Rivera v. Rivera (In re Rivera)
| Decision Date | 04 June 2012 |
| Docket Number | Supreme Court Case No. 11SA261 |
| Citation | 2012 CO 43 |
| Parties | In re: Anthony E. Rivera, Debtor, Harvey Sender, Chapter 7 Trustee, Plaintiff v. Norman K. Cygan and Carol S. Cygan. Defendants |
| Court | Colorado Supreme Court |
United States Bankruptcy Court for the District of Colorado
en banc
Attorneys for Plaintiff:
Maria J. Flora, P.C.
Maria J. Flora
Denver, Colorado
Attorneys for Defendants:
John A. Berman
Winzenburg Leff Purvis & Payne, LLP
Lindsay S. Smith
Denver, Colorado
¶1 Pursuant to C.A.R. 21.1, we agreed to answer a certified question of law posed to us by the United States Bankruptcy Court for the District of Colorado. The question arises out of an adversary proceeding in which the plaintiff, in his capacity as Chapter 7 Trustee, seeks to assert his "strong arm" powers under 11 U.S.C. § 544(a)(3) to avoid the defendants' security interest in the debtor's property and to recover the property for the benefit of the estate under 11 U.S.C. § 550(a)(1). At the time the bankruptcy petition was filed, the defendants' security interest was documented in a deed of trust that was recorded and properly indexed in the City and County of Denver, where the encumbered property is located. The recorded deed identified the encumbered property by a correct and complete street address and expressly referred to an attached legal description of the property. The recorded deed, however, omitted the referenced attachment. The Trustee contends that, because the recorded deed of trust did not contain a legal description of the encumbered property, it failed to provide sufficient notice of the defendants' security interest to a subsequent purchaser of the property under sections 38-35-109(1) and 38-35-122, C.R.S. (2011).
¶2 The Bankruptcy Court's certified question asks:
Whether a properly recorded deed of trust provides sufficient notice of a party's interest in the property if the deed of trust contains no legal description and identifies the property only by a street address.
¶3 We hold that a recorded deed of trust that completely omits a legal description is defectively recorded and cannot provide constructive notice to a subsequent purchaser of another party's security interest in the property. Under the circumstances of this case, the deed of trust did not provide sufficient notice of the defendants' securityinterest in the debtor's property. We therefore answer the certified question in the negative. We recognize that this outcome may appear harsh given that the failure to record the attachment containing the legal description was unintentional. However, our holding is consistent with Colorado's recording statutes and longstanding practice, and is the only conclusion that accords appropriate respect for the need for certainty and stability in Colorado's real property system.
¶4 We summarize the facts provided by the bankruptcy court under C.A.R. 21.1(c)(2) to give context for the question certified. In 2006, Anthony E. Rivera ("Debtor") executed a promissory note payable to Norman K. Cygan and Carol S. Cygan ("Defendants"). The promissory note was secured by a deed of trust dated June 29, 2006, encumbering a condominium unit located in the City and County of Denver. The deed accurately identifies the complete street address of the encumbered property, including the condominium unit number. The deed of trust does not contain the legal description of the property, but instead describes the encumbered property as: "SEE EXHIBIT A - LEGAL ATTACHED." On July 11, 2006, the deed was recorded in the real property records of the Clerk and Recorder of Denver County, Colorado, and was properly indexed in the grantor-grantee index for the City and County of Denver. However, when the deed was recorded, "Exhibit A" containing the legal description was not attached.
¶5 In July 2009, the Debtor filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Plaintiff Harvey Sender was appointed Chapter 7 Trustee ("Trustee"). TheDebtor listed the real property at issue here as an asset. In August 2009, the Defendants filed a motion for relief from the automatic stay, seeking leave to enforce their security interest in the property. The Defendants attached to their motion a partial copy of the deed of trust along with Exhibit A containing the legal description. The Defendants' motion did not state that Exhibit A had not been recorded with the deed.1 The Trustee did not oppose the motion.
¶6 The bankruptcy court granted the motion for relief from the automatic stay in September 2009, and the Defendants commenced judicial foreclosure proceedings on the property. On April 14, 2011, the Defendants obtained a reformation of the deed and a judgment of foreclosure in state court.2
¶7 Thereafter, the Trustee brought an adversary proceeding in the bankruptcy court that gave rise to the question certified here. The Trustee asserted that his strong arm powers under 11 U.S.C. § 544(a)(3) permit him to avoid the Defendants' security interest in the Debtor's condominium unit and thus recover the deed of trust or the value thereof from the Defendants for the benefit of the bankruptcy estate. The parties dispute whether the recorded deed of trust provided sufficient notice of the Defendants' security interest in the Debtor's condominium unit. Because the sufficiency of a property description in a deed is a question of state law, and because the issue of whether a deed of trust that contains no legal description can provide sufficient notice of the encumbrance is one of first impression, the bankruptcy court certified this question to this court. We accepted jurisdiction.
¶8 The bankruptcy court has asked us to determine whether, under Colorado law, a recorded deed of trust provides "sufficient notice" of a party's interest in the property if the deed of trust identifies the encumbered property by a correct and complete street address but contains no legal description. Although the certified question assumes that the deed of trust here was "properly recorded," we interpret that phrase in the question to mean simply that the recorded deed of trust was properly indexed in the grantor-grantee index, and not that the deed was necessarily free of all defects that might render it invalidly recorded.
¶9 We conclude that a recorded deed of trust that completely omits a legal description is defectively recorded and cannot provide constructive notice to asubsequent purchaser of another party's security interest in the property. Under the circumstances of this case, we cannot impute actual notice to the Trustee, and the deed of trust did not otherwise provide sufficient notice of the Defendants' security interest in the Debtor's property. We therefore answer the bankruptcy court's certified question in the negative.
¶10 The bankruptcy court's certified question arose because the Trustee seeks to avoid the Defendants' deed of trust using the "strong-arm" power set forth in 11 U.S.C. § 544(a)(3). Under that provision, a bankruptcy trustee stands in the shoes of a bona fide purchaser of real property from the debtor, and may avoid a security interest in the debtor's real property if a hypothetical bona fide purchaser could have acquired that property free and clear of the security interest at the time the bankruptcy case commenced. See 11 U.S.C. § 544(a)(3) (2006); Hill v. Taylor (In re Taylor), 422 B.R. 270, 273 (Bankr. D. Colo. 2009). Under such circumstances, the trustee may recover the deed of trust for the benefit of the bankruptcy estate. 11 U.S.C. §§ 544(a), 550 (2006); see also In re Taylor, 422 B.R. at 273. Whether a hypothetical bona fide purchaser could have obtained real property free and clear of a security interest is a question of state law. See In re Taylor, 422 B.R. at 273 (citing Zilkha Energy Co. v. Leighton, 920 F.2d 1520 (10th Cir. 1990)).
¶11 In Colorado, a bona fide purchaser of property is one who pays value, in good faith, without any notice of defect in title. See Martinez v. Affordable Hous. Network, Inc., 123 P.3d 1201, 1206 (Colo. 2005). Colorado's race-notice recording statute protectspurchasers who acquire an interest in property in good faith without notice of a prior unrecorded instrument or document encumbering that property. See § 38-35-109(1), C.R.S. (2011); In re Taylor, 422 B.R. at 273; Guar. Bank & Trust Co. v. LaSalle NatT Bank Ass'n, 111 P.3d 521, 523 (Colo. App. 2004). In other words, an unrecorded encumbrance on real property has no effect with respect to a subsequent bona fide purchaser who acquires that property without notice of the encumbrance. Conversely, a purchaser who has notice of an encumbrance or defect in title does not qualify as a bona fide purchaser and cannot take the property free and clear of that encumbrance.
¶12 We have traditionally recognized three forms of notice: actual notice, constructive notice, and inquiry notice. Franklin Bank, N.A. v. Bowling, 74 P.3d 308, 313 (Colo. 2003). Actual notice exists when one has actual knowledge of another's claim. Id. By contrast, constructive and inquiry notice operate to impute knowledge to a party under certain circumstances. Id.
¶13 Constructive notice is essentially record notice. When a party properly records his interest, the party gives constructive notice to the public of his claim. Id. A properly recorded instrument operates to alert future grantees of the recording party's rights because the law assumes that a grantee will search the index at the county clerk and recorder's office and discover the claim. Id.; Guar. Bank & Trust Co., 111 P.3d at 523. Thus, the law charges subsequent purchasers with constructive notice of a properly recorded interest, even if they do not...
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Sender v. Cygan (In re Rivera)
...which provide as follows: (3.5) Legislative declaration. (a) The general assembly finds, determines, and declares that in In re Rivera, 2012 CO 43 (also referred to as Sender v. Cygan ), the Colorado supreme court held that a recorded deed of trust that completely omits a legal description ......
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