Eagle Admixtures, Ltd. v. Hannon, 92CA0892

• Decision Date: 15 July 1993
• Docket Number: No. 92CA0892,92CA0892
• Parties: EAGLE ADMIXTURES, LTD., a Colorado corporation, Plaintiff-Appellant, v. Robert HANNON, doing business as World's Greatest Company, Defendant-Appellee. . III
• Court: Colorado Court of Appeals

Page 111

867 P.2d 111

EAGLE ADMIXTURES, LTD., a Colorado corporation, Plaintiff-Appellant, v. Robert HANNON, doing business as World's Greatest Company,

Defendant-Appellee.

No. 92CA0892.

Colorado Court of Appeals,

Div. III.

July 15, 1993.

Caplan & Earnest, J. Marcus Painter, Richard E. Bump, Boulder, for plaintiff-appellant.

Bostrom & Sands, P.C., Jon F. Sands, Denver, for defendant-appellee.

Opinion by Judge ROTHENBERG.

In this forcible entry and detainer action, plaintiff, Eagle Admixtures, Ltd. (landlord), appeals from the judgment entered upon a jury verdict in favor of defendant, Robert Hannon (tenant). Landlord also appeals the trial court's award of attorney fees. We reverse the judgment, vacate the order awarding attorney fees, and remand for new trial.

Tenant is president of World's Greatest Co., which operates amusement rides at Heritage Square, an entertainment complex located in Golden, Colorado. In November 1979, tenant talked to Virginians-Heritage Square Co. (Virginians), which then owned and operated Heritage Square, about entering into a lease. Tenant did not produce an original lease, but introduced into evidence a copy of a lease which had been signed by him. Authorship of the lease was disputed, and although the signature of Virginians does not appear on the lease, there was oral evidence of a signed, but unrecorded, document.

According to tenant's evidence, the lease which was drafted allowed tenant to operate amusement rides there. The lease was for an initial five-year period with an addendum giving tenant a renewal option of five years, plus one additional year for each investment over $10,000 made by tenant with the approval of Heritage Square owners or management.

In May 1981, Virginians conveyed ownership of Heritage Square to K.A.M. Development Corporation. In order to purchase the property, K.A.M. obtained financing from Silverado Savings & Loan Association. The property was security for the Silverado loan.

Approximately five years later, K.A.M. conveyed ownership of Heritage Square to Johnson Homes, Inc. In 1987, when Johnson Homes failed to make the required payments, Silverado foreclosed on the property and became its owner. During these changes in ownership from Virginians to K.A.M. Development to Silverado, tenant remained on the property.

In 1990, Silverado failed. The Federal Savings & Loan Insurance Corporation (FSLIC) was appointed receiver until FSLIC was succeeded in this capacity by the Federal Deposit Insurance Corporation (FDIC).

In February 1990, the FDIC notified tenant that his lease had expired in May 1989 and, therefore, that he was a month-to-month tenant.

In January 1991, FDIC sold Heritage Square to landlord, and in March of the same year, landlord served tenant with notice of termination of the tenancy. Landlord claimed tenant had a month-to-month tenancy. Tenant disagreed that he was a month-to-month tenant and contended that, because he had previously made approximately $150,000 worth of improvements at Heritage Square, under the terms of the lease, his tenancy had been extended for an additional 15 years from May 1989. Accordingly, tenant refused to vacate the property.

Thereafter, landlord filed this unlawful detainer action, demanding possession of the property, damages, costs, and attorney fees. At the close of the evidence, the jury returned a verdict in favor of tenant, thereby denying landlord possession of the property. Although inherent in its verdict was the conclusion that the tenant occupied the property pursuant to the lease in question, the jury was not asked to determine the exact length of tenant's lease. Landlord now appeals.

I.

Landlord's first contention is that the trial court should have applied the holding in D'Oench, Duhme & Co. v. F.D.I.C., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and refused to admit the unsigned lease and addendum to the lease. We agree with the trial court that D'Oench is inapplicable here.

In D'Oench, supra, the maker of a note was estopped from asserting as a defense against the FDIC the fact that the maker had an alleged oral agreement with the lender that excused payment. The United States Supreme Court's decision was based upon federal policy which is to protect the FDIC from misrepresentations regarding the genuineness or integrity of securities held by the banks it insured. See Reisig v. Resolution Trust Corp., 806 P.2d 397 (Colo.App.1991) (D'Oench doctrine barred plaintiff from asserting defense to promissory note based upon alleged verbal representations made by bank's loan officer). See generally Galves, FDIC and RTC Special Powers In Failed Bank Litigation, 22 Colo.Law. 473 (March 1993).

Thus, the D'Oench doctrine, now codified as 12 U.S.C. § 1823(e) (1988), protects federal banking authorities and their successors from all claims and defenses based upon secret or unrecorded side agreements that alter terms of facially unqualified obligations, whether or not these claims or defenses might otherwise be permitted.

Here, however, contrary to landlord's contention, the tenant's defense was not based upon a secret, verbal side agreement. Rather, tenant presented evidence that he entered into a written lease with Virginians, his original landlord. We have found no authority for the proposition that tenant's inability to produce the original lease signed by both parties converts this into a situation governed by D'Oench. Accordingly, we conclude the trial court did not err in failing to exclude tenant's evidence of the lease and addendum to the lease.

Tenant also asserts that the D'Oench doctrine is inapplicable because it was not raised by either the FSLIC or the FDIC and that both federal agencies had acknowledged the existence of the lease during ownership of the property. However, in view of our conclusion that D'Oench does not apply to these facts, we need not address that contention.

II.

Landlord next contends that, under the subordination clause of tenant's lease, all of tenant's rights were extinguished when Silverado foreclosed on the property in 1987. We agree.

The subordination agreement in defendant's 1979 lease expressly subordinates tenant's interest in the property to any existing or future deed of trust. It states:

This lease and all of the rights of Tenant hereunder, at Landlord's option, shall be subject and subordinate to ... the lien of any mortgages or deeds of trust in any amount or amounts whatsoever ... without the necessity of the execution and delivery of any further instruments on the part of Tenant to affect such subordination.

At least one Colorado decision has addressed a tenant's contractual obligations to a new purchaser after foreclosure. See White v. Short, 794 P.2d 1110 (Colo.App.1990) (contractual obligations assumed by tenant are enforceable by purchaser at foreclosure; subordination clause not involved).

However, no Colorado decision has addressed the precise issue of whether a subordination clause causes a tenant's right to his leasehold interest in the property to be terminated upon foreclosure, if the lessee has received the requisite notice of foreclosure and has failed to exercise his rights of redemption. See § 38-39-106, C.R.S. (1982 Repl.Vol. 16A) and § 38-38-104, C.R.S. (1992 Cum.Supp.) (lessee is considered a lienor under redemption statute and is entitled to cure default). See also § 38-37-113(2), C.R.S. (1982 Repl.Vol. 16A) (notice of election and demand for sale required "to each person who appears to have acquired a record interest in said real estate subsequent to the recording of said trust deed...." (emphasis added)); § 38-39-102(5) (notice of right to redeem required to persons "only if their interest in the real estate being foreclosed was established by an instrument recorded ...."); S.L.K. Testamentary Trust v. Davids, 728 P.2d 1259 (Colo.1986). But see Colo.Sess.Laws 1990, ch. 275, § 38-38-101(7)(a) at 1654 (Effective October 1, 1990, foreclosing party wishing to extinguish a leasehold pursuant to an unrecorded lease required to provide notice of foreclosure to the lessee); § 38-38-101(7)(a), C.R.S. (1992 Cum.Supp.).

In Dover Mobile Estates v. Fiber Form Products, Inc., 270 Cal.Rptr. 183, 186, 220 Cal.App.3d 1494, 1498 (1990), the California Court of Appeals held that a lease which is subordinate to a deed of trust is automatically extinguished by a foreclosure sale. The court reasoned that this rule of law "comports with basic notions of priorities and notice." Accord 220 West 42 Associates v. Ronbet Newmark Co., 53 A.D.2d 829, 385 N.Y.S.2d 304 (1976) (lease subordinate to existing and future mortgages and thus extinguished by foreclosure sale). Cf. Fidelity Bond & Mortgage Co. v. Paul, 90 Colo. 94, 6 P.2d 462 (1931) (lease terminates upon foreclosure sale).

Here, at the time Silverado foreclosed upon Johnson's deed of trust in 1987, tenant's lease was not recorded, and the statute merely required notice to recorded interests. Cf. § 38-38-101(7)(a), C.R.S. (1992 Cum.Supp.) (requiring notice to holders of unrecorded leaseholds). And, although tenant's unrecorded lease gave him a statutory right of redemption, he failed to exercise that right.

Accordingly, applying the reasoning in Dover, we conclude that tenant's unrecorded lease was extinguished as a matter of law by the foreclosure sale and by tenant's subsequent failure to exercise his right to redemption. Concomitantly, all of tenant's rights and obligations under that 1979 lease also were terminated.

This, however, does not end the inquiry because, as the court also noted in Dover:

Even though the lease is extinguished, the tenant and purchaser are not precluded from entering into a new lease agreement.

Dover Mobile Estates v. Fiber Form Products, Inc., 270 Cal.Rptr. at 187, 220 Cal.App. 3d at 1500. See also Peterson v. NCNB Texas National Bank, 838 S.W.2d 263 (Tex.Ct.App.1992) (when lease is executed after recording of deed of trust, sale under...