ALH Holding Co. v. Bank of Telluride

Opinion by

Judge KAPELKE.

Defendant, Bank of Telluride (Bank), appeals the trial court’s judgment declaring that a deed of trust held by the plaintiff, ALH Holding Company (ALH), on a certain property in San Miguel County, Colorado, has priority over the deed of trust held by the Bank on that property. We reverse and remand with directions.

The parties stipulated to essentially all the determinative facts. In 1993, ALH sold the property for $165,000. In connection with the sale, it received a promissory note from the buyers in the amount of $110,000, secured by a deed of trust on the property being purchased. As part of that same transaction, the buyers borrowed $55,000 from the Bank to make the down payment and signed a promissory note payable to the Bank and a deed of trust on the purchased property securing payment of that loan.

The title company that handled the closing recorded the warranty deed and the deeds of trust for the Bank and AHL. Although they were recorded on the same day, the Bank’s deed of trust was recorded prior to ALH’s deed of trust.

The buyers defaulted on both notes, and the Bank commenced proceedings for foreclosure of its deed of trust. ALH brought this action against the Bank seeking a preliminary injunction to preserve the status quo, and a declaratory judgment determining the respective priorities of the parties’ deeds of trust. The court granted a preliminary injunction preventing the Bank from completing the foreclosure.

In its declaratory judgment, the court concluded that because AHL’s deed of trust was in the nature of a vendor purchase money mortgage it had priority over the deed of trust held by the Bank, even though the Bank’s deed of trust had also been given as security for a loan for the purchase of the property and had been recorded first. The Bank appeals from that declaratory judgment.

Relying on Bray v. Trower, 87 Colo. 240, 286 P. 275 (1930), the Bank contends that the trial court erred by concluding that ALH’s deed of trust had priority. We agree.

In Bray, the supreme court concluded that because both the deeds of trust at issue there were in the nature of purchase money mortgages, created in the same transaction, they were “of equal dignity and importance.” Accordingly, the court held that the recording statute governed priority.

We recognize that the trial court in its ruling here followed the principle stated in Restatement (Third) of Property-Mortgages § 7.2(c)(1997) that: “[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.”

This principle has been adopted by the courts of several other jurisdictions. See Giragosian v. Clement, 199 A.D.2d 656, 604 N.Y.S.2d 983 (1993); Farmers Trust Co. v. Bomberger, 362 Pa.Super. 92, 523 A.2d 790 (1987); Friarsgate, Inc. v. First Federal Savings & Loan Ass’n, 317 S.C. 452, 454 S.E.2d 901 (S.C.App.1995).

The rationale for the principle is that the property upon which the seller is relying for payment was owned by it until the time of sale and the mortgage back, and the seller presumably would not have parted with the property at all except on the belief that, in the event the buyer defaulted, such property could be looked to for payment. A third party mortgagee, on the other hand, including a lender of purchase money, is receiving as security a property in which neither it nor its borrower had previously held any interest. See G. Nelson & D. Whitman, Real Estate Finance Law 805-806 (3d ed.1993); see also Restatement (Third) of Property-Mortgages § 7.2, comment d (1997) (Reporters’ Note).

While we understand the logic and policy considerations underlying the priority principle adopted by the Restatement, the fact remains that in Bray v. Trower, supra, our supreme court considered and rejected an argument based on that very principle.

In Emery v. Ward, 68 Colo. 373, 191 P. 99 (1920), the supreme court had held that a deed of trust in the nature of a purchase money mortgage had priority over a judgment lien, notwithstanding that the lien had been recorded prior to the deed of trust. In so holding, the court recognized the special nature of a purchase money mortgage by reason of its having been created as part of the purchase transaction.

Later, however, in Bray v. Trower, supra, the supreme court refused to apply the principle set forth in Emery to a situation involving competing holders of deeds of trust both of which were in the nature of purchase money mortgages and were created as part of the same purchase transaction. The court rejected the notion that the vendor’s deed of trust should have priority over that of the third party lender and, instead, held that priority was governed by the order in which the respective instruments had been recorded.

Generally, priorities under the recording statute, § 38-35-109, C.R.S.1998, are based on the order in which the documents are recorded. Ragsdale Bros. Roofing, Inc. v. United Bank, 744 P.2d 750 (Colo.App.1987).

Because we are constrained to follow the holding of our supreme court in Bray v. Trower, supra, we conclude that the trial court erred in holding that ALH’s deed of trust is senior to the Bank’s deed of trust. Because the Bank’s deed of trust was recorded first, it is entitled to priority absent a subordination or other agreement to the contrary. No such agreement has been claimed or shown to exist here.

Accordingly, the judgment of the trial court is reversed, and the cause is remanded for entry of a judgment declaring that the lien held by the Bank pursuant to its deed of trust has priority over the lien held by ALH pursuant to its deed of trust, and for further proceedings consistent with this opinion.

Judge ROY concurs. Judge NEY dissents.