Bona Fide Purchasers of Real Property: Fraud Is Not Civil Theft

• Jurisdiction: Colorado,United States
• Citation: Vol. 32 No. 12 Pg. 101
• Pages: 101
• Publication year: 2003

32 Colo.Law. 101 Colorado Lawyer 2003.

2003, December, Pg. 101. Bona Fide Purchasers of Real Property: Fraud is Not Civil Theft

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101

Vol. 32, No. 12, Pg. 101

The Colorado Lawyer
December 2003
Vol. 32, No. 12 [Page 101]

Specialty Law Columns
Real Estate Law Newsletter
Bona Fide Purchasers of Real Property: Fraud is Not Civil Theft
by Seymour Joseph

This column is sponsored by the CBA Real Estate Law Section Articles in this column cover a broad range of real estate land use, and related topics, and focus on the practical aspects of matters of interest to real estate lawyers

Column Editors:

Steve Sommers, Denver, Brownstein Hyatt & Farber PC - (303) 223-1100, ssommers@bhf-law.com; Pat Barney, Steamboat Springs, TIC - (970) 879-2561, barneyp@ticus.com

Seymour Joseph
About The Author:

This month's article was written by Seymour Joseph, Denver, a partner with Karsh, Fulton, Gabler & Joseph, P.C. - (303) 753-9532, ext. 225; SJoseph@KFGJ.net.

Fraud is not civil theft, and CRS § 18-4-405 was not intended to affect the historic rights of a bona fide purchaser of real property. This article distinguishes between fraud and theft in construing the statute and its application to bona fide purchasers of real property.

When an owner of real property is fraudulently induced to convey title to his or her property, the defrauder may convert the property into cash by selling it. Often, the purchase is financed by a lender, whose loan is secured by a deed of trust on the property. By the time the former owner discovers the fraud, the wrongdoer may be long gone or have dissipated the proceeds. The former owner may sue to attempt to recover the property from the purchaser free and clear of the deed of trust. However, under Colorado law, a bona fide purchaser or encumbrancer of real property (collectively, "BFP") will retain its interest in the property, notwithstanding the former owner's claim of being defrauded by the wrongdoer.1 The rights of a BFP are supported both by Colorado's recording act2 ("Recording Act") and its common law.

Colorado's "Stolen Property Statute" (also known as the "Civil Theft Statute") is contained in CRS § 18-4-405.3 The Stolen Property Statute provides that an owner can recover stolen property, even from a BFP.4 It is becoming more common in litigation for counsel to allege fraud as civil theft to claim priority over a BFP.5 However, "fraud in the inducement" is not "theft" under the Stolen Property Statute. Thus, in such lawsuits, a BFP of real property should prevail over the defrauded owner.6

BFP Prevails Over Former Owner's Fraud Claim

Colorado law has always been that a bona fide purchaser or encumbrancer of real property takes free and clear of a claim by the former owner that he or she was induced to convey title by fraud. There are three grounds on which BFPs have prevailed over fraud claims by a former owner of real estate: (1) a fraudulent conveyance is merely voidable; (2) a BPF has priority under the Recording Act; and (3) owners may be estopped to challenge the validity of their deeds.

Fraudulent Conveyance
Is Merely Voidable

Because a fraudulent conveyance is voidable, a BFP can acquire good title against the defrauded owner. The ability to convey good title is a significant difference between property obtained by theft and property obtained by fraud. A thief cannot convey good title to stolen property.7 In contrast, a real property conveyance induced by fraud is voidable, not void.8 "Void" means "of no legal effect; null."9 In contrast, "voidable" means "valid until annulled."10 Because it is only voidable, legal title passes to the fraudulent grantee, and the conveyance remains valid until it is set aside.11

There are two significant legal repercussions arising from a fraudulent conveyance being merely voidable and passing title. First, as against the defrauder, the owner has an election to either rescind or to affirm the transaction and sue for damages.12 Second, if the defrauder grantee has conveyed title to a BFP without notice of the fraud, the BFP takes title free of a claim by the former owner.13 Because the Stolen Property Statute allows recovery against BFPs, applying it to conveyances induced by fraud would disregard long-standing Colorado law holding that such conveyances are merely voidable, and can pass good title to a BFP.

Priority Under Colorado's Recording Act

A BFP will prevail over a defrauded owner under the Recording Act. Since 1861, the Recording Act has protected BFPs of real property.14 Under the Recording Act,15 a party that first records without notice prevails over a party with an unrecorded claim to property.16 The purpose of the Recording Act is to make real estate titles secure and more marketable so that purchasers and encumbrancers may safely rely on the record title.17

The recording of a deed provides notice to the world that the grantee is the owner of the property.18 When an owner signs and delivers a deed, albeit induced by fraud, he or she enables the defrauder to put third parties on notice that the defrauder is the record owner of the property.19 Third parties typically will not have notice of a fraud claim until the owner brings a lawsuit and records a lis pendens, which provides constructive notice of the claim.20 Under the Recording Act, a BFP without notice will prevail over an owner or deed of trust holder that is claiming fraud.21

Since 1861, Colorado real estate transactions, including those induced by fraud, have been governed by the Recording Act. Allowing former owners alleging fraud to use the Stolen Property Statute to defeat the rights of a BFP with record title would conflict with the purpose and language of the Recording Act.

Owners Estopped to Challenge Their Own Deeds

Owners fraudulently induced to sign deeds are estopped to challenge their validity against a BFP. A wrongdoer who acquires title to real property will frequently defraud two persons: (1) the owner who conveys title; and (2) a BFP who believes he or she is purchasing from a legitimate owner. It is actually the owner's conveyance of title that enables the wrongdoer to defraud the BFP. Of the two victims, Colorado law favors the BFP. It has long-been Colorado law that

[w]here one of two innocent persons must suffer loss because of the fraudulent act of a third person, the law places the loss upon the one who put it in the power of the third person to commit the fraud.22

In particular, Colorado case law holds that a party who signs and delivers a deed is estopped from disputing the validity of his or her signature against the claim of a BFP.23

The estoppel is related to the Recording Act. By delivering a signed deed, the owner enables the wrongdoer to defraud others by recording the deed and putting third parties on notice that the defrauder is the record owner of the property.24 Whether based on the Recording Act, estoppel, or a combination of both, Colorado law has always been that a BFP of real property takes free of a claim by the former owner that he or she was fraudulently induced to convey title.

Fraud and the Stolen
Property Statute

The Stolen Property Statute does not apply to fraudulent real estate conveyances and does not change long-standing Colorado law protecting BFPs. The Stolen Property Statute allows owners to recover stolen property from BFPs. The current version, CRS § 18-4-405 (2002), refers to property obtained by "theft."

As a matter of criminal law, theft by deception includes fraud.25 Further, there can be a criminal "theft" of real property.26 Defrauded owners of real property may use criminal law to argue that they are victims of "civil theft" and, therefore, the Stolen Property Statute allows them to take back title, even from a BFP. However, these arguments disregard the history and civil context of the Stolen Property Statute.

Definitions used in the Colorado Criminal Code ("Criminal Code"), CRS §§ 18-1-101 et seq., do not apply to other sections of Title 18 if the context indicates they are inapplicable or if a term is not used in the same sense.27 In Itin v. Ungar,28 the Colorado Supreme Court noted that...