On July 9, 2026, the Colorado Court of Appeals issued its opinion in Elk Creek Ranch Owners Association v. Elk Creek Ranch Development, Inc. and YZ Ranch, LLC, 2026 COA 58, addressing three issues: (1) when a postjudgment order denying one party’s attorney fee request becomes final and appealable in a multi-party case where other fee requests remain pending; (2) whether a breach of the implied duty of good faith and fair dealing constitutes a “default” triggering an attorney’s fees clause in a commercial lease; and (3) the proper methodology for calculating attorney fee awards under the lodestar method. The division reversed the district court’s denial of the Association’s fee request against YZ Ranch, reversed the fee award to ECRD, and remanded with directions.

Background

This case arises from a dispute concerning Elk Creek Ranch, a residential development in Rio Blanco County, Colorado. Elk Creek Ranch Development, Inc. (“ECRD”) developed the property and created its homeowners’ association, Elk Creek Ranch Owners Association (the “Association”). ECRD also formed a separate entity, ECO, to serve as the Association management company. Meanwhile, YZ Ranch, LLC, the owner of property adjacent to Elk Creek, entered a lease (the “Lease”) with ECO as tenant that granted fishing access along Elk Creek to the Association’s members.

The Association brought suit against YZ Ranch for breaching the implied duty of good faith and fair dealing under the Lease, against ECO for breaching its management agreement with the Association (the “Management Agreement”), and against ERCD for violating the protective covenants that govern the development (the “Covenants”). At the close of evidence, the court dismissed the Associations claims against ERCD on statute of limitations grounds. The remaining claims went to trial, where the jury found in the Association’s favor against YZ Ranch and ECO.

Following trial, the parties filed multiple requests for postjudgment attorney fees. The Association sought fees from YZ Ranch under the Lease and from ECO under the Management Agreement; as for ECRD, it sought fees from the Association under the Covenants.  On August 20, 2024, the district court denied the Association’s fee request against YZ Ranch—concluding that under the plain language of the Lease, YZ Ranch, as landlord, could never trigger the fee-shifting clause—while simultaneously granting the Association’s fee request against ECO and granting ECRD’s fee request against the Association. The granted fee requests were not reduced to sums certain until a subsequent order entered on April 4, 2025. The Association filed its notice of appeal on May 21, 2025.

The Division’s Analysis

Appellate Jurisdiction and Finality. As a threshold matter, the division addressed whether the Association’s notice of appeal was timely under C.A.R. 4(a), given that it was filed more than 49 days after the August 20, 2024 order denying its fee request against YZ Ranch. The division applied the two-part finality test from Luster v. Brinkman, 250 P.3d 664 (Colo. App. 2010), asking (1) whether the order completely resolved the rights of the parties as to the particular part of the action in which it was entered, and (2) whether the order was more than merely ministerial. The division concluded that because other parties’ fee requests remained pending and had not yet been reduced to sums certain, the August 2024 order did not finally resolve all fee-related matters. Relying on persuasive federal authority—Mayer v. Wall Street Equity Group, Inc., 672 F.3d 1222 (11th Cir. 2012), and In re Syngenta AG MIR 162 Corn Litigation, 61 F.4th 1126 (10th Cir. 2023)—the division held that piecemeal appeals of fee orders should be avoided when other fee requests in the same action remain outstanding. Accordingly, the final appealable order was the April 4, 2025 order reducing the granted fee awards to sums certain, making the Association’s May 21, 2025 notice of appeal timely under C.A.R. 4(a).

Fee-Shifting Under the Terms of the Lease. On the merits, the division reversed the district court’s denial of the Association’s attorney fee request against YZ Ranch. Section 11.15 of the Lease provided for attorney’s fees upon “a default on the part of either party in the performance of any of the terms and conditions of this Lease.” The district court had read the undefined, lowercase term “default” as coextensive with the defined term “Default” in Section 8.1—which referred only to a “Default by Tenant” (e.g., failure to pay rent)—and thus concluded that YZ Ranch, as landlord, could never trigger the fee clause.

The division disagreed, holding instead that an undefined term in a contract must be given its plain and ordinary meaning and is not interchangeable with terms that the same instrument defines elsewhere. Applying the plain-meaning definition of “default,” the division held that any breach of contract constitutes a “default” under Section 11.15. The division further held that because a breach of the implied duty of good faith and fair dealing is itself a breach of contract—not a separate tort or independent cause of action—the jury’s finding that YZ Ranch breached the implied duty of good faith and fair dealing under the Lease entitled the Association to reasonable attorney’s fees and costs from YZ Ranch under Section 11.15.

Attorney Fee Award Methodology. Finally, the division reversed the district court’s award of $1,261,649.10 in attorneys’ fees to ECRD under the Covenants. The district court found, and the division affirmed, that ERCD’s fee request was unreasonable because the matter was overstaffed and ERCD failed to isolate the fees it actually incurred from those incurred by YZ Ranch and ECO, parties that shared the same counsel. But rather than excluding these unreasonable hours before calculating the lodestar, the district court calculated the full lodestar first and then applied a flat twenty-five percent reduction.

The division held this was backwards under Payan v. Nash Finch Co., 2012 COA 135M. Under Payan and Hensley v. Eckerhart, 461 U.S. 424 (1983), the US Supreme Court instructed that to calculate the lodestar, courts must first determine the “reasonable number of hours expended by counsel” on the case by excluding the “excessive, redundant, or otherwise unnecessary” hours and then multiply these reasonable hours by the reasonable hourly rate.  Applying Payan, the division reasoned thatan across-the-board percentage reduction after calculating the lodestar, like the district court applied here, inverts the proper methodology and constitutes reversible error.

Significance

This opinion offers several practical takeaways for Colorado practitioners. First, on appellate jurisdiction, the division’s holding establishes that in cases with requests for postjudgment attorney fees from multiple parties, a denial of one request is not final and appealable until all requests have been resolved and reduced to sums certain. Second, the decision underscores the importance of precise drafting in fee-shifting clauses. The division’s distinction between the undefined, lowercase term “default” and the specifically defined, capitalized term “Default” reinforces that courts will not conflate defined and undefined terms. Third, the division’s holding clarifies that a successful good-faith-and-fair-dealing breach can independently support an attorney fee award depending on the plain language of the contract’s fee-shifting clause. Fourth, the division’s treatment of the lodestar methodology reaffirms that courts must exclude unreasonable, excessive, and redundant hours before calculating the lodestar, not after. Courts may not shortcut the analysis by applying a blanket percentage reduction to a lodestar calculated from unfiltered hours.

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For questions about this legal alert, please contact a member of the Davis Graham Appellate Group.

Table of Contents

• SEC Seeks Public Comment on Novel Exchange-Traded Funds
• Supreme Court Unanimously Upholds the SEC’s Ability to use “Disgorgement” In Sripetch V. SEC
• SEC Announces Enforcement Results for Fiscal Year 2025
• Supreme Court Decision in FS Credit Opportunities Corp. v. Saba
• SEC Publishes Draft Strategic Plan For FY 2026-2030
• SEC Rescinds Policy Regarding Denials of Settlements in Enforcement Actions

SEC SEEKS PUBLIC COMMENT ON NOVEL EXCHANGE-TRADED FUNDS

On June 30, the U.S. Securities and Exchange Commission’s (“SEC” or “Commission”) issued a request for public comment (the “Request for Comment”) from funds, their advisers, investors and other market participants on exchange-traded funds (“ETFs”) seeking to invest in innovative asset classes or engage in novel investment strategies (“Novel ETFs”). The Request for Comment specifically seeks comments on ways to facilitate innovation in ETFs while still protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

The Request for Comment noted that ETF sponsors have expressed interest in providing exposure markets, and facilitating capital formation, including crypto assets; commodity-focused instruments; single‑stock strategies; heightened leverage; blockchain-enabled opportunities; private assets; event contracts; and/or a combination of the aforementioned categories. The Request for Comment outlined questions that have been raised by market participants regarding Novel ETFs (for example, whether a Novel ETF would qualify as an “investment company” or operate pursuant to the requirements of Rule 6c-11 under the Investment Company Act of 1940 (the “1940 Act”).

Under Section 3 of the 1940 Act, “investment company” is defined as an issuer that (i) is or holds itself out as being engaged primarily , or proposes to engage primarily in the business of investing, reinvesting, or trading in securities (the “Subjective Test”), or (ii) is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% or more of such issuer’s total assets (exclusive of Government securities and cash items), on an unconsolidated basis.  Among other questions, the Request for Comment asks whether a Novel ETF would meet the Subjective Test even if its principal investment strategy is to invest in securities that may not be securities.

With respect to Rule 6c-11 under the 1940 Act, the Request for Comment includes, for example, questions regarding portfolio-related conditions, including (i) whether the assets of Novel ETFs present any questions regarding the functioning of the ETF arbitrage mechanism and the supporting secondary trading activity, investor protection, the maintenance of fair, orderly, and efficient markets, or other structural or operational issues, and (ii) whether Rule 6c-11 should be amended to address these or other questions related to Novel ETFs.

Among other items, the Request for Comment also includes questions regarding automatic effectiveness of post-effective amendments filed pursuant to Rule 485 under the Securities Act of 1933, including whether the 75-day and 60-day automatic effectiveness periods should be extended for Novel ETFs.

Comments must be submitted to the Commission by August 31.

SUPREME COURT UNANIMOUSLY UPHOLDS THE SEC’S ABILITY TO USE “DISGORGEMENT” IN SRIPETCH V. SEC

On June 4, the United States Supreme Court (the “Court”) issued a unanimous decision in Sripetch v. Securities and Exchange Commission, No. 25-466, addressing what the SEC must show to obtain disgorgement from a defendant in federal court. The Supreme Court held that the SEC need not prove investor pecuniary loss to obtain disgorgement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), so long as the remedy is directed to the defendant’s unjust gains and otherwise fits within the equitable framework assumed by the Court for purposes of the case. In doing so, the Court also resolved a circuit split: the First and Ninth Circuits did not require proof of investor pecuniary loss, while the Second Circuit did.

Sripetch arose against the backdrop of the SEC’s evolving authority to seek monetary remedies in federal securities enforcement actions. As explained in the Supreme Court’s decision, when Congress created the SEC in the 1930s, the SEC’s statutory enforcement toolkit did not include monetary awards and was limited principally to seeking injunctions against future violations of the federal securities laws. Congress later expanded the agency’s enforcement powers, including by authorizing monetary penalties in 1990. Beginning in the 1970s, however, courts began permitting the SEC to seek disgorgement as ancillary equitable relief in enforcement actions. In 2002, Congress enacted the Sarbanes-Oxley Act, which, among other things, provides that the SEC may seek “equitable relief” for the “benefit of investors” in civil actions under Section 21(d)(5) of the Exchange Act.

Over time, the SEC’s disgorgement practice became a significant enforcement remedy and, in some cases, produced awards that were deposited with the United States Treasury or exceeded the defendant’s own profits from the alleged violation. The Supreme Court previously addressed aspects of that practice by applying a five-year statute of limitations in Kokesh v. SEC, 581 U. S. 455 (2017), and by imposing two “traditional equitable principles” limits on its use: (1) remedies are limited to a defendant’s net profits, and (2) the award must go to victims rather than be imposed as a penalty where feasible, Liu v. SEC, 591 U.S. 71 (2020).

After Liu, Congress amended the Exchange Act in a way that made the SEC’s disgorgement authority more explicit but also generated new questions about the relationship between statutory disgorgement and equitable limits. Congress left intact Exchange Act Section 21(d)(5), which authorizes “equitable relief,” and added Section 21(d)(7), which expressly authorizes the SEC to seek disgorgement in enforcement proceedings. Congress also provided that federal district courts may require disgorgement of “any unjust enrichment” received as a result of a securities-law violation and added limitations provisions addressing both equitable relief and disgorgement. Unlike Section 21(d)(5), Section 21(d)(7) does not contain language requiring relief to be “for the benefit of investors,” which led to differing views about how Liu’s requirements apply after the statutory amendments and created the conflict that prompted Supreme Court review. The Second Circuit held that the disgorgement remedy under both Sections 21(d)(5) and 21(d)(7) is equitable and available only if it can be awarded to victims, which the court defined as those who have suffered “pecuniary harm.” In contrast, the First Circuit held that, because disgorgement’s purpose is to deprive wrongdoers of ill-gotten gains, a pecuniary harm showing is not required.

In Sripetch, the underlying dispute stemmed from a civil enforcement action against Ongkaruck Sripetch (“Sripetch”) and other defendants in the United States District Court for the Southern District of California, in which the SEC alleged securities-law violations arising from alleged classic “pump and dump” schemes involving at least 20 penny-stock companies. The SEC charged Sripetch with six counts of securities fraud and one count of selling unregistered securities, and it sought, among other remedies, disgorgement of more than $6.6 million in ill-gotten gains. Sripetch ultimately consented to entry of judgment and agreed that the District Court could order disgorgement, but when the SEC sought more than $4.1 million in disgorgement, Sripetch objected that the request was inconsistent with Liu v. SEC because the SEC had not shown that investors suffered financial losses and therefore had not identified “victims” for whom disgorgement could be awarded. The SEC responded that investors may qualify as victims even without proof of pecuniary loss and, in the alternative, that its evidence showed investor pecuniary harm in any event. The District Court for the Southern District of California accepted the SEC’s alternative evidentiary position, concluded that the SEC had made an adequate showing of pecuniary harm, and ordered disgorgement of $2,251,923.16 in net profits plus prejudgment interest without deciding whether such a showing was legally required.

On appeal, Sripetch again argued that disgorgement under Exchange Act Sections 21(d)(5) and 21(d)(7) requires proof that investors suffered pecuniary harm. The Ninth Circuit ruled against Sripetch, concluding that demonstrating pecuniary loss to investors is unnecessary to support a disgorgement order. The Ninth Circuit acknowledged Liu’s requirement that disgorgement be awarded for victims but rejected the argument that “victim” status turns on proof of measurable financial loss. In doing so, the Ninth Circuit aligned with the First Circuit and rejected the Second Circuit’s approach. The Supreme Court granted certiorari to decide the narrow question whether the SEC must prove that investors suffered pecuniary loss before obtaining disgorgement under Section 21(d)(5) or Section 21(d)(7) of the Exchange Act.

In a unanimous opinion by Justice Gorsuch, the Court affirmed the Ninth Circuit, holding that the SEC does not need to show financial harm to investors. The Court explained that traditional equitable principles do not require proof of pecuniary loss and that a person whose legally protected interests have been invaded may qualify as a victim for disgorgement purposes even without a measurable financial loss. Accordingly, the Supreme Court rejected Sripetch’s reading of Liu v. SEC because Liu required disgorgement to be “awarded for victims,” but did not make pecuniary loss a prerequisite to victim status. The Court also rejected Sripetch’s “status quo” argument, reasoning that, where a defendant is unjustly enriched without leaving the victim financially worse off, equity traditionally favors stripping the wrongdoer’s gain rather than allowing the wrongdoer to retain the benefit.

The Supreme Court’s decision in Sripetch further distinguished SEC enforcement actions from private securities-fraud suits, which do require a preliminary showing of the plaintiff’s economic loss. The Court, however, did not decide the full scope of the SEC’s post-Liu disgorgement authority, including whether Congress’s addition of Section 21(d)(7) displaced any traditional equitable limits on disgorgement. Justice Thomas concurred, agreeing with the result while stating that a future case should address whether SEC disgorgement under the amended Exchange Act is a legal remedy that implicates the Seventh Amendment right to a jury trial.

SEC ANNOUNCES ENFORCEMENT RESULTS FOR FISCAL YEAR 2025

On April 6, the Commission announced enforcement results for its fiscal year ended September 30, 2025 (“FY 2025”). During FY 2025, the Commission filed 456 enforcement actions comprised of 303 standalone actions and 69 follow on administrative proceedings that sought to bar or suspend individuals from certain securities market functions based on criminal convictions, civil injunctions, or other orders. The Commission obtained orders for monetary relief of $17.9 billion.

The press release announcing the enforcement results (the “Press Release”) included that, “[t]hese enforcement actions addressing a broad range of misconduct demonstrate the Commission’s prioritization of cases that directly harm investors and the integrity of the U.S. securities markets, including offering frauds, market manipulation, insider trading, issuer disclosure violations, and breaches of fiduciary duty by investment advisers.” The Press Release also noted that FY 2025 was a transition period for the enforcement division, noting its renewed focus on bringing actions that prevent investor harm and that moving forward, enforcement priorities and results would be linked to the Commission’s core mandate and focus on (i) standing up to fraud and market participants engaged in such misconduct; (ii) addressing fraudulent and manipulative conduct through appropriate remediation; and (iii) repaying investor losses when harmed.

SUPREME COURT DECISION IN FS CREDIT OPPORTUNITIES CORP. V. SABA

On June 11, the United States Supreme Court held in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., No. 24-345, that Section 47(b) of the 1940 Act does not impliedly allow private parties to sue for rescission of contracts that allegedly violate the 1940 Act. The 6–3 decision reverses the prior decision by the Second Circuit and resolves a longstanding circuit split.

 Section 47(b) of the 1940 Act permits rescission of any contract that allegedly violates the 1940 Act as a remedy to parties to such a contract, provided that rescission would not produce a more inequitable result than performance. In recent years, litigants have argued that Section 47(b) implicitly creates a private right of action for rescission available not just to parties to the contract, but to any investor affected by it.

 The case arose from a dispute between investment companies that manage closed-end mutual funds (the “Funds”) and Saba Capital Master Fund, Ltd., and Saba Capital Management, L.P. (collectively, “Saba”), each an activist investor. The Funds were incorporated in Maryland and adopted resolutions opting into the Maryland Control Share Acquisition Act, which limits the voting rights of shareholders holding a disproportionate number of shares—such as activist investors—unless other shareholders approve. Saba sued the Funds, arguing that these resolutions violate the 1940 Act’s requirement that every share of stock be a voting stock with equal voting rights. Saba’s argument relied on Section 47(b), which provides that “a court may not deny rescission” of contracts violating the 1940 Act “at the instance of any party” unless certain equitable conditions are met.

 The Court’s reasoning focused on several arguments, including the following:

1. The Court concluded that Section 47(b)’s language stating “a court may not deny rescission at the instance of any party” is a directive to courts, not a grant of rights to individuals. This language assumes that parties are already before the court and merely directs how courts should exercise their remedial authority; it does not confer a standalone right to sue.
2. The Court noted that under longstanding contract-law principles, rescission is a remedy, not a cause of action in and of itself.
3. The Court observed that Congress created two express private rights of action elsewhere in the 1940 Act—for breach of fiduciary duty by investment advisers and for recovery of certain short-term profits. The existence of these express provisions demonstrates that when Congress wants to provide a private remedy, it does so expressly.
4. Saba relied heavily on the Court’s 1979 decision in Transamerica Mortgage Advisors, Inc. v. Lewis (“TAMA”), which found an implied right of action in a comparable “shall be void” provision of the Investment Advisers Act of 1940 (“Advisers Act”). However, the Court noted that Congress amended Section 47(b) in 1980 to delete the “shall be void” language on which TAMA relied and replaced it with language focused on a court’s remedial authority. In contrast, Congress retained “shall be void” language in other related provisions, suggesting the change was intentional and substantive rather than merely clarifying.

The Court’s decision significantly narrows the ability of private parties (including activist investors) to bring implied private suits under the 1940 Act to challenge fund governance decisions. The decision also reinforces the principle that the SEC, as the 1940 Act’s primary enforcer, is the principal avenue for addressing alleged 1940 Act violations, and private enforcement must be grounded in an express statutory grant.

SEC PUBLISHES DRAFT STRATEGIC PLAN FOR FY 2026-2030

On June 2, the SEC published its Draft Strategic Plan (the “Draft Strategic Plan”) for Fiscal Years 2026-2030 and opened the plan for public comment through July 2, 2026. The Draft Strategic Plan provides a roadmap for the agency’s direction and the initiatives SEC Chairman Paul Atkins intends to advance.

The Draft Strategic Plan indicates that the SEC is focusing on three primary goals as part of its strategy over the next four years:

• Goal 1: Modernize regulation. The SEC plans to update its regulatory approach to better support innovation, capital formation, market efficiency, and investor protection, including by addressing digital assets, distributed ledger technology, and alternative trading platforms. In particular, the Draft Strategic Plan emphasizes easier access to public and private capital markets, modernized early-stage fundraising rules, streamlined disclosure, updated shelf registration, and improvements to Regulation A for smaller issuers.
• Goal 2: Change regulatory practices. The SEC plans to increase engagement with stakeholders, make compliance easier for market participants, and shift enforcement back toward clear violations of established law, especially fraud and manipulation. The Draft Strategic Plan specifically identifies possible retrospective review of rules involving foreign private issuers, quarterly and private fund reporting, executive compensation, alternative trading systems, and market structure.
• Goal 3: Improve internal operations. The SEC plans to reorganize, modernize technology, improve performance management, and use internal reporting to track accountability, resource use, and program success.

The Draft Strategic Plan indicates that the SEC seeks to regulate in a way that is more innovation-friendly, more predictable for market participants, more focused on fraud and manipulation, and more efficient internally.

Compared with the strategic plan adopted under former Chairman Gary Gensler for Fiscal Years 2022-2026, the Draft Strategic Plan retains the same mission statement, and both plans emphasize technology, data, and the need to keep pace with changing markets. Under SEC Chairman Paul Atkins’ Draft Strategic Plan, however, the order of priorities has shifted. For instance, the SEC’s plan for Fiscal Years 2022-2026 emphasized keeping pace with emerging risks through enforcement measures. By contrast, the Draft Strategic Plan states that enforcement should focus on established legal violations and should not be used as a substitute for policymaking. Accordingly, the plan signals a likely push toward clearer, more formal rules rather than regulation primarily through enforcement.

Going forward, market participants should watch for the final Strategic Plan, along with any additional SEC rulemaking or guidance, to evaluate how these activities correspond with the SEC’s stated strategic priorities in the draft Strategic Plan.

SEC RESCINDS POLICY REGARDING DENIALS OF SETTLEMENTS IN ENFORCEMENT ACTIONS

Historically, pursuant to Rule 202.5(e) of the SEC’s informal rules of procedure, defendants or respondents settling enforcement actions were required to agree not to publicly deny the allegations made in an SEC complaint or administrative order. On May 18, the SEC rescinded this informal rule. As a result, defendants settling SEC enforcement actions are no longer required to comply with no-deny restrictions as a condition of settlement. Such defendants will now be able to freely comment on and contest such allegations made in enforcement actions.

The SEC gave four reasons for the rescission of the informal rule:

1. The Commission noted that it is not aware of any instance in which an action was reopened following a violation of the no-deny provision.
2. Given the prevalence of social media, implementation of the rule has become more difficult and the line between public and private statements has become less clear.
3. Rescinding this rule aligns the SEC with the majority of federal agencies that do not have a similar rule.
4. Rescinding the rule gives the Commission additional flexibility in settling enforcement actions. The SEC noted that the rule will no longer “preclude settlements with defendants who do not wish to waive their rights by signing a no-deny provision that imposes a contractual obligation regarding denials that continues into the future beyond the time of settlement.”

Going forward, the SEC has stated that it will no longer enforce no-deny restrictions that have previously been agreed to in settlements.

UPCOMING CONFERENCES

2026
Date	Host*	Event	Location
7/21	MFDF	Director Discussion Series – Open Forum (Philadelphia)	Philadelphia, PA
7/21	MFDF	Board Oversight of Subadvisers: Compliance and Regulatory Issues	Webinar
7/28	MFDF	Director Discussion Series – Open Forum (NYC)	New York, NY
7/29	ICI/IDC	Cybersecurity in the Age of AI: A Primer for Fund Directors	Webinar
7/29	MFDF	Closed-End Fund Roundtable	New York, NY
9/1	MFDF	AI in the Fund Boardroom	Webinar
9/9	MFDF	Section 351 & ETF Formation: What Fund Directors Need to Know	Webinar
9/14	MFDF	Intermediary Fees: What Today’s Trends Mean for Independent Directors	Webinar
9/15-17	ICI/IDC	Compliance, Risk, and Legal Conference	Nashville, TN
9/17	MFDF	How the SPIVA U.S. Scorecard Understates the Performance of Actively Managed Mutual Funds – What Directors Should Know	Webinar
9/23	MFDF	Director Discussion Series – Open Forum	Denver, CO
9/27-30	ICI/IDC	Tax and Accounting Conference	Marco Island, FL
10/15	MFDF	In Focus – Board Oversight Approaches to AI and Risk Management	Webinar
10/21	MFDF	Director Discussion Series – Open Forum	Boston, MA
10/26-28	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/10	ICI/IDC	2026 Retail Alternatives and Closed-End Funds Conference	New York, NY
11/2	MFDF	ETFs, Mutual Funds, and Taxes: A Structural Comparison for Fund Boards	Webinar
11/9	MFDF	In Focus – Usage of AI in the Boardroom	Virtual
12/2-3	ICI/IDC	Foundations for Fund Directors	Virtual

2027
Date	Host*	Event	Location
2/1	MFDF	2027 Directors’ Institute	Amelia Island, FL
2/3-5	ICI/IDC	ICI Innovate	Phoenix, AZ
3/14-17	ICI/IDC	Investment Management Conference	San Diego, CA
4/8	MFDF	2027 Fund Governance & Regulatory Insights Conference	Washington, DC
5/10-12	ICI/IDC	Leadership Summit	Washington, DC
5/10-12	ICI/IDC	Fund Directors Workshop (IDC)	Washington, DC
6/7-9	ICI/IDC	ETF Conference	New Orleans, LA
9/19-22	ICI/IDC	Tax and Accounting Conference	Phoenix, AZ
10/25-27	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/9	ICI/IDC	Retail Alternatives and Closed-End Funds Conference	New York, NY

*Host Organization Key: Mutual Fund Directors Forum (“MFDF”), Independent Directors Council (“IDC”), and Investment Company Institute (“ICI”)

© 2026, Davis Graham & Stubbs LLP. All rights reserved. This newsletter does not constitute legal advice. The views expressed in this newsletter are the views of the authors and not necessarily the views of the firm. Please consult with your legal counsel for specific advice and/or information.

On June 11, 2026, the Colorado Court of Appeals held in Nunn v. Nestor, 2026 COA 49, that a verdict form labeled “Special Verdict Form” was in fact a general verdict accompanied by answers to interrogatories under Colorado Rule of Civil Procedure 49(b). The division reached this conclusion because the verdict form required the jury to decide the ultimate legal result of each claim, leaving nothing for the court to do but enter judgment. Because the form constituted a general verdict rather than a special verdict, the defendant-appellant was required to object to any inconsistency before the jury was discharged. His failure to do so resulted in waiver of the right to raise that challenge on appeal.

Background

In May 2021, Officer Nestor pulled over Nunn, a young black man, for failing to yield to an emergency vehicle. As Nunn handed Nestor his registration and reached for his wallet to produce his driver’s license, Nestor drew his gun and called for backup. Nunn got out of his car at gunpoint as more officers arrived. Once out of the car, Nunn was tackled to the ground by another officer, tased twice, arrested, and charged with several crimes. All charges were later dismissed.

Nunn sued Nestor for excessive force, unreasonable seizure, failure to intervene in another officer’s use of force, and an equal protection violation based on racial discrimination. The jury found in Nunn’s favor only on the excessive force claim based on the officer pointing his weapon at Nunn.

Nestor appealed, contending that the jury’s verdict was irreconcilably inconsistent. Nunn responded that Nestor failed to preserve that issue for appeal because he did not object before the jury was dismissed.

Both arguments turned on whether the jury’s verdict was (1) a special verdict, or (2) a general verdict with special interrogatories. A challenge to a special verdict need not be preserved before the jury is discharged, but a challenge to a general verdict with interrogatories must be raised before discharge or it is waived.

The Jury Verdict Form

The trial court submitted a verdict form to the jury labeled “SPECIAL VERDICT FORM-DEFENDANT NESTOR.” In relevant part, the verdict form asked:

SECTION I: PRESTON NUNN’S EXCESSIVE FORCE CLAIM AGAINST GABRIEL NESTOR

1. Did Defendant Gabriel Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from excessive force?

Yes X No    

. . . .

(a). Did Defendant Gabriel Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from excessive force when he pointed his duty weapon at Plaintiff Nunn?

Yes X No    

(b). Did Defendant Gabriel Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from excessive force when he used his Taser on Plaintiff Nunn?

Yes     No X

. . . .

SECTION II: PRESTON NUNN’S UNREASONABLE SEIZURE CLAIM AGAINST GABRIEL NESTOR

1. Did Defendant Gabriel Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from unlawful seizure?

Yes     No X

The Division’s Analysis 

The Division began by highlighting that Colo. R. Civ. P. 49 is identical to Fed. R. Civ. P. 49, and that the Division may look to federal authority for guidance in construing the Colorado rule.

The division recognized that the Colorado Rules of Civil Procedure contemplate three types of verdicts and described each as follows:

• General Verdict: A verdict by which the jury finds in favor of one party or the other, as opposed to resolving specific legal questions. The hallmark of a general verdict is that it requires the jury to announce the ultimate legal result of each claim and leaves nothing for the judge to do other than enter judgment.

• Special Verdict: A verdict in which the jury makes findings only on factual issues submitted by the judge, and the judge decides the legal effect of those findings. It is a special verdict only if the judgment itself requires the judge to apply the law to the facts found by the jury.

• General Verdict with Interrogatories: A verdict that combines a general verdict with factual questions that, standing alone, would be special verdicts. If the court asks for a general verdict, then any factual question is an interrogatory.

The division reaffirmed that if a party fails to object to a Rule 49(b) general verdict accompanied by answers to interrogatories before the jury is discharged, the party waives any later challenge based on an alleged inconsistency. A timely objection matters because it gives the trial court the option to send the jury back for further deliberations.

The division next examined the language of the verdict form, which was labeled as a “Special Verdict Form.” The form asked the jury:

• “Did Defendant Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from excessive force?”
• “Did Defendant Nestor deprive Plaintiff Preston Nunn of his constitutional right to be free from unlawful seizure?”

The division concluded that those questions required the jury to decide the ultimate legal result of each claim. By answering these questions, the jury left nothing for the court to do but enter judgment. All remaining factual questions were therefore interrogatories accompanying a general verdict under Rule 49(b).

The verdict form’s label as a “Special Verdict Form” did not change the conclusion because the label given to a verdict form is not controlling.

Accordingly, the division held Nestor needed to object to any inconsistencies before the jury was discharged to preserve the issue for appellate review. Because he didn’t object, Nestor was barred from raising his inconsistent-verdict argument on appeal.

Implications 

In order to preserve its rights to appeal, a party should object to a plausible verdict-inconsistency issue before the jury is discharged. Waiting until post-trial motions or appeal risks waiver of the objection if the verdict is later characterized as a general verdict or a general verdict accompanied by answers to interrogatories.

In addition, parties should examine the verdict form’s language, not just the label. If the form requires the jury to determine liability or damages and leaves only entry of judgment for the court, the form may be treated as a general verdict even if it is labeled as a “Special Verdict Form.” The division’s decision also reinforces the importance of preserving objections in real time. This preserves the client’s right to challenge a verdict’s consistency on appeal.

This decision clarifies the boundaries between special verdicts and general verdicts (including general verdicts with interrogatories). The division’s reasoning reinforces that substance—not the form’s label—controls the classification.

The Court of Appeals affirmed.   

The opinion was authored by Judge Moultrie, Judges Gomez and Berger concurring.

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For questions about this legal alert, please contact a member of the Davis Graham Appellate Group.

DENVER – July 7, 2026 – Davis Graham & Stubbs LLP is pleased to announce that Maria Y. Luna will join Kathleen Schroder as Co-Chair of the Davis Graham Clean Energy & Sustainability Group.

“Maria has long been an important contributor to the firm’s clean energy and renewable energy work,” said Zachary D. Detra, Head of the firm’s Transactions Department. “Her experience advising clients on large-scale renewable energy projects, combined with her practical approach to real estate and project development matters, will further strengthen the group’s ability to serve clients across the clean energy sector.”

Maria has extensive experience representing clients across the United States in large-scale real estate matters, with a particular focus on renewable energy and complex, multi-site acquisitions spanning industrial, retail, and office properties nationwide. Her practice encompasses utility-scale renewable energy projects, leasing, acquisitions, and dispositions. She regularly represents clients developing utility-scale wind and solar projects, guiding them through the full range of issues these developments present, including title, access, easements, and leasing. 

Davis Graham’s Clean Energy & Sustainability Group advises clients on clean energy projects from start to finish, including project siting and permitting, and contractual agreements. The group’s work spans wind, solar, geothermal, green hydrogen, biomass, renewable natural gas, hydrogen, renewable energy storage, and carbon capture, use, and sequestration.

BLM Issues Curative NEPA Analysis for Wyoming Leases Subject to WildEarth Guardians and Western Watersheds Project Litigation

On June 5, 2026, the Bureau of Land Management (BLM) Wyoming State Office released a long-awaited environmental assessment (EA) intended to cure National Environmental Policy Act (NEPA) deficiencies affecting hundreds of federal oil and gas leases in Wyoming sold between 2015 and 2020. The EA supplements the NEPA analysis for the May 2015, August 2015, November 2015, February/May 2016, August 2016, November 2016, February 2017, June 2017, September 2017, September 2018, March 2019, and March 2020 Wyoming lease sales.

Environmental groups challenged these lease sales in WildEarth Guardians v. Haaland, No. 1:16-cv-01724 (D.D.C.) (“WEG I”), WildEarth Guardians v. Haaland, No. 1:20-cv-00056 (D.D.C.) (“WEG II”), WildEarth Guardians v. Haaland, No. 1:21-cv-00175 (D.D.C.) (“WEG III”), and Western Watersheds Project v. Haaland, No. 1:18-cv-00187 (D. Idaho). The supplemental NEPA analysis was required either because a court found error in BLM’s original analysis or through settlement agreements. The EA provides additional analysis on the effects of leasing on greenhouse gas emissions and greater sage-grouse, among other resources.

The EA has two significant consequences for federal oil and gas lessees in Wyoming. First, it allows BLM to resume approving applications for permit to drill (APDs) on leases covered by the EA. Second, it may cause lease suspensions to terminate. BLM had suspended leases subject to the WEG and Western Watersheds Project cases upon lessees’ request. Lessees should review their suspension terms carefully to determine whether the EA’s issuance caused suspensions to terminate automatically and primary terms to resume running.

Notably, the EA does not address lease sales challenged in Montana Wildlife Federation v. Burgum, No. 4:18-cv-00069-BMM (D. Mont.), which include the December 2017, March 2018, June 2018, February 2019, September 2019, December 2019, and December 2020 Wyoming lease sales. The Montana Wildlife Federation court has canceled most of these leases, rendering them ineligible for curative NEPA analysis.

District of Montana Vacates Oil and Gas Leases in Phase III of Montana Wildlife Federation

On June 12, 2026, the U.S. District Court for the District of Montana adjudicated the third phase of challenges to federal oil and gas lease sales in Montana Wildlife Federation v. Burgum, No. 18-cv-0069 (D. Mont.). The court found that, when deciding to lease, BLM did not properly apply a directive in its resource management plans (RMPs) requiring it to prioritize oil and gas leasing and development outside of sage-grouse habitat. As a result, the court vacated all nonproducing leases sold at the March and December 2019 Montana/Dakota lease sales and the February, September, and December 2019 Wyoming lease sales. The court declined to vacate nine producing leases from these sales and did not vacate BLM’s offering of parcels at the December 2020 Wyoming lease sale.

This decision aligns with prior rulings in the case. In Phase I (2020) and Phase II (2022), the court similarly vacated oil and gas leases after finding BLM failed to comply with the prioritization directive. The Ninth Circuit affirmed the Phase I decision, and an appeal of the Phase II decision is pending.

The Phase III decision is notable not only for vacating a broad swath of oil and gas leases but for sparing nine producing oil and gas leases. The court declined to vacate only those leases on which actual production, i.e., drilling, occurred. Leases held by communitized or unitized production, but on which drilling had not occurred, were vacated.

The court also declined to vacate BLM’s decision to offer leases at the December 2020 Wyoming lease sale. The court reasoned that, because BLM had not issued these leases, no final agency action existed that the court could vacate. The court expressly allowed BLM to complete further NEPA analysis to determine whether to issue these leases.

For the vacated leases, BLM will not immediately return monies to leaseholders. The court stayed the effectiveness of its decision to allow for appeals. As of July 15, 2026, no appeals have been filed.

Although the decision invalidates thousands of acres of existing leases, it may have a limited effect on future leasing. The prioritization directive was contained in BLM’s 2015 RMPs for greater sage-grouse management. BLM has since revised these RMPs, and the revised RMPs lack a prioritization directive. Moreover, Public Law 119-21 (2025), colloquially known as the One Big Beautiful Bill Act, requires BLM to offer for lease any lands designated as open for leasing in an RMP that received a nomination.

For questions about this legal alert, please contact a member of the Davis Graham Environmental & Public Lands Group.

On June 23, 2026, the United States Court of Appeals for the Federal Circuit affirmed a district court decision that an Enanta Pharmaceuticals patent was invalid as anticipated by Pfizer’s public disclosure. The court held that Enanta’s provisional patent application did not sufficiently support the subject matter later claimed in the eventual patent and rejected patentee’s argument that the missing disclosure was a simple typographical error.

Provisional applications are often filed shortly before a public disclosure, such as a presentation at a conference, a big meeting with investors, or a publication in a journal.  At times, the decision to file a patent application is a last-minute consideration and rushed. However, this case provides a pointed lesson in how such hastiness can have dire consequences, particularly in competitive areas of technology where multiple companies are striving to reach the same goals.

Here, Enanta filed a provisional patent application on July 20, 2020, disclosing a chemical composition where one of the substituents was identified as NHC(O)-C₂-C_12, whereas the later granted patent claims a composition where that substituent is identified as NHC(O)-C₁-C₁₂. Enanta first introduced the C₁ substituent in its first non-provisional patent application one year after the provisional filing on July 19, 2021, which is perfectly permissible.

However, in the meantime at Pfizer, work was being carried out on the C₁-substituent compound, and during the time between Enanta’s provisional and non-provisional patent application filings, Pfizer presented the C₁-substituent compound at a presentation on April 6, 2021.  This presentation created an intervening public disclosure. Pfizer went on to commercialize a compound identical to the claims, including the C₁ substituent. Enanta sued Pfizer for infringement of that claim in its granted patent.

The issue in the case was whether the compound having the C₁ substituent was sufficiently disclosed in the provisional application to support the later granted claims, which included the C₁ compound. Enanta argued that the difference between NHC(O)-C₂-C₁₂ and NHC(O)-C₁-C₁₂ was a typographical error. Pfizer argued that “2” is expressly different from “1” and that “2” expressly excludes “1.”

Certain mistakes in patent claims can be corrected either through the U.S. Patent Office reissue process or by a court. In Novo Indus. L.P. v. Micro Molds Corp, 350 F.3d 1348, 1354 (Fed. Cir. 2003), the court set forth a two-part test for when it is appropriate for a court to make a correction in the claims. First, the correction must not be subject to reasonable debate based on consideration of the claim language and the specification, and second, the prosecution history must not suggest a different interpretation of the claims. In other words, the error must be evident from the face of the patent taken from the viewpoint of a person in the technical field of the invention. Here, the court held that this error was clearly subject to reasonable debate and therefore was not the type of error that could be corrected by a court. To explain its position, the court likened the distinction between a C₁ compound and a C₂ compound to the difference between methanol (a C₁ compound, highly toxic to human ingestion) and ethanol (a C₂ compound, commonly consumed alcohol). This example, according to the court, “illustrates why a disclosure of one chemical compound, or integer in this case, cannot necessarily be a disclosure of another, even one close by structurally.” Id. at 10.

Pfizer was particularly suited to attack the Enanta claim on the basis of a claim drafting error, because years earlier Pfizer itself was on the other end of such an error.  Pfizer, Inc. v. Ranbaxy Labs, 457 F.3d 1284, 1292 (Fed. Cir. 2006). In the Pfizer case, Pfizer had asserted a patent against a generic drug maker alleging infringement, only to find that the asserted claim depended from a non-overlapping claim (i.e., the claim depended from claim 2 but should have depended from claim 1). Again, a “2” was mistakenly recited where the claim should have stated “1” and there too, the claim was held invalid. Although the statutory basis for invalidity was different, the coincidence is remarkable.

Patent applications are important company assets. It is critical that both a competent patent attorney and the inventor(s) work carefully to prepare and prosecute patent applications. Errors which may seem easily correctable may lead to patent invalidity if not addressed before litigation is initiated, and preferably during prosecution.

The case is Enanta Pharmaceuticals, Inc. v. Pfizer Inc. C.A. No. 2025-1427 __ F.4^th__ (Fed. Cir., June 23, 2026). The case was before Circuit Judges Lourie, Bryson, and Chen, with the opinion authored by Circuit Judge Lourie.

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For questions about this legal alert, please contact a member of the Davis Graham Intellectual Property & Transactions Group.

On May 5, 2026, the United States Court of Appeals for the Tenth Circuit reversed the district court in Rider v. OXY USA, Inc., Case No. 25-3142. The panel held that the United States District Court for the District of Kansas erred in denying class certification of royalty interest owners who alleged that Merit Energy Company, LLC and Merit Hugoton, L.P. (“Merit”) and Oxy USA, Inc. (“Oxy,” and together with Merit, “Defendants”) breached a 2008 class action settlement agreement governing royalty deductions in the Kansas Hugoton Gas Field. Applying its recently clarified ascertainability standard from Cline v. Sunoco, Inc., 159 F.4th 1171 (10th Cir. 2025), the panel found the proposed class plainly ascertainable and reversed with instructions to certify the class.

Background

In 1998, a group of plaintiffs filed the Littell v. OXY USA, Inc. class action in Kansas state court, alleging that Oxy was underpaying royalties on lease agreements in the Kansas Hugoton Gas Field. The court certified the class, and in January 2008, the parties entered into a settlement. Under the settlement, Oxy agreed to provide $16.7 million to a settlement fund and to limit gathering charges on future royalty payments to $0.15 per mmbtu. The settlement stated that it would be binding on the parties’ successors, assigns, and any entity into which a party may merge or consolidate.

Merit acquired Oxy’s assets in the Kansas Hugoton Gas Field in May 2014. At that time, Oxy informed Merit about the identity of royalty owners it had been paying under the Littell settlement and its methodology for calculating royalty payments. Merit, however, determined that it was not bound by the settlement’s future royalty provisions and began taking deductions that Plaintiffs allege violate the settlement.

Plaintiffs filed a putative class action in December 2023, asserting breach of contract claims against Defendants. After the district court denied Defendants’ motions to dismiss, the court denied class certification, finding the class was not ascertainable because determining which payees owned mineral interests in land burdened by leases acquired from Oxy was not “administratively feasible.” The court then concluded that Plaintiffs could not satisfy any other Rule 23 requirement.

The Tenth Circuit’s Analysis

A panel of the Tenth Circuit reversed, applying its intervening decision in Cline v. Sunoco, which rejected the “administrative feasibility” requirement for ascertainability. Under Cline, a class definition need only be (1) clearly defined and not vague, and (2) defined by objective criteria. The court found both requirements satisfied: Merit can identify each person or entity it has paid from its own records, and when Merit acquired Oxy’s assets, Oxy provided Merit with the identities of settlement payees.

The panel rejected Defendants’ arguments that individualized title searches would be required to connect payees to the Littell settlement. Citing Cline, the panel held that a defendant cannot defeat class certification by pointing to deficiencies in its own records or by arguing that it must individually review a large number of records. The panel observed that if Merit’s records are adequate for it to rely on to make regular payments, they are adequate for it to rely on to make additional payments should Plaintiffs have a meritorious claim.

Turning to the remaining Rule 23 requirements, the panel found the district court’s ascertainability error “tainted” the rest of its analysis. The panel held that commonality was satisfied because the central issue, i.e., whether Merit breached the settlement by deducting more than the permitted limit, applied to all leases and all wells under the settlement. Typicality and adequacy of representation were likewise met because the named plaintiffs’ claims were based on the same legal theory as the class. On predominance, the panel found that Defendants’ alleged systematic breach was the predominant issue, and that individualized damages questions do not defeat predominance as a matter of law. Finally, the panel concluded that superiority was satisfied, noting that a class action is the ideal method to litigate breach of a class action settlement.

The case is Rider v. OXY USA, Inc., No. 25-3142, __F.4th__ (10th Cir. 2026). The decision was authored by Judge Kelly, joined by Judges Bacharach and Federico.

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For questions about this legal alert, please contact a member of the Davis Graham Appellate Group.

By RJ Colwell, Patrick Datz, and Rachel Nixon

Data center projects increasingly include on-site power generation that transforms their risk profile from a technology asset into a hybrid energy-and-technology facility. Standard insurance products were not designed for this configuration, and the legal documents that govern these projects frequently allocate risks in ways that do not align with the insurance actually in place. This alert illustrates those gaps through four scenarios drawn from transactions we are seeing in the market and outlines the coordination that sponsors, lenders, and operators need to close them.

The Scale of What Is Being Built

The artificial intelligence boom is driving one of the largest infrastructure buildouts in American history. U.S. data center construction spending reached $41 billion in 2025 – up 344% from 2020 – with more than 565 large-scale facilities operating and nearly as many in the planning or construction pipeline. Five major technology companies alone have announced roughly $700 billion in combined capital expenditure plans for 2026, the vast majority directed toward AI-related infrastructure. Private equity and infrastructure funds are deploying capital at comparable scale, with firms such as Blackstone, KKR, and Brookfield building or acquiring multi-gigawatt data center platforms that carry project-finance-style risk profiles regardless of how they are capitalized.

For developers, operators, investors, and lenders, those numbers signal enormous opportunity. They also signal a shift in the risk profile of these projects that deserves careful attention – and, in our experience, is not yet receiving it in many deal rooms.

A New Kind of Asset, a New Kind of Risk

Until recently, most data centers drew their power from the electrical grid. Their risk profile was largely that of a technology asset: expensive equipment, high uptime requirements, and exposure to outages and cyberattacks. Standard commercial property, business interruption, and cyber insurance policies, while imperfect, were reasonably well suited to those risks.

That picture has changed. Grid interconnection delays – now commonly exceeding three to five years in many ISO/RTO queue regions – have driven developers to build their own on-site power generation, often structured as behind-the-meter (BTM) facilities to avoid triggering FERC jurisdictional obligations under the Federal Power Act. These BTM installations can include fleets of reciprocating engines, combustion turbines, or fuel cells running on natural gas, sometimes generating hundreds of megawatts on a single campus.

The result is that a modern data center campus is no longer just a technology asset. It is a hybrid energy-and-technology facility, with a risk profile that straddles both industries. On-site power generation introduces exposures that are familiar in the oil and gas and power generation sectors but new to many data center developers: air quality permitting requirements, fuel supply and commodity price volatility, thermal and mechanical risks from generation equipment, and environmental liabilities related to emissions, noise, and cooling water discharge. These are risks that standard technology-sector insurance programs were never designed to address.

From an underwriting standpoint – and this is a point that developers and their counsel frequently underestimate – this shift moves the risk from a single-class technology occupancy into a combined energy-and-technology classification. Property carriers writing pure data center risk often will not accept the on-site generation exposure, and power generation underwriters are not equipped to evaluate the IT load. The result is that the program frequently needs to be placed across multiple carriers or through a specialty facility that can accommodate both classes on one form. Equipment breakdown coverage (sometimes still referenced by its legacy name, boiler and machinery) becomes a central rather than incidental coverage element, since reciprocating engines, combustion turbines, transformers, switchgear, and chillers are all rotating or pressure-containing equipment with breakdown exposure that the all-risk property form does not respond to.

The valuation basis matters as well: data center hardware depreciates aggressively under tax accounting but is almost always replaced new, so replacement cost coverage with appropriate margin clauses and obsolete-equipment endorsements should be confirmed line by line. For lenders, this is not an academic exercise: inadequate valuation language in the insurance program can create a gap between the collateral value assumed in the credit agreement and the recovery available after a loss, which is precisely the scenario that triggers covenant defaults and impairs recovery.

It is worth noting that these exposures vary depending on the commercial model. A developer building a single-tenant, build-to-suit campus faces a different risk allocation than a colocation operator hosting multiple tenants, each of whom may carry its own insurance program. In the colocation context, the gaps are frequently found not in the operator’s own policies but in the interplay between the operator’s coverage, the tenant’s coverage, and the lease provisions that allocate responsibility between them. Developers and operators at sufficient scale may also evaluate self-insurance or captive insurance structures as part of their overall risk management strategy. The threshold question in every case is the same: Have the legal documents and the insurance program been designed together, or have they been assembled independently?

The question has a regulatory dimension as well. In states where the public utility commission asserts jurisdiction over entities that sell electricity to third parties, a colocation operator that provides power to tenants under a bundled services model may face rate regulation arguments that the operator’s insurance program was never designed to address. Understanding the interaction between the commercial structure, the regulatory classification, and the insurance program is essential.

Captive and self-insurance structures merit a closer look in this context, particularly for developers operating at platform scale. A single-parent captive domiciled in Vermont, Bermuda, or the Cayman Islands can sit in the middle of the program to retain the predictable layers of risk (deductible buy-down, equipment breakdown frequency layers, cyber retention), with a fronting carrier issuing the policy of record to satisfy lender and lease requirements. The critical caution is that lender credit agreements often specify minimum carrier ratings (typically A- or better by AM Best) and prohibit deductibles above stated thresholds; a captive structure that has not been pre-approved by the lender can trip the same covenants the program is meant to support. Tax treatment under IRC 831(b) and the related material risk provisions should be confirmed with counsel before the structure is finalized.

The good news is that the insurance market is evolving to meet the moment. Specialized programs now offer integrated coverage spanning construction, operations, cyber, cargo, and delay-in-start-up – bringing together risk classes that were traditionally placed separately. These programs represent a meaningful step forward for developers who know to ask for them and who engage their insurance advisors early enough in the project timeline to structure coverage properly.

The challenge is one of coordination. The legal documents that govern the project – the engineering, procurement, and construction contract (commonly called the EPC contract), the lease, the generation services agreement, the power purchase arrangement – allocate risk among the parties. The insurance program is supposed to backstop those allocations. When the two are built in parallel, the result is a well-integrated structure. When they are built in sequence – or in isolation – gaps emerge. Those gaps are where the nine-figure surprises live.

Where the Gaps Are: Four Practical Scenarios

The most effective way to understand the emerging risk gap is to walk through the scenarios where legal structuring and insurance placement either reinforce each other or leave the project exposed.

Fire and thermal runaway. Lithium-ion batteries are increasingly used in server racks and on-site energy storage systems. These batteries carry a well-documented risk of thermal runaway – a self-reinforcing overheating cycle that can cause fire and explosion.

If a thermal event destroys server racks and causes an extended outage, the insurance and legal questions arise simultaneously. On the insurance side: Does the property policy cover the full replacement value of the specialized equipment, or do sublimits apply? Does it cover the loss of electronic data stored on the destroyed servers? Many standard property policies exclude data loss entirely, which is a critical gap for facilities whose core function is storing and processing data. Does the business interruption coverage reflect the actual revenue at stake when tenants are running high-value AI training workloads?

On the legal side, the questions are equally urgent. Who bears liability under the lease, the services agreement, or the EPC contract – the operator, the equipment vendor, or the general contractor? These questions need to be answered in concert, before the loss occurs, not after.

The insurance market’s response to this exposure is evolving rapidly, and several specifics are worth flagging for developers and their counsel. Property carriers have been narrowing their appetite for battery energy storage systems and high-density lithium-ion server rack deployments throughout the 2025 and 2026 renewal cycles, and many programs now carry sublimits in the $10 million to $25 million range for BESS losses on facilities where the total insured value is in the hundreds of millions or billions. Some carriers have introduced outright exclusions tied to non-compliance with NFPA 855 (the standard for the installation of stationary energy storage systems), UL 9540 (the safety standard for energy storage systems), and UL 9540A (the cell-level propagation test). Underwriters increasingly want to see fire detection and suppression that meets or exceeds these standards, spacing and compartmentalization of battery enclosures, and documented commissioning records.

On the data side, electronic data and media coverage is almost always sublimited on a standard property form, and the cost of recreating training datasets or model weights after a destructive event can be orders of magnitude larger than the sublimit. The obsolescence dimension compounds the problem: AI accelerator hardware may cycle through multiple generations during a single policy period, and a replacement cost provision that reimburses the cost of like-kind-and-quality equipment may not deliver equivalent compute capacity if the destroyed hardware is no longer manufactured. A separate technology errors and omissions or cyber policy may pick up some of this exposure, but only if the coverage trigger and the property trigger are deliberately coordinated. Cause-of-loss disputes between the property and cyber markets are the most common reason a covered loss ends up partially paid. For in-house counsel managing a claim in the aftermath of a thermal event, the time to resolve this coordination question is at placement, not at the point of loss.

Permitting delays. A developer plans a multi-phase campus expansion. Local residents raise concerns about noise, water consumption, or air emissions. The permitting process stalls. Construction slips by six months or more, and the developer misses contractual deadlines with anchor tenants. Delay-in-start-up exposure – the financial cost of the delay itself, measured in lost revenue and contractual penalties (often abbreviated “DSU” in insurance terminology) – can exceed a billion dollars on a single large campus. The question for the development team is whether the builders risk policy (a specialized form of property insurance that covers loss or damage during the construction phase) includes DSU coverage and whether the sublimit is adequate. In most cases, it is not – unless the coverage has been specifically negotiated at the outset. On the contract side, the allocation of permitting delay risk between the developer and the EPC contractor must be addressed with precision. Generic force majeure provisions rarely suffice.

The distinction matters for lenders as well. Credit agreements for data center projects typically require the borrower to maintain insurance at specified levels and to provide evidence that the permitting timeline assumed in the financing model remains on track. When a permitting delay arises and the insurance coverage does not respond – because the DSU sublimit is exhausted, or because the cause of the delay falls within a policy exclusion – the borrower may find itself in technical default of its insurance covenants at the same moment it most needs its lender’s flexibility.

Several distinctions inside the delay coverages are worth making explicit, because they interact directly with the credit agreement provisions that lenders and their counsel negotiate. Builders risk DSU and operating-phase business interruption are not the same coverage; they sit on different policies, are triggered by different events, and use different valuation methodologies. The builders risk DSU indemnity period typically runs from the originally scheduled commercial operation date to the actual commercial operation date, capped at a stated number of months. The operating-phase business interruption indemnity period runs from the date of the physical damage event to the date the facility is restored to operating condition, also capped. Between the two policies, there is often a gap at the handover from construction to operations that needs to be specifically negotiated.

Soft costs coverage (interest carry, additional financing costs, real estate taxes, leasing commissions) is a separate line that lenders increasingly require, and it is typically sublimited well below the DSU limit. Lender-required endorsements that should be confirmed on every placement include the lender’s loss payable endorsement (438 BFU or equivalent), waiver of subrogation in favor of the lender, severability of interests, primary and non-contributory language, and at least 30 days’ notice of cancellation or material change (often 60 to 90 days’ notice on syndicated facilities). Developers should also be aware that permitting delays tied to air quality or environmental review under state implementation plans may implicate federal regulatory timelines that cannot be accelerated by commercial negotiation alone, a dimension that the force majeure analysis in the EPC contract and the DSU coverage in the insurance program must both account for.

Equipment loss in transit. A critical shipment of servers or power generation equipment is damaged during transport. With multiple developers competing for the same specialized equipment, replacement lead times are growing – and so is the DSU exposure triggered by the delay. A single cargo loss on a hyperscale project can produce a DSU claim that far exceeds the replacement value of the equipment itself. The relevant insurance policies – cargo, builders risk, and DSU – often overlap in theory but leave gaps in practice. The generation services agreement may allocate the risk differently than the insurance program assumes. Identifying and closing these gaps requires coordination between legal counsel and the insurance placement team.

Marine cargo placement for hyperscale projects has its own discipline, and the details matter for lenders and sponsors who are relying on equipment delivery timelines to support their financial models. Coverage should be written on Institute Cargo Clauses A (the broadest all-risk form available in the London market) with extensions for war and strikes, general average and salvage, and contingent and seller’s interest where the project takes title at different stages of the supply chain. The accumulation limit, which caps the carrier’s exposure at any single location at any single time, is often the binding constraint on a large project rather than the per-conveyance limit; equipment staged at a port of discharge or at an intermediate warehouse can sit there in quantities that exceed standard accumulation terms. Delay-in-start-up triggered by a cargo loss is a separate coverage decision: many marine cargo policies exclude delay as a covered cause, and the DSU section of the builders risk policy may not respond unless the cargo loss is also a covered cause under the builders risk form. A difference-in-conditions endorsement or a marine DSU extension may be needed to close that seam. Project cargo and stock throughput placements written by specialty marine markets handle these issues more cleanly than a transactional cargo policy bought on a per-shipment basis.

Fuel supply disruption. A behind-the-meter gas fleet depends on a reliable natural gas supply. A pipeline constraint, a severe weather event, or a spike in commodity prices disrupts fuel delivery or makes continued operation uneconomic. Who bears this risk? Under the generation services agreement or the power purchase arrangement, the answer depends on how the fuel supply provisions and force majeure definitions are drafted. Whether business interruption insurance responds to a fuel supply disruption – as distinct from a mechanical failure of the generation equipment itself – depends on the specific policy language. This scenario sits at the intersection of energy law and insurance placement, and it is one where clients with experience structuring oil and gas transactions have a meaningful advantage.

This scenario exposes one of the most consequential limitations in standard business interruption forms, and it is where the data center sector’s relative unfamiliarity with energy-sector risk allocation is most visible. A pipeline constraint, a regulatory curtailment, or a commodity price spike that interrupts fuel delivery without any physical damage to insured property will not trigger standard business interruption coverage. The coverages that respond to this exposure sit in different parts of the program: contingent business interruption (covering income loss from physical damage to a named supplier’s property), supply chain or trade disruption coverage (a non-damage business interruption form that pays on a defined trigger such as a denial of access, supplier insolvency, or regulatory action), and weather or parametric coverage that pays on a measured index rather than on demonstrated damage. Each has its own trigger, exclusions, and valuation methodology, and each must be sized against the specific fuel supply structure in the generation services agreement. The pricing for these coverages has firmed considerably as carriers have absorbed losses from supply chain disruptions, but capacity is generally available for well-engineered risks. Commodity price risk itself is typically hedged in the financial markets rather than insured. Water supply risk presents a parallel exposure in water-stressed jurisdictions, particularly in Western states governed by prior appropriation doctrines, groundwater management areas, or active management frameworks such as Arizona’s, where cooling water demand may be subject to curtailment or reallocation. Standard property and business interruption forms do not address this exposure, and whether standalone or parametric coverage is available for water curtailment risk remains an evolving question. At a minimum, the site lease and generation services agreement should address water supply continuity, curtailment allocation, and the right to secure alternative sources.

For developers and sponsors who have structured oil and gas midstream or downstream transactions, the analytical framework here will be familiar: the generation services agreement is functionally a gas processing or tolling agreement, and the insurance and hedging program should be designed with the same rigor. For those coming from a pure technology or real estate background, this is an area where experienced energy counsel and insurance advisors add the most value.

Practical Considerations

The core insight is structural. Every risk allocation decision in the project documents has an insurance counterpart. A force majeure clause that shifts permitting delay risk to the developer is typically matched by adequate DSU coverage in the builders risk policy. An environmental indemnity in the lease is often backstopped by environmental impairment liability coverage. A fuel supply agreement that is silent on commodity price escalation creates an exposure that will surface in the business interruption analysis if the risk materializes.

From a placement standpoint, a coordinated program for a hyperscale or BTM-powered project will typically include the following coverage lines, each with project-specific endorsements that should be reviewed alongside the transaction documents. Builders risk should be placed on an all-risk form with LEG 3 defects coverage, testing and commissioning extensions, soft costs, and DSU sized to the financing model. Operational property and equipment breakdown should sit on a combined form covering both IT and generation equipment, with data restoration and dependent property extensions. General liability with completed operations coverage should be extended to match the statute of repose in the project jurisdiction, supported by an excess and umbrella tower commonly in the $200 million to $500 million range for hyperscale risks. Environmental impairment liability should address emissions, cooling water discharge, and historical site conditions, with coverage periods extending past the policy term to address long-tail claims. Cyber and technology errors and omissions coverage should include operational technology and industrial control system extensions, contingent business interruption, and the broadest available silent-cyber and war exclusion language. Project-specific professional liability should ideally be carried by the architects, engineers, and design-build contractors, with completed operations tail extending past project delivery. Marine cargo and stock throughput should be placed as discussed above. Finally, in most cases workers compensation and the contractor’s liability program should be structured either as separate placements or, on larger projects, through an owner-controlled or contractor-controlled insurance program (OCIP or CCIP) that consolidates coverage across the entire job site. The common thread across all of these lines is that the coverage in well-structured programs must be designed against the specific risk allocations in the project documents, not layered on after the documents are signed. The most expensive insurance failures we see are not coverage gaps in the abstract; they are mismatches between what the contract says and what the policy actually covers.

The developers and operators who are navigating this landscape most effectively are the ones who bring their legal counsel and their insurance advisors into alignment early – before the letter of intent is signed, not after construction is underway and the gaps have already been baked into the deal structure. For sponsors, lenders, and in-house teams evaluating new platforms or expanding existing ones, the threshold question remains: Have the legal documents and the insurance program been designed together?

This alert is intended to provide a general overview of the risk management considerations relevant to data center development and on-site power generation. It does not constitute legal or insurance advice, and the appropriate coverage structure and contractual approach will depend on the specific facts, commercial model, jurisdiction, and risk profile applicable to each project.

RJ Colwell is a senior associate in the Energy & Mining Group at Davis Graham & Stubbs LLP, where he advises data center developers, power generation companies, private equity and infrastructure sponsors, and their lenders on the regulatory, transactional, and permitting dimensions of AI power infrastructure. His practice spans energy M&A, FERC regulatory compliance, behind-the-meter generation structuring, and data center power supply arrangements. RJ can be reached at rj.colwell@davisgraham.com.

Patrick Datz is an Executive Vice President at IMA Financial Group, where he specializes in insurance program design for energy, power generation, and large-scale infrastructure assets. He advises developers, sponsors, and lenders on property and equipment breakdown placement, builders risk and delay-in-start-up structuring, and the use of captive and self-insurance strategies for capital-intensive projects. Patrick can be reached at patrick.datz@imacorp.com.

Rachel Nixon is a Senior Vice President at IMA Financial Group, where she advises technology, data center, and hybrid energy-technology companies on risk architecture and insurance strategy. Her work focuses on AI-driven and emerging exposures, including cyber and technology errors and omissions, supply chain and cargo risk, and the coordination of coverage across complex, multi-carrier programs. Rachel can be reached at rachel.nixon@imacorp.com.

On April 28, 2026, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued Release No. IA-6961, approving an adjustment to the dollar amount thresholds used to determine “qualified client” status under Rule 205-3[1] of the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The new thresholds take effect on June 29, 2026, and will affect how Colorado state-licensed and SEC-registered investment advisers charge performance-based fees to clients and private fund investors.

Background

Under Section 205(a)(1) of the Advisers Act, registered investment advisers (“RIAs”) are generally prohibited from entering into or performing any investment advisory contract that provides for compensation based on a share of capital gains or appreciation in the value of a client’s funds—commonly referred to as “performance fees,” “carried interests,” or “incentive allocations.”  However, RIAs are exempt from this prohibition if the client is considered a “qualified client” under Rule 205-3 under the Advisers Act. “Qualified clients” include, among others, clients meeting an assets-under-management test or a net worth test. The Dodd-Frank Act requires the Commission to adjust the dollar thresholds for these two tests for inflation every five years, rounded to the nearest $100,000.

New Thresholds

Beginning June 29, 2026, to be deemed a qualified client, a client or private fund investor must have:

• Assets-Under-Management: At least $1,400,000 (adjusted from $1,100,000) under the management of the RIA immediately after entering into the advisory arrangement; or
• Net Worth: A household net worth (excluding the value of a primary residence and related debt) of more than $2,700,000 (adjusted from $2,200,000) at the time of entering into the advisory agreement.

The adjusted thresholds will not apply retroactively or to contractual relationships entered into prior to the effective date.

Key Takeaways and Recommended Next Steps

1. Update Fund Offering Documentation. Private fund advisers who oversee Section 3(c)(1) funds should review their investor questionnaires, subscription agreements, and transfer documentation to incorporate the updated dollar thresholds for qualified client eligibility.
2. Update Compliance Programs. Advisers should review compliance policies and procedures, private placement guidelines, marketing materials, and training materials for references to the dollar-based qualified client thresholds and make any necessary updates.
3. Review Indirect Basis Application. For RIAs advising a Section 3(c)(1) fund[2], mutual fund, or business development company under Rule 205-3(d), performance fee limitations also apply on an indirect basis. To the extent that an investor in any of these products is being charged a performance fee, review investor materials to ensure that the fund is not charging such fees to non-qualified client investors.
4. Application of Indirect Basis for Colorado RIAs. The regulations adopted under the Colorado Securities Act impose additional conditions on exempt reporting advisers (“ERAs”) that advise a Section 3(c)(1) fund. For these ERAs, interests in the Section 3(c)(1) fund may be offered only to qualified clients.[3] ERAs should therefore review subscription documents to seek to ensure they do not inadvertently create a compliance gap.
5. Assess Timing of Upcoming Closings. As fund sponsors prepare for upcoming initial or additional closings involving investors who will be charged a performance fee, those sponsors should account for the higher thresholds when obtaining confirmations from such investors.

For additional guidance or support, please reach out to a member of our Asset Management Group or another member of the Davis Graham Team.

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[1] 17 C.F.R. §275.205-3.

[2] Note that under Rule 205-3, the fund is not required to “look through” to the investor level to determine qualified client status for Section 3(c)(5), 3(c)(7), or 3(c)(9) funds.

[3] Colorado Rule 51-4.11(c)(1)(IA).