A Brief History of Colorado's Public Trustee System (1894-2002)

• Publication year: 2002
• Pages: 67
• Citation: Vol. 31 No. 2 Pg. 67

31 Colo.Law. 67 Colorado Lawyer 2002.

2002, February, Pg. 67. A Brief History of Colorado's Public Trustee System (1894-2002)

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67

Vol. 31, No. 2, Pg. 67

The Colorado Lawyer
February 2002
Vol. 31, No. 2 [Page 67]

Specialty Law Columns
Real Estate Law Newsletter
A Brief History of Colorado's Public Trustee System (1894-2002)
by Willis Carpenter

This article provides a historical perspective of the public trustee foreclosure system in an attempt to answer the question, "Why is Colorado the only state with a public trustee foreclosure system?"

Editor's Note: This article on the history of the Colorado Public Trustee System represents a departure from the typical substantive law article published by the CBA Real Estate Section in the "Real Estate Law Newsletter." The Colorado Lawyer column editors and Section Council believe this history will be of enough interest to the real estate bar to devote this space to its publication. A version of this article was originally presented at the 19th Annual Real Estate Symposium, July 2001, Colorado Bar Association CLE

This month's article was written by Willis Carpenter Denver, a shareholder in Carpenter & Klatskin, P.C.?(303) 534-6315. The invaluable research assistance of Holly S Hoxeng, M.L.I.S., is gratefully acknowledged.

Yes, it is unique. No other state has a public trustee system, although deeds of trust are used as security for real estate loans in many of the jurisdictions in this country. Over the years we have asked others why the office of public trustee was created in Colorado by legislation adopted in 1894. Two rather vague responses were received. There was some awareness that the system grew out of the hard times surrounding the Panic of 1893;1 and, in one book published in 1955, the authors alluded to abuses perpetrated by private trustees in the late 1800s.2 Yet, the question lingered until now, when the time seemed propitious to dig into the matter and come up with an answer.

Although the real estate financing industry has used the services of the office of public trustee in Colorado for over 107 years, almost to the total exclusion of the common law mortgage, the history of the creation of the public trustee system has not been preserved. Numerous articles and treatises have been written on the methods of foreclosure of a deed of trust to public trustee.3 Despite the recognized benefits of that process?diligent and in

expensive foreclosure with reasonable protection for the debtor?no explanation has been located that unmasks the mystery of why, for all these years, we have supported a statewide bureaucracy of public offices, one in each county, solely to administer real estate foreclosures. This article attempts to provide that explanation.

Colorado, like the rest of the nation, runs on credit. Debt secured by real property is paramount to the business of lending money. In the event of default, creditors must be assured that they will have recourse to the property pledged as security for the debt, without undue delay or cost. Experience has shown that it is equally important that borrowers not be crushed by an overbearing lending industry. A balancing of interests must occur, and the balancing act is not an easy one. Following default, debtors need a "second chance" to regroup, refinance, and save their property. This "second chance" traditionally consists of a right of redemption imposed by courts of equity or by statute and, more recently in Colorado, a "right to cure" law.4

Before Public Trustees?Private Trustees

How did the public trustee system come about? We travel back to the early 1890s, a time of depression and devaluation. It has been estimated that a greater percentage of the real property was mortgaged in Colorado than in any other western state.5 At that time, the mortgage instrument of choice was a deed of trust to private trustee, wherein the trustee was typically the cohort or agent of the lender-beneficiary of the trust.6

As the general depression in the eastern United States, known as the Panic of 1893, worsened and rolled westward, Colorado borrowers found themselves in the near impossible position of attempting to pay debt to clear their homesteads and businesses with dollars that were more difficult to earn than when the indebtedness was incurred. Contrast that situation with our current times, wherein we invite a modest inflation rate of 3 to 5 percent per annum to help the multitude pay its debts with cheaper dollars?so that the borrowers benefit and the lenders fret. Just the opposite was true in the decades following the Civil War, when the Federal Reserve Bank had not yet been invented and devaluation was a recurring scourge of the debtor class.

The unrest in the 1880s and 1890s was mirrored in the formation of various political parties that challenged the hegemony of the Republicans and Democrats. A basic tenet of these "upstart" parties was the need for cheaper dollars and more money in circulation.7

Silver Crashes in the 1890s

In 1890 and 1891, the economy of Colorado was faltering. Good harvests of grain and favorable conditions in the livestock industries only served to drive prices lower. The mining industry was on the verge of collapse. Previously, Colorado had mined more silver than any other state, approximately one-half of all silver production in the United States. But circumstances in the 1870s and 1880s had taken a turn that made depression in Colorado in the 1890s nearly inevitable. In 1873, Congress adopted a policy of demonetization of silver, which meant that gold was the standard for payment of contracts and guaranteeing currency. The price of silver fell, and Colorado felt the effects.

A silver subsidy bill known as the Bland-Allison Act was adopted in 1878, but it had little positive effect. Silver mines reduced their forces and some in Aspen and Leadville closed altogether. In the election year of 1892, more than 10,000 silver miners were unemployed in Colorado. Between 1883 and 1893, the price of silver declined from $1.12 to $.82 per ounce.8

On demand of the congressional delegations of the western mining states, in 1890 Congress passed the Silver Purchase Act, whereby the U.S. Treasury purchased silver on the open market. But the Act stated no firm price, and the Secretary of the Treasury responded by purchasing the required 4.5 million ounces of silver per month at the best price offered on the open market. In 1893, the Silver Purchase Act was repealed, silver prices were driven even lower, and by September 1893, 45,000 miners were out of work.9 Gold, on the other hand, retained its value and the mines at Cripple Creek and other gold-producing areas remained profitable. However, with a large surplus of experienced but out-of-work hard-rock miners in the state, gold mine owners in Cripple Creek seized the opportunity to lengthen the working day from eight to nine hours for the same standard $3.00 per day. Strikes and violence ensued.10

Private Trustee Foreclosures?No Redemption

With unemployment throughout the state, defaults on real estate loans accelerated. Closure of the mines was followed by hard times imposed on merchants, tradesmen, and others who depended on the mining economy. Soon, a new class of investors found profit in speculation on real estate foreclosure sales throughout the state. Under the deed of trust to private trustee, then in vogue, the trustee enjoyed a private right of sale, dictated by the language of the trust instrument, which usually called for a brief advertisement in some newspaper followed by a sale at public auction. The instrument contained a stipulation that no right of redemption was available after the sale.11

The high bidder at the foreclosure sale received a deed from the trustee, and that was that. Investors with cash, including many members of the Colorado Bar,12 followed the notices in the newspapers, buying property at distressed values. Borrowers experienced the loss of property almost overnight, with no recourse to the courts, which consistently held the process to be legal, and equity granted no relief.13 The only redemption rights by statute or common law applied solely to mortgages, which required foreclosure through the courts.

If a borrower were fortunate enough to grant a mortgage rather than a deed of trust to private trustee, or if the holder of the deed of trust elected to foreclose by court decree, on default the property was sold according to the provisions of the law on executions, and the borrower was entitled to the same six-month redemption period as on sales at execution.14 Judgment creditors of the borrower were given an additional three months to redeem in the event the borrower did not. The impression gained from reading contemporary accounts is similar to the situation today: most borrowing was secured by deed of trust and not by mortgage; and, until 1894, the trustee was a private trustee, subject to the influences of the lender-beneficiary.15

Populists to the Rescue

Into this milieu of panic and general depression, unemployment, rampant real estate foreclosure actions, and speculation in distressed properties appeared a third political party, the "People's Party," whose adherents were commonly referred to as Populists. The members of this party took their guidance from the Populist platform adopted at its convention in Omaha, Nebraska, in 1892. The Omaha convention was attended by delegates from Colorado, including Thomas M. Patterson, the Democrat owner and editor of the Rocky Mountain News, and an obscure Populist newspaperman from Aspen by the name of Davis Hanson Waite.

A sense of the purpose of the People's Party can be...