Lead Opinion
delivered the Opmlon of the Court.
T1 Petitioner Branch Banking and Trust Company asks us to decide whether a deed of trust securing a promissory note is a negotiable instrument under Article 3 of Colorado's Uniform Commercial Code ("UCC"). The court of appeals held that deeds of trust are not negotiable instruments within the meaning of Article 3, and therefore the bank was not a holder in due course with respect to the deed at issue here. Fiscus v. Liberty Mortg. Corp.,
[ 2 We affirm the judgment of the court of appeals, but on different grounds. In this case, the deed and other documents were forged. ' We hold that, even assuming a deed of trust qualifies as a negotiable instrument, holder-in-due-course status does not preclude a purported maker from asserting a forgery defense. Here, the purported maker possesses a valid forgery defense, his negligence did not contribute to the forgery, and he did not ratify the forged documents. As such, we need not and do not reach the issue of the negotiability of deeds of trust under Article 8. f
L.
T8 Respondent Ray Fiseus ("Husband") married Vickie Casper-Fiscus ("Wife") in 1985. In 1987, he purchased property in Grand Junetion, Colorado, and titled it solely in his name. He financed the purchase with a mortgage loan, and the couple used the property as their marital home. Throughout their marriage, Wife managed their finances, which included the payment of household bills as well as mortgage and credit card debts. Husband neither confirmed these payments nor reviewed the couple's bank statements or tax returns, and so he had little knowledge of their precise finances.
4 In June 2008, without his knowledge or authorization, Wife signed Husband's name
{5 In early 2009, Wife began making inquiries about refinancing the 2008 note. While doing so, she sent an email to a mortgage broker informing him that Husband "is out of town a lot so I have power of attorney" and asking if proceeding with the refinancing by power of attorney would be a problem. In February and March, she signed Husband's name to several loan application documents, and, on March 30, she executed another note in the amount of $220,000 with Liberty Mortgage, onee again using the forged POAs, securing the note with a deed of trust purporting to encumber the property (the "2009 deed"), and signing both documents as "Raymond Fiscus by Vickie L. Cas-per-Fiscus as Attorney in Fact." Husband never authorized her to execute the 2009 note or deed in his name and had no knowledge of them at the time. Wife paid off the 2008 note with the proceeds from the 2009 note, and the 2008 note was released. Liberty Mortgage subsequently assigned the 2009 note and deed to BB&T Corporation, which, in turn, assigned them to petitioner Branch Banking and Trust.
T 6 The mortgage interest deduction on the couple's 2009 tax return was $12,823, an amount much higher than Husband would have expected to claim on the original mortgage loan from 1987. Wife signed his name on the tax return without his knowledge, and, when he asked about it, she told him he did not need to sign it because he had authorized electronic filing. Husband never saw the tax return.
T7 Wife hid all the documents evidencing the 2008 and 2009 transactions in the crawl space of their home. Husband did not learn of the transactions until 2011 when his broker contacted him to authorize an attempted withdrawal from his IRA account in the amount of $5,000. During that conversation, Husband learned that Wife had made an unauthorized withdrawal from his account earlier for $10,000 with the help of her son-in-law, who had impersonated Husband on the phone. Husband then performed a ered-it check and discovered the 2009 note. After discovering the note, he checked the county property records and uncovered the 2008 and 2009 deeds as well as the forged POAs. He filed an identity theft report with the sheriffs office and an identity theft statement with Branch Banking and Trust, He also sued Liberty Mortgage, BB&T, and Branch Banking and Trust under the spurious lien statute, §§ 88-85-201 to -204, C.R.S. (2015), seeking to have the 2009 deed invalidated.
T8 The district court held a show cause hearing in August 2012 at which Husband, Wife, Wife's daughter, and a BB&T representative, among others, testified. In a detailed order, the district court held that the 2009 deed was spurious because it was not created, suffered, assumed, or agreed to by Husband, the property's sole owner, and contained a material misstatement, that is, Husband's signature.
T9 The court also rejected Branch Banking and Trust's defenses. As relevant here, the bank argued that, under Article 3 of the UCC, it qualified as a holder in due course and took the 2009 deed free from any forgery defense. In the alternative, it contended that Husband's negligence contributed to the making of the forged deed and that he ratified the deed. The trial court, however, held that the 2009 deed was not a "negotiable instrument" but a "security instrument," and therefore the bank could not assert a holder-in-due-course or negligent-contribution defense under Article 3. It also rejected Branch
¶ 10 The court of appeals affirmed. Fis-cus, T 1. It agreed with the trial court that a deed of trust is a security instrument, not a negotiable instrument, and therefore held that the Article 8 defenses did not apply. Id. at 47. It further concluded that there was record support for the trial court's finding that Husband lacked knowledge of the material facts relating to the 2009 deed until December 2011. Id. at T41. Correspondingly, it affirmed the lower court's holding that Husband did not ratify the note. Id. at 1 41, 48.
T11 Branch Banking and Trust petitioned this court to review the court of appeals' holding, and we granted certiorari to determine whether a lender in possession of a promissory note secured by a deed of trust on real property may assert a holder-in-due-course defense under section 4-3-805, C.R.S. (2015), to a claim that the deed of trust was forged. We conclude, however, that Husband has a valid forgery defense, not barred by negligence or ratification, and thus decline to address this issue. We therefore affirm the judgment of the court of appeals, but on other grounds.
IT.
Branch Banking and Trust argues that the 2009 deed is a negotiable instrument under Article 8 because it secures the promise to pay contained in the 2009 note, which plainly qualifies as a negotiable instrument. But even assuming (without deciding) that Branch Banking and Trust is correct, we conclude that, on these facts, Husband has a valid forgery defense to any claim the bank might assert as a holder in due course, and that this defense is. not precluded by any negligence or ratification on Husband's part. As such, we need not and do not address the negotiability of a deed of trust under Article 83.
{13 Article 3 of the UCC governs the issuance, transfer, enforcement, and discharge of negotiable instruments. Under Article 3, a holder in due course of a negotiable instrument takes it free of most defenses. § 4-3-805(b) (enumerating the defenses that do and do not apply to holders in due course); see also 2A Cathy Stricklin Krendl et al., Colorado Methods of Practice § 88:11 (6th ed. 2012) ("A holder in due course takes the instrument free from all claims of any party and of all defenses of any party with whom he has not dealt except for 'real' de- ... A person who is not a holder in due course (including both a transferee and a holder) has much more limited rights." (footnotes omitted)). Nevertheless, some defenses, such as infancy, duress, lack of legal capacity, and "fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms," still apply to holders in due course. § 4-3-305(a)(1), (b). On the other hand, other defenses enumerated in Article 8 and those provided by contract law may not be used to challenge the enforcement of an instrument. § 4-8-305(a)(2), (b).
$14 Branch Banking and Trust asserts that, under section 4-38-805(b), holders in due course are only subject to the defenses outlined in subsection (a)(1). Because subsection (a)(1) does not include forgery, the bank argues that it is a contract defense to which holders in due course are not subject under subsection (a)(2). We disagree.
{15 By its plain terms, the statute only identifies the defenses that apply to "[the right of a holder in due course to enforce the obligation of a party to pay the instrument." § 4-83-805(b) (emphasis added); see also § 4-8-805(a) (listing the defenses to which "the right to enforce the obligation of a party to pay an instrument is subject") (emphasis added). This language presupposes that an obligation exists and that the holder in due course has a right to enforce it.
116 When a purported maker raises a forgery defense, however, he is challenging the very existence of the obligation itself, not its enforcement. For an instrument to bind a person under Article 8, that person must
17 The omission of forgery from section 4-3-805(a)(1) thus makes sense because it is not a defense to enforcement and therefore falls outside the seope of subsections (a) and (b). See § 4-3-8302 emt. 2, C.RS. (2015) ("Notice of forgery or alteration is stated separately [in section 4-38-802(a)(1) ] because forgery and alteration are not technically defenses under subsection (a) of Section 3-305."). It follows that, despite this omission, a party may still assert forgery against a holder in due course, See Real Defense, Black's Low Dictionary (10th ed. 2014) (listing "forgery of a necessary signature" as a "defense that is good against any possible claimant, so that the maker or drawer of a negotiable instrument can raise it even against a holder in due course").
Article 3's requirements for proving the validity 'of signatures on a negotiable instrument bolster this conclusion. In general, when a party files suit to enforce an instrument, the court presumes that signatures are valid unless specifically contested by the purported maker, § 4-3-808(a), CRS. (2015). Holder-in-due-course status becomes relevant only after the validity of the signatures has been éstablished. § 4-8-808); see also § 4-8-8308 emt. 2 ("Onee signatures are proved or admitted a holder, by mere production of the instrument, proves 'entitlement to enforce the instrument'. ... Until proof of a defense or claim in recoupment is made, the issue as to whether the plaintiff has rights of a holder in due course does not arise."). In this way, Article 3 provides for the assertion of a forgery defense even against holders in due course.
119 Therefore, consistent with other jurisdictions interpreting their versions of Article 3, we hold that a purported maker may raise forgery as a defense to an obligation on an instrument held by a party claiming holder-in-due-course status. Seq, e.g., Ingersoll-Rand Fin. Corp. v. Anderson,
{20 On the facts as found by the district court, Husband has a valid forgery defense. The district court found that he never appointed Wife as his attorney or authorized her to sign his name on the forged POAs, any of the notes or deeds, or the loan applications. She thus was not an "an agent or representative" of Husband within the meaning of section 4-8-4011, Yet she fraudulently signed his name on all of these documents, had her daughter from a prior marriage notarize them, and represented herself as his attorney. Husband therefore has a valid forgery defense.
121 Furthermore, although Article 8 bars a person whose signature was forged from asserting forgery as a defense if his own negligence contributed to the forgery, § 4-8-406(a), CRS. (2015), the district court's detailed factual findings preclude any finding of negligence on Husband's part here. Given that the interest deduction on the 2008 tax return was in the amount he expected, the district court concluded that the earliest
1 22 This was not a case where a purported maker failed to exercise reasonable control over his checks or signing devices. See § 4-3-406 emt. 8. Rather, it was an active effort on Wife's part to encumber the property without Husband's knowledge. She forged his signature on three powers of attorney by signing his name without his permission; had her daughter from a previous marriage fraudulently notarize them; encumbered the property without his . consent using the forged POAs; falsely advised the mortgage broker that he was unavailable and that they therefore had to proceed using powers of attorney; hid the documents evidencing the transactions in the crawl space of their home; and lied when he asked her about the 2009 tax returns. In short, Wife went to 'great lengths to defraud Husband, and he was not negligent for falling victim to her elaborate scheme.
123 We also agree with the court of appeals that the record supported the district court's finding on ratification. While a purported holder may ratify an unauthorized signature, and thus make it binding on him, § 4-3-403(a), "ratification can never exist unless it is clearly shown that the party charged with ratification has full knowledge of all material facts, and thereafter knowingly accepts and approves the contract," Colo. Mgmt. Corp. v. Am. Founders Life Ins. Co. of Denver,
€24 Overall, then, the facts as found by the district court indicate that Husband has a valid forgery defense, did not negligently contribute to the forgery, and never ratified the notes or the deeds of trust securing them. On these facts, even assuming without deciding that Article 8 applies to the 2009 deed of trust, Husband prevails.
T25 Because Husband has a valid forgery defense, not precluded by any negligence or ratification on his part, we need not and do not reach the question of whether a deed of trust is a negotiable instrument under Article 3. Correspondingly, we hold that it was unnecessary for the court of appeals to address this issue, and affirm its judgment on other grounds.
II.
¶ 26 We affirm the judgment of the court of appeals on other grounds.
Concurrence Opinion
specially concurring.
€ 27 While I concur in the majority opinion and fully agree that we need not reach the issue of the negotiability of deeds of trust under Article 3 or Colorado's Uniform Commercial Code, in light of Justice Hood's alternate opinion urging the treatment of the deed of trust in this case as a negotiable instrument, I write separately to explain my own understanding of the controlling statutes.
28 I emphasize "controlling statutes" because I think it clear that the question whether a deed of trust referenced by, and securing a promise to pay contained in, a negotiable instrument is therefore to be treated as inseparable from that negotiable instrument itself, is first and foremost a matter of statutory interpretation. By contrast, Justice Hood would resolve the question on the basis of ancient interpretations of the common law and principles of equity,; and the decisions of two intermediate appellate courts still relying on pre-Uniform Commercial Code. precedent in their respective states. See Carnegie Bank v. Shalleck,
$29 Although we have previously made clear that our adoption of the Uniform Commercial Code allows for the continued vitality of preexisting principles of law and equity only to the extent that they have not been displaced by the Code, and that "displacement," as that term appears in the Code, contemplates the abrogation of common law rules without requiring unequivocal, explicit reference to the doctrine in question, see Clancy Sys. Int'l, Inc. v. Salazar, 177 P.8d 1235, 1287 (Colo.2008), Justice Hood offers no explanation why the rule of Carpenter, even if we were to find it useful as a matter of policy, has not been displaced by the statutory scheme of the Code. And although the Code treats the age-old problem of the bona fide purchaser in its own way, through its own scheme of tightly interlocking concepts like the "negotiable instrument" and the "holder in due course," Justice Hood offers no explanation how the Code can be interpreted to allow for the treatment of a security document as a negotiable instrument, or how the legislature's distinctly separate treatment of real property interests, including mortgages and deeds of trust, can be reconciled with their conversion into commercial paper.
30 In perhaps the only case decided by this court concerning the effect of referencing a deed of trust in a promissory note, we addressed the converse question: whether the note lost its character as a negotiable instrument by being collateralized by the mortgage. In Haberl v. Bigelow,
{31 Apart from the fact that the Code's definition of "negotiable instrument" therefore necessarily displaces the "equitable" solution carved out in Corpenter, the legislature's choice to separately define "spurious liens," without including the defenses applicable to negotiable instruments, and to provide a specific, expedited process for having such liens declared invalid and removed further demonstrate its intent to draw a clear demarcation between negotiable instruments and liens. Part 2 of title 38, article 35 of the revised statutes, entitled "Spurious Liens and Documents," defines, in pertinent part, a "[s]purious lien" to mean "a purported lien or claim of lien that ... [is not ereated, suffered, assumed, or agreed to by the owner of the property it purports to encumber." § 38-835-201(4), (4)(c),, C.R.S. (2015). The legislature similarly provides for an expedited procedure by which any person whose property is affected by a recorded lien he believes to be spurious may petition the district court for an order to show cause why the lien should not be declared invalid and ordered released. § 88-35-204, C.RS8. (2015), Although easily lost sight of in Justice Hood's discussion of negotiable instruments and holders in due course under the Commercial Code, the action at issue here is one brought by Fiseus pursuant to this Part 2.
¶ 32 A lien is an encumbrance on property. For the foregoing reasons, the Uniform Commercial Code simply eannot be construed to include a Hen within the definition of a negotiable instrument or intend that one can be a holder in due course of a lien. In light of the legislature's express provision for the removal of any lien that is "spurious," however, even if a deed of trust collateraliz-ing a promissory note could be considered a combination lien and negotiable instrument, the lien would nevertheless be subject to removal, as long as it was "not created, suffered, assumed, or agreed to by the owner of the property it purports to encumber." The trier of fact in this spurious len action expressly found from the evidence that Fiseus did not create, suffer, assume, or agree to Liberty's lien on his property.
133 Justice Hood's contention that the reasoning of cases pre-dating our adoption of the commercial code remains valid today seems to me best explained as an attempt to substitute a court-devised solution to the dilemma of the bona fide purchaser for the one chosen by the legislature, With regard to the class of which this case stands as a good example, it is a mystery to me how one could find greater equities to lie with a trader in commercial paper than with a homeowner who has been victimized by forgery. __
1 34 Notwithstanding my doubts about the position taken by Justice Hood's alternate opinion, I coneur in the majority opinion and fully concur with its determination that we need not reach the negotiability of deeds of trust in this case.
Concurrence in Part
concurring in part and dissenting in part.
135 I agree with the majority that the purported maker of a negotiable instrument may raise forgery as a defense to an obligation held by a party claiming holder-indue-course status. As the majority correctly notes, when a purported maker raises a forgery defense, he challenges the existence of the obligation, not its enforcement. Maj. op. [ 16. On the facts found by the trial court, I
{36 I respectfully part company with the majority regarding whether remanding on negligence would amount to idle ceremony. Section 4-8-406, C.R.S, (2015), precludes a person from asserting that his signature was forged on a negotiable instrument if his own negligence contributed to the alleged forgery. Because the trial court concluded that the 2009 deed was not a negotiable instrument, it rejected Branch Banking and Trust's section 4-8-406 negligence argument on its face. The majority deems further consideration of Husband's alleged negligence unnecessary due to Wife's highly deceptive conduct and his understandable faith in his spouse, Maj. op. 121 ("We decline to declare him negligent for trusting his wife,"). But Wife's undeniably egregious behavior and the trust implicit in most marital relationships do not allow us to resolve a fact-intensive defense that the factfinder has yet to address.
137 Of course, if the deed of trust is not a negotiable instrument, then asking the trial court to examine Husband's alleged negli-genee truly would be inviting idle ceremony. After all, any defenses under the UCC would then be unavailable. Therefore, I first address the threshold legal matter on which we granted certiorari; "Whether a lender in possession of a promissory note secured by a deed of trust on real property may assert a holder-in-due-course defense under section 4-8-805, C.R.S. (2014), to a claim that the deed of trust was forged."
188 UCC Article 8 governs the issuance, transfer, enforcement, and discharge of negotiable instruments. A promissory note, such as the one Wife executed in this case, is a negotiable instrument governed by Article 8. A deed of trust is a "security instrument containing a grant to a public trustee together with a power of sale," § 38-88-100.3(7), C.R.S. (2015), and is generally governed by real property law.
T389 Jurisdictions are split on whether a deed of trust securing a promissory note is, like the note itself, a negotiable instrument subject to the UCC's provisions and protections. Compare Hogan v. Wash. Mut. Bank, N.A., 230 Ariz, 584,
{40 On the one hand, because a deed of trust provides a security interest in real property, guaranteeing a remedy in the event of a default on a promise to pay, it may be considered to exist separately from the promise to pay itself; accordingly, it would not be subject to negotiable-instroment law. But on the other hand, the promissory note and accompanying deed of trust are functionally interdependent: a default on the note triggers rights under the deed of trust. Consequently, one could argue, the deed shares the note's negotiability, and both must be governed by the UCC.
[ 41 This latter notion that a deed of trust shares a promissory note's - negotiability dates back to the United States Supreme Court's opinion in Carpenter v. Longan,
{42 Early Colorado cases in the years following Carpenter emphasized the close relationship between a note and the mortgage securing it. E.g., Coler v. Barth,
11 48 Though these cases pre-date the adoption of the UCC, I believe their reasoning remains valid today. Indeed, decades after Colorado's 1965 codification of the UCC, this court observed the synergetic relationship between a promissory note and a deed of trust. See Columbus Invs. v. Lewis,
44 In the briefing, Husband relies on Upson v. Goodland State Bank & Trust Co.,
"[ 45 Similarly, Haber! v. Bigelow,
1 46 Additionally, holding a deed of trust to be a negotiable instrument would further a fundamental policy of the UCC's holder-indue-course doctrine by encouraging the use of commercial paper to facilitate the flow of capital. See Georg v. Metro Fixtures Contractors, Inc,
T47 Accordingly, I would hold that because a deed of trust is fundamentally interdependent with the note it secures, the deed takes on the note's negotiable character and is governed by Article 8. And because the trial court initially held to the contrary and rejected Branch Banking and Trust's section 4-3-406 negligence defense on the grounds that Article 3 did not apply, I would remand to the trial court for a full consideration of that defense.
{48 For these reasons, I concur with the majority's conclusions regarding forgery and ratification, but I respectfully dissent from its holding that Husband was not negligent and Branch Banking and Trust may not raise section 4-8-406 as a defense to Husband's forgery claim.
I am authorized to state that JUSTICE MARQUEZ joins in the concurrence in part and dissent in part.
Notes
. I also respectfully disagree with the majority's implication that the negligence defense should be confined to "checks or signing devices." Maj. op. 122. The comments to section 4-3-406 explain that the current version of that section was expanded from its former iteration "to apply not only to drafts but to all instruments." § 4-3-406 crat. 1.