Meadow Homes Development Corp. v. Bowens
2009 Colo. App. LEXIS 1008, 211 P.3d 743, 69 U.C.C. Rep. Serv. 2d (West) 42 (2009)
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Rule of Law:
A purchaser of a security who has notice of a third party's equitable property interest in that security, particularly when the interest arises from a fraudulent transfer of a unique asset, does not qualify as a "protected purchaser" under UCC Article 8 and takes the security subject to the third party's claim.
Facts:
- The Horvats, Meadow Homes Development Corp., and Ronald R. Bowens were all parties to a multiphase land development agreement.
- The agreement created a limited tax bond, which the Horvats would retain if they closed on a specific phase of the property development.
- The agreement stipulated that if the Horvats failed to close on the property, they were required to sell the bond to Meadow Homes for $50,000.
- Bowens was a signatory to this agreement.
- The Horvats ultimately failed to close on the relevant phase of the property development.
- Meadow Homes then closed on the property and made a demand to purchase the bond from the Horvats as per the agreement.
- Unbeknownst to Meadow Homes, the Horvats had already transferred the bond to Bowens.
Procedural Posture:
- Meadow Homes Development Corp. sued the Horvats and Ronald R. Bowens in a Colorado trial court, seeking a declaratory judgment and an order entitling it to the bond.
- Following a four-day bench trial, the trial court ruled in favor of Meadow Homes.
- The trial court found that Bowens was not a "protected purchaser" under UCC § 8-303 because he had notice of Meadow Homes' adverse claim to the bond.
- The trial court ordered that Meadow Homes could recover the bond from Bowens upon payment of the agreed-upon $50,000.
- Ronald R. Bowens (appellant) appealed the trial court's judgment to the Colorado Court of Appeals; Meadow Homes (appellee) did not cross-appeal.
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Issue:
Does a purchaser of a security, who has notice of a third party's contingent right to purchase that security under a contract, qualify as a "protected purchaser" under UCC § 8-303, thereby taking the security free from the third party's adverse claim?
Opinions:
Majority - Judge Connelly
No. A purchaser with notice of an adverse claim does not qualify as a "protected purchaser" and therefore takes the security subject to that claim. The general rule of commercial law is that a purchaser acquires only the rights that the transferor had the power to transfer. An exception exists for a "protected purchaser," who takes a security free of any adverse claim. To qualify, a purchaser must give value, obtain control, and not have notice of any adverse claim. Here, Bowens had notice of Meadow Homes' adverse claim because he was a signatory to the original agreement creating Meadow Homes' contingent right to the bond. At minimum, he was willfully blind to the fact that the transfer from the Horvats violated Meadow Homes' rights. Furthermore, Meadow Homes' interest was a protectable "adverse claim" because it was more than a simple breach of contract; it was an equitable property interest arising from the Horvats' fraudulent transfer and the unique nature of the bond, which was specifically tied to the land development.
Analysis:
This decision clarifies the scope of the "protected purchaser" defense under UCC Article 8 in Colorado. It establishes that notice of a contingent interest, especially when the purchaser was a party to the instrument creating that interest, is sufficient to defeat protected purchaser status. The case is significant for its interpretation of "adverse claim," extending it beyond simple contract breaches to include equitable property interests arising from fraudulent conduct. This limits the principle of finality in securities transactions where a buyer is aware, or should be aware, of underlying fraudulent activity, reinforcing the idea that equity can override formal legal defenses.
