ALH Holding Co. v. Bank of Telluride
In ALH Holding Co. v. Bank of Telluride, 18 P.3d 742 (Colo.2000), the buyer of property borrowed $110,000 from the vendor, secured by a vendor's purchase money deed of trust, and borrowed $55,000 from a bank for the balance of the purchase price, also secured by a deed of trust. The vendor and the bank each had notice of the other's purchase money deed of trust.
They were recorded the same day, but the bank's was recorded first. After default, the vendor and bank each sought to have its deed of trust declared superior.
The trial court found in favor of the vendor, finding that as a matter of law, a vendor's purchase money deed of trust has priority over a third-party's purchase money deed of trust.
The Colorado Court of Appeals reversed and held that the bank's deed of trust had priority because it was recorded first.
On certiorari, the Colorado Supreme Court first noted that Colorado has a "race-notice" recording act, which provides that no unrecorded instrument is valid against anyone who first records, except between the parties and those who have notice of the instrument.
The court observed that as a result of this statute, although the bank's deed of trust was recorded first, the recording statute would not afford priority if the bank had notice of the vendor's deed of trust before the bank acquired its rights. 18 P.3d at 744-745. T
he court next noted that where a mortgage is executed between a purchaser and a vendor as part of the same transaction in which the purchaser acquires title, then the execution of the deed and the mortgage are considered to be simultaneous. Id. at 745.
And, "(a)s a matter of law, such a purchaser never has an unencumbered title." Id. The court noted the result of this is that a third-party lender of part of the purchase money "cannot acquire rights to the property from the purchaser unencumbered by the vendor's mortgage, regardless of the order in which the documents are signed." Id.
The court held that because the bank and the vendor had knowledge of the other's deed of trust, the state's race-notice recording statute would not resolve the issue of priority. Id. The court next recognized the rule in Colorado that where the recording statute does not dictate priority, purchase money mortgages have priority over all other liens. Id. at 746.
The court noted that rule also derives from the fact that the purchaser never acquires an interest unencumbered by the purchase-money mortgage and therefore has no greater interest to assign. Id.
The court found that this rule would necessarily give the vendor a leg up in the case of purchase money mortgages granted to both a vendor and a third-party lender, because the purchaser never has title, unencumbered by the vendor's purchase money mortgage, to grant to a third-party lender. Id.
The court noted earlier Colorado decisions which were in accord with the Restatement rule, despite the rule not being expressly adopted. Id.
The court found nothing in its prior decisions which would prevent the parties from avoiding the effect of the rule by agreement, but the court noted there was no stipulation regarding such an agreement in the record. The court held that although the bank's deed of trust was recorded first, the bank was not entitled to priority under the recording statute because it had notice of the vendor's unrecorded instrument prior to acquiring rights of its own. Id.
The court further held that in the absence of an agreement to the contrary, the vendor's purchase money deed of trust had priority over the third-party's deed of trust. Id. The court therefore reversed the decision of the Colorado Court of Appeals. Id.