Opinion ID: 4529386
Heading Depth: 2
Heading Rank: 4

Heading: Kim and Foster’s Legal Arguments

Text: Aside from their factual arguments, Kim and Foster raise two legal challenges to the bankruptcy judge’s ruling. First, they argue in the alternative that even if Chase 12 Kim and Foster also mount evidentiary challenges to Exhibit M. While we do have concerns about Exhibit M—namely, whether it was created in the ordinary course of business and near the time of the events at issue—we need not reengage in this analysis separately for Exhibit M. A review of the bankruptcy judge’s order shows that if the bankruptcy judge even relied on Exhibit M, it was for one fact only: “Presumably th[e] loss [of the Note] occurred sometime after the May 12, 2010 transmission of the original documents to Chase’s prior attorney, but no precise date was identified.” App. vol. 5 at 1127 n.23. But the bankruptcy judge only presumed that Chase sent the Note to its foreclosure attorney on that day, explaining that the parties had not conclusively established a precise date when Chase would have done so. Nothing about that is in error, because the lost-instrument statute does not require precise dates. Lea’s testimony establishes that Chase sent the Note to its foreclosure counsel some time after first receiving the Note from Washington Mutual in 2009. On a clearly erroneous standard of review, we conclude that this was all that was needed for the bankruptcy judge to make this finding. 29 possessed the Note, it transferred the Note to its foreclosure counsel when it sent the Note to him. Second, they argue that the FDIC’s failure to follow the terms of the Purchase and Assumption Agreement meant that Chase never legally acquired the Note. We review de novo these two questions of law. See In re Long, 843 F.3d at 873. A. Chase Did Not Transfer the Note to Its Foreclosure Counsel. Relying on La Junta State Bank v. Travis, 727 P.2d 48 (Colo. 1986), Kim and Foster argue that when Chase gave the blank-indorsed Note to its attorney, it transferred the Note to him. That is significant, Kim and Foster argue, because under the lost-instrument statute, a person who lost an instrument can enforce it only if “the loss of possession was not the result of a transfer.” Colo. Rev. Stat. Ann. § 4-3-309(a) (emphasis added). Before addressing La Junta State Bank, we will first explain what constitutes a transfer.
Under Colorado law, “[a]n instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” Colo. Rev. Stat. Ann. § 4-3-203(a) (West 2020). The plain language of this statute provides that a transfer occurs if two elements are satisfied: (1) a person who did not issue the instrument delivers it to another person, and (2) the person who delivers the instrument does so to give the person receiving delivery the right to enforce the instrument. Addressing this second element, the official commentary to this statute obligates courts to consider why the instrument 30 changed possession: “Subsection (a) defines transfer by limiting it to cases in which possession of the instrument is delivered for the purpose of giving to the person receiving delivery the right to enforce the instrument.” Id. § 4-3-203 cmt. 1. Both delivery and intent matter, hence a transfer does not occur in “cases in which a delivery of possession is for some purpose other than transfer of the right to enforce.” Id. Here, no evidence shows that Chase gave the Note to its foreclosure counsel with the intent of giving him the right to enforce it on his own behalf. But that does not matter, Kim and Foster argue, because they claim that this transfer rule and Chase’s intent are irrelevant, given that bearer paper has unique footing under Colorado law. They point out that a blank-indorsed instrument “may be negotiated by transfer of possession alone.” Appellants’ Reply Br. 3 (internal quotation marks omitted) (quoting Colo. Rev. Stat. Ann. § 4-3-205(b)). And because “[n]egotiation is merely a special form of transfer,” Pierce v. DeZeeuw, 824 P.2d 97, 99 (Colo. App. 1991),13 the next issue is how these principles operate in the context of a blankindorsed note. 13 “Negotiation” allows a person to become a “holder,” a status that in turn allows a person to become a “holder in due course,” an extra-special status that permits the party to “take the instrument free from all claims to it and most defenses of any party to the instrument.” La Junta State Bank, 727 P.2d at 51 (citations omitted); see also Colo. Rev. Stat. Ann. §§ 4-1-201(20) (holder), 4-3-201(a) (negotiation), 4-3-302(a) (holder-in-due-course) (West 2020). 31
In La Junta State Bank, a woman named Katherine Warnock bought a $53,541.93 cashier’s check from Pueblo Bank and Trust Company. 727 P.2d at 50. She indorsed “Katherine Warnock” on the back of the check and then gave it to her attorney, Jerry Quick. Id. Attorney Quick wrote “deposit only” under her indorsement and deposited the check in a separate trust account that he maintained at the La Junta State Bank. See id. The La Junta State Bank “collected the amount of the check from the Pueblo Bank and Trust Company.” Id. When Warnock died, one of the administrators of her estate could find no receipt for the cashier’s check and discovered that the funds had not been remitted to the estate. See id. The administrator made a demand for payment on the La Junta State Bank, but it refused the demand because Attorney Quick’s trust fund was depleted. Id. The administrators of the estate sued the La Junta State Bank on various state-law grounds, arguing that Attorney Quick had placed the words “deposit only” for Warnock’s benefit; thus, they contended that the La Junta State Bank had a duty to set the funds aside in a separate account for her benefit rather than placing them in Attorney Quick’s account. Id. The Colorado Supreme Court reasoned that when Warnock bought the original cashier’s check, “it was negotiable order paper in her hands.” Id. at 52. This means that the cashier’s check was payable “to any person that [she] designate[d].” Paper, Black’s Law Dictionary (11th ed. 2019). By writing her name on the back of the check and not identifying a specific payee, the court concluded that she had indorsed 32 the check in blank. La Junta State Bank, 727 P.2d at 52; see also Colo. Rev. Stat. Ann. § 4-3-205 cmt. 2 (“A blank indorsement is usually the signature of the indorser on the back of the instrument without other words.”). The court then ruled that when Warnock delivered that blank-indorsed check to Attorney Quick, he “became a holder of the instrument in bearer form with the right to transfer or negotiate it by delivery alone.” La Junta State Bank, 727 P.2d at 52. And because Attorney Quick received the cashier’s check with a blank indorsement, “he was free to direct its deposit in any manner he elected.” Id. at 55. Thus, when he wrote, “deposit only,” that restrictive indorsement was “added by Quick on his own behalf.” Id. As a result, the La Junta State Bank owed Attorney Quick a duty “to honor his restrictive indorsement,” and it owed Warnock no duty at all. Id. Significantly, the Colorado Supreme Court rejected the administrators’ argument that Attorney Quick wrote for “deposit only” on Warnock’s behalf as her agent. Id. at 53. Though agents can indorse a negotiable instrument for a principal, the court refused to infer that Attorney Quick was Warnock’s agent; it stated that “the respondents presented no evidence that Quick wrote ‘deposit only’ on behalf of Warnock.” Id. The court also remarked that no evidence had been presented showing “why Warnock purchased the check or how Quick acquired it.” Id. We view the Colorado Supreme Court’s inquiry into that matter—how and why the attorney acquired the Note—as having significant implications. Consider a hypothetical in which Attorney Quick had been assisting Warnock with purchasing 33 real estate, and evidence showed that Warnock had given to him the cashier’s check to present to the sellers at closing. Even if the check were bearer paper, would the Colorado Supreme Court have concluded that Warnock transferred the Note to Attorney Quick? In light of the doctrine of constructive possession, we think not. Unlike actual possession, constructive possession exists if a person “has the power and intent to exercise control over the object,” lack of physical control notwithstanding. Henderson v. United States, 135 S. Ct. 1780, 1784 (2015) (citing Black’s Law Dictionary 1047 (5th ed. 1979); 2A K. O’Malley, J. Grenig & W. Lee, Federal Jury Practice and Instructions, Criminal § 39.12, p. 55 (6th ed. 2009)). Since deciding La Junta State Bank, the Colorado Supreme Court has recognized that constructive possession applies in the negotiable-instruments context. See Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1214 (Colo. 2008) (“[T]here are circumstances wherein requiring actual physical possession of the instrument would be problematic and constructive possession applies.” (citing 6 William D. Hawkland & Lary Lawrence, Uniform Commercial Code Series, § 3-301:3 (1999))). And though a blank-indorsed instrument was not at issue in Georg, the court there provided a rule for analyzing whether a party maintained possession of an instrument through constructive possession: “a determination of constructive possession should occur only when delivery is clearly for an identifiable person under circumstances excluding any other party as a holder in due course.” Id. (citing Hawkland & Lawrence, supra, § 3-301:3). Because La Junta State Bank considered why Warnock gave Attorney Quick the blank-indorsed cashier’s check and Georg applied 34 constructive possession in the negotiable-instruments context, this guidance from the Colorado Supreme Court shows that constructive possession is relevant in the negotiable-instruments setting—even in the case of bearer paper.14 Thus, we apply Georg here, meaning “a determination of constructive possession should occur only when delivery is clearly for an identifiable person under circumstances excluding any other party as a holder in due course.” 178 P.3d at 1214 (citation omitted). Delivery occurs if a party (1) transfers possession of an instrument to another party (2) with intent to transfer possession. Id. at 1215. We have already concluded that at one time Chase had actual possession of the Note. And the FDIC’s execution with Chase of the Purchase and Assumption Agreement, through which the FDIC transferred Washington Mutual’s assets to Chase, satisfies 14 And even if this guidance did not settle the issue, we would reach this result if we had to make an Erie–guess. See Pino v. United States, 507 F.3d 1233, 1236 (10th Cir. 2007) (“Under our own federal jurisprudence, we will not trouble our sister state courts every time an arguably unsettled question of state law comes across our desks. When we see a reasonably clear and principled course, we will seek to follow it ourselves.” (citations omitted)). This is the reasonably clear and principled course under Colorado law and, although the case law on the issue is sparse, appears to follow the general trend. See, e.g., Deutsche Bank Nat’l Tr. v. Moynihan, 270 F. Supp. 3d 497, 508, 512 (D. Mass. 2017) (concluding that Massachusetts’s lostinstrument statute does “not displace principles of agency,” even in the context of a blank-indorsed note, and allowing a bank to enforce the note through constructive possession after its attorney-agent lost the note); Lakiesha v. Bank of N.Y. Mellon, No. 3:15-CV-0901-B, 2015 WL 5934439, at  (N.D. Tex. Oct. 9, 2015) (“[A] blank-indorsed promissory note is enforceable by the party to whose possession— constructive or actual—it is delivered.” (citation omitted)); Caraccia v. U.S. Bank, Nat. Ass’n, 185 So. 3d 1277, 1279 (Fla. Dist. Ct. App. 2016) (“We emphasize that we do not hold that possession is not necessary when bearer paper is at issue; instead we hold only that, when an agency relationship such as that exists here is at issue, the element of possession can be met through either actual or constructive possession.”). 35 the intent element. Thus, the FDIC’s delivery of the Note was “clearly for an identifiable person”—Chase. That brings us to the key issue: under these circumstances, did Chase transfer possession of the Note to its foreclosure counsel so that he became a holder-in-duecourse? A holder of an instrument is “[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” Colo. Rev. Stat. Ann. § 4-1-201(20)(A) (West 2020). And to be a holder-in-due-course, Chase’s foreclosure counsel must “(1) be a holder; (2) of a negotiable instrument who took it; (3) for value; (4) in good faith; (5) without notice of certain problems with the instrument.” Georg, 178 P.3d at 1212–13 (footnotes and citation omitted). “Negotiation,” a special form of transfer, determines whether a person can meet the first element and become a holder. See Colo. Rev. Stat. Ann. § 4-3-201(a) (West 2020). Section 201(a) defines “negotiation” as “a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.” (emphasis added). A party becomes a holder of an instrument through negotiation if that party also possesses the Note and it is blank-indorsed. Id. § 4-1-201(20)(A); see also id. § 4-3-205(b) (“When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer 36 of possession alone until specially indorsed.”). Accordingly, Chase’s foreclosure counsel’s status hinges on whether Chase transferred possession of the Note to him.15 But Chase never transferred possession. As discussed, Lea testified that Chase gave custody of the Note to its foreclosure counsel, an action meant to facilitate foreclosure proceedings against Kim and Foster. That means that Chase gave its foreclosure counsel custody of the Note through an agency relationship—i.e., an attorney-client relationship. See Steffes v. Stepan Co., 144 F.3d 1070, 1075 (7th Cir. 1998) (explaining that the “traditional understanding of the attorney-client relationship” is that the attorney is the client’s agent (citing Restatement (Second) of Agency § 1(3) cmt. e (Am. Law. Inst. 1957))). But as the Colorado Supreme Court recognized in Georg, “[u]nder traditional analysis, the agent’s possession would be the owner’s possession and thus the owner would have ‘possession.’” 178 P.3d at 1213–14 (emphasis and citation omitted); see also 73 C.J.S. Property § 54 (Mar. 2020 update) (“Property in the hands of an agent or servant is in the possession and control of the principal or employer, the agent or servant having only custody, since the possession of the agent or servant is the possession of the principal or employer.” (emphasis added) (footnote omitted) (collecting cases)); cf. Holland v. Sutherland, 15 Kim and Foster also argue that the bankruptcy judge improperly shifted the burden from Chase (of proving that the Note was not transferred to its foreclosure counsel) to Kim and Foster (of proving that the Note was transferred). But the court did no such thing; it concluded that “[n]o evidence indicates, and, indeed, neither party suggests, that Chase transferred the original Note to another entity, or that the Note was lawfully seized by another entity.” App. vol. 5 at 1127. This quote shows that the court relied on the “evidence” that the parties—both parties—provided to it. 37 635 P.2d 926, 928 (Colo. App. 1981) (concluding that an absent squatter can establish adverse-possession rights to real property through an agent’s possession of the property, because the agent’s possession is the principal’s possession). So through this agency relationship, Chase’s foreclosure counsel’s physical custody of the Note was Chase’s constructive possession. Therefore, because Chase maintained possession, it never transferred its possession of the Note to its foreclosure counsel, meaning it did not negotiate or transfer the Note.16 Claiming that physical custody is pivotal, Kim and Foster point out that even a thief who steals a blank-indorsed note becomes the holder of the note. See Colo. Rev. Stat. Ann. § 4-3-203 cmt. 1. That same comment recognizes that “[t]he right to enforce an instrument and ownership of the instrument are two different concepts,” so a thief who steals a blank-indorsed note might be able to enforce it without owning it. Id. And that makes sense—in that scenario, the thief deprived the owner of both actual and constructive possession of the blank-indorsed note, thereby depriving the owner of the right to enforce the note. But, though some cynics may beg to differ, lawyers are not thieves, and when a lawyer holds a financial instrument on behalf of a client through an agency relationship, the lawyer has not deprived the client of his or her right of possession. Rather, unlike in the case of a thief, “the 16 Moreover, constructive possession applies because Chase’s foreclosure counsel was not a holder-in-due-course. See Georg, 178 P.3d at 1214. To be a holderin-due-course, Chase’s foreclosure counsel must have (among other things) obtained the Note for value. Id. at 1213. Unlike in La Junta State Bank, see 727 P.2d at 53, the record here does not create a factual question about whether Chase gave its counsel a $2,000,000 promissory note in return for value. 38 [lawyer’s] possession would be the owner’s possession and thus the owner would have ‘possession.’” Georg, 178 P.3d at 1213–14 (emphasis and citation omitted). We hold that Chase maintained constructive possession of the Note when it gave custody of the Note to its foreclosure counsel. Accordingly, we agree with and affirm the bankruptcy court’s ruling that Chase did not transfer or negotiate to its foreclosure counsel a $2,000,000 promissory note. B. The Purchase and Assumption Agreement Section 3.3 of the Purchase and Assumption Agreement requires conveyances between the FDIC and Chase to be documented, “as necessary,” by either a receiver’s deed or bill of sale. App. vol. 8 at 1968 (capitalization removed). Kim and Foster argue next that because the FDIC did not provide this documentation, “the legal basis upon which Chase could have obtained title” is absent. Appellants’ Opening Br. 47. Kim and Foster’s only supporting case is Kim v. JPMorgan Chase Bank, 825 N.W.2d 329 (Mich. 2012).17 There, the plaintiffs’ mortgage had been acquired by Chase from Washington Mutual. Id. at 330. When the FDIC became Washington Mutual’s receiver, it executed a Purchase and Assumption Agreement with Chase. Id. at 330–31. Chase then later attempted to foreclose on the mortgage. Id. at 331. Even though Chase had purchased the mortgage through the Purchase and Assumption Agreement, the trial court ruled that Chase had acquired the mortgage “by operation of law,” a conclusion that meant that Chase did not need to comply with a Michigan 17 The Kim here is different than the Kim in this Michigan case. 39 statute requiring “that a mortgage assignment be recorded before initiation of a foreclosure by advertisement.” Id. If Chase had acquired the mortgage by operation of law, it had not acquired it through a mortgage assignment. See id. On review, the Michigan Supreme Court concluded that the FDIC had acquired Washington Mutual’s assets by operation of law, because it became a receiver under 12 U.S.C. § 1821(d)(2)(A)(i)–(ii). Id. at 333. On the other hand, the court ruled that Chase had not acquired Washington Mutual’s assets by operation of law, but that Chase had instead acquired them through a “voluntary transaction”—the Purchase and Assumption Agreement with the FDIC. Id. at 334. Thus, the Michigan Supreme Court ruled that Chase needed to comply with Michigan statutory law and publicly record its assignment of mortgage before foreclosing. Id. at 336. Not once in the Kim opinion did the Michigan Supreme Court mention section 3.3 of the Purchase and Assumption Agreement, a receiver’s deed, or a receiver’s bill of sale. True, Kim might stand for the limited proposition that Chase acquired Washington Mutual’s assets through the Purchase and Assumption Agreement rather than through operation of law. But it does not support the argument that the FDIC’s failure to comply with section 3.3 voided the transaction. Moreover, as the district court recognized, section 3.3 does not even apply to every transfer under the agreement, because it is limited to “conveyances where a receiver’s deed or receiver’s bill of sale is ‘necessary.’” App. vol. 5 at 1258. That limitation establishes that, in some cases, assignments between the FDIC and Chase could be made without a receiver’s deed or bill of sale. 40 Here, Kim and Foster fail to explain how this was the type of transaction in which a receiver’s deed or bill of sale was necessary. And even if it were such a transaction, we fail to see how the FDIC’s breach of that provision would invalidate the transaction with Chase. Only a material breach of a contract gives the nonbreaching party a right to set aside the contract. See Coors v. Sec. Life of Denver Ins., 112 P.3d 59, 64 (Colo. 2005) (citing Sci. Packages, Inc. v. Gwinn, 301 P.2d 719, 722 (1956)). Kim and Foster do not claim that this breach equated to a material breach. What is more, even if it had been a material breach, nothing prevents the nonbreaching party—here, that would be Chase—from preserving the contract and performing in spite of the breach. Sci. Packages, 301 P.2d at 722. Because Chase elected to purchase Washington Mutual’s assets through the Purchase and Assumption Agreement, Chase upheld the contract. Thus, we conclude that the FDIC’s failure to provide Chase with a receiver’s deed or bill of sale, if one was even necessary, is irrelevant to whether Chase acquired Kim’s Note.18