Chase Bank of Arizona v. Acosta

• Decision Date: 03 February 1994
• Docket Number: No. 1,CA-CV,1
• Parties: CHASE BANK OF ARIZONA, an Arizona corporation, successor to Continental Bank, Plaintiff, Counterdefendant-Appellee, Cross-Appellant, v. Joe ACOSTA and Aurora Acosta, husband and wife, Defendants, Counterclaimants-Appellants, Cross-Appellees. 91-0093.
• Court: Arizona Court of Appeals

Page 1109

880 P.2d 1109

179 Ariz. 563

CHASE BANK OF ARIZONA, an Arizona corporation, successor to Continental Bank, Plaintiff, Counterdefendant-Appellee, Cross-Appellant, v. Joe ACOSTA and Aurora Acosta, husband and wife, Defendants, Counterclaimants-Appellants, Cross-Appellees.

No. 1 CA-CV 91-0093.

Court of Appeals of Arizona,

Division 1, Department B.

Feb. 3, 1994.

Review Granted on issue B and

Denied on other issues Oct. 4, 1994.

[179 Ariz. 564] Streich Lang, P.A. by William S. Hawgood, II, Timothy Thomason and Leigh Lani Brown, Phoenix, for plaintiff, counterdefendant-appellee, cross-appellant.

Stewart & McLean, Ltd. by Harry A. Stewart, Jr. and William H. McLean, Phoenix, for defendants, counterclaimants-appellants, cross-appellees.

OPINION

JACOBSON, Presiding Judge.

The trial court granted summary judgment in favor of the plaintiff bank foreclosing a real property mortgage given by a limited partnership and granting a deficiency judgment against appellants, Joe and Aurora Acosta. Appellants, a general partner in the limited partnership and his wife (hereafter collectively "Acosta"), appeal from the deficiency judgment entered against them. The bank cross-appeals from the court's award of its attorneys' fees in an amount less than requested.

FACTS

We view the facts in the light most favorable to appellants, the parties against whom summary judgment was entered. Gordinier v. Aetna Casualty & Sur. Co., 154 Ariz. 266, 267, 742 P.2d 277, 278 (1987). In 1984, Edwin Grant, his brother-in-law Walter Barr, and Joe Acosta formed the Meadowbrook Equity Partners Limited One Partnership (Meadowbrook) to purchase commercial realty in Phoenix for $2,160,000. Grant, a real estate syndicator, asked Acosta, a certified public accountant who had performed services for Grant, to become a Meadowbrook general partner. Acosta agreed, although he did not take an active part in the transaction, and he further agreed that Grant would have authority to act as the managing general partner.

The realty consisted of three parcels. At the time of the purchase, parcels one and two were leased to "Grandinetti's" restaurant. (Parcels one and two will be referred to as "the restaurant parcel.") Parcel three contained the Meadowbrook apartments ("the apartment parcel").

Grant had already arranged with Continental Bank to finance the purchase before Acosta became involved in the partnership. Grant, Continental, and the escrow company advised Acosta that Continental would finance the project if Continental could obtain a first mortgage on the property, which was already encumbered by several other liens, and if the general partners personally guaranteed the loan. In a June 7, 1984, letter to Grant, Continental set out the proposed terms of the loan:

Continental Bank's Senior Loan Committee will consider a first mortgage loan on the referenced properties with the following general terms and conditions:

....

GUARANTEE: Personal guaranties will be required from the general partners; Edwin H. Grant, Jr., Walter Barr, Gary Snapp, and Joe Acosta.

....

CLOSING REQUIREMENTS: Closing will require satisfactory Promissory Note and Mortgage, Partnership Agreement ..., and ALTA title insurance policy insuring Lenders First Lien all in form and content satisfactory to Continental Bank....

Grant, as managing general partner, signed the letter accepting these terms on June 12, 1984. On June 14, 1984, Continental approved the loan and an escrow was opened, with the provision that Continental receive a first mortgage and first lien on the property and an ALTA title policy.

On August 29, 1984, on behalf of the partnership, Grant then executed a promissory note for $1,620,000 and a mortgage on the property, to secure the note. The note called for monthly payments of accrued interest at 2% above Continental's prime rate, with the principal balance falling due on September 1, 1986. Upon default, the interest on the principal would be 25% per annum.

The mortgage required the loan to be secured by a first lien on the mortgaged property:

... Mortgagor hereby covenants and agrees with said mortgagee as follows:

1. The mortgagor is well seized, in fee simple, of the premises described above and has full right, power and lawful authority to grant, bargain, sell and convey the same, and the same is free and clear of all liens and encumbrances ..., and the Mortgagor shall and will warrant and forever defend the Mortgagee herein in the quiet and peaceful possession of the said premises against all and every person lawfully claiming or to claim the whole or any part thereof; with the sole exception of the holder of this mortgage....

Acosta and the other general partners each signed "Unconditional Guarant[ies]" for the payment of the loan. Acosta testified he signed the guaranty as a favor to Grant because he believed that the note would be secured by a first lien on all the property based on Grant's and Continental's representations and the escrow provisions. He received no money, benefit, or any consideration for signing the guaranty.

Acosta's wife, Aurora Acosta, did not sign the guaranty, and allegedly had no knowledge of either the guaranty or the entire transaction. She averred in an affidavit that, had she been asked, she would have refused to sign the guaranty.

On August 31, 1984, the bank disbursed $800,000 to the escrow company for Meadowbrook's purchase of the restaurant parcel. The bank obtained a first lien position with respect to this parcel.

The same is not true of the apartment parcel. Continental received a title report in August 1984, showing that the apartment property was encumbered by additional senior liens. Included was an agreement for sale between Joe M. Ross, as seller, and Phoenix Capital Growth Investors (PCGI), as buyer ("the Ross lien"). Also included was a purchase money deed of trust in favor of PCGI arising out of its subsequent sale of the apartment property to Meadowbrook ("the PCGI lien"). Meadowbrook and its agents paid off other prior liens.

Continental and Grant attempted to resolve the remaining lien priority problems. Without Acosta's knowledge, Continental agreed to a plan proffered by William Allen, a mortgage broker who worked with Grant. ¹ Under the plan, Continental would disburse money from the loan for Grant and Allen to purchase in their own names the outstanding liens on the apartment parcel at a total discount of more than $150,000. Grant and Allen would then assign those liens to Continental to enable it to attain seniority, rather than closing the purchase through a title company to pay off the prior liens in full as was done for the restaurant parcel. ²

Grant and Allen negotiated the purchase of the Ross lien for $300,000. On February 15, 1985, Continental disbursed that amount from the loan to Grant and Allen. Allen paid Ross and Ross assigned his interest to Allen; the assignment was recorded. Allen then reassigned this interest to Continental on February 17, 1985, but Grant requested the bank not to record this assignment, pending Grant's and Allen's efforts to also resolve the PCGI lien problem. Continental agreed and did not record the assignment from Allen.

Grant contracted with PCGI to purchase the property for $1,335,000 by paying PCGI a down payment, assuming an existing encumbrance, and giving PCGI a carry-back note and deed of trust for the balance.

Pursuant to the plan, Continental disbursed the balance of the loan proceeds, over $800,000, to Grant and Allen to purchase the outstanding liens on the apartment parcel. ³ However, Grant and Allen did not use the loan funds to resolve the problem with the Ross lien; additionally, they made a second assignment of the Ross lien to Gilbert and Sullivan Mortgage Company (G & S) in exchange for a $440,000 loan to purchase property in Sedona. ⁴ G & S immediately recorded the assigned Ross lien, putting G & S ahead of Continental because of the latter's failure to record the assignment from Allen to it. ⁵

The failure to record the Allen assignment of the Ross lien to Continental also allowed the PCGI lien to take priority. The bank conceded that all the loan proceeds were distributed without accomplishing a payoff and release of the prior liens against the apartment property. Thus, the total encumbrances on the apartment parcel far exceeded the total value of all the property and the amount of the loan Acosta guaranteed.

The note went into default when Meadowbrook failed to pay any interest beginning with the February 1, 1986, payment, or the principal balance, which became due on September 1, 1986.

On October 1, 1986, Chase Bank of Arizona acquired Continental and its assets and became the holder and owner of the Meadowbrook promissory note, the mortgage, and the guaranties. We will refer to Continental and/or Chase simply as "the bank."

In late 1986 or early 1987, PCGI began non-judicial foreclosure of its deed of trust, and the bank commenced judicial foreclosure proceedings on all of the property.

PROCEDURAL HISTORY

The bank filed a complaint against the Meadowbrook partnership on November 21, 1986, seeking to judicially foreclose the mortgage. It also named Edwin H. and Barbara Grant, Walter and Kathleen Barr, and Joe and Aurora Acosta, seeking judgment for the principal balance due on the note, $1,618,728.02, plus interest, costs, and attorneys' fees. The court appointed a receiver on December 4, 1986, to take possession of the apartments, to manage them, and to collect rents.

The bank moved for summary judgment on October 5, 1987. The Grants then filed for bankruptcy and filed an involuntary bankruptcy petition against the partnership, staying this suit. The bank's case was dismissed without prejudice for failure to prosecute on October 13, 1988.

On December 5, 1988, the bank filed a complaint in the Grants' bankruptcy case, seeking judgment for the balance due on the note and to have the debt determined non-dischargeable...