist” in certain
circumstances, including “where he knows that disclosure of the fact would correct a mistake of
the other party as to the contents or effect of a writing, evidencing or embodying an agreement in
whole or part.” Comment e to Section 161 explains that “one party cannot hold the other to a
writing if he knew that the other was mistaken as to its contents or as to its legal effect. He is
expected to correct such mistakes of the other party and his failure to do so is equivalent to a
misrepresentation.” This comment also makes clear that “the failure of a party to use care in
reading the writing so as to discover the mistake may not preclude such relief” unless the
21
negligent party was not acting in good faith. Citing Section 172 (“A recipient's fault in not
knowing or discovering the facts before making the contract does not make his reliance
unjustified unless it amounts to a failure to act in good faith”); see also Restatement Section 157;
Powder Horn, 754 P.2d at 361.
Illustration 12 to Section 161 is germane here. It posits a situation in which A offers to
buy a tract of land from B for the sum of $100,000. B mistakenly thinks that the offer includes
an agreement by A to assume an existing mortgage. A knows of B’s mistake but also knows that
the offer does not include such a term and does not disclose that knowledge to B. B signs an
integrated agreement that does not contain a provision for A to assume the mortgage. The
Restatement makes clear that “A’s non-disclosure is equivalent to an assertion that the writing
contains [the mortgage-assumption] provision, and this assertion is a misrepresentation.” The
illustration directs the reader to Section 164 of the Restatement to determine whether “the
contract is voidable by B” in such circumstances. Section 164 explains that if the mistaken
party’s assent to the contract “is induced by either a fraudulent or a material misrepresentation by
the other party upon which the recipient is justified in relying, the contract is voidable by the
recipient.”
Analysis
Applying these principles to the instant facts, the Court has previously found that Mr.
Connelly had a mistaken understanding of the Guaranty Agreements he signed: he subjectively
believed them to guarantee only Mosaica’s repayment of the particular short-term advance with
which they were associated. Although this misunderstanding was the result of Mr. Connelly’s
own negligence in failing to adequately review and evaluate the plain language of the Guaranty
Agreements, the Court cannot conclude that Mr. Connelly’s misunderstanding was made by him
22
in bad faith. Mr. Gorka had been having discussions with Mr. Connelly about the guarantees and
seemed to share Mr. Connelly’s mistaken understanding about what the Guaranty Agreements
actually required. As late as the same date that the first Guaranty Agreement was signed,
Tatonka had proposed additional language to the agreements that would also be somewhat
consistent with Mr. Connelly’s position here. Thus, although the Court finds that Mr. Connelly
is solely responsible for misunderstanding the legal effect of the Guaranty Agreements’
language, it also finds that Mr. Connelly’s misunderstanding was nevertheless one that he
reached in good faith under Section 172 of the Restatement.
Next, the Court turns to whether and when Tatonka became aware of Mr. Connelly’s
misunderstanding. The Court finds that Ms. Chapin’s March 14, 2013 e-mail (Exhibit 51), was
the first point in time at which Tatonka had unambiguous evidence that the Mosaica officials
mistakenly understood the Guaranty Agreements to be “satisf[ied]” by the repayment of the
corresponding short-term advances. Prior to that date, the record only reflects vague discussions
between Mr. Connelly and Mr. Gorka or Mr. Bauers about the possibility that the Guaranty
Agreements could be structured to terminate the guarantees upon repayment of the short-term
advances. The final act in those negotiations – Mr. Connelly signing the first Guaranty
Agreement as written – could have been understood by Tatonka to constitute Mr. Connelly
accepting the broad guarantee language contained in the agreement, and Tatonka could
reasonably expect that Mr. Connelly, an experienced lawyer and businessman, intended to
comply with the agreement’s plain language.
Ms. Chapin’s March 14, 2013 e-mail, however, clearly informed Tatonka that Mr.
Connelly had a different understanding the agreement and that he believed the repayment of the
short-term advance had the effect of nullifying the guarantee. Mr. Bauers did not testify that he
23
misunderstood the meaning or intent of Ms. Chapin’s references to “satisfaction” of the
guarantees. Indeed, when Mr. Connelly asked him at trial whether “you knew that she thought
that these monies were being used to satisfy the outstanding guaranty, and you did nothing to
correct her?,” Mr. Bauers did not deny the predicate of the question – that he knew Ms. Chapin
thought the payment satisfied the guarantees. He merely stated that he “ha[d] no obligation to
correct her.” Accordingly, the Court finds that Tatonka knew as of March 14, 2013 that Mr.
Connelly had a misunderstanding about the effect of the Guaranty Agreements. The record also
unambiguously reflects that, despite that understanding, Tatonka chose to remain silent about
that misunderstanding instead of correcting it.
Under these circumstances – and with the exception discussed in the note below – the
Court finds that Tatonka knew of Mr. Connelly’s mistaken understanding of the effect of the
Guaranty Agreements, and that Tatonka’s silence and refusal to correct Mr. Connelly’s
misunderstanding constitutes a misrepresentation to Mr. Connelly about the effect of the
Guaranty Agreements under Restatement Section 161 and illustration 12. The same facts –
Tatonka’s knowledge of Mr. Connelly’s mistaken understanding of the Guaranty Agreements
and its refusal to correct that misunderstanding – also warrant the Court finding that Tatonka
bears the risk of mistake under Section 154 of the Restatement. Notably, consistent with Powder
Horn’s emphasis on the preserving the parties’ reasonable expectations, the Court observes that
Tatonka received exactly what it knew that Mr. Connelly intended to promise: prompt repayment
of the short-term obligations. There is no dispute that Mosaica paid those advances back as
scheduled. Tatonka’s further expectation that the Guaranty Agreements would also secure
repayment of antecedent debt already in the Revolver was unreasonable, given its knowledge
that Mr. Connelly did not understand the agreement to have such an effect. Tatonka did not take
24
the position at trial that, had it understood the Guaranty Agreements to secure only the short-term
advances, it would have charged a higher interest rate on them or otherwise acted any differently
than it did. Thus, it is reasonable under the circumstances to place the risk of a mistake in the
interpretation of the Guaranty Agreements on Tatonka, the party who knew of Mr. Connelly’s
mistake and chose to ignore (or perhaps even capitalize on) it, rather than on Mr. Connelly
himself.
But these findings lead to the question of whether the Guaranty Agreements are
ultimately voidable under Restatement Section 164 (or, for that matter, appropriate for
reformation). Mr. Connelly must show that Tatonka’s “misrepresentation” – that the Guaranty
Agreement would guarantee only the short-term advances – induced him to enter into those
agreements or that he relied upon that misrepresentation in some way. The purpose of such a
requirement is obvious: if Mr. Connelly would have agreed to the guarantees even knowing their
true effect, he can hardly claim any prejudice from his mistaken understanding of them.
Mr. Connelly never testified that he would not have signed the Guaranty Agreements had
he known that they also guaranteed his repayment of a portion of the Revolver debt so long as
any of it existed. This omission is particularly significant given that Mr. Connelly is an attorney
and that he bears the burden of proof of this fact by clear and convincing evidence. There is
evidence in the record that Mosaica was especially desperate for funding in 2013, as Mr.
Connelly testified that it agreed to take out the short-term advances even though those advances
were “especially expensive.” And Exhibit 58 indicates that Tatonka proposed a guaranty that
would specifically terminate upon specified conditions, but the undisputed testimony is that Mr.
Connelly rejected that proposal and instead agreed to language that had no fixed terms for the
termination of the his personal guarantees. Thus, there is at least some reason to believe that Mr.
25
Connelly might have been willing to sign the guarantees, regardless of whether they applied to
antecedent debt or not, simply to preserve the flow of needed capital into Mosaica. When
juxtaposed against the complete absence of evidence by Mr. Connelly to the contrary, and with
the imposing burden of proof he bears, the Court is compelled to find that Mr. Connelly has not
shown that he acted in reliance upon his mistaken understanding of the Guaranty Agreements
when he signed them. Under such circumstances, relief in the form of voiding or reforming the
agreements is not appropriate.
Accordingly, the Court finds that Mr. Connelly did not prove all of the required elements
for his defense of unilateral mistake.9
D. Remedy
Because Tatonka has proven its claim for breach of contract, and Mr. Connelly has not
adequately proven his affirmative defenses, the Court enters judgment in favor of Tatonka. The
parties agree that the total amount guaranteed by Mr. Connelly under the various Guaranty
Agreements is $4.369 million, but Tatonka concedes that Mosaica’s total remaining indebtedness
Even if Mr. Connelly had established the elements for unilateral mistake, the Court
would find that such a mistake was first known to Tatonka on March 14, 2013, when Ms. Chapin
informed Tatonka that the repayment of the first short-term advance “satisf[ied]” the Guaranty
Agreements. Prior to that date, Tatonka had no clear reason to assume that Mr. Connelly – an
experienced attorney and businessman – had misunderstood the plain language of the
agreements. And the Restatement is clear that reformation of a contract is appropriate only if the
non-mistaken party was aware of the mistake at the time of contract formation. Thus, the Court
would hold that Mr. Connelly remains liable to Tatonka on any Guaranty Agreements signed
prior to March 14, 2013. The first agreement, signed on February 7, 2013 in the amount of
$618,00 meets this criteria, and thus, the Court would enter judgment in favor of Tatonka on this
sum regardless of Mr. Connelly’s success on his defense of unilateral mistake in all other
respects. In addition, as discussed herein, the Court would also assess prejudgment interest on
that sum, consistent with the terms of the Revolver Agreement, from the date Tatonka
commenced this action in 2016 until the date of this Order, amounting to roughly $550,000 in
interest.
9
26
is only $4,312,000. Thus, the Court will enter judgment in favor of Tatonka on this principal
sum.
Tatonka also requests prejudgment interest. Colorado law requires such interest to be
included in a judgment whenever a defendant has “wrongfully withheld” payment of funds it
owes to the plaintiff. See e.g. Personnel Dept., Inc. v. Professional Staff Leasing Corp., 297
Fed.Appx. 773, 789-90 (10th Cir. 2008), citing C.R.S. § 5-12-102(1)(a). Under C.R.S. § 5-12102(4)(a), the appropriate rate for prejudgment interest is either 8% or the amount agreed upon
by the parties in a written instrument that provides for the payment of interest at a specified rate.
Here, the Revolver agreement, whose terms are incorporated by reference into the Guaranty
Agreements, provides that interest on unpaid sums shall accrue at an annual rate of 18%. In the
absence of a provision for compounding of that interest, the Court will treat that as simple
interest. Divided over a 12 month period, that 18% interest rate is equivalent to 1.5% per month,
or $64,680 on a principal sum of $4,312,000.
The parties appear to agree that Tatonka did not make demand upon Mr. Connelly to
honor his Guaranty Agreement until 2016, when this action was commenced. Because Tatonka
did not call upon Mr. Connelly to honor his guarantees until that date, the Court cannot conclude
that Mr. Connelly “wrongfully withheld” payment to Tatonka prior to that date for prejudgment
interest purposes. Thus, prejudgment interest shall run from May 2016, when this action was
commenced, until May 2019, the approximate date of entry of judgment herein, a period of 60
months. At the rate of $64,680 per month, that sum comes to $3,888,080. Thus, the amount
owed by Mosaica is a combination of principal and interest - ($4,312,000 + $3,888,080) or
$8,192,800.
27
CONCLUSION
For the foregoing reasons, the Clerk of the Court shall enter judgment in favor of Tatonka
on its claim against Mr. Connelly, in the sum of $8,192,800, to bear post-judgment interest at
the rate set by Colorado law. There being no remaining matters to address against any remaining
Defendants, the Clerk of the Court shall close this case.
Dated this 20th day of May, 2019.
BY THE COURT:
Marcia S. Krieger
Senior United States District Judge
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