Public Trustee Foreclosures: Be Aware of What Remains
| Publication year | 2011 |
| Pages | 61 |
| Citation | Vol. 40 No. 9 Pg. 61 |
2011, September, Pg. 61. Public Trustee Foreclosures: Be Aware of What Remains
September 2011
Vol. 40, No. 9 [Page 61]
Real Estate Law
Real Estate Law articles are sponsoredby the CBA Real Estate Law Section.
Coordinating Editor
Joseph E. Lubinski, Denver, of Ballard Spahr LLP-(303) 299-7359, lubinskij@ballardspahr.com
About the Authors
Garfield and Hecht, P.C. is a full-service Western Slope law firm with offices in Aspen, Avon, Basalt, Glenwood Springs, and Rifle. Matthew L. Trinidad is an attorney formerly associated with Garfield and Hecht, P.C.'s transactional practice. He now works primarily in trusts and estates-matt@kerstlaw.com. Avery A. Simpson is an associate with the Aspen office of Garfield and Hecht, P.C., whose practice includes real estate and commercial litigation-asimpson@garfieldhecht.com. Ronald Garfield is the head of the firm's transactional practice, which includes representation of institutional and private lender clients-garfield@garfieldhecht.com. Trinidad and Simpson thank him for providing the basic outline for the article and for his editing of article drafts.
Statute, case law, or contract may elevate the priority of certain seemingly junior liens, causing them to survive a foreclosure in whole or in part. Early detection of such liens enables the foreclosing attorney to address these potential problems before the client takes title to the property.
This article evaluates the interests in real property that can and cannot be extinguished in a public trustee (PT or trustee) foreclosure. Statutes, case law, contracts, and the sale process itself may affect the relative priorities among the foreclosed deed of trust and after-recorded or unrecorded liens and encumbrances. Because the marketability of title will impact the value of the property, an evaluation of recorded and unrecorded interests should be madeby the foreclosing lender, potential third-party bidder, or redeemer of the property. The foreclosing party must observe a number of formalities to extinguish or preserve junior interests. Also, certain interests are not affected regardless of the foreclosing party's actions. This article provides a summary of the PT foreclosure process, followedby an analysis of several notable interests and their status in the aftermath of a foreclosure.
Summary of the PT Foreclosure Process
CRS §§ 38-38-101 et seq. govern all foreclosure sales, including PT foreclosures. The lender commences a PT foreclosureby submitting to the PT a Notice of Election and Demand for Sale (NED) and other documents.(fn1) Included among the documents is a mailing list(fn2) that identifies the notice parties whose junior interests will be extinguishedby the foreclosure. The trustee records the NED,(fn3) sets a sale date,(fn4) mails a notice of sale(fn5) to notice parties, and publishes notice of sale in the local paper.
Meanwhile, the foreclosing party petitions the district court for an Order Authorizing Sale under C.R.C.P. 120. Before the sale, the foreclosing party is to submit a bid statement(fn6) reciting amounts due and owing on the debt, including advances, foreclosure fees and costs, and the foreclosing party's bid. The foreclosing party has a credit for amounts due on the debt. An overbid that exceeds the amounts due results in excess proceeds, which are payable to junior lienors and then to the property owner.
An underbidby the foreclosing party (or a bid of an amount less than the foreclosing party's credit) results in a deficiency. A deficiency preserves the lender's right to pursue recourse on the promissory note and any other collateral pledged. Recovery on a deficiency is limited to the extent that the underbid is a "good faith estimate of the fair market value of the property being sold."(fn7) This estimate may take into account, among other things, all amounts "securedby liens against the property being sold that are senior to the deed of trust,"(fn8) given that senior liens are not extinguished in the PT foreclosure.(fn9)
Assuming the Order Authorizing Sale and the bid have been timely submitted to the trustee, the trustee conducts the sale and issues a Certificate of Purchase (COP) to the successful bidder. If no one timely asserts a redemption right, "title to the property sold shall [automatically] vest in the holder of the certificate of purchase" at the end of the eighth business day after the sale.(fn10) The holder of the COP may request a Confirmation Deed from the trustee the following day.(fn11)
The Confirmation Deed evidences the vesting of record title in the COP holder;(fn12) however, the failure to obtain a Confirmation Deed will not impair the vesting of title. The COP has no particular effect after the Confirmation Deed is recorded, but the COP continues to significantly impact the status of title-the mailing lists used in the foreclosure are recorded with the COP, providing evidence(fn13) on the public record of the notice parties whose interests, if junior, were extinguished.
Surviving and Extinguished Interests
CRS § 38-38-501 provides that a foreclosed property will be "free and clear of all liens and encumbrances junior to the lien foreclosed." Colorado is a race-notice state under CRS § 38-35-109(1) (Recording Act).(fn14) As long as the Recording Act applies, after-recorded and unrecorded(fn15) interests will be extinguished in a PT foreclosure.(fn16) A junior lien is:
a deed of trust or other lien or encumbrance upon the property for which the amount due and owing thereunder is subordinate to the deed of trust or other lien being foreclosed.(fn17)
The term "encumbrance" has no precise definition under Colorado law, but the Colorado Court of Appeals has formulated a definition of encumbrance that likely applies in the context of a PT foreclosure: "any right or interest in land subsisting in a third person, to the diminution of the value of the land, not inconsistent with the passing of fee simple title."(fn18)
Not all matters affecting land are vulnerable to foreclosure. Case law suggests that use and zoning ordinances, for example, are not aspects of title and therefore are invulnerable to PT foreclosure.(fn19)
The myriad junior interests that a PT foreclosure extinguishes include:
1) after-recorded deeds of trust (second or third mortgages);
2) deeds and quitclaims, easements, and leases;(fn20)
3) judgment liens;
4) environmental liens under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)(fn21) or state law;(fn22)
5) real estate brokers' commission liens;(fn23)
6) liens for wells and drilling equipment;(fn24)
7) harvesters' liens;(fn25) and
8) contracts and agreements with state or local governing authorities.(fn26)
An extinguished governmental lien or contract-for instance, an environmental remediation lien or subdivision improvement agreement-may not necessarily avoid the underlying obligation. For example, an owner that takes title through foreclosure may be subject to a new lien or unable to obtain building permits until it remediates the hazard or submits to the conditions of the extinguished agreement.
As a general rule, and with the notable exception of certain federal liens discussed below, interests recorded after the NED are extinguished even though their holders are not notice parties. Prior-recorded interests and interests to which the foreclosing lienor voluntarily agreed to subordinate are not junior interests and will survive.by the same token, a prior-recorded interest whose holder has voluntarily agreed to subordinate to the deed of trust is junior and can be extinguished.(fn27)
Priorities Not Governedby the Recording Act
The Recording Act provides that no unrecorded or after-recorded...
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