Douglas N. Owens P.S.

Attorney At Law -  Your Legal Resource
360-299-3990
 dougowens@seattlerelawyer.com
 1610 Commercial Ave., Suite 207
Anacortes, WA 98221

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SOMETIMES, YOU CAN FIGHT CITY HALL—AND WIN
DAMAGES
            In land use matters, the conventional wisdom is that it is difficult to “fight city hall’ in the sense that the costs of the fight can overwhelm the benefits, and market conditions can change dramatically due to the passage of time during the contest.  A recent Supreme Court case showed that sometimes the fight is worth pursuing despite these obstacles.
            Normally, land use decisions can be appealed under LUPA, the Land Use Petition Act.  Appeals under LUPA are limited to determining whether the local government’s decision was based on unlawful procedure, an erroneous interpretation of the law, was outside the agency’s power, was clearly erroneous based on the evidence or violated an appellant’s constitutional rights.  This recent case involved an appeal under LUPA and also a more unusual lawsuit for damages to the property owner that resulted from the two years that had been consumed in battling opponents in the administrative process including activists and officials of government agencies, and which delay had ended the business that would have used the permitted land.
            The case began with a company called Citifor which had manufactured munitions on property in Thurston County that was located on or near a significant prairie oak-wetland habitat, and which obtained from Thurston County a twenty year permit to engage in gravel mining on the site in 2005.  The permit was issued after negotiations with environmental opponents of the mine, one of which withdrew its opposition in exchange for concessions by Citifor as to the scope of mining and restoration activities after mining.  However before mining began Citifor sold the land with the permit to the Port of Tacoma for its use in building a freight transfer location.  The freight transfer location was never built and so the Port of Tacoma negotiated with a company called Maytown to sell the property and based on the assurance to Maytown by the Thurston County Department of Natural Resources that the permit was still valid, Maytown bought the property in 2009.
            Maytown’s problems after its purchase centered on four issues: an environmental opponent (not the one that had negotiated with Citifor) challenged the validity of the permit; because of the delay between the permit’s issuance and the expected commencement of mining certain water quality deadlines had already passed; there was a discrepancy between the type of water quality testing required by the permit and the groundwater monitoring plan; and the permit was due for a five year review by a Department hearing examiner.
            Maytown had proposed some amendments to the conditions in the permit to reflect changed circumstances but once the extent of the legal campaign against the mine became apparent, Maytown withdrew all of the proposed amendments except two that dealt with the timeliness of the water quality measurements.
            During the two year administrative review period, decisions were made by the Department and appealed to a hearing examiner and then to the Department’s Board of Commissioners, all within Thurston County local government, and all during a time when according to the Supreme Court, at least two of the County Commissioners had adopted a plan to try to torpedo the mine for political reasons.
            Accordingly, after the internal county appeals had been exhausted (at which one of the environmental groups that had negotiated and agreed with Citifor participated as a mine opponent) and then the LUPA appeals to Superior Court had also been exhausted, and Maytown and the the Port of Tacoma had largely been vindicated, the victory was a Pyhrric one because the mining market had changed and the business failed.  So the Port of Tacoma and Maytown sued the county for damages resulting from the intentional misuse of government processes to interfere with a valid permit for the use of land.
            The jury agreed with Maytown and awarded $13.1 million in damages against the county, and the county appealed to the Supreme Court.  Other than on the issue of whether the trial court could award Maytown damages for its attorney’s fees in the administrative process, the Supreme Court upheld the lower court.  This case should hearten property owners who face bureaucratic opponents over land use.
            The foregoing is not intended as legal advice and should be considered as educational only.
            
SIGNPOSTS IN THE RELATIONSHIP OF BANKRUPTCY
AND DEED OF TRUST LAW WHEN YOU INVEST IN FORECLOSURES

            Some investors these days look for opportunities to obtain residential properties in foreclosure sales, including trustee’s sales under the Deed of Trust Act.  The Deed of Trust Act specifies periods that must elapse between the notice of the sale and when the sale can legally take place.
            Sometimes the borrower who is in financial distress will file a petition in bankruptcy after the notice of trustee’s sale has been recorded but before the sale takes place.   This may be an attempt by the borrower to stave off the trustee’s sale or for other reasons.  The filing of the petition invokes the automatic stay provisions of bankruptcy law, making it illegal for the trustee’s sale to be held as long as the bankruptcy case is pending in the bankruptcy court.
Unless the petition is deemed meritorious by the bankruptcy court, it will be dismissed. This type of situation can present a quandary for the investor who attends and bids at the trustee’s auction after a petition in bankruptcy by the borrower has been dismissed.  A recent case in the Court of Appeals considered such a case in which the borrower filed a petition in bankruptcy the day before the scheduled trustee’s sale and after the petition was dismissed, the trustee’s sale which had been continued by the trustee, was rescheduled and went forward, resulting in the borrower’s loss of the home.
The borrower then sued the lender and the purchaser at the trustee’s sale and the trustee, arguing that the trustee was required to send out a new notice of trustee’s sale, giving forty-five days’ notice after the dismissal of the bankruptcy petition before the sale could legally go forward.  The borrower also contended that the continuance of the trustee’s sale by the trustee violated the bankruptcy stay, and for both of these reasons asked that the sale be set aside by the court.
The Court of Appeals analyzed the borrower’s first argument based on two different statutes. The first statute says that when a bankruptcy petition is filed by the borrower and then later dismissed the trustee can choose to issue a new notice of trustee’s sale and the date of the sale cannot be fewer than forty-five days from the date the bankruptcy petition is dismissed.  The second statute says that the first statute is permissive only and does not apply when a trustee’s sale has been properly continued for a period not exceeding one hundred twenty days.  Because the trustee in this case had properly continued the sale after the filing of the bankruptcy petition for about fifty-eight days, the court held that the trustee was not required by the Deed of Trust Act to record a new notice of trustee’s sale.  
The Court of Appeals considered the borrower’s second argument under a case decided by the federal appeals court for the Ninth Circuit.  That case said that the automatic stay in bankruptcy is not violated by any action of the lender that does not change the status quo or give the lender some advantage over the borrower or harass or interfere with the borrower.  The Ninth Circuit court held that a continuance by the lender of the date of the trustee’s sale by publishing a notice of postponement of the sale did not create any advantage in the lender or otherwise prejudice the borrower while the bankruptcy was pending and therefore such a postponement did not violate the automatic stay.
The Court of Appeals therefore concluded that the borrower’s second argument was without merit and affirmed the dismissal of the lawsuit.  The court rejected the borrower’s argument that the “permissive” statute described above did not apply since according to the borrower the trustee lacked power to continue the sale due to the bankruptcy stay and must necessarily issue a new notice.  
The teaching of this case is that while it is important to keep abreast of any bankruptcy filings by the borrower that affect a trustee’s sale of property in which an investor is interested, that due diligence includes reviewing how the trustee has reacted to the bankruptcy filing.
The foregoing is intended to be educational and should not be considered legal advice.
            

CAN A CONDO ASSOCIATION'S LIEN TRUMP A PRIOR DEED OF TRUST ON THE CONDO UNIT?

In this economy, it is certainly not unusual for a homeowner to fall into a situation in which it is not possible to make ends meet. When this occurs, some bills do not get paid on time, or even at all. This can include housing expenses such as homeowner's dues and mortgage payments. There is also some amount of assignment and transferring of deeds of trust to real estate among lenders and "packagers" of so-called mortgage backed securities, and apparently sometimes lines of communication among these parties are weak. When a condominium unit is involved, there are some legal quirks that present risks for lenders and opportunities for investors.

A recent case involved a condominium owner who fell behind in payment of the assessments to the condominium association for common expenses. The owner also had a loan secured by a deed of trust against the condominium unit. Under Washington law there is a statutory lien against any condominium unit in favor of the condominium association to secure the payment of assessments. The condominium association filed a lawsuit against the owner to foreclose its lien and obtain payment of the delinquent assessments, which totaled approximately $10,202. The association recorded a lis pendens which is a document that gives notice to the world that there are claims involving the title to real estate, and served the lawsuit on the holder of the deed of trust, which was the so-called Mortgage Electronic Registration System, or MERS. MERS generally is involved in deeds of trust that have been transferred from the original lender in the course of "packaging" multiple loans for purposes of marketing them as investments. The condominium owner did not respond to the lawsuit and the association obtained a default judgment against the owner for the $10,202 in back assessments. Neither did MERS respond to the lawsuit.

A few months later, the association had the condominium unit sold at a sheriff's sale and an investor purchased the unit for the $10,202 amount of the default judgment plus $100. In the meantime MERS had assigned its interest in the deed of trust to Deutsche Bank and appointed a successor trustee for the deed of trust. The investor who purchased the unit notified the successor trustee about the sheriff's sale and asked about the lender's intentions concerning the property, but received no response.

During this time the condominium owner also became delinquent on her mortgage payments. The loan servicer for Deutsche Bank began foreclosure proceedings on the deed of trust and apparently as a result of a title search in connection with this intended foreclosure learned for the first time about the sheriff's sale. The loan servicer, GMAC, intervened in the condominium association's foreclosure proceeding and tried to have the default set aside or alternatively tried to redeem the property. Redemption is when someone who is legally entitled to do so pays the delinquent debt and is allowed to set aside a foreclosure.

The court decided that GMAC's lien was subordinate to the condominium association's lien and was therefore wiped out by the association's foreclosure. The court refused to set aside the default judgment and then considered GMAC's request to redeem the property. The quirk in the law is that ordinarily priority of liens is based on the date of recording, and since the deed of trust was recorded before the condo owner became delinquent in her assessments one would expect that the condo association's lien would not be able to eliminate the deed of trust. Our state's law says that condo association liens for common expenses have a "super priority" over previously recorded liens. And this super priority produces the twist in the case here.

In an interesting turn of events, the court held that GMAC was not allowed to redeem the property by paying the amount of the default judgment because only subordinate liens that are subsequent in time to a condo association's lien have the right of redemption. The very fact that the deed of trust was recorded before the assessments became delinquent defeated the lender's right of redemption in this case. The court considered GMAC's argument that this outcome produced a windfall for the investor and a loan deficiency for the former condominium owner and "punished" the lender but the court was unmoved. The court determined that the legislature had spoken clearly and this was the intended outcome in such a situation. Of course, if the lender had paid attention to the notice it received about the foreclosure lawsuit it could easily have paid the delinquent assessments and avoided having its deed of trust eliminated.

So a lucky investor obtained a condo unit for $10,302, plainly a small fraction of its true value, because an owner ran into financial difficulties and the lender slept on its rights. Sometimes luck can produce a very profitable outcome.

The foregoing is intended for education and may not be considered as legal advice.

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Douglas Owens Attorney Seattle

Douglas N. Owens

1971 Graduate of University of Michigan Law School, twelve years service as Assistant Attorney General, thirty-four years private practice