Altabet v. Monroe Methodist Church

• Decision Date: 10 July 1989
• Docket Number: No. 22602-9-1,22602-9-1
• Citation: 54 Wn.App. 695,777 P.2d 544
• Parties: Sol M. ALTABET and Estelle A. Altabet, husband and wife, Respondents, v. MONROE METHODIST CHURCH and Voice of China and Asia Missionary Society, Inc., Appellants.
• Court: Washington Court of Appeals

Page 695

54 Wn.App. 695

777 P.2d 544

Sol M. ALTABET and Estelle A. Altabet, husband and wife, Respondents, v. MONROE METHODIST CHURCH and Voice of China and Asia Missionary Society, Inc., Appellants.

No. 22602-9-1.

Court of Appeals of Washington Division 1.

July 10, 1989.

William L. Bishop, Jr., Seattle, for Sol M. Altabet.

Theodore M. Rosenblume, Seattle, for Monroe Methodist Church.

WILLIAMS, Judge Pro Tem. ^*

The Monroe Methodist Church and Voice of China & Asia Missionary Society, Inc. (Church) appeal the trial court's determination that Sol and Estelle Altabet (Altabets') interest in a parcel of real property was paramount to its interest. We reverse.

In 1972 the Church was given property located in unincorporated south King County. In March, 1981, the Church sold the property to Pierre Ehmke by real estate contract. Ehmke paid $10,000 down and executed a note and deed of trust for the remaining $40,000. The deed of trust was recorded on August 11, 1981.

In May, 1983, Pierre Ehmke borrowed $27,500 from Altabets and executed a note and deed of trust in the same property. The terms of the note were for payments of $600 or more per month, with payment in full by May 2, 1984. This deed of trust was recorded on May 11, 1983. In June, 1984, Altabets agreed to a 6-month extension of the note. Ehmke made some payments on the note until 1987, when Altabets decided to foreclose. A notice of default was given to Ehmke and to the Church in November, 1987.

Ehmke also defaulted on the Church's note. In October, 1984, Ehmke executed a quitclaim deed in lieu of foreclosure to the property in favor of the Church. This deed was recorded on November 27, 1984. In January, 1988 the Church commenced foreclosure of its deed of trust.

Altabets then brought a declaratory judgment action, seeking a declaration that the Church's deed of trust and note had been released and discharged by acceptance of the quitclaim deed and that it was therefore barred from foreclosing on the deed of trust. The trial court granted summary judgment in favor of Altabets, ruling that the Church's deed of trust was "subordinate and junior" to the Altabets' deed of trust.

The Church contends that the trial court erred in ruling that its deed of trust was junior to that of Altabets. The court based its ruling on principles of equitable subrogation, see MGIC Fin. Corp. v. H.A. Briggs Co., 24 Wash.App. 1, 600 P.2d 573 (1979), and on the Church's failure to give timely notice. The Church argues (1) that its lien is prior by application of the recording statute, RCW 65.08.070, (2) that the doctrine of merger does not apply, (3) that Altabets' subrogation rights were not prejudiced, and (4) that Altabets is equitably estopped to claim priority.

RCW 65.08.070 provides that conveyances of real property may be recorded and that "[a]n instrument is deemed recorded the minute it is filed for record." The purpose of the statute is to make a deed recorded first superior to any unrecorded conveyance of the property unless there is actual knowledge of an unrecorded transfer, Tacoma Hotel, Inc. v. Morrison & Co., Inc., 193 Wash. 134, 74 P.2d 1003 (1938); a subsequent purchaser, without notice of the existing equities, is not required to search outside the record to inquire about them. Diimmel v. Morse, 36 Wash.2d 344, 347, 218 P.2d 334 (1950). Thus, if the only conveyances of the property were the two deeds of trust it seems clear that the Church would be in the senior position. However, the fact that Ehmke gave the Church a quitclaim deed in lieu of foreclosure after the Altabets' deed of trust raises an issue of merger.

Merger occurs when the fee interest and a charge, such as a deed of trust or a mortgage, vests in the possession of one person. Anderson v. Starr, 159 Wash. 641, 643, 294 P. 581 (1930).

The doctrine of merger arises from the fact that, when the entire legal and equitable estates are united in one person, there can be no occasion to keep them distinct; but if there is an outstanding intervening title, the foundation of the merger does not exist as a matter of law. Equity does not favor the doctrine of merger, and even though two or more rights or estates are united in one person, equity will keep them distinct where it appears from the intention of the person, either express or implied, that he wishes them to be so kept.

Anderson, at 643, 294 P. 581. Whether there is a merger of equitable and legal title and a satisfaction and extinguishment of the underlying debt depends on the intention of the parties and is therefore a question of fact. Van Woerden v. Union Imp. Co., 156 Wash. 555, 560, 287 P. 870 (1930). The doctrine of merger does not apply if there are other intervening encumbrances on the property.

[T]he existence of a junior or intervening, encumbrance or equity will, in the absence of a showing of an intention to the contrary, prevent a merger of a prior mortgage in the fee, where the continued existence of the mortgage is necessary to protect the mortgagee against the intervening, junior claims.

Gill v. Strouf, 5 Wash.2d 426, 431, 105 P.2d 829 (1940). An exception to this rule occurs when the mortgage is not one the owner intended to assume or is one against which he is estopped from defending. Gill, at 431-32, 105 P.2d 829. Whether this exception applies is also a question of fact. Gill, at 432, 105 P.2d 829.

Altabets argued to the trial court that the quitclaim deed from Ehmke to the Church extinguished the debt released Ehmke from personal liability and took away the Church's ability to foreclose on the deed of trust. While a deed in lieu of foreclosure may result in a merger as a matter of law as between the mortgagor and mortgagee, it does not do so if it affects the rights of third parties. In Anderson v. Starr, supra, the court held that the giving of a quitclaim deed and the surrendering of a note extinguishes the debt and merges the title as between the grantor and grantee, but that there is no merger when there are outstanding intervening rights. See also 3 R. Powell, Real Property para. 469.1 (1987) ("If there are junior liens, courts usually assume that the mortgagee did not intend a merger which would be against his own self-interest. In the absence of affirmative intent, it is generally held that no merger occurs and such junior liens remain subordinate."); 9 G. Thompson, Commentaries on the Law of Real Property sec. 4738 (1958). Here, Altabets' deed of trust, which was granted after the Church's deed of trust, but before the quitclaim deed, was such an intervening right which would preclude application of the merger doctrine. Thus, the presumption against merger applies and the quitclaim deed in lieu of foreclosure did not as a matter of law merge the Church's legal and equitable title and thereby extinguish the Church's deed of trust. As a result, Altabets' deed of trust did not become the senior lien against the property as a matter of law and summary judgment was not proper on this theory. While the court might still find merger it only may do...