Liberty Mortgage Corp. v. Fiscus

JUSTICE HOOD,

concurring in part and dissenting in part.

135 I agree with the majority that the purported maker of a negotiable instrument may raise forgery as a defense to an obligation held by a party claiming holder-indue-course status. As the majority correctly notes, when a purported maker raises a forgery defense, he challenges the existence of the obligation, not its enforcement. Maj. op. [ 16. On the facts found by the trial court, I likewise agree that Husband has a valid forgery defense not barred by ratification.

{36 I respectfully part company with the majority regarding whether remanding on negligence would amount to idle ceremony. Section 4-8-406, C.R.S, (2015), precludes a person from asserting that his signature was forged on a negotiable instrument if his own negligence contributed to the alleged forgery. Because the trial court concluded that the 2009 deed was not a negotiable instrument, it rejected Branch Banking and Trust's section 4-8-406 negligence argument on its face. The majority deems further consideration of Husband's alleged negligence unnecessary due to Wife's highly deceptive conduct and his understandable faith in his spouse, Maj. op. 121 ("We decline to declare him negligent for trusting his wife,"). But Wife's undeniably egregious behavior and the trust implicit in most marital relationships do not allow us to resolve a fact-intensive defense that the factfinder has yet to address.

137 Of course, if the deed of trust is not a negotiable instrument, then asking the trial court to examine Husband's alleged negli-genee truly would be inviting idle ceremony. After all, any defenses under the UCC would then be unavailable. Therefore, I first address the threshold legal matter on which we granted certiorari; "Whether a lender in possession of a promissory note secured by a deed of trust on real property may assert a holder-in-due-course defense under section 4-8-805, C.R.S. (2014), to a claim that the deed of trust was forged."

188 UCC Article 8 governs the issuance, transfer, enforcement, and discharge of negotiable instruments. A promissory note, such as the one Wife executed in this case, is a negotiable instrument governed by Article 8. A deed of trust is a "security instrument containing a grant to a public trustee together with a power of sale," § 38-88-100.3(7), C.R.S. (2015), and is generally governed by real property law.

T389 Jurisdictions are split on whether a deed of trust securing a promissory note is, like the note itself, a negotiable instrument subject to the UCC's provisions and protections. Compare Hogan v. Wash. Mut. Bank, N.A., 230 Ariz, 584, 277 P.3d 781, 783 (2012) (concluding trustee seeking to commence non-judicial foreclosure on deed of trust was not required to comply with UCC provisions, though compliance would have been required to collect on the accompanying note), and You v. JP Morgan Chase Bank, N.A., 293 Ga. 67, 748 S.E.2d 423, 433 (2018) (stating that a security deed is not a negotiable instrument and is not governed by UCC Article 8), with Pitman Place Dev., LLC v. Howard Invs., LLC, 330 S.W.3d 519, 536 (Mo.Ct.App.2010) (holding that a deed of trust shares the negotiable characteristics of the note it secures), and Carnegie Bank v. Shaileck, 256 N.J.Super, 28, 606 A.2d 889, 400 (N.J.Super.Ct.App.Div.1992) (explaining that upon assignment of negotiable instrament and accompanying mortgage to holder in due course, assignee may enforce both mortgage and note free of personal defenses mortgagor may have had against assignor). l

{40 On the one hand, because a deed of trust provides a security interest in real property, guaranteeing a remedy in the event of a default on a promise to pay, it may be considered to exist separately from the promise to pay itself; accordingly, it would not be subject to negotiable-instroment law. But on the other hand, the promissory note and accompanying deed of trust are functionally interdependent: a default on the note triggers rights under the deed of trust. Consequently, one could argue, the deed shares the note's negotiability, and both must be governed by the UCC.

[ 41 This latter notion that a deed of trust shares a promissory note's - negotiability dates back to the United States Supreme Court's opinion in Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 21 L.Ed. 313 (1872), an appeal from the Supreme Court of Colorado Territory, In Carpenter, the Court held that the assignee of a mortgage and negotiable note takes the mortgage as he takes the note, "free from the objections to which it was liable in the hands of the mortgagee." Id. at 273. The Court explained the inseparability of the mortgage and the note: the note, as debt, is the principal thing, and the mortgage is an accessory that is carried with an assignment of the note, Id. at 274-75. It considered this dependence necessary to hon- or the bargain made between the parties that formed the mortgage, as well as the parties that agreed to its assignment. See id. at 278.

{42 Early Colorado cases in the years following Carpenter emphasized the close relationship between a note and the mortgage securing it. E.g., Coler v. Barth, 24 Colo. 31, 48 P. 656, 659 (1897) ("It is stated as a general rule, and it is unquestionably correct, that the note secured by a mortgage, or a deed of trust in the nature of a mortgage, is the principal thing, and the security but an incident....."); Fasselt v. Mulock, 5 Colo. 466, 469 (1880) ("It is a familiar principle that a mortgage is but an incident of the debt it secures, and an assignment of the debt carries the mortgage with it."); accord McGovney v. Gwillim, 16 Colo.App. 284, 65 P. 346, 347 (1901) (holding that where action upon note was barred by statute of limitations, action to foreclose on deed of trust securing note was also barred).

11 48 Though these cases pre-date the adoption of the UCC, I believe their reasoning remains valid today. Indeed, decades after Colorado's 1965 codification of the UCC, this court observed the synergetic relationship between a promissory note and a deed of trust. See Columbus Invs. v. Lewis, 48 P.3d 1222, 1226 & n. 4 (Colo.2002) ("The transfer or assignment of a negotiable promissory note carries with it, as an incident, the deed of trust or mortgage upon real estate or chattels that secure[s] its payment."). Given this court's steadfast acknowledgement that a deed of trust is incidental to the note it secures, I1 would join those jurisdictions that have held that a deed of trust securing a promissory note takes on the note's negotiable character.

44 In the briefing, Husband relies on Upson v. Goodland State Bank & Trust Co., 823 P.2d 704 (Colo.1992), for a contrary result. That reliance is misplaced. In Upson, we held that when the release of a deed is obtained through fraud, that release is invalid. Id. at 706. We reached this result in part by analogizing to cases from other jurisdictions stating that a forged deed cannot pass title. Id. at 705-06. 'We also concluded that without a valid release, even a subsequent bona fide purchaser for value is not protected against a claim by the original beneficiary of the deed of trust. Id. at 706. Husband argues that, following Upson, the 2009 deed of trust executed using the forged POAs is void, and thus unenforceable by Branch Banking and Trust. But Upson held only that the release of a deed based on a forged request has no legal effect,. Id. Although we indicated that a forged deed is void, we did not consider whether the UCC applies to a deed of trust securing a promissory note, which is the question we face here. Furthermore, the UCC displaces conflicting common law provisions, Clancy Sys. Int'l Inc. v. Salazar, 177 P.3d 1235, 1237 (Colo.2008); see also § 4-1-108(b), C.R.S. (2015). Consequently, Upson must yield to the UCC and its holder-in-due-course provisions to the extent that the two might conflict. Thus, Upson is distinguishable and not controlling.

"[ 45 Similarly, Haber! v. Bigelow, 855 P.2d 18368 (Colo.1993), which the court of appeals used to reject Branch Banking and Trust's argument that a deed of trust is a negotiable instrument, is of limited relevance, In Ha-berl, this court considered whether the silence of a holder of a deed of trust securing a promissory note was sufficient to establish his consent to subordinate the instrument to another deed of trust. See id. at 1872. As a preliminary matter, we stated that the note secured was a negotiable instrument governed by UCC Article 3, and we supported that statement with a string of citations from other jurisdictions establishing that a promissory note is a negotiable instrument even when secured by a deed of trust. Id. at 1872-78. But while we acknowledged this general principle, it was not a focal point of our analysis. Moreover, we did not address the issue before the court today. Haberl therefore has minimal significance here.

1 46 Additionally, holding a deed of trust to be a negotiable instrument would further a fundamental policy of the UCC's holder-indue-course doctrine by encouraging the use of commercial paper to facilitate the flow of capital. See Georg v. Metro Fixtures Contractors, Inc, 178 P.3d 1209, 1212 (Colo.2008). Such a result would ensure that Branch Banking and Trust is able to enforce the deed of trust that was "conditioned to secure the fulfilment of [the promissory note)," Carpenter, 83 U.S. (16 Wall.) at 273, to the same extent as it is able to enforce the note itself, protecting Branch Banking and Trust and other similarly situated parties' bargained-for expectations and promoting commercial transactions.

T47 Accordingly, I would hold that because a deed of trust is fundamentally interdependent with the note it secures, the deed takes on the note's negotiable character and is governed by Article 8. And because the trial court initially held to the contrary and rejected Branch Banking and Trust's section 4-3-406 negligence defense on the grounds that Article 3 did not apply, I would remand to the trial court for a full consideration of that defense.¹

{48 For these reasons, I concur with the majority's conclusions regarding forgery and ratification, but I respectfully dissent from its holding that Husband was not negligent and Branch Banking and Trust may not raise section 4-8-406 as a defense to Husband's forgery claim.

I am authorized to state that JUSTICE MARQUEZ joins in the concurrence in part and dissent in part.

1 . I also respectfully disagree with the majority's implication that the negligence defense should be confined to "checks or signing devices." Maj. op. 122. The comments to section 4-3-406 explain that the current version of that section was expanded from its former iteration "to apply not only to drafts but to all instruments." § 4-3-406 crat. 1.