May 21, 2019

Colorado Court of Appeals: Person Entitled to Enforce Promissory Note Need Not Be the Holder; Law of Agency Supplements the UCC

The Colorado Court of Appeals issued its opinion in Citywide Banks. v. Armijo on October 13, 2011.

Uniform Commercial Code—Foreclosure—Agency

Plaintiff Citywide Banks (Bank) appealed the order denying its motion for sale of the property owned by defendant. The order was affirmed.

In 2003, Dakota Lending, LLC (Dakota) executed a promissory note to Bank in exchange for a revolving line of credit that allowed Dakota to borrow up to $4 million. Dakota used this line of credit to finance its business of buying, selling, and holding real estate mortgages. As security, Bank took assignments of the promissory notes and deeds of trust that Dakota financed or acquired in its course of business.

In 2007, Kimberly Poladsky and RE Services, LLC (collectively, RE Services) executed a promissory note (Note) payable to Jaguar Mortgage Company. The Note was secured by a deed of trust that encumbered the property at issue. After a series of transfers, Dakota acquired the Note. Dakota then assigned all of its rights and interest in the Note and deed of trust to Bank. While Bank held the Note, it allowed Dakota to service the loan and retain for itself periodic payments made on the Note.

In 2008, RE Services sold the property to defendant. Title insurance was purchased from Stewart Title, which conducted the closing. At closing, defendant tendered the purchase price and Stewart Title accepted those funds as closing agent. Stewart Title did not demand production of the Note at closing and did not attempt to determine the identity of the Note holder. Bank alleged that Stewart Title also failed to obtain a release of the deed of trust at closing. Stewart Title issued a check payable to Dakota for the amount listed on the payoff statement, but Dakota never tendered the funds to Bank. Dakota is now defunct and its managers are under criminal indictment. Bank, which still holds the Note, has declared it in default.

Bank brought this action to foreclose its lien on the property based on the unpaid Note balance. The trial court determined that Dakota was Bank’s agent and had authority to receive the payoff of the Note and, therefore, Bank was not entitled to foreclose on the property.

On appeal, Bank argued that Colorado’s Uniform Commercial Code (UCC) establishes that Bank’s lien remains enforceable against the property because any payoff made to Dakota was ineffective. The Court of Appeals disagreed. Bank argued that UCC § 4-3-301 required payment to be made to the Note holder. The Court found that the section does not contain an explicit requirement that a “person entitled to enforce” an instrument must be the holder. UCC § 4-1-103 provides that the common law, including the law of agency, supplements the statutory provisions of the UCC. Under Colorado’s common law, payment to a holder’s authorized agent is equivalent to payment to the holder. The Court held that payment to a holder’s agent is equivalent to payment to the holder.

Bank also argued that it was error to find that Dakota was its agent. The Court disagreed, holding that the trial court’s finding was amply supported by the record.

Bank further contended that it was error to find that Dakota was authorized to accept payoff of the Note. The trial court found that Dakota had apparent authority to accept payoff of the Note. The Court upheld the ruling, but found that the facts established Dakota’s implied authority to accept a payoff.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on October 13, 2011, can be found here.

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