In re Taylor, Bankruptcy No. 08-25734 HRT.

• Decision Date: 03 December 2009
• Docket Number: Bankruptcy No. 08-25734 HRT.,Adversary No. 09-01050 HRT.
• Citation: 422 B.R. 270
• Parties: In re Scott Hughes TAYLOR, Debtor. Jeffrey L. Hill, Trustee, Plaintiff, v. Scott Hughes Taylor and Bayview Loan Servicing, LLC, Defendants.
• Court: U.S. Bankruptcy Court — District of Colorado

422 B.R. 270

In re Scott Hughes TAYLOR, Debtor Jeffrey L. Hill, Trustee, Plaintiff, v. Scott Hughes Taylor and Bayview Loan Servicing, LLC, Defendants.

Bankruptcy No. 08-25734 HRT.

Adversary No. 09-01050 HRT.

United States Bankruptcy Court, D. Colorado.

December 3, 2009.

COPYRIGHT MATERIAL OMITTED

Sharon W. Grossenbach, Denver, CO, for Debtor.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

HOWARD R. TALLMAN, Chief Judge.

This case comes before the Court on cross-motions for summary judgment. Plaintiff Jeffrey L. Hill, Chapter 7 Trustee (the "Trustee"), filed his motion (the "Trustee's Motion," docket # 22) on July 9, 2009, to which Defendant Bayview Loan Servicing, LLC ("Bayview") filed a response (docket # 24, filed July 24, 2009), and the Trustee filed a reply (docket # 29, filed August 11, 2009). Bayview filed its motion ("Bayview's Motion," docket # 23) on July 10, 2009, to which the Trustee filed a response (docket #25, filed July 27, 2009), and Bayview filed a reply (docket #27, filed August 6, 2009). The Court, having reviewed the file and being fully advised, hereby concludes as follows.

Background

The following facts are undisputed. The Debtor, Defendant Scott Hughes Taylor (the "Debtor"), owns real property located at 5494 S. Sicily Street, Aurora, CO 80015 (the "Property"). In 2004, when the Debtor and Cindy Taylor initially obtained the Property from 5494 Sicily St. Land Trust, they were issued a quit claim deed (the "2004 Deed"). The 2004 Deed correctly described the Property as Lot 7, Block 34, Saddle Rock Ridge 1 Flg, County of Arapahoe, State of Colorado (emphasis added). The 2004 Deed further contained the Property's street address, 5494 S. Sicily Street, Aurora, CO 80016 (the "Street Address"). The 2004 Deed was recorded on December 9, 2004.

On January 9, 2007, the Debtor and Cindy Taylor executed a quit claim deed in favor of the Debtor (the "2007 Deed"). The 2007 Deed incorrectly described the Property as Lot 7, Block 4, Saddle Rock Ridge 1 Flg, County of Arapahoe, State of Colorado (emphasis added). The 2007 Deed contained the Property's correct Street Address. The 2007 Deed was recorded on February 8, 2007.

On February 2, 2007, the Debtor executed a note and deed of trust (the "Deed of Trust") for the benefit of Mortgage Electronic Registration Systems, Inc., as nominee for Ace Mortgage Funding, its successors and assigns. The Deed of Trust contained the same error in the Property's block number as the 2007 Deed, describing the Property as located in Block 4 instead of Block 34. The Deed of Trust further contained the Property's Parcel ID number, 2073-13-2-07-03, and the Property's Street Address. The Deed of Trust was recorded on February 8, 2007. The note was subsequently transferred to Bayview, which is the current holder of the note and beneficiary of the Deed of Trust.

At some point, Bayview realized that the Deed of Trust contained an error in the Property's block number. The Deed of Trust was re-recorded on October 8, 2008, at 3:25 p.m., with an indication that it was "re-recorded to correct error in legal description." On the rerecorded Deed of Trust, the incorrect block number, 4, was crossed out, and the correct block number, 34, was written in.

Also on October 8, 2008, at 12:09 p.m., a few hours prior to the re-recording of the Deed of Trust, the Debtor filed his Chapter 7 bankruptcy petition. The Trustee brought the instant adversary proceeding against the Debtor and Bayview, seeking (1) to avoid the Deed of Trust, sell the Property free and clear of liens, and obtain related relief based upon the potential avoidance of the Deed of Trust, and (2) to obtain a declaration that the re-recording of the Deed of Trust was in violation of the automatic stay and therefore a nullity. The Debtor was served with process but did not file an answer or otherwise respond to the Trustee's complaint. The Trustee's Motion and Bayview's Motion each seek summary judgment.

Summary Judgment Standard

Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c), incorporated herein by Fed. R. Bankr.P. 7056; see Anderson v. Liberty Lobby, 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Here, the Trustee and Bayview agree that there is no dispute as to any material fact.

Discussion

A. Avoidance of Deed of Trust

The Trustee seeks to avoid the Deed of Trust using the "strong-arm" power set forth in 11 U.S.C. § 544(a)(3), which gives the Trustee the rights and powers of a bona fide purchaser ("BFP") of real property from the Debtor. If a BFP could obtain the Property free and clear of the Deed of Trust, then the Trustee will be entitled to avoid the Deed of Trust and obtain the Property free and clear of Bayview's interest. Although the Trustee's strong-arm power is granted by federal statute, the determination of what liens and interests may be avoided is a question of state law. Zilkha Energy Co. v. Leighton, 920 F.2d 1520 (10th Cir.1990). Here, the determination of whether the Deed of Trust may be avoided is a matter of Colorado law.

As a race-notice state, see Colo. Rev.Stat. § 38-35-109, Colorado protects BFPs who acquire an interest in property without notice of a prior unrecorded deed or encumbrance on the same property. See Guaranty Bank and Trust Co. v. La-Salle Nat. Bank Ass'n, 111 P.3d 521, 523 (Colo.Ct.App.2004). Proper recording of a document provides constructive notice to all those claiming under the same chain of title. Id. Here, the Deed of Trust was recorded and was properly indexed in the grantor-grantee indices. But, it and the 2007 Deed contained an error in the legal description. This Court must determine whether the error prevented the documents from providing constructive notice of Bayview's interest in the Property.

The Trustee relies on two Colorado cases holding that mortgages containing incorrect legal descriptions did not provide constructive notice to a subsequent BFP. In Wedman v. Carpenter, 65 Colo. 63, 173 P. 57 (1918), the mortgage described the property as located in township 37, rather than 38, the actual township where the property was located. The court held that the recorded deed of trust did not provide constructive notice as to property located in township 38. Id. at 59. Similarly, in Wixon v. Wixon, 76 Colo. 392, 232 P. 665 (1925), the mortgage listed property located in section 7, rather than 4, the actual section. The court held that the mortgage did not provide constructive notice that any property in section 4 was mortgaged, because section 4 was not mentioned in the instrument. Id. at 666.

In both Wedman and Wixon, the party with the rights of a BFP prevailed over the negligent encumbrancer. If Colorado law had remained unchanged since 1925, this Court would be bound to reach the same result. But, many years after Wedman and Wixon were decided, the Colorado legislature enacted Colo.Rev. Stat. § 38-35-122, which provides:

(1) (a) All documents of title relating to real property, including instruments creating a lien on real property, except mechanics' liens and judgment liens, shall include as an aid to identification, immediately preceding or following the legal description of the property, the street address or comparable identifying numbers, if such address or numbers are displayed on the property or any building thereon. (b) Preparers of conveyance documents may include as an aid to identification, immediately preceding or following the legal description of the property, the assessor's schedule number or parcel number.

(2) Should any variance or ambiguity result from the inclusion of a street address, identifying number, or assessor's schedule number or parcel number on a document, the legal description of the property shall govern.

(3) The fact that a document of title does not contain an address, identifying number, or assessor's schedule number or parcel number shall not render the document ineffective nor render title unmarketable if the legal description appears therein.

Colo.Rev.Stat. § 38-35-122. Before § 38-35-122, documents may have contained only a legal description. When that legal description contained an error, as the mortgages did in the Wedman and Wixon cases, the document contained no other information that might alert a title searcher or prospective purchaser that the legal description was inaccurate. But after § 38-35-122, documents were required to contain both a legal description and a street address or other identifying information. With the addition of other identifying information, it became possible for a document to contain descriptions that were inconsistent, with some of the information correct and some incorrect, as is the case here. The 2007 Deed and the Deed of Trust contained an incorrect legal description but a correct Street Address, and the Deed of Trust also contained a correct parcel ID number. To be sure, § 38-35-122 provides that in case of an ambiguity, the legal description governs. But the question before the Court is not which one of two or more parcels the parties intended to encumber. Instead, the question before the Court is whether the Deed of Trust provided sufficient notice that a title searcher or prospective purchaser would be required to conduct further inquiry. As the U.S. District Court has held:

It is a well-settled general rule, in determining whether a purchaser had notice of outstanding equities or unrecorded interests so as to preclude him from being entitled to protection as a bona fide purchaser, that if he has knowledge of circumstances which, in the exercise of common reason and prudence, ought to put a man upon particular inquiry, he will be presumed to have made that inquiry, and will be charged with notice of every fact which would in all probability have been...