“I THOUGHT I PAID THAT OFF!”
REAL PROPERTY TITLES, AGENCY, AND THE UCC
THE SWEETSER LAW FIRM, P. C.
1741 High Street
Denver, Colorado 80218
I.
The UCC
a. Payment and Discharge of Promissory Notes. The UCC1 provides that the holder
of a promissory note, or any other “person” with the same rights as a holder,
including a transferee for value, is entitled to enforce payment of the note. 2 An
obligor under the note discharges the obligation under the note by paying a
“person” entitled to enforce the note.3 Said another way, if the obligor pays
someone other than a “person” entitled to enforce the note, then the obligor has
not discharged the obligation under the note.
II.
Agency
a. Three Types of Agent Authority. There are three types of agent authority: 1)
actual; 2) implied; and 3) apparent.
i. An agency relationship results from the manifestation of consent by one
person to another that the other shall act on his behalf, and subject to his
control, and consent by the other to so act.4 It is an agreement between the
principal and the agent.
ii. Actual or express authority is that authority directly stated by the principal
to the agent.5
iii. Implied authority is the authority to perform acts incidental to or
necessary, usual or proper to accomplish the stated purpose of the agency.6
Implied authority may also exist to act as is ordinary or customary in a
particular industry, or by the acquiescence or ratification of the principal.
iv. Apparent authority is created through representations of the principal to a
third party causing the third party to reasonably believe, in good faith, that
the agent can act on behalf of the principal.7
b. Liability of the Principal. The risk that an apparent agent may abuse his authority
and act for his own benefit is placed on the principal rather than the innocent third
party dealing with the agent, reasonably and in good faith.8 Put another way,
when two innocent persons suffer from the acts of a third person, the one who
1
§4-3-101, et seq., C.R.S.
§§4-3-301 and 4-3-203, C.R.S.
3
§4-3-602, C.R.S.
4
Villalpando v. Denver Health and Hosp. Authority, 181 P.3d 357, 362 (Colo. App. 2007)
5
Wiley v. Mayer, 876 P.2d 1260, 1264 (Colo. 1994)
6
Id.
7
Carl’s Italian Restaurant v. Truck Insurance Exchange, 183 P.3d 636, 641 (Colo. App. 2007)
8
Grease Monkey International, Inc. v. Montoya, 904 P.2d 468, 477 (Colo. 1995)
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must suffer the loss is the one who placed the wrongdoer in place to inflict the
harm.9
III.
Real Property Titles
a. Deeds of Trust. A deed of trust is a security instrument securing the payment of a
promissory note or other evidence of debt.10 Security is provided when the deed
of trust is recorded with the Clerk and Recorder against certain real property,
encumbering that property such that any subsequent purchasers shall take the
property subject to the encumbrance of the deed of trust.11 Before a purchaser can
obtain title to the property free and clear of the encumbrance of the deed of trust,
the deed of trust must released of record, which is usually accomplished by
payment of the underlying secured promissory note. The beneficiary under the
deed of trust is generally the payee of the promissory note.
b. Previous Common Practices. Common practice used to be, and sometimes still is,
that a lender would hold the original promissory note and deed of trust until
payment in full was made on the note and the deed of trust was released of record.
If the lender sold the note it would be endorsed to the purchaser and an
assignment of the deed of trust to the new holder would be recorded with the
Clerk and Recorder. In this manner, the public records would reflect the holder of
the promissory note and those public records would, thereby, inform the public to
whom payment should be made in order to discharge the debt evidenced by the
promissory note. When the note was paid off the original note and deed of trust
would be presented to the public trustee along with a request for release of the
deed of trust, a release of the deed of trust would be recorded with the clerk and
recorder, and the encumbrance of the deed of trust would be removed from the
real property records affecting the property.
c. Current Common Practices. Today, and for the past decade or two, at least,
promissory notes are bought and sold at breakneck speed. Promissory notes are
also often pledged as collateral for other loans or become security for a warehouse
line of credit. In these situations the borrower who has pledged the note(s) will
usually often continue to receive payments on the pledged note(s) and the original
borrowers under the pledged notes will have no knowledge of the fact that they
are making payments to someone other than the holder of the note. A pledged
note may well become due and be paid off during the time that it is still pledged
as collateral. In these situations, particularly in the case of a warehouse line of
credit, the deeds of trust securing the pledged notes are not assigned to the new
holders. And there is no requirement in Colorado that the deed of trust be
assigned of record. Because of these practices, the real property records often
will not reflect to whom payment should be made in order to discharge the debt of
9
Id, at 476.
§38-38-100.3(7) and (8), C.R.S.
11
§38-35-109(1), C.R.S.
10
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the promissory note. While it is required that the deed of trust be released of
record after the indebtedness of the promissory note has been satisfied, when the
note holder is an institutional lender it is not required that the original promissory
note be provided to the public trustee in order for a release of the deed of trust to
be issued and recorded.12
IV.
Addressing the Problem
a. Reliance on Public Records. Borrowers and title companies can no longer rely
upon the public real property records or the original loan documentation to
determine whom to pay in order to discharge the debt evidenced by a promissory
note secured by real property. It can be extremely difficult to work from those
records all the way to the current holder of the note. Note, however, that while
the public records cannot necessarily be relied upon, they also cannot be ignored.
In the event that assignment(s) of a deed of trust do appear of record they should
be followed up on.
b. Servicer Agency. Borrowers are, however, making payments as directed. While
information concerning changes in note holders will not always be provided to
borrowers, borrowers will always (or almost always) be advised of the servicer to
whom payments should be made.13 Under the concepts of apparent agency and
the law of Grease Monkey should not a payoff to the servicer always be sufficient
to discharge the borrower’s obligation under the note? If an agency agreement is
in place between the holder and the servicer for servicing the loan wouldn’t the
ability to accept a payoff be implied in the agency? It seems so. This is
particularly so in the case of a payoff after years of monthly payments to the
servicer. If the borrower, having delivered a payoff to an unauthorized servicer, is
harmed, and the holder of the note, having not received payment from the
servicer, is harmed, it is the holder who has put the wayward servicer in a position
to abscond with the payments. Query: Should this be addressed by statute?
12
13
§38-35-124, C.R.S.
See RESPA, which requires lenders to provide borrowers with notice of a change in loan servicers
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