Liberty Mortgage Corp. v. Fiscus

JUSTICE EID 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., 2014 COA 79, TM 47-49, 378 P.3d 644. [ 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 [280] on a General Power of Attorney, a Limited Power of Attorney, and a Power of Attorney (Real Estate) (collectively, the "forged POAs"), which together purported to appoint her as Husband's lawful attorney. Her daughter from a previous marriage notarized the documents. Using the forged POAs, Wife closed on a promissory note for approximately $220,000 with Liberty Mortgage Corporation and secured it with a deed of trust (the "2008 deed") purporting to encumber the property. She signed the 2008 deed as "Raymond Fiseus by Vickie L. Casper-Fis-cus as Attorney in Fact." The couple's 2008 tax return, signed by both spouses, included a mortgage interest deduction in the amount of $1,722. This was consistent with the amount Husband would have expected to have paid on the original 1987 mortgage loan. At no time in 2008 did Husband become aware of the note Wife executed. {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 [281] Banking and Trust's ratification argument, concluding instead that Husband lacked knowledge of the facts relating to the doeu-ments' creation until December 2011 and took no action at that time to approve them. Consequently, the court invalidated the 2009 deed and ordered its release. ¶ 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 [282] either personally sign the instrument or be represented by an agent who signs it on his behalf, § 4-8-401, C.R.S. (2015); see also § 4-8-401 emt. 1 ("Obligation on an instrument depends on a signature that is binding on the obligor. The signature may be made by the obligor personally or by an agent authorized to act for the obligor."). This requirement is plainly not satisfied where his name is signed without authorization, Indeed, section 4-3-408(a), C.R.S. (2015), specifically provides that an "unauthorized signature" does not bind the person whose name is signed absent ratification, and seetion 4-1-201(b)(41), C.R.S. (2015), specifies that the term "unauthorized signature" includes a forgery. | | 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, 921 F.2d 497, 503 (Bd Cir. 1990) ("[UInder New Jersey law, when a negotiable instrument is claimed to be a forgery, until such time as its status as a genuine instrument is established, even a holder in due course takes subject to the forgery defense,"); Fed. Fin. Co. v. Charomonte, No. CV 950148828, 1998 WL 727768, at *2 n2 (Conn. Oct. 5, 1998) ("[The defense of forgery] is available to the defendants whether the holder. is a holder in due course or not, since an unauthorized signature is ineffective. ..."); Southtrust Bank of Ga. v. Parker, 226 Ga.App. 292, 486 S.E.2d 402, 404-06 (1997) (reversing grant of summary judgment where questions of material fact remained as to forgery, even though holder was holder in due course). {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 [283] Husband could or should have discovered the 2009 deed by the exercise of reasonable dili-genee was in April 2010, when he could have reviewed the 2009 tax returns. But when he asked Wife about the returns, she deliberately misled him, telling him that he did not need to sign them. We decline to declare him negligent for trusting his wife. And the next time he detected suspicious activity-in December 2011-he exercised "ordinary care" under section 4-8-406 by performing a credit check and filing identity theft reports with the police and the bank. 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, 145 Colo. 413, 359 P.2d 665, 669 (1961). The party alleging ratification-here, Branch Banking and Trust-carries the burden of proof,. Film Enters, Inc. v. Selected Pictures, Inc., 138 Colo. 468, 335 P.2d 260, 265 (1959). Husband testified, however, that he never knew of the 2008 or 2009 loan transactions or their resulting deeds of trust, and the district court credited that testimony. The record, therefore supports the district court's conclusion that he lacked "full knowledge of all material facts" about the transactions required for ratification, Colo. Mgmt. Corp., 359 P.2d at 669, and we affirm the court of appeals' holding on this point, see C.R,C.P. 52 ("Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses."); Amos v. Aspen Alps 123, LLC, 2012 CO 46, T 25, 280 P.3d 1256, 1262 ("In an appeal of a judgment entered after a trial to the court, we defer to the trial court's credibility determinations and will disturb its findings of fact only if they are clearly erroneous and are not supported by the record."). €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. JUSTICE COATS joins with the majority and specially concurs. JUSTICE HOOD concurs in part and dissents in part, and JUSTICE MARQUEZ joins in the concurrence in part and dissent in part. + JUSTICE GABRIEL does not participate.