A lawsuit from Aurora is garnering attention for successfully questioning the constitutionality of Colorado’s foreclosure law. But before discussing it, let’s briefly consider Colorado’s public trustee foreclosure system.
Public trustee foreclosure is an administrative procedure designed to allow efficient foreclosure of notes and deeds of trust while also affording borrowers with the due process guaranteed by the U.S. Constitution. In Colorado, there are two different public trustee foreclosure processes depending on the status of the lender.
The first process, which must be followed by what we’ll call “ordinary lenders,” such as state banks and finance companies, requires a foreclosing lender to prove that it has a right to foreclose. The lender does this by providing the original note and deed of trust — the wet-ink originals, not a copy — to an official called the public trustee, who conducts the foreclosure sale. The borrower is assured that the foreclosing lender actually has a right to foreclose because it has produced the documents. In the absence of a lender producing the original documents, there is no easy way for a borrower to determine if the foreclosing lender actually owns the loan and has a right to foreclose.
Then there’s the second process, which is available to big banks. These lenders are not required to produce the original note and deed of trust or otherwise prove in any meaningful way that they have a right to foreclose. Instead, they simply need an attorney to sign a document saying that to the “best knowledge” of the attorney, they have a right to foreclose. This can leave borrowers wondering whether the lender actually has a right to foreclose.
That brings us to the case mentioned above in which an Aurora woman, Kay Brumfiel, representing herself, successfully obtained an order from a federal judge stopping a state court foreclosure action against her by US Bank. The federal judge, William J. Martínez, indicated that he would review the constitutionality of Colorado’s “big bank” foreclosure process to determine whether it provides adequate due process before he would allow the foreclosure to continue. This ruling struck fear into the hearts of big banks because it could have resulted in the judge invalidating the special foreclosure process.
In response to the order, interest groups started lining up on each side of the issue to file briefs with the court. However, the matter never got to a hearing because US Bank quickly withdrew the foreclosure and agreed to never again try to foreclose on Brumfiel using the public trustee system. Instead, it appears that US Bank will file a formal lawsuit against Brumfiel where it will attempt to prove that it has a right to foreclose.
US Bank’s swift withdrawal of the foreclosure successfully avoided the federal judge ruling on the constitutionality of the public trustee process at this time. But questions about the legality of Colorado’s preferential foreclosure system remain and, given Brumfiel’s success in at least getting the court to consider the issue, it is likely that the questions will be brought forward again in future cases.
When new cases come, big banks will likely argue that mistakes under the current system are rare and that, even when they occur, it is usually a paperwork mixup and the debtor stood to lose the property to foreclosure anyway. They will also likely argue that requiring them to follow the ordinary process will drive up costs that must eventually be passed on to borrowers. The issue, then, will be whether Colorado should continue to allow foreclosures by big banks without them routinely showing that they hold the original note and deed of trust or determine that due process requires more.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.