Wash. Fed. Sav. & Loan Ass'n v. McNaughton

• Decision Date: 19 May 2014
• Docket Number: No. 68178–8–I.,68178–8–I.
• Citation: 181 Wash.App. 281,325 P.3d 383
• Court: Washington Court of Appeals
• Parties: WASHINGTON FEDERAL SAVINGS & LOAN ASSOCIATION, a federal association, Respondent, v. Mark A. McNAUGHTON and Marna L. McNaughton, husband and wife, individually and the marital community comprised thereof, Appellants.

181 Wash.App. 281

325 P.3d 383

WASHINGTON FEDERAL SAVINGS & LOAN ASSOCIATION, a federal association, Respondent,

v.Mark A. McNAUGHTON and Marna L. McNaughton, husband and wife, individually and the marital community comprised thereof, Appellants.

No. 68178–8–I.

Court of Appeals of Washington, Division 1.

May 19, 2014.

Charles Ennis Newton, Cairncross & Hempelmann PS, Christopher Ian Brain, Adrienne McEntee, Tousley Brain Stephens PLLC, Seattle, WA, for Appellants.

Gregory R. Fox, Ryan P. McBride, Lane Powell PC, Seattle, WA, for Respondent.

SCHINDLER, J.

¶ 1 Real estate developers Mark A. and Marna L. McNaughton own The McNaughton Group LLC (TMG). Mark McNaughton signed a promissory note on behalf of TMG for an $11.7 million commercial loan. The note was secured by a deed of trust on two parcels of property owned by TMG. Mark and Marna McNaughton each personally guaranteed payment of the $11.7 million debt to the bank. Following the default on the promissory note and a nonjudicial foreclosure sale of the properties, the bank filed an action for a deficiency judgment against the McNaughtons as the guarantors of the debt. As an affirmative defense, the McNaughtons requested the court determine the “fair value for the property sold at the trustee's sale” under RCW 61.24.100(5) of the “Deeds of Trust Act,” chapter 61.24 RCW. The court granted the bank's motion for summary judgment and entered a judgment against the McNaughtons for the remaining amount owed on the debt plus interest and attorney fees and costs. On appeal, the McNaughtons argue the bank did not meet its burden on summary judgment of establishing the fair value of the properties sold at the nonjudicial foreclosure sale. The McNaughtons assert the appraisals the bank relied on to make a bid at the nonjudicial foreclosure sale did not analyze “fair value” or take into account the factors to determine an “upset price” under RCW 61.12.060 of the “ Foreclosure of Real Estate Mortgages and Personal Property Liens Act,” chapter 61.12 RCW. In the alternative, the McNaughtons argue material issues of fact preclude summary judgment. Because the McNaughtons' arguments ignore the plain language of the Deeds of Trust Act and the well-established burden of proof on summary judgment, we affirm.

FACTS

¶ 2 The material facts are not in dispute. Mark A. McNaughton and Marna L. McNaughton are real estate developers and the sole owners of The McNaughton Group LLC (TMG). In 2005, TMG borrowed $7 million from Horizon Bank and signed a “Business Loan Agreement.” In 2007, the loan amount was increased to $11.7 million, and TMG signed a “Modification of Business Loan Agreement.” Mark McNaughton on behalf of TMG executed a promissory note for $11.7 million plus interest at 8 percent. Under the terms of the promissory note, TMG agreed to make monthly payments to Horizon Bank and pay the outstanding amount due on or before July 31, 2009. To secure the promissory note, TMG executed and delivered a “Construction Deed of Trust” on two parcels of property owned by TMG, the preliminary plat of “Sommerwood” and the preliminary plat of “King's Corner.”

¶ 3 Mark and Marna McNaughton also each executed a “Commercial Guaranty.” The McNaughtons each “unconditionally guarantee[ ]” to pay the promissory note. In November 2008, TMG defaulted on the promissory note, and the McNaughtons did not honor the guaranties.

¶ 4 Horizon Bank retained John Bryan and Michael McMahon of the Columbia Valuation Group Incorporated to appraise the Sommerwood and King's Corner properties. The Columbia Valuation Group appraised the preliminary plat of Sommerwood with a market value of $4,115,000 as of April 24, 2009. The Sommerwood appraisal identifies 12 comparable properties that had recently sold or were listed for sale. The Columbia Valuation Group appraised the preliminary plat of King's Corner with a market value of $930,000 as of June 1, 2009. The King's Corner appraisal identifies 6 comparable properties that had recently sold or were listed for sale. The total appraised value of the 2 properties was $5,045,000.

¶ 5 On June 5, 2009, the trustee initiated a nonjudicial foreclosure proceeding of the Sommerwood and King's Corner properties. The trustee sent a “Notice of Foreclosure” (Notice) to TMG and the McNaughtons. The Notice states that unless the default is cured, the property will be sold on September 18, 2009. The Notice also states that as the guarantors of a commercial loan, the failure of the McNaughtons to cure the default and pay the debt by September 7 may result in “a deficiency judgment to the extent the sale price obtained at the trustee's sale is less than the debt secured by the deed of trust.” As of September 7, the balance owing on the promissory note was $12,133,225 plus attorney fees and costs. Neither TMG nor the McNaughtons made any effort to cure the default.

¶ 6 Horizon Bank purchased the Sommerwood property and King's Corner property at the trustee's sale on September 18 with a bid of $6 million.¹ The trustee conveyed the properties to Horizon Bank. After Horizon Bank failed, the Federal Deposit Insurance Corporation assigned the bank's interest in the promissory note to secure the commercial loan, the deeds of trust on the two properties, and the commercial guaranties executed by the McNaughtons to Washington Federal Savings & Loan Association (Washington Federal).

¶ 7 At the request of Washington Federal, the Columbia Valuation Group prepared anotherappraisal of the Sommerwood and King's Corner properties. The appraisal concluded that the market value of the two properties as of June 10, 2010 was $5.1 million.

¶ 8 On June 21, 2010, Washington Federal filed a “Complaint for Monies Due” against Mark and Mama McNaughton as the guarantors of the remaining amount owed under the promissory note. Washington Federal sought a judgment of $6,133,255 plus accrued interest and attorney fees and costs.

¶ 9 The McNaughtons filed an answer admitting TMG defaulted on the promissory note and “they defaulted on the terms of the Guarantees.” The McNaughtons asserted a number of affirmative defenses, including the statutory defense that the $6 million bid at the foreclosure sale did not “properly account for the fair value of the property.” The McNaughtons requested the court “determine the fair value for the property sold at the trustee's sale, pursuant to RCW 61.24.100(5).”

¶ 10 On December 30, 2010, Washington Federal filed a declaratory judgment action against TMG and the Silver Lake Water and Sewer District (District) to determine whether it was entitled to payments under a “Latecomers Agreement” that TMG and the District entered into on October 7, 2009. As part of the Latecomers Agreement, the District agreed to reimburse TMG with the latecomers fees for the cost of constructing a sewer lift facility to serve the preliminary plat of Sommerwood and other subdivisions.²

¶ 11 In April 2011, the McNaughtons served answers to interrogatories and requests for production propounded by Washington Federal. In response to the interrogatory requesting identification of the “fair value” of the properties and the request to “[d]escribe with specificity” all facts in support of the affirmative defense that the nonjudicial foreclosure sale did not “ properly account for the fair value of the property,” the McNaughtons state they are “in the process of identifying an expert witness with respect to the valuation” of the properties.

¶ 12 Approximately four months later, Washington Federal filed a motion for summary judgment. Washington Federal argued there was no dispute TMG defaulted on the loan, the McNaughtons did not honor the commercial guaranties, and Washington Federal was entitled to a deficiency judgment for the remaining amount owed on the promissory note. Washington Federal also argued the McNaughtons had not produced “any evidence to suggest that the Property was (or is) worth more than the amount bid at the sale.” In support, Washington Federal submitted the responses to “Plaintiff's First Interrogatories and Requests for Production to Defendants Mark A. McNaughton and Marna L. McNaughton.” In addition, Washington Federal submitted the 2009 and 2010 appraisals for the Sommerwood and King's Corner properties.

¶ 13 The McNaughtons filed a CR 56(f) motion to continue the summary judgment hearing. The McNaughtons asserted they needed additional time to obtain expert testimony on the “affirmative defense with respect to the fair value of the Property.” The McNaughtons also argued the amount of the judgment could not be determined until resolution of the declaratory judgment action on latecomers fees.

¶ 14 In support of the motion for a continuance, the McNaughtons submitted a four-page declaration from certified real estate appraiser Anthony Gibbons. Gibbons states that he was retained on June 24, 2011 to evaluate and review the appraisals on the Sommerwood and King's Corner properties. Gibbons states that after an initial review of the April 2009 appraisal of the Sommerwood property and the June 2009 appraisal of the King's Corner property, his “preliminary opinion is that Appraisals do not accurately value the Property as of the date of the trustee's sale.” Gibbons cites a number of reasons for his preliminary opinion, including the failure of the appraisals to use “the correct effective valuation date” or to “recognize the value of any latecomers' fees due to TMG regarding the lift station that TMG built on the Sommerwood portion of the Property under the Latecomers' Agreement.” Gibbonsalso states that “the $6,000,000 credit bid at the foreclosure sale in September 2009 may not represent the ‘Fair Value’ of the Property under ‘normal’ market conditions due to the extraordinary economic conditions beginning in late 2008 and continuing into 2009.” However, Gibbon states that because “[t]his opinion is based on my preliminary review of the Appraisals,” he “will need to conduct...