October 4, 2013
by Kimberly L. Martinez
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)
In June the Colorado Supreme Court issued an advisory opinion in Sender v. Cygan (In re Rivera) (11SA261, 2012 LEXIS 398 (Colo. June 4, 2012)), creating potentially wide-reaching implications for the title insurance industry and real estate practitioners with respect to the recording of real estate documents. The Cygan opinion arose from a request by the U.S. Bankruptcy Court for the District of Colorado to the Colorado Supreme Court to answer the following question: Does a recorded deed of trust provide sufficient notice of a party’s interest in real property if the deed of trust contains no legal description and identifies the property only by a street address?
In response, the Colorado Supreme Court held that a deed of trust recorded without a legal description is defectively recorded, or invalid, and does not provide constructive notice to a subsequent purchaser of another party’s security interest in real property. In its determination, the Colorado Supreme Court reviewed C.R.S. sections 38-35-122 and 38-35-109(1) and reasoned that under C.R.S. § 38-35-122, a validly recorded lien must contain a legal description of the property, and a legal description must be more than a property address for notice purposes. Consequently, the creditor’s deed of trust in Cygan was declared void and, thus, incapable of providing constructive notice of the encumbrance despite the fact that it was recorded in the grantor-grantee indices and contained the correct property address.
The majority opinion in Cygan distinguished prior cases that held a recorded instrument containing an erroneous or incomplete legal description provides sufficient notice of an encumbrance so long as the instrument describes the property with reasonable certainty. For example, in Hill v. Bayview Loan Servicing, LLC (In re Taylor) the Bankruptcy Court for the District of Colorado held that a deed of trust properly recorded in the grantor-grantee indices with a correct street address, but with a legal description identifying the incorrect block number for the parcel placed the bankruptcy trustee on inquiry/constructive notice of an encumbrance on the subject real property. In Cygan, the Colorado Supreme Court declined to extend the general rule set forth in Taylor to a deed of trust that completely omitted the legal description. The Colorado Supreme Court reasoned that the recording of the creditor’s deed of trust without a legal description materially fails to describe the recording party’s interest in the property and cannot be validly recorded. Therefore, the recording of the creditor’s deed of trust without a legal description was void and incapable of providing constructive notice of the encumbrance.
Subsequent to the Cygan opinion, the title industry expressed grave concerns regarding the implications of the decision and the status of recordings of real property documents in the public records of Colorado. Following lobbying efforts by the title industry, the Colorado General Assembly introduced House Bill 13-1307 in order to address the issues created by the Cygan decision. House Bill 13-1307 modifies C.R.S. § 38-35-122 by adding subsections (3.5), (4), and (5). These subsections clarify that notwithstanding the Cygan opinion, a failure to include a legal description on a document does not, by itself and without regard to the totality of the circumstances, necessarily render that document defective or invalid upon its recording.
The new legislation sustains a prior Colorado Court of Appeals unpublished opinion, which held that a deed of trust contained sufficient information to place another on inquiry notice despite the fact that it omitted the legal description and contained several other defects. In EMC Mortgage Corporation v. Getrado, a senior lienholder’s deed of trust was recorded with no legal description, an incorrect property address, a variation in the grantor’s name, and an incorrect name of the public trustee. The Colorado Court of Appeals held that the senior deed of trust contained sufficient information to place a subsequent lienholder on notice of the senior lienholder’s priority interest in the property. The court noted that even though the senior deed of trust did not contain a legal description, it contained the correct assessor’s parcel number, which upon further inquiry would have affirmatively disclosed the senior lienholder’s interest in the property.
Analogous to the holding in Getrado, House Bill 13-1307 clarifies that a deed of trust recorded without a legal description does not render the instrument defective if, under the circumstances, the recorded deed of trust includes other identifying information such as a street address and/or assessor information. Hence, House Bill 13-1307 in essence codified the Getrado holding by specifying that the absence of a legal description neither invalidates the document or its recording, nor determines the validity of the document as against a person obtaining rights in the property. Under the revised statute, for notice purposes, those with an interest in real property must also consider the totality of the circumstances when determining whether the document is defective, valid, or invalid against the person obtaining rights in the real property.
Following the legislation negating the Cygan opinion, on August 19, 2013, the Colorado Supreme Court withdrew its opinion, and denied the certified question. In withdrawing its opinion, the Colorado Supreme Court noted that it “improvidently” granted the certified question. Thus, it appears that the Colorado Supreme Court had not fully contemplated the broad implications of the Cygan decision.
House Bill 13-1307 clarifies and confirms the prior decisions by the Colorado Court of Appeals on this issue, while still leaving a substantial amount of discretion with the courts to look at the totality of the circumstances as it relates to a legal description. Although real estate practitioners may now have less reason for concern when faced with the same situation as in Cygan, additional issues should be anticipated as Colorado courts interpret and apply the new legislation to differing factual scenarios.
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