Haberl v. Bigelow, 92SC103

• Decision Date: 12 July 1993
• Docket Number: No. 92SC103,92SC103
• Citation: 855 P.2d 1368
• Parties: 23 UCC Rep.Serv.2d 820 Frank J. HABERL, Petitioner, v. Eugene A. BIGELOW and Alyce M. Bigelow, Respondents.
• Court: Colorado Supreme Court

Page 1368

855 P.2d 1368

23 UCC Rep.Serv.2d 820

Frank J. HABERL, Petitioner, v. Eugene A. BIGELOW and Alyce M. Bigelow, Respondents.

No. 92SC103.

Supreme Court of Colorado En Banc.

July 12, 1993.

Leeon E. Hayden, Lakewood, Jacobson & Dudgeon, Ethan A. Jacobson, Lakewood, for petitioner.

Ducker, Dewey & Seawell, P.C., Thomas C. Seawell, Denver, Parcel, Mauro, Hultin & Spaanstra, P.C., Richard P. Barkley, Denver, for respondents.

Justice KIRSHBAUM delivered the Opinion of the Court.

In Bigelow v. Nottingham, 833 P.2d 764 (Colo.App.1991), the court of appeals affirmed the trial court's judgment in favor of the respondents, Eugene A. Bigelow and Alyce M. Bigelow (the Bigelows), against the petitioner, Frank J. Haberl (Haberl), on a promissory note executed by Haberl and his wife, Dorothy Haberl. In so doing, the court of appeals affirmed the trial court's conclusions that Haberl consented to the subordination of a deed of trust to real property executed in connection with the note; that the applicable statute of frauds did not render such consent invalid; and that the provisions of section 4-3-401(1), 2 C.R.S. (1992), did not operate to discharge Haberl from liability under the note even though the terms thereof were subsequently modified by an instrument he did not sign. Having granted Haberl's petition for certiorari to review these determinations, we reverse the judgment of the court of appeals and remand the case to that court with directions.

I

In October 1967, the Bigelows executed a promissory note in the amount of $145,000 secured by a deed of trust in favor of Empire Savings & Loan Association (Empire) in connection with the purchase of an apartment building located in Arapahoe County, Colorado. On January 6, 1976, the Bigelows sold the property to the Haberls. The Haberls took the property subject to the 1967 note and deed of trust and jointly executed a promissory note to the Bigelows in the amount of $112,018.91 together with a second deed of trust (the Bigelow deed of trust). The security instrument incorporated by reference a rider providing that if the Haberls refinanced their indebtedness, the Bigelow deed of trust would be subordinated to any new deed of trust, the Haberls would pay a higher annual interest rate on the balance of the Bigelow note, and the period of time within which the Haberls' periodic payments were to be made was extended.

In October 1980, the Haberls sold the property to Marathon Realty, Inc. (Marathon). In connection with this sale Marathon executed a note for $166,524 (the Haberl note) and a third deed of trust (the Haberl deed of trust), and the Haberls agreed that in the event the property were refinanced the Haberls would subordinate the Haberl note and deed of trust to any new security instrument. On October 9, 1983, the Haberls assigned the Haberl deed of trust to United Bank of Skyline.

In November 1983, the property was purchased by American Properties Equities, a Colorado general partnership whose general partners included David Nottingham, Philip Hazouri, James Giasafakis, and Richard Elliott (hereinafter referred to collectively as APE). In connection with this transaction APE assumed and agreed to pay the three existing notes.

In February 1984, APE refinanced the property. In connection with this transaction, APE executed a $400,000 promissory note and a fourth deed of trust in favor of Midland Federal Savings and Loan Association ¹ (the Midland note and deed of trust) the Bigelows were requested to subordinate the Bigelow deed of trust to the Midland deed of trust; the Haberls were requested to subordinate the Haberl deed of trust to the Midland deed of trust; and APE paid off the 1967 Empire note. As a result, the Empire deed of trust was released and the Bigelow deed of trust assumed first priority.

On February 29, 1984, the Haberls, through their assignee, the United Bank of Skyline, subordinated the Haberl deed of trust to the Midland deed of trust. On November 16, 1984, the Bigelows and APE executed an assumption agreement. The agreement provided that the Bigelows would subordinate the Bigelow deed of trust to the Midland deed of trust, APE would assume primary liability for repayment of the Bigelow note, ² and the interest rate and amount of monthly payments due on the Bigelow note would be increased according to the terms of the rider signed by the Haberls and the Bigelows in connection with the Haberls' purchase of the property. Accordingly, the Midland deed of trust assumed first priority, ahead of both the Haberl and Bigelow deeds of trust. APE subsequently sold the property to APE 1984-A Ltd., a limited partnership whose general partners included Philip Hazouri, David Nottingham, James Giasafakis, and Merlin Resources, Inc.

The Haberls were not parties to the November 16, 1984, assumption agreement and did not execute a written consent to the subordination of the Bigelow deed of trust to the Midland deed of trust. However, prior to November 16, 1984, Hazouri telephoned Haberl, informed Haberl that APE planned to pay off the Haberl note and that subordination of the Bigelow deed of trust to the Midland deed of trust was crucial, and informed Haberl that APE was having problems in obtaining the Bigelows' agreement to such subordination. Haberl did not object or otherwise respond to Hazouri's statements concerning the importance of the subordination of the Bigelow deed of trust. ³

In November 1985, APE and APE 1984-A, Ltd., paid the Haberl note and the Haberl deed of trust was released. However, APE and APE 1984-A Ltd., ultimately defaulted on the Midland and Bigelow notes. A subsequent foreclosure of the Midland deed of trust resulted in a deficiency.

The Bigelows then instituted this civil action on the Bigelow note against the Haberls, APE, APE 1984-A, Ltd., and Merlin Resources, Inc. The Haberls asserted as a defense that they did not consent to the subordination of the Bigelow deed of trust and that the resultant impairment of collateral and increase in their risk of repayment relieved them of liability pursuant to section 4-3-606, Comment 3, 2 C.R.S. (1992), of Colorado's Commercial Code (hereinafter the Code). ⁴

At the conclusion of a bench trial the trial court found, as the Bigelows conceded, that the "collateral" for the Bigelow note had been impaired by the subordination of the Bigelow deed of trust to the Midland deed of trust. ⁵ The trial court also determined that the rider executed by the Haberls was personal to the Haberls and did not constitute general consent by the Haberls to any future subordination.

The trial court dismissed the claim against Dorothy Haberl on the ground that she did not consent to the November 16, 1984, subordination of the Bigelow deed of trust to the Midland deed of trust. However, the trial court held that by failing to voice any objection to the proposed subordination during or after his telephone conversation with Hazouri, Haberl did consent to such subordination and was therefore not subject to the protection afforded by section 4-3-606, Comment 3. The trial court entered judgment against Haberl and APE, jointly and severally, on the Bigelow note in the amount of $135,560.53, plus attorney fees, costs, and interest from December 16, 1988. In an unsuccessful post-trial motion to amend judgment Haberl argued, inter alia, that he could not have consented to the subordination of the Bigelow deed of trust because any such consent was required to be in writing by the terms of section 38-10-106, 16A C.R.S. (1982) (hereinafter the statute of frauds).

Haberl appealed the trial court's judgment. ⁶ He initially asserted that he could not be held liable to the Bigelows on the basis of the November 16, 1984, assumption agreement because he did not sign that document. The court of appeals rejected this argument on the ground that Haberl's liability was based on the Bigelow note, not the assumption agreement. The court of appeals also rejected Haberl's argument that he was relieved of liability on the Bigelow note by virtue of section 4-3-606, 2 C.R.S. (1992), of the Code because he did not consent to the subordination of the Bigelow deed of trust. Accordingly, the court of appeals affirmed the trial court's judgment against Haberl.

Haberl petitioned this court for certiorari review of the court of appeals decision. We granted his petition with respect to the following issues:

1. Does a deed of trust constitute an interest in land for purposes of the statutes of fraud, §§ 38-10-106, -108, 16A C.R.S. (1982)?

2. Is the grantor of a deed of trust required pursuant to the statutes of fraud, §§ 38-10-106, -108, 16A C.R.S. (1982), to give written consent to an agreement to subordinate that deed of trust to another trust deed?

3. May the petitioner be held liable, consistent with § 4-3-401(1), 2 C.R.S. (1973), to the terms of a promissory note as modified by an agreement that he did not sign?

4. Did the trial court and the court of appeals err in applying the doctrine of consent by silence?

II

Haberl asserts that the court of appeals and the trial court erred in concluding that he consented to the subordination of the Bigelow deed of trust to the Midland deed of trust. We agree.

The issue of whether Haberl's conduct during and after his telephone conversation with Hazouri constitutes consent by Haberl to the subordination of the Bigelow deed of trust to the Midland deed of trust presents a question of mixed law and fact. In applying the appropriate legal standard to the facts established by the record, we conclude that the trial court erred in concluding that Haberl's consent to the subordination of the Bigelow deed of trust could be implied.

The Bigelow note is a negotiable instrument, as it contains both an unconditional promise to pay and a fixed date of payment. Bank of Kimball v. Rostek, 161 Colo. 584, 423 P.2d 579 (1967). As such, transactions involving the note are governed by article 3 of...