The Dangers of Accepting Transfers of Real Property as Loan Collateral in Colorado

RVM Law, LLC Recovers All Monies, Attorney’s Fees, and Back Due Interest Owed to client in Denver District Court.

RVM Law, LLC’s client agreed to loan his neighbor $40,000.00 so that his neighbor could avoid the foreclosure of his home by the first position lender Bank of America, NA.  Without the advice of an attorney, the client (hereinafter “Client”) and his neighbor (hereinafter “Neighbor”) executed a loan agreement, and Neighbor quitclaimed his home to Client with both parties thinking this quitclaim transaction formed valid security for repayment of the loan.  Theoretically, once Neighbor repaid the loan, Client would quitclaim the property back to Neighbor.  As is often the case, Neighbor failed to repay the balance owed within 90 days as required by the agreement and Client contacted RVM Law, LLC.   RVM Law, LLC commenced a judicial foreclosure and/or quiet title proceeding pursuant to Colorado Rule of Civil Procedure 105 in Denver District Court against Neighbor.  Fortunately, the loan agreement executed by the Neighbor in favor of the Client provided for the recovery of attorney’s fees in Client’s favor and a substantial default interest rate.

Colorado Revised Statutes § 38-15-117 Prohibits Conveyances Intended To Secure Repayment of Debt

In Colorado, unlike many other states, any “[m]ortgages, trust deeds, or other instrument intended to secure the payment of an obligation affecting title to or an interest in real property shall not be deemed a conveyance, regardless of its terms, so as to enable the owner of an obligation secured to recovery possession of real property without foreclosure and sale, but the same shall be deemed a lien.”  Colorado Revised Statutes § 38-15-117.

In layman’s terms, Colorado prohibits any transfer of title of real property or the holding of such transfer in escrow, as security for the repayment of a debt. 

Instead, Colorado treats such transactions, regardless of what is reflected in the conveyance documents as a “lien” instead of a conveyance of an interest in real property.  In this instance, the impact of this statute on Client’s ability to recover his money was substantial.   Instead of owning the neighbor’s property outright (subject to any pre-exiting encumbrances), which is what the quitclaim deed executed by Neighbor in favor of Client stated expressly by its terms, the Denver District Court read the loan agreement and the quitclaim deed together and determined the deed was in fact a “lien” pursuant to C.R.S. § 38-15-117. 

This determination meant that Client’s judicially determined lien was now secured by the neighbor’s property in fourth position behind the first position Bank of America mortgage, and two other debts including an IRS tax lien previously recorded against the neighbor’s property.  The Denver District Court ordered a judicial foreclosure of Client’s lien at a Denver County Sheriff’s sale, but because Client’s lien was now in fourth position this was only half the battle in seeking recovery of the monies owed. 

Colorado’s Homestead Exemption Complicates Judicial Foreclosure of Subsidiary Position Liens

Now that the Court established Client had a fourth position lien in the amount of $40,000.00 plus interest, and attorney’s fees encumbering Neighbor’s property, RVM Law, LLC had to address the problem of Colorado’s Homestead Exemption in attempting to foreclose on the lien in a judicially ordered foreclosure sale.

Colorado’s Homestead Exemption contained in Colorado Revised Statute § 38-41-201(1) states “[e]very homestead in the state of Colorado shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon: (a) the sum of seventy-five thousand dollars if the homestead is occupied as a home by an owner thereof or an owner’s family; or (b)  the sum of one hundred five thousand dollars if the homestead is occupied as a home by an elderly or disabled owner, an elderly or disabled spouse of an owner, or an elderly or disabled dependent of an owner.”

In this case, Neighbor was under 60 years old and his property definitely qualified as his “homestead” under C.R.S. § 38-41-201(1).  Therefore, Neighbor was entitled to a $75,000.00 exemption, rather than the $105,000.00 exemption for homeowner’s more than 60 years old.  In order to foreclose on Neighbors property and recover repayment of the debt, Client had to certify to the Denver County Sheriff that the property had sufficient equity i.e. market value to cover the first position mortgage, the second and third position liens, Client’s fourth position lien, plus the $75,000.00 Homestead Exemption.

Colorado Revised Statutes § 38-41-206 Requires Appraiser Affidavit of Value

In order to proceed with the Denver County Sheriff’s foreclosure, C.R.S. § 38-41-206 required Client obtain an affidavit of an independent appraiser establishing “[t]hat the fair market value of said property less any prior liens or encumbrances thereon exceeds the amount of the homestead exemption fixed in section 38-41-201 for which the claimant qualifies.”  Fortunately, in this instance, Neighbor’s property was located in the popular west Washington Park neighborhood in central Denver and the appraised fair market value exceeded all prior encumbrances, plus Client’s debt, plus the $75,000.00 Homestead Exemption and left more than $200,000.00 in equity.  The remaining equity was crucial in Client’s decision to proceed with the sheriff’s sale, because any potential purchaser of the Property would take the Property subject to the prior liens, and there needed to be sufficient equity to make such a sale attractive to potential bidders at a foreclosure sale.

Colorado Revised Statutes § 38-41-206(2) Voids The Foreclosure Sale If The Amount Offered Does Not Exceed Seventy Percent Of The Fair Market Value

To make the foreclosure sale even more complicated, C.R.S. § 38-41-206(2) required that the winning bid at the foreclosure sale must exceed “seventy percent of the fair market value shown in the affidavit of the independent appraiser” otherwise the foreclosure sale would terminate and Clients’ lien would be extinguished permanently.  In essence, Colorado law gave Client one shot to foreclose on his lien and the only way for Client to ensure the property sold at the foreclosure sale was to start the bidding at “seventy percent of the fair market value shown in the affidavit of the independent appraiser.” 

This meant that the Client would be obligated to pay off all prior liens plus the $75,000.00 homestead exemption in cash to the Neighbor, if his initial bid was the winning bid at the sale according to C.R.S. § 38-41-206(3)(“If the successful bidder at such sale is a judgment creditor, he shall be required to pay in cash to the sheriff or other property officer making the sale an amount sufficient to pay the exemption plus the proper costs and expenses and shall not have the right to have such exemption amount applied toward the satisfaction of his judgment.”)  Again, fortunately, the Property had sufficient equity that this was worthwhile to Client and Client had the funds available to pay this amount in cash on the date of the foreclosure sale.

Neighbor Cured Hours Before The Foreclosure Sale As Permitted by C.R.S. § 38-38-104

RVM Law, LLC obtained a foreclosure sale date from the Denver County Sheriff, complied with all statutory notices and publication requirements and Client lien was subject to a scheduled sale date.  The Neighbor submitted a request for cure as permitted by C.R.S. § 38-38-104 and paid the amounts owed in certified funds to the Denver County Sheriff prior to 12 noon on the day before the sale as permitted by C.R.S. § 38-38-104(2)(b).  Client was therefore repaid all monies owed, plus all attorney’s fees incurred, plus all costs, plus all accrued interest because of RVM Law, LLC’s knowledge of the complicated Colorado judicial foreclosure process and its interplay with the Colorado Homestead Exemption Act.

Moral Of The Story

               While Client was made whole in this situation, had Client retained an attorney before loaning the money to Neighbor he would have been advised of the substantial risks and expense associated with having a fourth position lien on Neighbor’s property as the only security ensuring the recovery of his money.  In all likelihood the loan never would have been made.  However, if the loan was made, RVM Law, LLC would have recorded a Deed of Trust in favor of the Denver County Public Trustee which would have enabled Client to pursue foreclosure through the Denver County public trustee’s office and a C.R.C.P. 120 rule 120 proceeding rather than the more expensive and time consuming judicial foreclosure proceeding. 

We recommend you contact RVM Law, LLC for any situation involving a loan or a lien involving real property since the law in this arena is very complicated the decisions you make now can impact your ability to recoup any monies years from now.