National Bank of Washington v. Equity Investors, s. 42354

• Court: United States State Supreme Court of Washington
• Writing for the Court: HALE; FINLEY, HUNTER, STAFFORD, HAMILTON, WRIGHT and UTTER, JJ., and RYAN
• Citation: 506 P.2d 20,81 Wn.2d 886
• Parties: NATIONAL BANK OF WASHINGTON, Tacoma, Washington, and General Mortgage Investments, a Maryland real estate investment trust, Appellants, v. EQUITY INVESTORS, a limited partnership, et al., Respondents. COLUMBIA WOOD PRODUCTS, INC., Appellant, v. EQUITY INVESTORS, a limited partnership, whose general partners are Richard Walsh et al., Respondents. Joseph F. MacDONALD et al., Respondents, v. EQUITY INVESTORS, a limited partnership, et al., Defendants, Transamerica Title Insurance Company, Appellant.
• Docket Number: 42264,Nos. 42354,s. 42354
• Decision Date: 08 February 1973

Page 886

81 Wn.2d 886

506 P.2d 20

NATIONAL BANK OF WASHINGTON, Tacoma, Washington, and General

Mortgage Investments, a Maryland real estate

investment trust, Appellants, v. EQUITY INVESTORS, a limited partnership, et al., Respondents.

COLUMBIA WOOD PRODUCTS, INC., Appellant, v. EQUITY INVESTORS, a limited partnership, whose general

partners are Richard Walsh et al., Respondents.

Joseph F. MacDONALD et al., Respondents, v. EQUITY INVESTORS, a limited partnership, et al., Defendants, Transamerica Title Insurance Company, Appellant.

Nos. 42354, 42264.

Supreme Court of Washington, En Banc.

Feb. 8, 1973.

David W. Gossard, Jr. Bogle, Gates, Dobrin, Wakefield & Long, Orlo B. Kellogg, Dan P. Hungate, Bettina B. Plevan Charles S. Wheeler, Torbenson, Thatcher, Burns & McGrath, Richard M. Thatcher, Seattle, for appellants.

Schweppe, Doolittle, Krug, Tausend, Beezer & Beierle, Robert R. Beezer, Fred G. Cook, Seattle for respondents.

HALE, Chief Justice.

Three separate actions consolidated for trial with a fourth added on the appeal were precipitated by the National Bank of Washington's decision to foreclose its security interest in a 220-unit apartment complex construction project called Crestview West, in Federal Way, Washington. The issues now here on appeal come from the details of financing and constructing the project, and involve (1) a materialman's claim of lien against the property for unpaid lumber, (2) the land sellers' claim that the escrow agent breached a fiduciary duty in the closing, (3) the claim of a guarantor that he should in law be released from his guaranty because the lending bank assertedly mismanaged the loan, and also whether the superior court lost jurisdiction over the estate of one of the defendant guarantors whose death occurred after issue joined and whose estate was admitted to probate in Minnesota and given substituted service, and (4) from a different cause and different parts of the same record but joined in this appeal, the propriety of the trial court's fixing of an upset price and its refusal to confirm the foreclosure sale.

Although we will consider each controversy seriatim, we think it appropriate first to give a summary or overview of the more significant facts developed in these separate cases and then to narrate briefly the events out of which the separate appeals arose.

General Circumstances

Joseph F. Macdonald, an employee of the Boeing Company, speculated in real estate. The record indicates that, prior to the sale of the property in this case, Macdonald had bought and sold some 12 to 18 parcels of land. Apparently with a speculative eye, Mr. Macdonald and his wife, Marilynn, purchased a parcel of real estate in 1966 for $42,500, and an adjacent parcel in 1967 for $15,000. Both parcels were purchased on real-eatate contracts. Three other persons, ostensibly willing to participate in both possible risks and possible gains from the sale of the two parcels, bought into the property as cotenants under a document prepared by Macdonald. The cotenants G. E. Stein, J. M. Lancaster and L. N. Christian, along with the Macdonalds, constituted what the record describes as the 'macdonald group.' Because Macdonald was the participant responsible for several legal documents executed by the group and played a leading role in making of decisions with regard to their property, the group will be referred to as the Macdonald group except where the context requires otherwise.

A different group constituting a limited partnership called Equity Investors, whose general partners were M. Richard Walsh and Brama Construction Company, agreed to buy the Macdonald group property. This limited partnership accordingly entered into two earnest money agreements with the Macdonald group in 1968 to purchase the two parcels of land from them. The first agreement, dated April 22, 1968, provided for a sale price of $168,000; the second, dated June 17, 1968, and by which the property was eventually conveyed, specified a sale price of $160,000. The Macdonald group and Equity Investors signed a contract December 31, 1968, for the sale of these two parcels to the latter.

Equity Investors, then with a purchaser's interest in the property and substantial hope for successful development, obtained an architect's plan and cost estimate for a 220-unit apartment complex requiring long-term financing of approximately $1.85 million. Then, having acquired a right to possession, Equity Investors began its search for an interim or construction lender. First it approached Seattle Trust and Savings Bank, but that lender declined to advance the requested funds. Another try, to the National Bank of Washington, was successful, and in April, 1969, Equity Investor's application for a $1.75 million loan for the construction of the apartment house complex was granted.

At this point, a year after the original earnest money agreement between the Macdonald group and Equity Investors had been signed, in order to put Equity Investors in a better position for obtaining a loan, the parties to the real-eatate contract decided that the contract of sale would be terminated, and that the land would pass to Equity Investors subject to a deed of trust designating Macdonald as beneficiary. This transaction, it was agreed, would be effected at the same time the construction loan and security interest agreement between National Bank of Washington and Equity Investors was to be closed. Transamerica Title, designated by the parties as escrow agent for the transfer and loan, was also the insurer of title for the lender, National Bank of Washington.

In conversations with Equity Investors and in a rider to the deed of trust naming Macdonald as beneficiary, Macdonald and Equity Investors, in order to facilitate the loan for Equity from the National Bank of Washington, agreed that Macdonald's otherwise prior interest would be subordinate to the security interest of the bank; certain other conditions not here pertinent were additionally to be performed by the parties to that agreement. Macdonald prepared his own escrow instructions to Transamerica and insisted that all documents relative to the sale and escrow be examined by his attorney, a Mr. Best, who did examine many of the documents for him. The trial court, in one of these consolidated cases, held Transamerica liable, however, for breach of fiduciary trust and for negligence when a Mr. Stenesen, a Transamerica employee, submitted to the Macdonald group for their individual signatures a form of agreement expressly and unconditionally subordinating their interest to those of the bank. Mr. Stenesen at the time told Macdonald that the instrument was needed for closing but did not advise Macdonald of the document's legal effect nor suggest that he see his attorney about it. This document, called a subordination agreement, was later returned by Macdonald to Transamerica with his signature and that of his wife; subsequently, it was individually signed by the other members of the Macdonald group. It contained subordinating language similar to that of the rider to the earlier second deed of trust which they similarly had signed, but was phrased in language purporting to make the subordination unconditional and categorical.

In this phase of the action between the Macdonald group and Transamerica, the trial court found that the Macdonald group would have refused to go through with the deal if the only alternative were an unconditional subordination agreement, and awarded the Macdonald group damages from Transamerica. The trial court found that, although Transamerica intended to make the subordination unconditional, had Macdonald understood its absolute and unconditional legal effect he would not have acquiesced in signing the document which, as noted, provided for an unconditional rather than a conditional subordination. The bank's instructions to Transamerica, as escrow agent, explicitly required that its interests be unconditionally prior and superior to all other security interests before advancing. The court, however, found the Macdonald group was unaware of the bank's requirement. Transamerica's employee, Stenesen, testified by deposition, and the court, as a basis for recovery by Macdonald against the escrow holder, found that the unconditional subordination agreement had been prepared by Transamerica for its own benefit as title insurer for the bank. The escrow and financing deal closed on May 14, 1969, and construction of the apartment house project commenced.

Another phase of the deal produced a lien priority case. Brama Construction, Inc., and Equity Investors selected Columbia Wood Products, Inc., as one of the lumber suppliers. Columbia began furnishing material May 26, 1969, and some 4 months later, September 15, 1969, filed a claim of lien for materials delivered and unpaid for. It notified the bank, as disbursing agent for the project, that a part of its claim was unpaid and owing. The amount of that claim came to $119,672, plus interest and attorneys' fees of over $28,000.

Then, in a phase of the case giving rise to the guaranty issue on appeal, the bank, in October, 1969, refused to make a progress advance until the percentage of moneys advanced was brought into line with the percentage of construction completed. Only 63 percent of the project had been then completed, but with the advance in question the loan would have been 65.6 percent advanced. The two figures were made to substantially coincide, however, with the infusion of an additional $75,000 advanced by one Walter Stepnitz as further capital. At this time, the bank's cost projections indicated the total cost of the project would run to about $1,988,467, more than $200,000 in excess of the original estimate.

By December 16, 1969, the National Bank of Washington had advanced $1,386,659.21 of the total loan. It had obtained earlier a guaranty agreement from several persons as a condition to granting the loan...