You've Got an Amicus Curiae in Me (or Two) the Importance of in Re Cates
| Publication year | 2022 |
| Pages | 30 |
REAL ESTATE LAW
You've Got an Amicus Curiae in Me (or Two) The Importance of In re Cates
BY LINDSAY J. OBERT
This article discusses Colorado's race-notice statute in the context of In re Cates.
This article explores Colorado's race-notice statute, CRS § 38-35-109, by following Walters v. Cates (In re Cates)[1] as it traveled over the course of six years from the US Bankruptcy Court for the District of Colorado to the Tenth Circuit Court of Appeals. From areal estate perspective, the Cates facts present a fascinating look at the importance of the timing, recordation, and execution of documents affecting real property, and the resulting significant impact on a variety of bankruptcy rights if this importance is overlooked.
Practitioners recognized early on that the potential implications of Cates on Colorado real estate transactions were far-reaching. Accordingly, two amicus curiae sought involvement in the appeal and requested permission to file briefs with the Tenth Circuit: Land Title Association of Colorado and the Colorado Bar Association Real Estate Section. Both amici had concerns about the case's potential impact on Colorado laws regarding conveyancing, security of tide, marketability of tide, and the accuracy and completeness of real property records. Ultimately, the Tenth Circuit reversed the bankruptcy court's initial holding, thus preserving and protecting the race-notice statute as urged by the trustee of the subject bankruptcy estate (Trustee) and both amici.
The Bankruptcy Case: Is There a Homestead Exemption?
When Diann Marie Cates filed for Chapter 7 bankruptcy protection in 2015 she likely had no idea what an uproar her financial situation would cause in both the real estate and bankruptcy realms. At first, her potential homestead exemption (valued at $52,000) for a condominium in Durango (the property) appeared straightforward, but it soon became complicated. On her Schedule D, identifying "Creditors Holding Secured Claims," Cates noted the existence of a $135,000 deed of trust recorded against the property.[2] The holders of this secured claim were Cates's father L. Edmund Cates and sister Jann Redele Cates (collectively, Cateses).[3] Cates estimated that her condominium was valued at approximately $187,000,[4] which was the exact amount of the deed of trust plus the $52,000 homestead exemption available to debtors under CRS §§38-41-201(l)(a),-201.6, and -202. The Trustee objected, alleging that Cates's "misconduct warrants the denial of her homestead exemption" because she had "[used] the exemption to further her scheme of defrauding creditors by impermissibly shielding assets."[5] The Trustee cited the following facts in support of his objection:
■ Cates filed her bankruptcy case on August 11,2015.
■ On August 1, 2012, Cates executed a promissory note (note) in the original principal amount of $135,000 payable to her father and sister.
■ The note was secured by a deed of trust dated August 1, 2012, but not recorded in the real property records of La Plata County until March 4, 2013.
■ Before recording the deed of trust, Cates transferred her interest in the property to the "Diann M. Cates Family Trust," a revocable one-party living trust (Trust), by quitclaim deed executed on February 4, 2013.
■ The quitclaim deed was recorded the same day as the Trust.
■ The Trust was self-setded: Cates was the settlor, trustee, and beneficiary.
■ On August 3, 2015, eight days before she filed her bankruptcy case, the Trust (by Cates) conveyed the property back to Cates, individually, by quitclaim deed executed and recorded the same day.[6]
These facts remained uncontested through to the final appeal.
The Trustee argued that Cates had "encumbered the Property with an insider loan, but conveyed the Property to the Trust before the Deed of Trust was recorded; thus, preventing the Deed of Trust from attaching to the Property."[7] The Trustee concluded that "[b]y conveying the Property to the Trust," Cates shielded the property from collection by other creditors.[8]Moreover, the Trustee argued, because Cates had "accumulated significant credit card debt," it was foreseeable that those creditors would seek judgments and lien the property—in fact, Cates disclosed an ongoing collection matter at the time of her filing.[9] In the days just before her filing, the Trust (by Cates) conveyed the property back to Cates, with the result that (1) the property had been "shielded" by the Trust, and "with an imminent bankruptcy filing" any judgments that would "attach" to the property would be eliminated as "avoidable preferences"; and (2) the transfer back to Cates would allow her to assert a homestead exemption not otherwise allowed for the Trust.[10]
In response, Cates first acknowledged that the parties agreed as to the documents at issue and the dates of recordation.[11] Cates then pointed out that "objections to exemption claims are governed by state law," and the facts of In re Gardner,[12] which the Trustee relied on, were distinguishable from Cates's case because "intentional and bad faith misconduct by financially sophisticated debtors" were present in Gardner but not in Cates.[13] Cates argued that the Gardner Court cited to well-established case law that stood for the "proposition that claiming the Colorado homestead exemption as to real estate is a valid exemption, even if that claim of exemption would have been a fraud against creditors if claimed with respect to personal property.[14]
Cates further argued that self-setded, revocable trusts are common estate-planning tools, and her Trust did not preclude creditors from accessing the Trust corpus.[15]For this reason, and with the understanding that the settlor of such a Trust "is considered the owner of the trust property until death," conveying the property into the Trust could not be said to be fraudulent because the property was not out of reach of creditors.[16] Further, Cates argued in her response to the Trustee's objection that a notice of the Trust was not recorded in the real property records pursuant to CRS § 38-30-108, which perhaps resulted in her taking title to the property (again), inadvertently, in her own name.[17]Thus, Cates argued, there were no "attachment" issues, and the lien created by the deed of trust was unaffected by the conveyance to the Trust.[18] And if Cates never lost ownership of the property, despite its transfer to the Trust, the homestead exemption was still intact and available to her.[19] The bankruptcy court entered an order discharging debtor on November 23, 2015, essentially finding in favor of Cates and rejecting the Trustee's objections.[20]
The Adversary Case: When did the "Transfer" Occur?
Undeterred, the Trustee filed an adversary proceeding against the Cateses on May 27,2016, alleging that the conveyance of the property from the Trust back to Cates on August 3, 2015, was "preferential pursuant to 11 U.S.C. § 547(b)" because (1) it was made for or on account of an antecedent debt owed by Cates before August 3, 2015, (2) it occurred while Cates was insolvent, (3) it was made on or within 90 days before Cates's bankruptcy filing, and (4) the conveyance back to Cates allowed her family members to "receive more than they would have" had the transfer not occurred and they were instead forced to receive payment along with other creditors under the Bankruptcy Code.[21] The Trustee further argued that if the lien were avoided, the deed of trust would become property of Cates's bankruptcy estate, and the deed of trust should be assigned to the Trustee.[22]
The parties eventually submitted cross-motions for summary judgment. The Cateses asserted that they were entided to judgment on the Trustee's first claim (avoidable transfer under 11 USC § 547(b)) because the "undisputed facts establish that the transfer of the [lien] interest to [the Cateses] occurred upon the execution of the Deed of Trust on August 1, 2012,"[23] and "[a]ctual notice of the transfer occurred on March 4, 2013 when the Deed of Trust was recorded in La Plata County."[24]
The Cateses further argued that CRS § 38-35-109(1) does not require the recordation of an "instrument affecting title to real property" to be valid as to (1) the parties to the conveyance and (2) those who had notice of the unrecorded document before acquiring an interest.[25]
The Cateses maintained that the Trustee was incorrect in asserting that the deed of trust did not "attach" to the property until August3,2015.[26] Moreover, the fact that the Trust was the owner of the property at the time the deed of trust was recorded did not affect the validity of the lien or lien perfection[27] because the late recording of the deed of trust would "invalidate [Cates's] lien as to any person with rights who records their interest before March 3, 2013," and after that date, the lien was of public record and gave subsequent purchasers constructive notice.[28] The Cateses argued that Bandell Investments, Ltd. v. Capitol Federal Savings and Loan Ass'n of Denver and Carmack v. Place illustrated this concept in their favor.[29]
Lastly, the Cateses addressed whether the Trustee's interest in the property had priority over the deed of trust, arguing that it did not because "[Cates] transferred a lien interest to [the Cateses] [in 2012]," and that interest was "perfected as to third parties" when the deed of trust was recorded on March 4, 2013.[30]They further argued that the Trustee "had constructive notice" of the deed of trust at the time Cates's bankruptcy case was filed, the "transfer of interest" from Cates to the Cateses occurred in 2012 when the deed of trust was executed, and the interest was "perfected" upon recordation in March 2013.[31] Thus, the recordation gave "actual notice"...
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