Sender v Cygan (Of Note)

Summary:  A document recorded with a street address and without a legal description did not provide sufficient notice to defeat a bankruptcy trustee’s strong arm power.

Sender v Cygan, 2012 WL 1994873, 2012 CO 43 (Co. S. Ct., 2012).

Facts: 

Anthony Rivera (Rivera) executed a promissory note secured by a deed of trust encumbering a condominium unit in Denver (property) in favor of Norman and Carol Cygan (Cygan).  The deed contained the street address but did not contain the legal description.  Instead it stated see “EXHIBIT A” under the legal description section and had an attachment with the legal description.  The deed was recorded, but Exhibit A was omitted.  Rivera filed for bankruptcy, and Harvey Sender (Sender) was appointed Chapter 7 Trustee.  Rivera listed the property as an asset.  Cygan filed a motion for relief from the automatic stay and sought leave to enforce their security interest on the property.  Cygan attached a partial copy of the deed of trust including Exhibit A to the motion.   Sender did not oppose the motion and the bankruptcy court granted the motion for relief.  Cygan later received a reformation of the deed of trust and a judgment of foreclosure. 

Sender brought a proceeding in bankruptcy court alleging that his strong arm powers under Section 544(a)(3) of the Bankruptcy Code permit him to avoid the security interest because it did not supply sufficient notice.  This led to the certified question from the bankruptcy court of whether a recorded deed of trust provides sufficient notice of a party’s interest if the deed contains a correct street address but no legal description.

Holding: 

Merely having a street address without a legal description does not provide sufficient notice of a party’s interest.  The strong arm power of a trustee allows the trustee to stand in the shoes of a bona fide purchaser (BFP) of the property. This allows the trustee to avoid a security interest if a hypothetical BFP could have acquired the property free from the interest.  Under Colorado law, a BFP is a person who “pays value, in good faith, without any notice of defect in title.”  The three forms of notice are actual, constructive, and inquiry.  Actual notice is when a party has actual knowledge of another’s claim.  Constructive notice is essentially recorded notice.  Inquiry notice is when knowledge is imputed in instance in which a party should have been aware of the claim of another.

The Supreme Court of Colorado based its decision that a street address without a legal description is insufficient notice based upon a holistic reading of Colorado Statutes Sections 38-35-122 and 38-35-109(1).  Section 38-35-109(1) states that written instruments affecting title to real property may be recorded in the office of the clerk and recorder of the county where the property is located.  Section 38-35-122(1)(a) requires that an aid is included “immediately preceding or following the legal description of the property.” Furthermore, Section 38-35-122(2) states that a variance from inclusion of a street address will be governed by the legal description, and Section 38-35-122(3) states that omission of a street address will not void the document so long as there is a legal description. 

The court found that the lack of statutory text preventing the voiding of a document that omits a legal description to indicate that a legal description must be included.  While there are instances in which a document is valid despite typographical errors in legal descriptions, the court refused to extend this to instances in which the description is completely omitted.  While Sender had actual notice, the Bankruptcy Code’s Section 544(a) prevents this from being imputed to him.  Therefore, because no duty to inquire was triggered, a recorded document without a legal description provided insufficient notice and therefore the strong arm provision applied.

 

Opinion Year: 
2012
Jurisdiction: 
Of Note
By: ATG Underwriting Department | Posted on: Mon, 12/03/2012 - 4:27pm