Weig v. Stanley (In re Sleestak, LLC)
| Docket Number | 21-20237-NGH,Adv. 22-07008-NGH |
| Decision Date | 24 July 2023 |
| Parties | IN RE: SLEESTAK, LLC, Debtor. v. MICHAEL STANLEY, Defendant. HANS WEIG, Plaintiff, |
| Court | U.S. Bankruptcy Court — District of Idaho |
On May 15, 2022, Hans Weig ("Plaintiff") commenced this adversary proceeding against Michael Stanley ("Defendant") seeking to invalidate a promissory note and deed of trust, or alternatively to reduce the amount owed under the promissory note. Doc. No. 1. A trial on the matter was held on May 2 and 3, 2023, after which the parties submitted written closing arguments. Doc. No. 48, 49, 57 &58. The Court took the matter under advisement. The Court has now considered the testimony and evidence presented, the briefs and arguments of the parties, and the applicable law. The following Memorandum constitutes the Court's findings of facts and conclusions of law. See Fed.R.Bankr.P. 7052.[1]
Plaintiff and Defendant met in early 2019 and became friends. Shortly after, the parties began discussing the idea of going into business together. In May 2019, the parties became aware that a piece of real property was for sale located at 401 W Dakota, in Hayden, Idaho (the "Property"). Seeing it as a good business investment, the parties created the entity Sleestak, LLC to purchase the Property. Pursuant to Sleestak's operating agreement, Sarah Nelson Defendant's girlfriend at the time, was the sole member of Sleestak. Ex. 206. Plaintiff never saw the operating agreement and contends Defendant and Plaintiff were meant to be the members, with Ms. Nelson acting as the manager.
On May 31, 2019, Plaintiff, Defendant, and Ms. Nelson obtained cashier's checks and money orders from several different locations in order to provide the down payment needed to purchase the Property. Defendant provided $35,460 and Plaintiff provided $61,000 towards the down payment, with Sleestak financing the remaining portion of the purchase price. After collecting the necessary funds, the parties went to Kootenai Title to complete the closing.
On September 3, 2019, Sleestak and Defendant entered into a promissory note for Defendant to lend Sleestak funds. Ex. 200. The loan was secured by a deed of trust on the Property. Exs. 200 at 4, 201, 210. Under the promissory note, Defendant extended a maximum principal sum of $176,000. Id. This permitted Sleestak to make draws from the loan for necessary business purchases, and included the funds already paid by Defendant for the purchase of the Property. Additionally, the promissory note included a revolving line of credit not to exceed $210,000. Id. The promissory note provides for 8.5% interest and for Defendant's attorney fees in the event Defendant incurs fees to enforce the note. Id.
On June 11, 2021, Sleestak filed a voluntary chapter 7 bankruptcy petition.[2] Case. No. 21-20237, Doc. No. 1. On October 3, 2021, the chapter 7 trustee, David Gardner, sold the Property for $575,000, with the estate realizing net sales proceeds of $313,323.82. Id. at Doc. No. 42. Defendant's lien attached to the net sale proceeds pending resolution of the dispute over Defendant's secured claim. Id. at Doc. No. 37. On April 18, 2022, Defendant filed a motion seeking to compel turnover of the sale proceeds encumbered by his lien, or alternatively relief from the automatic stay. Id. at Doc. No. 79.
Plaintiff objected, and subsequently initiated this adversary proceeding.[3] Plaintiff alleges he and Defendant created Sleestak in 2019 to purchase the Property, with both parties being 50% members and Defendant's girlfriend acting as the manager for the entity. Plaintiff asserts he contributed $61,000 for the purchase of the Property with the understanding he and Defendant would share the profits from the eventual sale of the Property.[4] Defendant claims under the promissory note and deed of trust, he is owed $166,468.71.[5]
First, Plaintiff asserts the deed of trust is facially invalid. In the complaint, Plaintiff asserted the deed of trust was invalid because Defendant was "identified as the Trustee and the Beneficiary." Doc. No. 1 at 3. Plaintiff's argument has evolved to claim that, pursuant to I.C. § 45-1504, Defendant was not a valid trustee. Defendant concedes he was not a qualified trustee under I.C. § 45-1504(2), and thus the deed of trust did not initially name a proper trustee. See Ex. 201. Defendant asserts, however, this error was later remedied when a substitute trustee was appointed and the amended deed of trust was recorded. Ex. 210. However, this amended deed of trust was not recorded until October 26, 2022, over a year after the petition date. Id. Thus, the Court must consider whether, as of the date the petition was filed, the deed of trust was valid and enforceable despite the lack of a proper trustee.
There is no significant Idaho case law addressing the validity of a deed of trust that failed to properly appoint a trustee. However, Washington has a nearly identical statute to I.C. § 45-1504-RCW 61.24.010-and the Washington Court of Appeals has addressed the question of whether a deed of trust is invalid due to a failure to initially appoint a trustee, even if one is later appointed. In GMAC Mortg. Co v. Wynkoop, 2007 WL 2909651, at *2 (Wash.Ct.App. Oct. 8, 2007), the plaintiff argued that a deed of trust where a trustee had not been designated at the time of drafting, but was later appointed, was invalid because a "trustee is necessary to secure the performance of the grantor to the beneficiary." However, the court noted that RCW 61.24.010(2) "contemplates that a deed of trust may not name a trustee and specifically provides that in that situation, the beneficiary has the authority to name one." As such, the court found that the lack of trustee at the time of drafting did not render the deed of trust invalid and the defendant's subsequent appointment of a trustee was permissible. See also Renata v. Flagstar Bank, F.S.B., 2015 WL 4528044, at *4 (Wash.Ct.App. July 27, 2015) ().
Other courts have also considered the validity of a deed of trust where no trustee was appointed. In Moon v. GMAC Mortg. Co. (In re Burche), the bankruptcy court held that a deed of trust could not be avoided where the deed of trust did not initially include a trustee, but there was post-petition effort to substitute a trustee. 249 B.R. 518 (Bankr. W.D. Mo. 2000). In so holding, the court noted that state law did not invalidate a deed of trust for the failure to name a trustee. Id. at 522-23. Thus, as of the petition date, the creditors had a valid lien on the subject property despite the failure to include a trustee. Id.[6] Additionally, other states have held that the failure to appoint a proper trustee does not render the deed of trust unenforceable. See Shuster v. BAC Home Loans Servicing, LP, 211 Cal.App.4th 505, 510-11 (Cal.Ct.App. 2012) (); In re Bisbee, 754 P.2d 1135, 1137 (Ariz. 1988) ().
Likewise, the Court finds the deed of trust here was enforceable as of the petition date despite the failure to appoint a proper trustee. I.C. § 45-1504(2) permits the appointment of a trustee or successor trustee "if a trustee is not appointed in the deed of trust." Additionally, like under the Arizona law discussed in Bisbee, Idaho law permits a beneficiary to bring certain actions without a trustee, such as a judicial foreclosure brought pursuant to I.C. § 45-1512. See I.C. § 45-1503. As such, Idaho law contemplates situations where a deed of trust is created or enforced without a trustee. Accordingly, the Court finds the failure to properly appoint a trustee does not render a deed of trust unenforceable under Idaho law. Thus, the Court finds that though no qualified trustee was appointed initially in the deed of trust, the deed of trust was still enforceable at the time the bankruptcy petition was filed, regardless of the subsequent appointment of a proper trustee.
Plaintiff has now expanded that argument and asserts that that Defendant committed fraud and misrepresentation against Plaintiff. To the extent Plaintiff is seeking a monetary judgment against Defendant for fraud, that is beyond the scope of the Complaint and the Court will deny such relief. To the extent Plaintiff is seeking to invalidate the deed of trust due to fraud or misrepresentation, the Court finds Plaintiff has not carried his burden.
The elements of fraud under Idaho law are "'(1) a statement or a representation of fact; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity [or ignorance of its truth]; (5) the speaker's intent that there be reliance; (6) the hearer's ignorance of the...
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