State v. First Nat. Bank of Anchorage, s. 5006

CourtSupreme Court of Alaska (US)
Citation660 P.2d 406
PartiesSTATE of Alaska, Appellant, v. FIRST NATIONAL BANK OF ANCHORAGE, Appellee. George H. BROWN, Jr., Lawrence Brouse, John Dryer and Commonwealth Mortgage Corporation, Appellants, Cross-Appellees, v. STATE of Alaska, Appellee, Cross-Appellant.
Docket NumberNos. 5006,5107,s. 5006
Decision Date03 December 1982

Michele D. Brown, Donna Dell'Olio, Connie J. Sipe, Asst. Attys. Gen., Anchorage, Avrum M. Gross and Wilson L. Condon, Attys. Gen., Juneau, for appellant, State of Alaska.

John R. Beard, Beard & Lawer, Anchorage, for appellee, First Nat. Bank.

Terry C. Aglietti, John W. Sivertsen, Aglietti, Offret & Pennington, Anchorage, for appellants, George H. Brown, Jr., Lawrence Brouse, John Dryer, and Commonwealth Mortgage Corp.



MATTHEWS, Justice.

These appeals arise from an action brought by the Attorney General against George Brown, Jr. and others 1 involved in the development and sale of certain real property in this state. The basic conduct complained of consists of various misleading statements and omissions concerning the suitability of the land for residential construction. The State sought to enjoin such conduct and to obtain restitution on behalf of individual lot purchasers. After obtaining a preliminary injunction, the State joined as an additional defendant First National Bank of Anchorage, which had financed the real estate development, seeking cancellation of purchasers' promissory notes which the Bank was holding as collateral for its loans to Brown. The lower court dismissed the State's action against First National and, after a non-jury trial, entered judgment against Brown. That judgment permanently enjoined Brown from engaging in certain conduct and adjudged him liable to the State, as trustee for individual purchasers, for $1,611,357.60. 2 Brown has appealed that judgment and the State has filed a cross-appeal. The State has also appealed the trial court's dismissal of its claim against First National.

A. Facts

The following facts were found by the court. They are not challenged on appeal and we therefore take them as true.

George Brown, Jr. is the general partner of Knik River Estates, a limited partnership. In the summer of 1975, he began developing some property which lies adjacent to the Knik River in the Matanuska-Susitna Borough, known as the Windsong Subdivision. He knew at that time that the land had in the past been subject to flooding. The source of that flooding is Lake George, which periodically forms when the Knik River becomes dammed by a glacier. When the ice dam breaks, water is released flooding certain downstream areas, including on occasion the Windsong Subdivision, covering it with as much as fifteen feet of water. 3

Brown hired Neil Hausam, a civil engineer and land surveyor, to survey and plat the land. Hausam studied the possibility of flooding and concluded that a reoccurrence was unlikely. Prior to approving the plat, the Matanuska-Susitna Borough requested that the Army Corps of Engineers conduct a flood-hazard evaluation of the Windsong Subdivision. The Corps concluded that virtually all of the subdivision was in a high-hazard area. Although Hausam disagreed with that conclusion and informed the Borough of this, the Borough required that the first page of the Windsong plat contain a flood-warning notation.

In 1976, Brown commenced selling lots. To assist him, he hired a salesman, John Dryer, and a property manager, Lawrence Brouse. Although purchasers were given the second page of the Windsong plat, they never received the first page containing the flood warning. In addition, Brown represented to purchasers, among other things, that: (1) Lake George had not formed since the Good Friday earthquake of 1964; (2) it would take another earthquake of equal magnitude for the lake to form again; (3) experts, including the Army Corps of Engineers, had concluded that the possibility of flooding was remote; (4) purchasers of Windsong lots would be able to obtain flood and mortgage insurance; and (5) construction financing was readily available. None of these representations were true.

In December 1977, the Consumer Protection Section of the Attorney General's Office began investigating the sale of Windsong lots. Upon learning of that investigation, Brown sent all purchasers a letter telling them that certain unfounded complaints were being directed at the Windsong development. The purpose of that letter was to make purchasers feel secure about their investments and continue making their property payments. In late January of 1978, a meeting was held at which Brown, Brouse, Hausam and various representatives of the Attorney General's Office were present. At that meeting Brown was told that the State had received several consumer complaints regarding the sale of Windsong lots. He was also shown letters that the State had received from various experts indicating the existence of a flood hazard at the Windsong Subdivision.

Immediately following this meeting, Brown contacted between sixty and seventy lot purchasers and induced them to sign a preprinted form affidavit entitled "Declaration and Memorandum of Understanding." This was drafted by Brown's attorneys for the purpose of lining up favorable witnesses in case of future litigation. At the time the document was presented to purchasers, Brown reassured them that the possibility of flooding was still remote and that property values had increased. Signing purchasers were not given a meaningful opportunity to study the document, and the language contained therein was not comprehensible to the average purchaser. In effect, the affidavits purported to be a vote of confidence by investors in the Windsong development. Those purchasers whom Brown knew to be dissatisfied with their investments were not offered the memorandum.

B. Proceedings Below

In February 1978, the State filed a complaint in superior court against Brown seeking injunctive relief and civil penalties. The State alleged various violations of the Alaska Unfair Trade Practices and Consumer Protection Act, AS 45.50.471-45.50.561. Brown filed his answer and later moved for summary judgment on the ground that the Consumer Protection Act did not apply to real estate transactions, or in the alternative that he was exempt from the Act under AS 45.50.481. 4 The trial court granted Brown's summary judgment motion, but gave the State leave to amend its complaint.

In June 1978, the State filed its amended complaint, this time alleging that Brown had violated the Uniform Land Sales Practices Act ("ULSPA"), AS 34.55.004-34.55.046. Shortly thereafter, the State moved for a preliminary injunction to enjoin Brown from disposing of Windsong lots in violation of ULSPA and the administrative regulations promulgated thereunder, 3 AAC 20.010-. 130. After a lengthy hearing, the lower court entered a preliminary injunction against Brown ordering him to disclose fully to prospective purchasers the Windsong Subdivision's flooding potential, and enjoining him from disposing of land in violation of ULSPA and its implementing regulations. Brown was also enjoined from taking any adverse action against lot purchasers who, after being notified by the State of the court's preliminary findings, elected to rescind their land purchase contracts. Such purchasers were directed to make all future payments to the court registry. Approximately seventy purchasers indicated that they wished to rescind their contracts and obtain restitution.

In December 1978, the State amended its complaint again to add First National Bank of Anchorage as a defendant. The Bank's involvement in this case stems from loans it made to Brown to finance the Windsong development. In 1977, First National loaned $200,000 to Knik River Estates to purchase materials for constructing a sewer system in the Windsong Subdivision. In accordance with its collateral and loan agreement, Knik River Estates pledged to the Bank the promissory notes and deeds of trust executed by lot purchasers. When, in the early part of 1978, Brown formed Commonwealth Mortgage Corporation to assume ownership of the Windsong Subdivision, Commonwealth continued to pledge to the Bank the promissory notes and deeds of trust received from the sale of Windsong lots. In August 1978, First National loaned Commonwealth $500,000 to retire the balance of the earlier loan and to install electric and telephone utilities at Windsong.

The 1977 and 1978 loan agreements were substantially identical. Neither involved actual endorsement of the promissory notes that had been pledged as security and delivered to First National. Instead, the loan agreements authorized the Bank to endorse the notes to itself on behalf of the borrower. In late November of 1978, First National endorsed over to itself all of the promissory notes in its possession. It then sent collection letters to all Windsong lot purchasers who were delinquent in their payments. First National informed these purchasers that unless all delinquent payments were paid within fifteen days, the entire balance would become due immediately. The Bank also told these purchasers that their payments to the court registry, pursuant to the preliminary injunction, would not be credited toward the amounts claimed due.

In its complaint against the Bank the State sought a declaratory judgment that First National was not a "holder in due course" as well as an order enjoining the Bank from taking action against purchasers who were making their note payments to the court registry. The State later moved for summary judgment against First National, requesting that the court order the Bank to deliver to the court the promissory notes of purchasers who had elected to rescind their land purchase contracts. First National responded by moving for dismissal of the State's complaint against it for failure to state a claim. The lower ...

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