Sender v. Cygan (In re Rivera)

• Decision Date: 13 June 2014
• Docket Number: Adversary Proceeding No. 11-01378-SBB,Bankruptcy Case No. 09-23209-SBB
• Citation: 513 B.R. 742
• Court: U.S. Bankruptcy Court — District of Colorado
• Parties: In re: Anthony E. Rivera, SS#xxx-xx-xxxx, Debtor(s). Harvey Sender, Plaintiff(s) v. Norman K. Cygan, and Carol S. Cygan, Defendant(s).

513 B.R. 742

In re: Anthony E. Rivera, SS#xxx-xx-xxxx, Debtor(s).

Harvey Sender, Plaintiff(s)

v.Norman K. Cygan, and Carol S. Cygan, Defendant(s).

Bankruptcy Case No. 09-23209-SBB

Adversary Proceeding No. 11-01378-SBB

United States Bankruptcy Court, D. Colorado.

Signed June 13, 2014

Maria J. Flora, Denver, CO, for Plaintiff.

John A. Berman, Denver, CO, for Defendants.

Lindsay Smith, Denver, CO, for Defendant Norman K. Cygan.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

Sidney B. Brooks, United States Bankruptcy Judge

This case is before the Court on remand from the Colorado Supreme Court on an avoidance action initiated almost two and a half years ago by the Chapter 7 Trustee, Harvey Sender, against the Defendants, Norman and Carol Cygan (hereinafter “the Cygans”) using his “strong-arm” powers under 11 U.S.C. § 544.

At the inception of this case in 2011, at the heart of the dispute was Colorado's real property title recording statute, C.R.S. § 38–35–122. The particular issue before the Court was whether Colorado law required a legal description of real property in a recorded deed of trust to effectuate a valid security interest therein. This Court, having examined the applicable statutes, the legislative history, and considered available case law on point, had determined in 2011 that the matter presented to this Court was a unique, important, and consequential, question of unsettled state law.¹

Because the matter presented a significant issue of first impression, in an exercise of caution and cognizant of jurisdictional limitations placed on bankruptcy courts in entering final findings on matters comprising entirely of state law,² this Court certified the question to the Colorado Supreme Court.³ What unfolded thereafter has been an interesting demonstration of the principle of separation of powers. This dispute has been particularly illuminating regarding the balance between the legislative and judicial branches and their interplay in shaping the development of laws.

The Colorado Supreme Court initially accepted this Court's certification in 2011 and issued an opinion on the question on June 4, 2012, answering the question before it in the negative.⁴ Specifically, the Supreme Court concluded that under Colorado Law, the complete omission of a legal description from a recorded deed of trust was fatal and rendered the recording ineffective. The consequence of this decision would be that the Trustees could avoid the creditors lien under 11 U.S.C. § 544(a) and preserve the lien for the benefit of the estate.

In response to the Colorado Supreme Court's opinion and following immediate lobbying by the Cygans with the support of the Land Title Company of Colorado (and others), on May 28, 2013, the Colorado Legislature enacted a clarification to C.R.S. § 38–35–122, adding thereto new subsections 3.5, 4 and 5, which now provide in unequivocal language that the absence of a legal description, in and of itself, does not render a recording under C.R.S. § 38–35–122 defective as a matter of law.⁵ That legislation made specific reference to the Colorado Supreme Court's decision in In re Rivera. Sometime following the legislative clarifications to C.R.S § 38–35–122, the Colorado Supreme Court withdrew its opinion in this case and vacated its previous certification by this court “as having been improvidently granted [.]” ⁶ Thereafter,the case was remanded back to this Court.

I. BACKGROUNDDeed of Trust

On or about June 29, 2006, Anthony E. Rivera (the “Debtor”) executed a promissory note in the original principal sum of $82,113.00 payable to the Cygans (the “Promissory Note”). On June 29, 2006, the Debtor executed a Deed of Trust for the benefit of the Cygans to secure to the Cygans the repayment of the Promissory Note (the “Deed of Trust”).

The Deed of Trust recites only that the property is in the City and County of Denver, State of Colorado, and has a street address of 9385 East Center Avenue # 11–A, Denver, Colorado 80231 (the “Property”). The Deed of Trust intended to serve as a security instrument for the subject promissory note contains only the correct street address; it does not contain any legal description of the property.⁷ The Deed of Trust was recorded in the City and County of Denver on July 11, 2006 at Reception No. 2006108037.⁸ Although the Deed of Trust purports to grant and convey to the Public Trustee an interest in certain property in the City and county of Denver, State of Colorado (described as: “SEE EXHIBIT A—LEGAL ATTACHED”), Exhibit A was omitted from the recording of the Deed of Trust.⁹

Debtor's Bankruptcy

On July 2, 2009, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code (the “Petition Date”). On August 18, 2009, the Defendants, through counsel, filed a Motion for Relief from Stay seeking leave to enforce their security interest in the Property.¹⁰

To their Motion, the Defendants attached a partial or incomplete copy of the Deed of Trust.¹¹ Specifically, the second page of the Deed of Trust was omitted, and the unrecorded Exhibit A containing the legal description was attached with no notation that it had not in fact been recorded.¹² The Trustee was provided notice of the Motion for Relief from Stay and did not oppose the relief sought by the Cygans.

The Defendants proceeded with a judicial foreclosure of the property after receiving relief from the automatic stay. An order and judgment of foreclosure was obtained on April 14, 2011 (over a year and one-half after the granting of relief from the automatic stay), which order also purportedly reformed the Deed of Trust to include the legal description of the Property.¹³ It is in the Order and Decree for Judicial Foreclosure and Reforming Deed of Trust issued by the District Court of the City and County of Denver on April 14, 2011, where it became evident, ostensibly for the first time, that the recorded Deed of Trust had completely omitted Exhibit A containing the legal description of the property.¹⁴

Adversary Proceeding

On June 9, 2011, the Trustee commenced the within adversary proceeding against the Cygans by filing a Complaint to Avoid Transfer of Property of the Debtor Pursuant to 11 U.S.C. § 544 and Recover Transfer Pursuant to 11 U.S.C. §§ 550 and 551 (the “Complaint”).¹⁵ On July 6, 2011, the Cygans filed a Motion to Dismiss Adversary Proceeding for Failure to State a Claim upon Which Relief Can Be Granted (Summary Judgment) (“Defendants' Motion for Summary Judgment”).¹⁶ On July 27, 2011, Plaintiff filed a Response to the Motion for Summary Judgment and Cross Motion for Summary Judgment (“Plaintiff's Response and Cross Motion for Summary Judgment”).¹⁷ On August 8, 2011, the Cygans filed a Reply to Plaintiff's Response and Cross Motion for Summary Judgment (“Cygans' Reply”).¹⁸

Certification to the Supreme Court

Following consideration of the Motions for Summary Judgment, on September 19, 2011, this Court entered an order certifying the following legal question of state law to the Colorado Supreme Court pursuant to Colorado Appellate Rule 21.1:

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.¹⁹

Additionally, the Court stayed the Cygans' Motion for Summary Judgment pending a final determination of the question before the Court by the Colorado Supreme Court.

On September 30, 2011, the Colorado Supreme Court issued an order accepting the certification of this Court and ordering parties to file opening briefs. ²⁰ On June 4, 2012, the Colorado Supreme Court issued a written opinion concluding that under Colorado law, “[b]ecause the recorded deed of trust in this case completely omitted any legal description of the encumbered property, it was defectively recorded and therefore could not provide a hypothetical purchaser constructive notice of the Defendants' security interest in the property at the time the bankruptcy proceeding commenced.” ²¹

Additionally, the Colorado Supreme Court went on to find that “under the circumstances of this case, actual knowledge cannot be imputed to the trustee, and the deed of trust did not otherwise provide sufficient notice to the defendant's [sic] security interest in the debtor's property.” ²² The court returned the matter to this court for further proceedings.²³ On June 13, 2012, however, the Cygans filed with this Court a notice advising the Court that Petitions for Rehearing had been filed with the Colorado Supreme Court.²⁴

Between June 13, 2012, and August 20, 2013, upon requests of this Court, parties filed a series of status reports apprising the Court of the status of the Petitions of Rehearing before the Colorado Supreme Court.²⁵ On August 20, 2013, through their respective status reports, parties informed the Court that following the Colorado Supreme Court's written opinion issued on June 4, 2012, the Colorado Legislature had unanimously passed House Bill 13–1307, which Bill attempted to clarify the Legislature's intent under C.R.S. § 38–35–122 regarding the effects of an omission of a legal description from a recorded deed of trust.²⁶ In the same status report, parties also informed the Court that on August 19, 2013, the Colorado Supreme Court had issued an Order and Corrected Order of the Court, withdrawing its opinion entered on June 14, 2012, denying its previous grant of certification to the court “as having been improvidently granted,” ²⁷ and remanding the matter back to this Court.²⁸

Remand to the Bankruptcy Court

On October 2, 2013, this Court conducted a status conference based on the Colorado Supreme Court's August 19, 2013 Order and Corrected Order withdrawing its Written Opinion and Denying this Court's Certification. At the October 2, 2013, status conference, this Court directed the parties to file all briefs necessary for the Court's consideration of all issues within this...