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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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United St.a.t~s Co~rt ~! Appza 

UNITED STATES COURT OF APPEALS Tenth Circm, 

TENTH CIRCUIT MJ\R2 0 1992 

----------........... OBERT L. HOECKEP. 

CASCADE ENERGY AND METALS CORPORATION, Clerk 

vs. 

Plaintiff-Counter-ClaimDefendant-Appellee, 

RESOURCE CONCEPTS, INC.; HAROLD 

MASUNAGA; MARION HARADA; UKIO AYABE; 

and GEORGE c. PINGREE, 

Appellants-Cross-Appellees, 

and, 

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JEFFERY G. BANKS; KENNETH CALDWELL; ) 

ELMER J. DAVIS; ROGER A. MANN; MANN ) 

CALDWELL PARTNERSHIP; ROBERT A. ) 

NICKERSON; PETER P. SAMARIN; HERBERT W. ) 

STOLTENBERG; EDWIN STOLTENBERG; PATRICIA) 

STOLTENBERG; DELFORD R. ASHLEY; GEORGE ) 

SLATER; PATRICIA SLATER; ROBERT DOUB; ) 

SAM HAMBARIAN; ALYCE HAMBARIAN; LIONEL ) 

ASCHER; COASTAL COMPUTER INVESTMENTS, ) 

a California partnership; HARMATZ AND ) 

HODOWSKI; CHRIS WAUGH; A.C. NEJEDLY; ) 

R.E. DONAHEY; GRACE V. DUNCAN; ELLIOT ) 

WEINBERG; BERNARD HODOWSKI; SAMUEL ) 

HARMATZ; DAVID G. HENRY; H.E. MOSES, ) 

Defendants-Cross-ClaimantsAppellees, Cross-Appellants, 

W. DAVID WESTON; TELEGRAPH MINE 

LIMITED, a partnership; REX MONTIS 

SILVER COMPANY; TELEGRAPGH MINE JOINT 

VENTURE; GOLD TECHNICS, LTD., a limited 

partnership; INTERPHASE CORPORATION; 

JAMES F. PETERS, as Trustee of the 

Gnolaum Unitrust, 

Cross-Claim-Defendants-Appellees. 

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Nos. 90-4185, 4208, 4209 

(D.C. No. 82-1223C) 

(D. Utah) 

Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 1 
* ORDER AND JUDGMENT 

Before TACHA, BALDOCK and EBEL, Circuit Judges. 

This case is a continuation of the morass of litigation that 

we reviewed in Cascade Energy & Metals Corp. v. Banks (Cascade I), 

896 F.2d 1557, 1568-69 {10th Cir. 1990), cert. denied, 111 S. Ct. 

138 (1990). In that case, Cascade Energy & Metals Corporation 

(Cascade), owner and operator of the Telegraph Mine claims in San 

Bernardino County, California, brought diversity claims in Utah 

federal district court against certain joint venture partners 

{Partners) for unpaid project costs. Partners counter-claimed, 1 

alleging breach of fiduciary duties. After a bench trial, the 

district court granted judgment on September 16, 1985 in favor of 

Partners, finding that Cascade breached its fiduciary duties and 

brought its claims for project costs in bad faith. The portion of 

the judgment at issue in this appeal totalled $335,449.68--

$70,449.68 as restitution for wrongfully collected project cost 

assessments, and $265,000 for attorneys' fees expended in 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

1 Partners also brought third-party claims against other 

promoters of the gold mine. See Cascade I, 896 F.2d at 1566 n.9. 

The nature of the partnership and the resulting lawsuit and appeal 

was exceedingly complex. See id. at 1563 {organizational chart); 

id. at 1567-68 {issues on appeal). For the sake of efficiency, we 

have limited our discussion of the background to those matters 

necessary for a proper understanding of this appeal. 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 2 
defending the project costs claim. The court also granted an 

equitable lien on the Telegraph Mine claims as security for the 

judgment. In order to stay execution of the judgment pending 

appeal, Cascade requested Sureties2 to post cash, letters of 

credit and real property mortgages as security for, or in lieu of, 

supersedeas bonds. See Fed. R. Civ. P. 62(d). After several 

hearings the Court approved of Cascade's supersedeas bond 

arrangement with Sureties and stayed execution of the judgment 

pending appeal. 

On February 16, 1990, we affirmed the judgment and remanded 

for resolution of other issues. Cascade I, 896 F.2d at 1583-84. 

Given our affirmance, Partners as judgment-creditors moved the 

district court to disburse the funds deposited in lieu of 

supersedeas bonds and to enforce liability on the supersedeas 

bonds. See Fed. R. Civ. P. 65.1 ("surety's liability may be 

enforced on motion without the necessity of an independent 

action"). Sureties defended, seeking release from the obligation 

by claiming that Partners, as judgment-creditors at the 

supersedeas bond hearings, misrepresented or failed to disclose 

facts material to Sureties' risk. On October 22, 1990, the 

district court ordered disbursement of funds and enforcement of 

liability on the supersedeas bonds, but, recognizing a lack of 

"candor" by Partners at the supersedeas bond hearings, the court 

2 The Sureties are the appellants in this case. Although none 

was named in the underlying lawsuit, all were affiliated in some 

manner with Cascade, and three of the Sureties--Harold Masunaga, 

Marion Harada and Ukio Ayabe--filed an amicus brief on behalf of 

Cascade in the prior appeal. See Cascade I, 896 F.2d at 1562 n.3. 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 3 
granted Sureties an equitable lien to take relative priority over 

any lien that Partners might have in the Telegraph Mine claims. 

See Cascade Energy & Metals Corporation v. Banks, No. C-82-1223J, 

unpub. order (D. Utah Oct. 22, 1990); Appellees' supp. app. at 410 

(August 2, 1990 hearing transcript in which Court refers to lack 

of candor). 

On appeal from the October 22, 1990 order, Sureties contend 

that the district court erred in failing to consider their 

defenses. Partners cross-appeal, contending that the court erred 

in granting Sureties the equitable lien on the Telegraph Mine 

claims. 3 We remand for proceedings consistent with this order and 

judgment. 

I. Misrepresentation or Failure to Disclose Material Facts. 

The underlying lawsuit and appeal centered on the Telegraph 

Mine claims in San Bernardino County, California. Early in 1983, 

after Partners filed their cross-claim in federal court, they 

recorded a lis pendens against the Telegraph Mine claims. This 

lis pendens was at issue in the supersedeas bond hearings that 

took place after the September 16, 1985 district court judgment. 

Partners were agreeable to a stay in execution of the judgment, 

3 Partners also have moved for dismissal for lack of finality. 

Partners did not make the motion in a timely fashion and have not 

explained the delay. See 10th Cir. R. 27.2.1 (party required to 

show cause if motion not made within 15 days of the filing of the 

notice of appeal). In any event, the motion is meritless and is 

hereby denied. Sureties' request for Rule 11 sanctions is also 

denied. 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 4 
but they were reluctant to release the lis pendens on account of 

$1.2 million in alleged mine improvements for which they expected 

to obtain recision on appeal. Appellants' 1st App. at 56 (May 20, 

1986 supersedeas bond hearing transcript). Cascade, on the other 

hand, had arranged for $400,000 in supersedeas bonds and other 

funds in lieu of supersedeas bonds to cover the judgment for 

improper project cost assessments and attorneys' fees. Id. at 55. 

The court gave Partners the choice of posting a cross-bond for 

$1.2 million in order to maintain the encumbrance or accepting the 

$400,000 in supersedeas bonds and funds and removing the 

4 encumbrance. Id. at 58. Partners chose the $400,000 arrangement 

and agreed to release the lis pendens. Id . But Partners did not 

disclose that they had previously recorded two judgment liens--the 

first on October 15, 1985, and the second on April 10, 1986--

against the Telegraph Mine claims. 

Sureties claim that they agreed to the supersedeas bond 

arrangements in reliance on representations that the Telegraph 

Mine claims would be free of encumbrance. They were interested in 

unencumbered property so that Cascade could obtain refinancing, 

4 The court stated to Partners' counsel: 

All right. And the judgment has in effect of [sic] 

extinguished your lis pendens. You're not entitled to a 

lis pendens once that has come to judgment unless you 

post a cross-bond. And if you're prepared to do that, 

I'll be willing to listen on a cross-bond. If they want 

to put up $400,000, and you say that lis pendens is 

worth a million two to you, put up the million two. And 

it's as simple as that. And if you don't want to make 

that decision, I'll make it for you. 

Appellants' 1st app. at 58 (May 20, 1986 hearing transcript). 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 5 
begin mine operations, and pay down its obligation to Sureties in 

the event Sureties were required to pay the judgment. See 

Appellants' 2d app. at 76-80 (Masanuga Affidavit); id. at 111 

(Ayabe Affidavit). In April 1987, Cascade filed for Chapter 11 

bankruptcy. As part of the reorganization plan, Cascade agreed to 

refinance the mine operations with premium gold bonds. Sureties 

contend that Cascade's attempted premium gold bond offering 

collapsed because Partners refused to release the "secret 

recordings" of October 15, 1985, and April 10, 1986, even though 

their judgment was secured by the supersedeas bonds. Had they 

been given proper notice of these recordings, which later were 

held invalid in an adversary proceeding in bankruptcy court, 5 they 

contend that they would not have entered the supersedeas bond 

undertakings. Instead, they have now paid the judgment and are 

left with only the recourse of unsecured creditors to Cascade's 

bankruptcy estate. 

A surety has a defense to liability if the creditor 

misrepresents or fails to disclose facts that are material to the 

risk undertaken by the surety. The Fifth Circuit has summarized 

the rule as follows: 

the suretyship bond is fragile, easily broken by the 

5 In an adversary proceeding brought by Cascade, the Bankruptcy 

Court held that the recordings did not amount to a perfected 

security interest and did not give constructive notice of the 

equitable lien included in the district court's September 15, 1985 

judgment. Partners appealed from this ruling and the district 

court dismissed the appeal for lack of a final order under 11 

U.S.C. § 158(d). We affirmed the district court's dismissal. 

Cascade Energy & Metals Corporation v. Banks (In re Cascade), No. 

91-4083, 1992 WL 19492 (10th Cir. Feb. 7, 1992) . 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 6 
conduct of the creditor. The validity of the contract 

may be vitiated ab initio by the creditor's actions 

during its creation. A creditor who, during 

negotiations, actively and fraudulently conceals 

pertinent facts cannot then turn to the surety for 

reimbursement. [Magee v. Manhattan Life Ins. Co., 92 

U.S. 93, 98 (1875)]; Town of Hamden v. American Surety 

Co., 93 F.2d 482, 484 (2d Cir. 1937). Similarly, the 

surety has a defense to liability if, before the 

obligation is undertaken, the creditor knew of facts 

unknown to the surety and which he had reason to believe 

were not known to the surety, the facts materially 

increased the obligor's risk and the creditor had 

adequate time to disclose them but failed in his 

responsibility. Restatement of Security, § 124 

(1941) ... Furthermore, assuming the suretyship 

agreement was initially enforceable, the creditor may 

thereafter lose the right to demand its coverage if he 

impairs any collateral to which the surety could look 

for reimbursement. United States v. Continental 

Casualty Co., 512 F.2d 475, 478 (5th Cir. 1975); 

Restatement of Security,§ 132 (1941). 

St. Paul Fire & Marine Ins. v. Commodity Credit Corp., 646 F.2d 

1064 (5th Cir. 1981). 

We have recognized the defenses articulated in St. Paul Fire 

& Marine Ins. See,~, Rocky Mountain Tool & Machine Co. v. 

Tecon Corp., 371 F.2d 589, 597-98 (10th Cir. 1966). However, we 

have clearly stated that it is the surety's burden to establish 

active misrepresentations or material omissions on the part of the 

creditor. Id. at 597. In this case, Partners contend that 

Sureties did not meet this burden, and they urge us to apply a 

clearly erroneous standard of review to the district court's 

finding to this effect. Appellees' brief at 10 ("The court found 

on the basis that the judgment creditors did not breach a duty of 

disclosure to the sureties."). This bold assertion is troubling 

in light of a review of the hearing transcripts, for the court 

clearly made no such finding. On the contrary, the court 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 7 
explicitly refused to consider Sureties' defenses and made no 

ruling on their repeated requests for an evidentiary hearing. 

See,~, Appellants' supp. app. at 297 (August 1, 1990 hearing 

transcript in which the court states: "Well, that's not before me. 

The enforcement question is before me, and I'm not going to get 

involved in some ancillary Lawsuits."). The court instead 

attempted to do equity between the parties by enforcing the 

supersedeas obligations but granting Sureties an equitable lien in 

the Telegraph Mine claims. 

Clearly the court was troubled by Partners' failure to 

disclose the judgment lien recordings. Otherwise it would not 

have granted the equitable lien in order to vindicate "the policy 

of absolute candor in Court." Id. at 328 (August 2, 1990 hearing 

transcript). But it did not rule on Sureties' defenses, and the 

effect of the nondisclosure is impossible for us to review given 

the lack of district court findings and the jumbled state of the 

record. We therefore remand for further proceedings. On remand, 

the district court is instructed to make findings regarding the 

effect of the nondisclosure of the judgment lien recordings. The 

court should determine whether Partners actively concealed 

pertinent information during the May 1986 supersedeas hearings. 

See St. Paul Fire & Marine Ins., 646 F.2d at 1072-73. Also, the 

court should find whether the recordings amounted to material 

nondisclosure under the standard set forth in the Restatement of 

Security§ 124 (1941), See St. Paul Fire & Marine Ins., 646 F.2d 

at 1073 ("Similarly, the surety has a defense to liability if, 

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Appellate Case: 90-4185 Document: 010110239027 Date Filed: 03/20/1992 Page: 8 
before the obligation is undertaken, the creditor knew of facts 

unknown to the surety and which he had reason to believe were not 

known to the surety, the facts materially increased the obligor's 

risk and the creditor had adequate time to disclose them but 

failed in his responsibility.") (citing Restatement§ 124). 

Depending on the findings, the court may fashion any necessary 

relief. 

II. Equitable Lien. 

On cross-appeal, Partners challenge the equitable lien that 

the district court granted Sureties. Partners failed to mention, 

however, that in the August hearings they suggested the lien. See 

Appellants' supp. app. at 312. We refuse to entertain this 

cross-appeal because Partners brought the error, if any, upon 

themselves. See Neu v. Grant, 548 F.2d 282, 287 (10th Cir. 1977). 

However, the equitable lien should of course be vacated on remand 

if the district court finds that Sureties are not liable on the 

supersedeas obligations. 

Entered for the Court 

BOBBY R. BALDOCK 

Circuit Judge 

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