Martinez v. Affordable Housing Network

• Decision Date: 05 December 2005
• Docket Number: No. 04SC421.,04SC421.
• Parties: Marvin L. MARTINEZ and Jorene M. Martinez, Petitioners, v. AFFORDABLE HOUSING NETWORK, INC.; Senior Entrepreneurs Foundation; E.W. Brossman; Tom Skaggs; Troco, Inc.; and Eldon R. Strong, Respondents.
• Court: Colorado Supreme Court

123 P.3d 1201

Marvin L. MARTINEZ and Jorene M. Martinez, Petitioners, v. AFFORDABLE HOUSING NETWORK, INC.; Senior Entrepreneurs Foundation; E.W. Brossman; Tom Skaggs; Troco, Inc.; and Eldon R. Strong, Respondents.

No. 04SC421.

Supreme Court of Colorado, En Banc.

December 5, 2005.

Underhill & Underhill, P.C., Joanne P. Underhill, Dana M. Arvin, Greenwood Village, for Petitioners.

Laff Campbell Tucker Delaney & Gordon, LLP, Darrel L. Campbell, Englewood, for Respondents Troco, Inc. and Eldon R. Strong.

Robert Stuart McCormick, Fort Collins, for Respondent Tom Skaggs.

MARTINEZ, Justice.

In this case we consider whether an interest in the property of homeowners, acquired through a fraudulent scheme, properly passed to purchasers without actual or constructive notice of the fraud. We examine the doctrine of inquiry notice, particularly notice of the rights of persons in exclusive possession of real property and of rights acquired by quitclaim deed. Because we find inquiry notice in the factual circumstances of this case, we reverse the decision of the court of appeals. Martinez v. Affordable Hous. Network, Inc., 109 P.3d 983 (Colo.App.2005).

I. Facts and Proceedings Below

In the early fall of 1999, Affordable Housing Network, Inc. (AHN) sent a mail solicitation to Marvin and JoRene Martinez (collectively "Martinez"). The solicitation targeted homeowners who had fallen behind on their mortgage payments and were in need of financial assistance. AHN advertised financial counseling services, assistance with refinancing homes, assistance with avoiding foreclosure, and other similar services. After contacting AHN, Martinez met several times with Tom Skaggs and E.W. Brossman, representatives of AHN. Skaggs and Brossman falsely claimed that AHN was a nonprofit, volunteer organization qualifying under section 501(c)(3) of the Internal Revenue Code. Skaggs and Brossman also falsely represented to Martinez that AHN was part of a HUD-approved program affiliated with Fannie Mae. They offered to help Martinez refinance the home and, if that failed, help Martinez sell the property and purchase a new home with the remaining equity.

Based upon these representations, Martinez entered into an option agreement with AHN on October 2, 1999. Under the agreement, AHN had an option to purchase the property for an option fee equivalent to the amount needed to cure the mortgage deficiency. AHN could purchase the home under certain conditions, including that AHN cure the default within ten days and place the deed into escrow with Rocky Mountain Title.¹ The deed could be removed from escrow only after receiving written instructions from AHN and with proof that the two mortgages had been paid in full or would be satisfied at closing.

On October 7, 1999, Skaggs and Brossman met with Marvin and JoRene Martinez and asked them to sign a quitclaim deed to their home. Skaggs and Brossman told Martinez that the quitclaim deed was for AHN's "protection" should the homeowners abandon the property once AHN cured the mortgage default.

On October 28, 1999, twenty-six days after the option agreement was executed, AHN cured the mortgage deficiency with a payment of $9,020.00 and subsequently put the property up for sale. Among the terms of the option agreement, AHN was to pay the arrears within ten days, declare in writing to the homeowners the intent to exercise the option, and deliver the deed into escrow. Although AHN failed to cure the mortgage default within the specified ten-day limit, Martinez never objected to the late payment.

For the next six months, Martinez cooperated with AHN's efforts to sell the property. Martinez became increasingly dissatisfied with AHN's lack of communication, lack of effort to refinance the home, and failure to show the couple comparable homes for purchase in the event their home sold. Martinez began receiving solicitations to refinance the home and, ultimately, Martinez decided to keep the home, refinance, and reimburse AHN the $9,020.00 for the deficiency.

Martinez testified that on May 2, 2000, a real estate agent telephoned the Martinez home because she wished to bring a potential buyer over to see the property. JoRene Martinez told the agent that she and her husband were no longer interested in selling their home and intended to refinance and pay the money owed to AHN for the deficiency.

The real estate agent "got silent on the phone" and the parties ended the call. The agent then contacted Brossman who in turn phoned JoRene Martinez and insisted that she allow the real estate agent to show the house.

When the real estate agent arrived at the Martinez residence, JoRene Martinez confronted the agent at her doorstep. JoRene Martinez again stated that she did not wish to sell the home and told the agent not to enter the home. The real estate agent ignored JoRene Martinez' protests, pushed her way into the home, and proceeded to show the home to Overton, a Troco, Inc. investor. Although Overton arrived with the real estate agent and was "right behind her" as she entered the home, Overton testified that he had no knowledge of JoRene Martinez' statements to the agent or JoRene Martinez' objection to their viewing of the property. Overton also claimed to be unaware of any fraudulent conduct on the part of AHN; however, none of the Troco investors — including Overton — sought any additional assurances from AHN, conducted a title search, or acquired title insurance before purchasing AHN's interest in the property.

Several days after the real estate agent showed the property to Overton, the agent phoned the Martinez home and again spoke with JoRene Martinez. JoRene Martinez insisted that the real estate agent remove the sale sign from the yard and remove the lockbox for the realtor keys from outside the home. The real estate agent went to the Martinez home and removed the sign and lockbox that day.

Within the week, however, the Respondents, Troco, Inc. and Strong (collectively "Troco"), agreed to purchase AHN's interest in the property for $25,000.00. Martinez was not informed of this agreement by AHN, the real estate agent, or Troco. On May 8, 2000, AHN completed and recorded the Martinez quitclaim deed.

Prior to recording the deed, AHN did not place the deed into escrow, did not inform Martinez of any arrangement to sell the property, and did not pay the balance of the two home mortgages or provide any proof that the mortgages would be satisfied at closing.

The next day, on May 9, 2000, AHN quitclaimed the property to Troco. The deed was recorded that same day. The mortgages were not paid.

The parties do not dispute that placing the deed into escrow was part of the agreement between AHN and Martinez. The parties also stipulate that AHN breached the terms of the agreement and AHN did not deliver the deed to Rocky Mountain Title to hold in escrow. Instead, AHN recorded the deed and conveyed its interest to Troco without the knowledge or consent of Martinez.

Troco purchased the home with the understanding that its interest was subject to the balance of the two mortgages totaling $112,646.00. However, the liens on the home were never assigned to AHN or Troco, and Martinez remained personally liable for the balance of the two mortgages. While Troco averred that it intended to pay the balance of the mortgages with the sale of the home, Troco assumed no actual obligation to do so. The profits from the sale to Troco were retained by AHN and distributed in part to Skaggs and the real estate agent. At no point did AHN offer to return the skimmed equity to Martinez.

On May 10, 2000, Martinez received a letter from AHN indicating that the home had been sold to Troco. In a letter dated May 18, 2000, Martinez was informed by Overton that Martinez had the option of repurchasing the home for $150,000.00 or vacating it by June 15, 2000. Martinez then filed suit.² Pursuant to a court order, Martinez has remained in the home and has continued to make all mortgage payments on the home. As part of the order, the mortgage payments are said to be the equivalent of rent. Martinez contributes to the equity in the home in exchange for physical occupation of the home and the reduction of Martinez' personal liability on the two mortgages.

At the close of Martinez' evidence, Troco moved for a directed verdict on the rescission claim. The trial court found that Martinez had abandoned the claim for rescission by failing to restore to AHN the option price that would have put AHN in the position it would have been in but for the contract. The court further reasoned that Troco was a bona fide purchaser entitled to rely upon the deed recorded by AHN. Based on these findings, the trial court quieted title with Troco and dismissed the Martinez' claims against them. A jury returned verdicts for Martinez and against the other defendants on all of the remaining claims.

Martinez raised a number of issues on appeal, the majority of which were appropriately resolved by the lower courts and will not be disturbed here. We address only those issues raised with respect to Martinez' quiet title claim. In the argument to the appellate court, Martinez asserted that the trial court erred in quieting title with Troco on three grounds: 1) the property should have been returned to Martinez under Colorado's stolen property statute, section 18-4-405, C.R.S. (2003)³; 2) the trial court improperly dismissed the Martinez' rescission claim; and 3) the purchasers had notice of Martinez' interests.

The court of appeals found that the stolen property statute was not applicable. The court went on to agree with the trial court that the rescission claim had been abandoned and that the purchasers received good title as bona fide purchasers for value. In reaching this result, the court found that the trial record supported the conclusion that the purchasers paid value, in good faith, and took title without actual or constructive notice of any defect.

We...