Shaw v. 17 W. Mill St., LLC

• Decision Date: 24 June 2013
• Docket Number: Supreme Court Case No. 11SC516
• Citation: 2013 CO 37
• Parties: Petitioners/Cross-Respondents: Dennis Shaw and First Horizon Home Loan Corporation, v. Respondent/Cross-Petitioner: 17 West Mill St., LLC, a Colorado limited liability company.
• Court: Colorado Supreme Court

2013 CO 37

Petitioners/Cross-Respondents: Dennis Shaw and First Horizon Home Loan Corporation,

v. Respondent/Cross-Petitioner: 17 West Mill St., LLC, a Colorado limited liability company.

Supreme Court Case No. 11SC516

Supreme Court of the State of Colorado

June 24, 2013

Certiorari to the Colorado Court of Appeals

Court of Appeals Case No. 10CA955

Judgment Reversed

en banc

Attorneys for Petitioner:

Sweetbaum Sands Anderson PC

Alan D. Sweetbaum

Geoffrey P. Anderson

Jonathan G. Nash

Denver, Colorado

Attorney for Respondent:

Stevens, Littman, Biddison, Tharp & Weinberg, LLC

Craig A. Weinberg

Boulder, Colorado

Attorneys for Amicus Curiae Real Estate Law Section of the Colorado Bar Association

Davis Graham & Stubbs LLP

Geoffrey C. Klingsporn

Denver, Colorado

Notarianni & Notarianni

Gregory J. Notarianni

Denver, Colorado

Attorneys for Amicus Curiae Land Title Association of Colorado

The Sweetser Law Firm, P.C.

Daniel A. Sweetser

Denver, Colorado

JUSTICE HOBBS delivered the Opinion of the Court.

¶1 In this case, reviewing the decision of the court of appeals in 17 West Mill St., LLC v. Shaw,2011 WL2321430, --- P.3d --- (Colo. App. 2011),¹ we construe section 38-39-102(8), C.R.S. (2012), as requiring proof of actual fraud by a preponderance of the evidence in order to void a public trustee's release of the lien of a deed of trust pursuant to a written request. The statute provides that, "[i]f the written request to release the lien of any deed of trust is a fraudulent request, the release by the public trustee based upon such request shall be void." The trial court found that the term "fraudulent request" invokes the elements of common law fraud: a person commits fraud when (1) the person makes a false representation of a past or present fact; (2) the fact was material; (3) at the time the representation was made, the person knew the representation was false; (4) the person made the representation with the intent that another person would rely on the representation; (5) the other person relied on the representation; (6) that other person's reliance was justified; and (7) the reliance caused damages.

¶2 Here, the trial court found that the attorney for the borrower, Floyd Smith, purporting to act on behalf of the lender, Jonathan Robbins, negligently signed the request for release of the Robbins deed of trust as "attorney for the lender." He did so believing he was acting in Robbins' interest, based on a series of real estate transactions Smith had facilitated among the interested borrowers and lenders. Disagreeing with the trial court's negligence conclusion, the court of appeals characterized Smith's signature on the request for release of the deed of trust to be "constructive fraud"— meaning "a breach of a legal or equitable duty that the law declares to be fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests, irrespective of the moral guilt of the perpetrator."

¶3 The court of appeals determined that the operative statutory term, "fraudulent request," in section 38-39-102(8) is ambiguous, and interpreted the statute to include both actual fraud and constructive fraud as a basis for voiding the public trustee's release of the deed of trust. The court of appeals concluded that Smith engaged in constructive fraud because he made two material misrepresentations in the request for release: (1) signing the release as "attorney for lender;" and (2) representing that the purpose of the deed of trust had been satisfied. In setting aside the contested release in this case based on constructive fraud, the court of appeals recognized that "this result is harsh as to bona fide purchaser Dennis Shaw," but that "he may pursue other available legal remedies."

¶4 We disagree with the court of appeals and agree with the trial court. The court of appeals' decision gives too little effect to a bona fide purchaser's reliance on the recording act, section 38-34-101, C.R.S. (2012), a principle of law the General Assembly intended to vindicate in adopting section 38-39-102(8). We adopt a plain meaning construction of section 38-39-102(8) and hold that this provision creates a narrow exception that voids the public trustee's release of a deed of trust only when proof of actual fraud is demonstrated by a preponderance of the evidence. We agree with the trial court that actual fraud was not proven in this case. Accordingly, we reverse the judgment of the court of appeals and remand this case to that court for resolution regarding any other issues remaining in this case.

I.

¶5 Jonathan Robbins, a real estate developer, was the sole member and manager of 17 West Mill St., LLC (17 West Mill). Robbins shared office space with Todd Demko, who was also involved in area real estate development. At different times, Robbins, 17 West Mill, and Demko all made loans to James Kreutzer, another local real estate developer. Kreutzer was the sole owner of Animas Investments, LLC, and Wildcat Properties, LLC.

¶6 This case arises from a $75,000 loan 17 West Mill made to Kreutzer and Animas Investments in March of 2006. Animas Investments signed a deed of trust to real property securing repayment of a promissory note made payable to 17 West Mill. On three separate occasions, at the request of Kreutzer, the parties exchanged collateral by substituting a different deed of trust on different real property for the original deed of trust securing the note. On two of these transactions, Robbins signed a letter drafted by and addressed to Kreutzer's attorney, FloydSmith, authorizing the release of the original deed of trust in exchange for the new deed of trust securing the note. Smith then prepared requests for release of the deeds of trust, signed as "Floyd L. Smith as attorney for lender," and submitted the requests to the public trustee. Ultimately, as a result of these dealings, 17 West Mill'spromissory note was secured by a deed of trust on real property described as "Unit 42 of Lightner Creek Village" (Unit 42).

¶7 In 2007, as part of a multi-million dollar refinancing deal that included the sale of Unit 42 to Dennis Shaw, Kreutzer sought out Robbins to release 17 West Mill's deed of trust on Unit 42. Smith drew up a letter for Robbins to sign, as he had in previous situations, authorizing the release of the deed of trust in exchange for a deed of trust on other real property. Robbins, however, was in Honduras and unable to physically sign the letter. Working under time-pressure to facilitate the deal, Smith did not attempt to contact Robbins, although Robbins was reachable by phone, and asked Demko to sign the letter on behalf of Robbins authorizing the release of the deed of trust. Demko explained that he did not have power of attorney to sign for Robbins on this particular transaction, but Smith persuaded him that he could authorize the release based on past course of conduct between him and Robbins where Demko did have power of attorney.² Demko signed the letter "Johann Robbins by Todd Demko," and Smith then filed a request with the public trustee to release the deed of trust on Unit 42. As he had in previous instances, Smith signed the request for release as "attorney for the lender," 17 West Mill, and asserted that the indebtedness secured by the deed of trust had been paid and/or the purpose of the deed of trust had been fully satisfied.

¶8 The closing occurred and Shaw obtained title to Unit 42 and then executed a deed of trust to First Horizon Home Loan Corporation, his lender. Nearly nine months later, Robbins sent a letter to Kreutzer inquiring why he had not received any payments on the loan. Robbins then learned, for the first time, that the deed of trust on Unit 42 had been released.

¶9 Robbins and 17 West Mill filed suit, alleging claims for negligence, civil conspiracy, and breach of fiduciary duty against Smith, as well as several other claims against Shaw, Kreutzer, the public trustee, First Horizon, and Animas Investments. Robbins requested an equitable lien on Unit 42 and a declaratory judgment that the release of the Unit 42 deed of trust was void.

¶10 In the trial court, Robbins argued that the release of the deed of trust was void because he did not personally authorize the release and it was obtained fraudulently. Robbins claimed, more broadly, that an unauthorized request for a release of a deed of trust renders the release void under the common law. The trial court, however, found that section 38–39–102(8) and its predecessors, which created the race–notice recording act, replaced the common law in this area. It determined that the language of section 38-39-102(8) provided for voiding a public trustee'srelease of a deed of trust only if the person seeking to void the release proved the elements of common law fraud. The court concluded that, while Smith was negligent, he did not commit actual fraud within the meaning of this provision.

¶11 The court of appeals reversed the trial court, concluding that section 38-39-102(8) required only "something akin to constructive fraud" in order to void the public trustee's release of the deed of trust. The court of appeals voided the release, restored the Unit 42 deed of trust to Robbins, and left Shaw to pursue other remedies, despite his undisputed position as a bona fide purchaser in reliance on the documents recorded under the recording act.³ Shaw, First Horizon, and amici The Real Estate Law Section of the Colorado Bar Association and the Land Title Association of Colorado, argue that section 38-39-102(8) codifies a narrow exception to the rule protecting bona fide purchasers embodied in our recording act, section 38-34-101. To qualify for this exception voiding the public trustee's release of a deed of trust, they argue one must prove the elements of common law fraud in order to establish the existence of a fraudulent request to the public trustee for release of the deed of trust. We agree.

II.

¶12 We adopt a plain...