Fed. Deposit Ins. Corp. v. Taylor

• Decision Date: 06 January 2012
• Docket Number: No. 20100356–CA.,20100356–CA.
• Citation: 697 Utah Adv. Rep. 8,2011 UT App 416,267 P.3d 949
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION and Richard W. Jones, Trustee, Plaintiffs, Appellees, and Cross-appellants, v. Bradford E. TAYLOR, Gary D. McDonald, Lynnea J. McDonald, G&L Mac, Inc., and Casey Florence, as Beneficiaries; Chad C. Shattuck and Stanford A. Graham, as Trustees; and Gray Excavation, Inc., Defendants, Appellant, and Cross-appellee.
• Court: Utah Court of Appeals

2011 UT App 416
267 P.3d 949
697 Utah Adv. Rep. 8

FEDERAL DEPOSIT INSURANCE CORPORATION and Richard W. Jones, Trustee, Plaintiffs, Appellees, and Cross-appellants,
v.
Bradford E. TAYLOR, Gary D. McDonald, Lynnea J. McDonald, G&L Mac, Inc., and Casey Florence, as Beneficiaries; Chad C. Shattuck and Stanford A. Graham, as Trustees; and Gray Excavation, Inc., Defendants, Appellant, and Cross-appellee.

No. 20100356–CA.

Court of Appeals of Utah.

Dec. 8, 2011.Rehearing Denied Jan. 6, 2012.

[267 P.3d 953]

Chad C. Shattuck, Draper, for Appellant.

Sherman C. Young and Dallas B. Young, Provo, for Appellees.

Before Judges McHUGH, ROTH, and CHRISTIANSEN.OPINION McHUGH, Associate Presiding Judge:

¶ 1 Bradford E. Taylor appeals the trial court's order granting a cross-motion for summary judgment in favor of Centennial Bank (the Bank),¹ in which the trial court

[267 P.3d 954]

held that due to Utah's after-acquired title statute, the Bank's trust deed was in first position with priority over Taylor's trust deed. The Bank cross-appeals, arguing that the trial court erred in denying summary judgment on its alternative theory of reformation. We reverse and remand for further proceedings consistent with this opinion.

BACKGROUND ²

¶ 2 This is a dispute about the priority of certain trust deeds provided to the Bank and Taylor as security for loans made by them to the developers of a subdivision in Riverton, Utah (the Property). The development plans did not go as expected and the borrowers defaulted on the amounts due to the Bank and on their obligations to Taylor. Both lenders then attempted to foreclose on the Property, with each claiming first position. In order to understand the decision of the trial court and our analysis on appeal, it is necessary to explain in some detail the facts surrounding the loans made and the corresponding attempts to secure the indebtedness.

A. The June 2006 Trust Deeds

¶ 3 In the spring of 2006, Ryan Andersen and Gary McDonald approached Taylor about a loan to be used to acquire the Property for the development of a subdivision. On June 1, 2006, Taylor loaned $335,000 to McDonald and Andersen, who each executed a promissory note that stated in relevant part, “PROCEEDS FROM THE SALE OF ANY LOTS SHALL BE DISBURSED FIRST TO [THE BANK] AND ANY AND ALL REMAINING FUNDS SHALL BE DISBURSED TO BRAD E. TAYLOR.” To secure the obligation evidenced by the note, McDonald and Andersen, in their individual capacities, executed a deed of trust in favor of Taylor. At that time, however, G&L Mac, Inc., a corporation controlled by McDonald, held title to the Property.

¶ 4 According to Taylor's affidavit, filed in connection with the cross-motions for summary judgment, the negotiations regarding the loan were primarily with Andersen. Andersen promised that Taylor's “loan would be secured in first position on the [P]roperty” and that the money would be used to purchase the Property so that Andersen and McDonald could then obtain a construction loan from the Bank. Taylor's affidavit also indicates that he and Andersen agreed to use First Southwest Title Agency of Utah, Inc. (First SW Title) to act “as a middleman to release the funds [Taylor] was loaning only after [Taylor's] position was secured against the [P]roperty.” “[O]n June 1, 2006, [Taylor] caused $226,000 to be wired to First [SW] Title for G&L Mac, Inc. The wire was completed on June 2, 2006 by 12:14 p.m.,” and Taylor expected G&L Mac to add $175.17 to that amount, for a total of $226,175.17. Taylor indicates that “it is my understanding that First [SW] Title wired the money ($226,175.17) to Mountain View [T]itle on June 2, 2006, shortly after receiving my wire of $226,000.” Taylor further states that he specifically instructed First SW Title not to fund the loan to Andersen and McDonald until the trust deed was recorded. However, First SW Title did not record the trust deed on that date.³

¶ 5 On June 2, 2006, McDonald, again acting in his individual capacity, executed a trust deed in favor of the Bank in exchange for a $1,704,375 ⁴ acquisition and development loan (Construction Loan Agreement). G&L Mac was still the record owner of the Property when McDonald executed the trust deed. The Bank was aware of that fact and anticipated that a warranty deed conveying the Property from G&L Mac to McDonald would be executed and recorded as part of the loan transaction. However, the warranty

[267 P.3d 955]

deed was not prepared, executed, or recorded at that time. According to the Bank's affidavits, its loan was conditional upon the Bank's trust deed being recorded in first position against the Property. The Bank also states that the

purpose of the Loan, (a) was to pay off two loans, to Millennia Investment Corporation and Cottonwood Assets [, that both had liens on the Property], (b) was to be a personal loan secured by a first lien on Property located in Riverton, Utah, to be owned by Gary McDonald personally, and (c) ... [was to be used] to acquire the Property, clear title to the Property of all liens and encumbrances, and pay for the improvements for a subdivision on the Property.The Construction Loan Agreement executed by McDonald included “Representations and Warranties,” stating that McDonald held title to the Property and that he had not granted any undisclosed encumbrances against the Property. It also provided that the loan was to be repaid through the sale of lots in the completed subdivision.

¶ 6 The Bank wired $864,452.23 to Mountain View Title on June 2, 2006, to be used to pay off the Millennia Investments and Cottonwood Assets liens. The Bank concedes, however, that “[a]lso on June 2, 2006, Mountain View Title and Escrow received another wire transfer from Centennial Bank's Ogden Utah office in the amount of $226,175.17.” ⁵ The settlement statement from the transaction indicates that McDonald was required to contribute $224,536.37 to the closing costs. Mountain View Title used both the $226,175.17 amount and the $864,452.23 amount to pay off the loans secured by the Millennia Investment and Cottonwood Assets liens. The Bank recorded its trust deed securing its loan to McDonald on June 2, 2006, the same day it was executed (6/2/06 TD). On June 5, 2006, three days after the Bank recorded its trust deed against the Property, First SW Title recorded the trust deed executed by McDonald and Andersen in favor of Taylor (6/5/06 TD).

B. The September 2006 Trust Deed

¶ 7 Several months later, while considering whether to lend additional sums to McDonald and Andersen for a sewer bond, Taylor discovered that G&L Mac was the record owner of the Property. Taylor became concerned that his 6/5/06 TD was invalid because it was signed by McDonald individually, rather than in a representative capacity for G&L Mac. In an attempt to cure this defect and to secure the additional funds advanced, Taylor obtained a new trust deed executed by G&L Mac as security for both loans. The promissory note in the amount of $435,000 that was secured by the new trust deed contained language identical to that in the June promissory note, indicating that the Bank would be paid first from the sale of lots in the proposed development. Taylor's affidavit indicates that he was not concerned about allowing the Bank to be paid out of lot sales because he knew his trust deed was in first position in the event of foreclosure. Taylor wrote a check to South Valley Sewer District for $100,000 to cover the cost of the sewer bond for the subdivision on September 5, 2006. Taylor recorded his new trust deed on September 6, 2006 (9/6/06 TD).

C. The December 2006 Warranty Deed

¶ 8 In December 2006, the Bank realized that its 6/2/06 TD had been executed by McDonald in his individual capacity but that the Property had not been conveyed by G&L Mac to McDonald as anticipated. The Bank decided to remedy the defect by asking McDonald, as president of G&L Mac, to execute a special warranty deed conveying title of the Property from G&L Mac to McDonald. The Bank recorded that special warranty deed on December 22, 2006.

D. Procedural Background

¶ 9 McDonald defaulted on the obligations under the promissory notes to Taylor and to the Bank. Both lenders sought to foreclose

[267 P.3d 956]

on their trust deeds, with each asserting that its loan was secured by a first position trust deed. This lawsuit followed. On August 19, 2009, the parties filed cross-motions for partial summary judgment on the issue of the priority of their respective interests in the Property. The Bank argued that it was entitled to priority (1) under the doctrine of equitable subrogation, (2) by reformation of the original loan transaction to include a warranty deed from G&L Mac to McDonald, and (3) because the Bank's 6/2/06 TD was in first position by operation of the after-acquired title statute. In response, Taylor asserted that (1) the doctrine of equitable subrogation gave priority to Taylor as the first innocent lender; (2) the doctrine of reformation is limited to the correction of scrivener's errors and cannot be used to create a warranty deed that was not prepared at the time; (3) the after-acquired title statute cannot invalidate his prior 9/6/06 TD because Taylor is a bona fide purchaser for value who took without notice of the Bank's interest, while the Bank had notice of Taylor's 9/6/06 TD when it recorded the December 22, 2006 warranty deed; and (4) Taylor filed his notice of default first, thereby giving him the right to conduct his foreclosure sale first.

¶ 10 On October 6, 2009, the trial court denied both parties' motions for summary judgment. The trial court first concluded that Taylor's 6/5/06 TD and the Bank's 6/2/06 TD were invalid because they were not executed by the owner of the property, and that Taylor was the first to discover the error and to record a trust deed from the record owner. Next, the trial court rejected the Bank's reformation argument, concluding that “this is not a case where the instruments themselves...