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18 P.3d 742 (Colo., Dec. 4, 2000)
Supreme Court of Colorado.
En Banc.
ALH HOLDING COMPANY, an Arizona corporation, Petitioner,
v.
The BANK OF TELLURIDE, a Colorado banking association, Respondent.
No. 99SC375.
Dec. 4, 2000.
Certiorari to the Colorado Court of Appeals.
JUDGMENT REVERSED AND CASE REMANDED.
Bendelow & Darling, P.C., Jeffrey R. Bergstrom and Lee J. Darling,
Denver, CO, Attorneys for Petitioner.
Gaddis, Kin & Herd, P.C., James W. Kin and Walter H. Sargent,
P.C. , Colorado Springs, CO, Attorneys for Respondent.
JUSTICE COATS delivered the Opinion of the Court.
*1)
ALH Holding Company petitioned for a writ of certiorari to review
the court of appeals decision in ALH Holding Co. v. Bank of Telluride,
988 P.2d 181, 183 (Colo.App.1999). The court of appeals reversed
the district court's judgment in favor of ALH in an action brought
by ALH against the Bank of Telluride and held that the Bank's deed
of trust was entitled to priority over the deed of trust of ALH
concerning the same property. Because Colorado's recording statute
does not resolve the question of priority under the circumstances
of this case, and because the law of the state apart from the recording
statute recognizes the priority of ALH's deed of trust executed
contemporaneously with its sale of the property, the judgment of
the court of appeals is reversed.
I.
The essential facts were undisputed by the parties. The Petitioner,
ALH Holding Company, sold real property to Linda Crocker and Robert
Hackley (the "buyers") for $165,000. In connection with
the sale, the buyers borrowed $110,000 from ALH in exchange for
a promissory note secured with a vendor's purchase money deed of
trust in favor of ALH. The buyers also borrowed $55,000 from the
Respondent, the Bank of Telluride, and similarly signed a promissory
note secured with a purchase money deed of trust in favor of the
Bank. Both ALH and the Bank knew, before the closing, that the other
would be loaning money to the purchaser and that both loans would
be secured by deeds of trust conveying interests in the same property.
Telluride Mountain Title Company closed the transaction for both
parties on June 29, 1993, and on the following day recorded the
deeds of trust. The deed of trust in favor of the Bank was recorded
before that of ALH.
After the buyers defaulted on both notes, the Bank initiated a public
trustee's foreclosure sale of its interest in the property, characterizing
its own deed of trust as a superior lien to that of ALH. ALH brought
an action against the Bank, seeking a preliminary injunction and
a declaratory judgment resolving the respective priorities of the
two deeds of trust. The parties stipulated to certain facts and
moved for a determination of the question of priority as between
the two deeds of trust pursuant to C.R.C.P. 56(h). The district
court concluded that as a matter of Colorado law, a vendor's purchase
money deed of trust takes priority over a third-party's purchase
money deed of trust, and it entered judgment in favor of ALH.
With one member dissenting, a panel of the court of appeals reversed,
holding that because the Bank's deed of trust was recorded first,
it was entitled to priority, absent an agreement to the contrary.
The disagreement between the majority and the dissent centered primarily
on the effect of this court's holding in Bray v.. Trower, 87 Colo.
240, 286 P. 275 (1930), and the relative priorities of purchase
money mortgages on the same property. Unlike the majority, the dissent
did not believe the holding of Bray dictated the priority of the
first recorded purchase money deed of trust and instead concluded
that the case law of this jurisdiction is in accord with the reasoning
of the Restatement (Third) of Property § 7.2 (1997), affording
priority among purchase money mortgages on real property to those
given to vendors.
*2)
This court granted ALH's petition for a writ of certiorari to consider
whether the court of appeals properly applied the state's recording
statute and if not to indicate the principles upon which the priority
of interests should be determined. [FN1]
FN1. The issues presented for certiorari review were:
(1) Whether the Court of Appeals erred in ruling that Bray v. Trower,
87 Colo. 240, 286 P.2d 275 (1930), was controlling in this case
and that the priority between a vendor's deed of trust and a third-party
lender's deed of trust was governed by the order in which the documents
were recorded.
(2) Whether the Court of Appeals erred by not following the Restatement
(Third) of Property: Mortgages § 7.2(c) (1997).
(3) Whether the Court of Appeals' opinion properly applied Colorado's
Recording Act.
II.
Recording statutes in this country have long operated to alter the
priority of various property rights on the basis of notice, recording,
or some combination of the two. Colorado has had a recording statute
since 1861. See § 9, Colo. G.L., p. 65 (1861). The statute
has undergone numerous revisions from its original form and is currently
codified at section 38-35-109(1) of the Colorado Revised Statutes.
At the time applicable to the events in this case, the recording
statute included the following language:
All deeds, powers of attorney, agreements, or other instruments
in writing conveying, encumbering, or affecting the title to real
property, certificates, and certified copies of orders, judgments,
and decrees of courts of record may be recorded in the office of
the county clerk and recorder of the county where such real property
is situated. No such unrecorded instrument or document shall be
valid as against any class of persons with any kind of rights who
first records, except between the parties thereto and such as have
notice thereof. This is a race-notice recording statute.
§ 38-35-109(1), 16A C.R.S. (Supp.1989). [FN2]
FN2. The recording statute was substantially amended in 1984, characterizing
itself for the first time as a "race-notice" recording
statute. Ch. 267, sec. 1, § 38-35-109(1), 1984 Colo. Sess.
Laws 979, 979.
The statute protects a later grantee with rights in real property
against a prior executed but unrecorded instrument to which it is
not a party, if the later grantee lacks notice of the prior unrecorded
instrument and records first. According to the plain language of
the statute, even though the later grantee's instrument was recorded
first, it still cannot benefit from the recording statute if it
had notice of the earlier unrecorded instrument. Until 1996 the
statute did not make clear that the class of later grantees excluded
from the benefits of the statute because of notice was limited to
those with notice of the unrecorded instrument before acquisition
of the later grantee's rights. [FN3] However, later grantees with
notice even before they acquired rights were clearly included in
the less precise language of the earlier statutes. Therefore, although
the Bank's deed of trust was recorded first, the recording statute
would confer no priority upon it if it were aware of ALH's unrecorded
deed of trust before acquiring its own rights in the property.
FN3. In 1996 the statute was amended by the addition of the words,
"prior to acquisition of such rights," after the words,
"notice thereof," in its exception from protection for
those having notice of the prior unrecorded instrument. Ch. 275,
sec. 1, § 38-35-109(1), 1996 Colo.Sess.Laws 1554, 1554.
Where a security agreement, or mortgage, is executed between a
purchaser and a vendor as part of the same transaction in which
the purchaser acquires title to the property, the execution of the
deed and the mortgage are considered simultaneous acts. Chambers
v. Nation, 178 Colo. 124, 129, 497 P.2d 5, 7 (1972); Bank of Denver
v. Legler, 142 Colo. 333, 336, 350 P.2d 1059, 1061 (1960). As a
matter of law, such a purchaser never has an unencumbered title
to property in which he can assign further rights. See Chambers,
178 Colo. at 129, 497 P.2d at 7; Legler, 142 Colo. at 336, 350 P
.2d at 1061. Therefore, even a third party who loans money to the
purchaser that is applied to the purchase, and who takes back a
mortgage on the purchased property, cannot acquire rights to the
property from the purchaser unencumbered by the vendor's mortgage,
regardless of the order in which the documents are signed. Legler,
142 Colo. at 336, 350 P.2d at 1061.
*3)
By acquiring its rights to the property in the same transaction,
with full knowledge that the loan of the vendor, ALH, would be secured
by a deed of trust, the Bank necessarily had notice of ALH's unrecorded
instrument within the meaning of the recording statute. Whether
or not the Bank's deed of trust was actually signed before that
of ALH at the closing, the Bank's deed of trust could not have the
legal effect of acquiring rights to the property before the execution
of ALH's instruments, of which the Bank was aware. The statute,
therefore, could not resolve the question of priorities in favor
of the Bank.
The court of appeals understood Bray v. Trower to hold that priority
among purchase money mortgages on the same land is necessarily governed
by the order in which the respective instruments were recorded,
absent an agreement to the contrary. Bray merely recognized, however,
that purchase money mortgages were instruments to which the recording
statute applied. It nowhere suggested that the applicable recording
statute--in that case the pre 1927 recording statute, which differed
substantially from the version at issue here, see Colo. Comp. Laws
ch. 102, § 4902 (1921)--would always resolve the question of
priority among purchase money mortgages, much less always resolve
it in favor of the first recorded mortgage. It clearly did not discount
the effect of notice or lack of notice on the statutory determination
of priority. See Bray, 87 Colo. at 247, 286 P. at 278 (emphasizing
Bray's lack of actual knowledge or notice of facts putting him on
inquiry and his right to rely on the public records). Given the
vastly different factual situation in Bray, it was never necessary
to consider the validity of the simultaneous act rationale or its
effect on notice to a third party taking a purchase money mortgage
at the same closing.
On its face, the recording statute provides a method by which a
later grantee of rights in real property can, under certain circumstances,
perfect its title against an earlier grantee. However, a failure
of the later grantee to qualify for the benefits of the statute
does not necessarily mean that its interests are subordinate to
those of an earlier grantee. If the later grantee has notice of
the earlier unrecorded instrument or fails to record first, the
recording statute simply fails to provide a mechanism for determining
the priority of the competing interests, and none will be imputed
to it. See Peters v. Smuggler- Durant Mining Corp., 930 P.2d 575,
580 (Colo.1997) ("Statutes that are in derogation of property
rights, as with other rights under the common law, must be strictly
construed."). Where no statute controls, the priority of rights
in real property must be determined by reference to the common law.
See 14 Richard R. Powell, Powell on Real Property § 82.02[3][b]
(1996) ("[I]f the subsequent purchaser cannot claim the benefit
of the recording act, which is in derogation of the common law,
the issue must be resolved by a reference to common law principles.").
Because the Bank necessarily acquired its rights to the property
following ALH's deed of trust, and it had notice of ALH's unrecorded
instrument prior to acquiring rights of its own, the recording statute
does not resolve the priority question.
III.
*4)
When the priority of rights in real property is not dictated by
the operation of the recording statute, the rule in Colorado has
long been that security interests, or mortgages, given in exchange
for money applied to the purchase of the property have priority
over all other liens. See, e.g., Chambers, 178 Colo. at 128-29,
497 P.2d at 7; Robinson v. Wright, 90 Colo. 417, 421, 9 P.2d 618,
619 (1932); Emery v. Ward, 68 Colo. 373, 374-75, 191 P. 99, 100
(1920). The rationale for the rule derives, here again, from the
fact that execution of the deed and mortgage are considered simultaneous
acts, such that the title never rests in the buyer unencumbered
by the mortgage. As between the owner of property who never parts
with the title except in exchange for a mortgage from the purchaser
and a third party who lends money to the purchaser for part of the
purchase price and accepts a mortgage on the property in return,
the same logic demands that the vendor's mortgage have priority.
The purchaser does not yet own the property at the time of the execution
and never acquires title free from the vendor's purchase money mortgage.
See Legler, 142 Colo. at 336, 350 P.2d at 1061; see also Fecteau
v. Fries, 234 N.W. 113, 114 (Mich.1931); Giragosian v. Clement,
604 N.Y.S.2d 983, 984 (N.Y.App.Div.1993); Friarsgate, Inc. v. First
Fed. Sav. & Loan Ass'n, 454 S.E.2d 901, 905 (S.C.Ct.App.1995).
The purchaser is therefore never in a position to assign rights
in the property without them being subject to the pre-existing encumbrance,
even to a party loaning him money for the purchase.
In Legler this court addressed the issue of priority as between
chattel mortgages held respectively by the owner of property and
a third-party lender. Legler, the owner of a service station, agreed
to sell the station to purchasers who procured a loan from the Bank
of Denver. Legler, 142 Colo. at 334, 350 P.2d at 1060. The loan
from the Bank of Denver to the purchasers was secured by a chattel
mortgage covering the property of the proposed sale. On the date
of the sale, Legler received a cashier's check in the amount of
$4,000 from the Bank of Denver on behalf of the purchasers and a
promissory note for $1,500, representing the balance of the purchase
price. The promissory note was secured by a chattel mortgage on
the property in favor of Legler. Id.
Although the Bank of Denver recorded its mortgage more than a year
before Legler recorded, the purchase money mortgage held by Legler,
the original seller of the property, was held to be entitled to
priority in express reliance on the simultaneous act rationale from
Robinson. Legler, 142 Colo. at 336, 350 P.2d at 1061. Noting particularly
that the rule applies equally to real estate and chattel mortgages,
the court in Legler inferred from the rationale giving purchase
money mortgages priority over other liens a necessary priority of
vendor purchase money mortgages over third-party purchase money
mortgages. The third party's mortgage could not come between the
deed and the vendor's purchase money mortgage any more than lesser
liens could come between the deed and purchase money mortgages generally.
See Emery, 68 Colo. at 376, 191 P. at 100.
*5)
If the holding and rationale of Legler, decades after Bray, were
not sufficient evidence of the continued acceptance of the special
nature of purchase money mortgages, including the priority of a
vendor's mortgage over that of a third party, a careful reading
of Bray dispels the suggestion that it intended anything to the
contrary. In Bray the court found it unnecessary to even characterize
the purchase money mortgages at issue as vendor or third- party
mortgages because it found the recording statute controlling. Rather
than rejecting the principle that purchase money mortgages are entitled
to priority over liens of lesser rank, as set out in Emery v. Ward,
the court in Bray merely noted that the mortgages at issue in the
case before it were "of equal dignity" in the sense that
both were governed by the recording statute, and distinguished Emery,
where both instruments were not covered by the recording statute.
[FN4] Bray, 87 Colo. at 248, 286 P. at 278
FN4. The recording statute in place at the time of Emery did not
include judgment liens among the interests affecting real property
entitled to its protection. See C.R.S. ch. 28, § 694 p. 330
(1908). It was not until 1919 that the statute was amended to provide
specifically for the recording of certified copies of judgments.
See Colo.Comp.Laws ch. 102, § 4902 (1921).
Although Colorado has never expressly adopted the Restatement (Third)
of Property § 7.2, the holdings of these cases, which support
the priority of a vendor purchase money mortgage over third-party
purchase money mortgages, are consistent with the Restatement and
are supported by the same equitable considerations. See id. [FN5]
As the Comments to the Restatement explain:
FN5. Section 7.2(c) of the Restatement reads:
A purchase money mortgage given to a vendor of real estate, in
the absence of a contrary intent of the parties to it and subject
to the operation of the recording acts, has priority over a purchase
money mortgage on that real estate given to a person who is not
its vendor.
[T]he equities favor the vendor. Not only does the vendor part
with specific real estate rather than money, but the vendor would
never relinquish it at all except on the understanding that the
vendor will be able to use it to satisfy the obligation to pay the
price. This is the case even though the vendor may know that the
mortgagor is going to finance the transaction in part by borrowing
from a third party and giving a mortgage to secure that obligation.
In the final analysis, the law is more sympathetic to the vendor's
hazard of losing real estate previously owned than to the third
party lender's risk of being unable to collect from an interest
in real estate that never previously belonged to it.
Id., cmt. 6.
Furthermore, nothing in these cases suggests that the parties cannot
avoid the effect of the priority afforded vendor purchase money
deeds of trust by subordinating the vendor's lien to that of the
third-party lender by agreement. See generally, George E. Osborne,
Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law §
12.9, at 776 (1979). Although subordination agreements can be found
by implication, the earlier recording of the third-party lender's
deed of trust cannot, without more, provide a basis for such a finding.
Here, the Bank and ALH stipulated that they were each aware the
other would be loaning money to the purchaser and that both loans
would be secured by deeds of trust, but they did not stipulate that
there was any agreement concerning the priority of interests. By
failing to challenge the district court's judgment in the court
of appeals on the basis of a subordination agreement between the
parties, the Bank waived this claim, and it will not be addressed
by this court.
IV.
*6)
Although the Bank's deed of trust was recorded before that of ALH,
the Bank was not entitled to the benefits of the recording statute
because it had notice of ALH's unrecorded instrument prior to acquiring
rights of its own in the property. Furthermore, in the absence of
a statutory determination of the relative priorities of the two
deeds of trust, or any agreement of the parties resolving the matter,
the deed of trust of ALH, the vendor, has priority over the deed
of trust of the Bank concerning the same real property. The judgment
of the court of appeals is therefore reversed, and the case is remanded.
Colo.,2000.
ALH Holding Co. v. Bank of Telluride
END OF DOCUMENT
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