In re United Home Loans, Inc., C86-1686D.

Decision Date27 March 1987
Docket NumberNo. C86-1686D.,C86-1686D.
PartiesIn re UNITED HOME LOANS, INC., Debtor. Robert STEINBERG, Trustee for the bankrupt estate of United Home Loans, Inc., Plaintiff, v. Vivian S. McGINNIS, Beatrice J. Larsen, Carma and Anthony Boydston, Border Brokerage, Inc. Profit Sharing Plan, Russell O. and Sylvia Jones, Lonnie Watson, Diane Brown and La Tanya Watson, Defendants.
CourtU.S. District Court — Western District of Washington

Norman Winn, Smith, Brucker, Winn & Ehlert, Seattle, Wash., for R. Jones & S. Jones.

John Schultz, Bannister, Bruhn & Clark, Mount Vernon, Wash., for Border Brokerage Inc. Profit Sharing Plan.

Michele R. Hankins, Ryan, Swanson & Cleveland, Seattle, Wash., for R. Steinberg, trustee.

David S. Kerruish, Robert E. Ordal, Seattle, Wash., for Vivian McGinnis.

Daniel M. Caine, Merkel, Caine, Jory, Donohue & Duvall, Seattle, Wash., for Beatrice J. Larsen.

Enoch Maffeo, Renton, Wash., for Carma Boydston & Anthony Boydston.

Lonnie Watson, L. Tanya Watson and Diane Brown, pro se.


DIMMICK, District Judge.

THIS MATTER comes before the Court on appeal from a final Order and Judgment by the Honorable Thomas T. Glover, United States Bankruptcy Judge for the Western District of Washington. Jurisdiction over this appeal is granted under 28 U.S.C. § 158(a). For the reasons set out below, this Court reverses the bankruptcy court's Order and Judgment in this interpleader action involving conflicting ownership claims to a promissory note and deed of trust.

The Order and Judgment appealed from was in the nature of a summary judgment under Fed.R.Civ.P. 56. Apparently because there were no genuine issues of material fact, the bankruptcy court did not make any specific findings of fact. Basic agreed facts formed the basis of the bankruptcy court's decision, and these facts are not in dispute on appeal.


United Home Loans, Inc. ("United") is the debtor in the underlying bankruptcy proceeding. Its trustee in bankruptcy commenced this action in bankruptcy for interpleader of specific documents held by United. Among these documents were a promissory note, a deed of trust securing the note and three forms of assignment of the deed of trust and note.

These documents were part of a transaction involving the parties to this appeal and relate to a loan of $30,000 made to a group of three individuals named Lonnie Watson, Diane Brown and Latanya Watson (defendants below, but not parties to this appeal, hereinafter referred to as "Watson"). Sometime before January 1983, Watson contacted United about the possibility of getting a loan. United was then in the business of brokering loans secured by deeds of trust on real property. Among other services, United matched borrowers with investors and served as a depository of the purchase monies and loan documents.

The original investors in the Watson loan included appellees Vivian McGinnis ("McGinnis"), Beatrice Larsen ("Larsen") and Anthony and Carma Boydston ("Boydston"), as well as payees Robert and Nina Church, whose 10 percent interest in the Watson loan is not involved in this appeal. In January 1983, these investors agreed to invest $30,000 in the Watson loan. United processed the loan and acted as depository of the funds and loan documents. The transaction was evidenced by a promissory note made payable to all of the investors and was secured by a deed of trust executed by Watson. McGinnis had an undivided 50 percent interest, Boydston an undivided 23.33 percent interest and Larsen an undivided 16.67 percent interest in the note and deed of trust. The note provided for interest only payments for three years, with the original principle payable on February 1, 1986.

Prior to the maturity date of the note, United, on behalf of Watson, asked the appellees if they would be willing to extend the note for an additional period of time. In January 1986, they advised United that they were not willing to do so and that they wished to be paid their investment upon maturity. Watson, however, did not want to pay off the note at maturity and apparently asked United to obtain new investors to whom the note and deed of trust could be transferred, thereby permitting Watson to extend the note and pay off the appellees.

United sent an extension agreement to Watson which they executed on January 28, 1986, four days before the original note matured. The extension agreement indicated that Watson's loan would be extended for an additional three-year term, and that all other terms of the original note would apply, except that the interest rate would be reduced from 12.5 percent to 12 percent. The appellees were not parties to this agreement.

United apparently advertised in various media that investors could obtain a high rate of return secured by deeds of trust on real property. When appellants Russell and Sylvia Jones ("Jones") and Border Brokerage, Inc. Profit Sharing Plan ("Border Brokerage") contacted United, they were given a "Specific Offering Circular" which described the investment as a participation unit in the Watson loan with a promissory note as the debt instrument and a deed of trust as security.

On February 10, 1986, appellant Jones deposited $6,999.97 with United, and appellant Border Brokerage similarly deposited $14,991.91 (with a $4,999.40 balance due). By receipt dated the same day, United acknowledged these deposits and indicated that with them Jones had obtained an undivided 23.33 percent interest and Border Brokerage had obtained an undivided 66.67 percent interest in the Watson loan. By separate letters to Jones and Border Brokerage, also dated February 10, United thanked the appellants for their purchases of interests in the Watson loan and stated that the purchases were transfers of previous investors' interests. In addition, the letter to Border Brokerage stated that it would receive a recorded assignment of the previous investors' interest. The letter to Jones made no mention of an assignment.

On February 20, 1986, 19 days after the original note matured, United sent letters to appellees McGinnis, Boydston and Larsen. All three letters apparently stated that the appellees' respective interests in the Watson loan were being assigned to other investors and that their original investment monies would be available to them upon the recording of the assignments. Each letter enclosed a document entitled "Assignment of Deed of Trust." The assignment sent to Boydston named Jones as assignee of Boydston's 23.33 percent interest in the Watson loan. The assignments sent to McGinnis and Larsen named Border Brokerage as assignee of McGinnis' 50 percent interest and Larsen's 16.67 percent interest in the Watson loan. While the promissory note was never separately endorsed by any of the appellees, each of the three assignments stated that it transferred the assignor's interest in the deed of trust "together with note or notes therein described or referred to."

Boydston, Larsen and McGinnis signed and returned the assignments to United sometime after February 20, 1986. The assignments were never recorded, and apparently because of United's financial difficulties, the appellees were never repaid their original investment monies. United also never delivered to the appellants the deed of trust, promissory note or assignments.

Because of the conflicting claims by the parties to these documents, the trustee for United filed this interpleader action. In its Order and Judgment, the bankruptcy court ruled that appellants Jones and Border Brokerage had no interest in the promissory note or deed of trust. The bankruptcy court, apparently regarding this matter as a real estate transaction governed by Washington real estate law of notes and mortgages, declared that the assignments were void and of no force or effect and that the promissory note and deed of trust were to be distributed to appellees.


In an appeal from a bankruptcy court's decision, a district court applies two different standards of review: one for findings of fact; the other for conclusions of law. In re Tesmetges, 47 B.R. 385, 388 (S.D.N.Y.1984). The district court is bound to accept the bankruptcy judge's factual findings unless they can be found to be clearly erroneous. Id.; Prudential Credit Services v. Hill, 14 B.R. 249, 250 (S.D.Miss.1981). The burden of establishing a clearly erroneous determination by the bankruptcy judge is a stringent one; to be convinced, the court must be left with a definite and firm conviction that a mistake has been committed. Prudential Credit Services, 14 B.R. at 249.

As for conclusions of law, the district court must independently determine the accuracy of the ultimate legal conclusions adopted by the bankruptcy judge on the basis of the facts shown. Id. at 251. Accordingly, this Court reviews the bankruptcy judge's conclusions of law de novo. In re Gullifor, 47 B.R. 450, 451 (E.D.Mich. 1985).


Appellees argue that under Washington real estate law of notes and mortgages, the transaction between the parties here is void. Although the appellees each signed and delivered an assignment of deed of trust which by its terms transferred their interests in the deed of trust "together with note or notes therein described or referred to" to the appellants, the appellees never endorsed the promissory note itself. Appellees argue that the note is payable to order, and under Washington law dealing with commercial paper, the note can be negotiated only by delivery with the necessary endorsement. See RCW 62A.3-202(1). They argue that unlike the assignment here, the endorsement must be written on the instrument itself or upon a paper so firmly affixed thereto as to become a part thereof. See RCW 62A.3-202(2). Appellees further argue that a deed of trust is, in effect, a mortgage and that a mortgage may not be transferred apart from the debt it secures. See RCW 61.24.020; 59 C.J.S. Mortgages § 359 (1949). Appellees conclude that the...

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