Worden v. Smith

• Decision Date: 12 December 2013
• Docket Number: No. 30401-9-III,c/w No. 30885-5-III,30401-9-III
• Citation: Worden v. Smith, c/w No. 30885-5-III, No. 30401-9-III (Wash. App. Dec 12, 2013)
• Court: Washington Court of Appeals
• Parties: BRIAN A. WORDEN and ANNE MEREDITH WORDEN, husband and wife, Plaintiffs, v. JAMES M. SMITH and JANE A. SMITH, husband and wife, Defendants, COLUMBIA BANK, a banking corporation, and SAALFELD GRIGGS, PC, Appellants, KAL FARMS, LLC, and GRANITE FARMS, LLC, Respondents.

BRIAN A. WORDEN and ANNE MEREDITH WORDEN,husband and wife, Plaintiffs, v. JAMES M. SMITH and JANE A. SMITH,husband and wife, Defendants,COLUMBIA BANK, a banking corporation,and SAALFELD GRIGGS, PC, Appellants,KAL FARMS, LLC, and GRANITE FARMS, LLC, Respondents.

No. 30401-9-III

c/w No. 30885-5-III

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION THREE

FILED: December 12, 2013

PUBLISHED OPINION

SIDDOWAY, A.C.J. — Brian and Anne Worden's foreclosure on property mortgaged to them by James and Jane Smith led to a predictable and error-free outcome for the Wordens and Smiths, but embroiled four other parties in disputes leading to this appeal. A bidding war for the property at the foreclosure sale resulted in a high price andsurplus proceeds that were paid out to the wrong recipients as provided by an order prepared by Columbia Bank, a junior lienholder. After the bank realized it had received almost $66,000 less than the amount to which it was entitled, it first sought an amendment to the distribution order and later sought to correct the error through a request for equitable relief when the property was redeemed.

The circumstances presented the trial court with an unusual problem and no easy solution, but the court erred in concluding that the law of the case doctrine or the stipulated character of the order prevented it from granting the relief requested by the bank. We reverse the trial court's decisions on both orders challenged on appeal and remand with directions to enter an order imposing an equitable lien on the property in favor of the bank's assignee.

FACTS AND PROCEDURAL BACKGROUND

In December 2010, Brian and Anne Worden commenced the action below against James and Jane Smith, seeking to recover over $650,000 owed by the Smiths on a promissory note and to foreclose a mortgage on property securing the note. Among relief requested by the Wordens was that the court determine that their mortgage was a valid first lien on the Smiths' property, senior to a deed of trust later granted to Columbia Bank.

The superior court granted the relief requested by the Wordens, entering a money judgment of $894,762.17 in their favor. It ordered that their mortgage be foreclosed and the property sold with the proceeds to be applied first to the amount owed to them.

At the sheriff's sale of the property in August, there were competing bidders. The property was ultimately sold to KAL Farms LLC and Alan Mehlenbacher (collectively KAL Farms) for a bid price of $1,625,000. After paying amounts owed the Wordens, surplus proceeds of $710,780.28 remained and were deposited by the sheriff with the clerk of the superior court.

Columbia Bank then filed a motion for an order "directing the [clerk of court] to distribute all surplus sales proceeds pursuant to RCW 61.12.150." Clerk's Papers (CP) at 190. RCW 61.12.150 dictates how the proceeds of a foreclosure sale should be applied. At the time of the motion, the parties to the foreclosure action were the Wordens (the creditors), the Smiths (the debtors), and Columbia Bank (the junior lienholder).

The bank's motion was unopposed. Before the time set for hearing on the motion, the bank's lawyer circulated to the parties a proposed form of order that made three references to the proposed distribution as being "pursuant to" or "required under" RCW 61.12.150. CP at 245-47. The Wordens and Smiths agreed to the proposed order, which, in its final form, was jointly presented by lawyers for the bank and the Wordens at the time set for hearing and was entered by the court.

Beyond describing the proposed distribution as being required by statute, the order went on to spell out who would receive the proceeds and in what amount. It stated that the proceeds would be distributed:

(1) First, towards outstanding real property taxes due and owing upon the Property, said real property taxes totaling approximately $65,625.73 . . . ;

(2) Second, towards outstanding storm water taxes totaling approximately $287.64 . . . ;

(3) Third, towards full satisfaction of [the Wordens'] judgment against Defendants James M. Smith and Jane A. Smith, said judgment totaling, as of September 20, 2011, the sum of $933,311.39 . . . ;

(4) Fourth, all remaining proceeds, said proceeds totaling approximately $625,775.24, to be distributed to [Columbia Bank] in partial satisfaction of the sums owing to it, as required under RCW 61.12.150.

CP at 246-47. In accordance with the order, property taxes and storm water taxes in the amounts indicated were paid to the county treasurer and $625,775.24 was paid to the bank.

The bank soon realized that it had made a mistake in providing that taxes should be paid from the proceeds. Within 10 days of the original order, it filed a motion to amend the order on grounds provided by CR 59(h) or, in the alternative, CR 60(b). Its motion explained that the bank's lawyer mistakenly believed that because property taxes were a higher priority lien¹ they must be satisfied before other distributions, and that inproviding for a priority payment of taxes the order was "a mistake in contravention of RCW 61.12.150 and should be corrected accordingly." CP at 255.

In response to the motion, KAL Farms, though not earlier a party to the foreclosure action, filed a notice of appearance and objected to the bank's motion. It argued that because the order directing distribution was an agreed order, the court should not entertain any motion to amend. The trial court considered KAL Farms's objection and allowed it to participate in the hearing on the bank's motion. It would later observe that although KAL Farms had not been a party at the time the order directing distribution was circulated, at least one version of the bank's proposed order directing distribution had been provided to KAL Farms's lawyer for approval.

During the hearing, the following exchange occurred between the court and KAL Farms's lawyer:

THE COURT: Okay, Ms. Geidl, why do you think I shouldn't amend the order? You didn't rely on the fact that taxes were going to—excuse me—your client didn't rely on the fact that these taxes were going to get paid from the sale proceeds, did he?

MS. GEIDL: No, but they, I believe the proceeds have already been distributed. . . .. . . [T]his was a stipulated order, and it was actually pushed by [Columbia Bank] and it was submitted on their counsel's pleading paper, and they were pretty adamant about the order and [its] verbiage. The parties all agreed, and to amend it now is, I believe, unjust, because all of the proceeds had been distributed.

Report of Proceedings (Oct. 17, 2011) (RP) at 9-10.

The court took the matter under advisement and thereafter issued a written opinion. Accepting arguments that had been made by KAL Farms, it explained its decision to deny the motion, stating;

The Order of September 19, 2011, became the law of the case when entered. While not consistent with RCW 61.12.150, it is not an improper or illegal order, and was in fact a product of discussion among the parties as well as the purchaser at the sale. The Court under these circumstances does not find sufficient grounds under either CR [5]9 or CR 60 or case law to "correct" the order previously entered, and [Columbia Bank's] motion to amend is denied.

CP at 307. The bank timely appealed.

While this first appeal was pending, and approximately seven months after the foreclosure sale, Granite Farms LLC, an assignee of the Smiths' redemption rights, filed a notice of redemption. Its notice, dated March 21, 2012, asked that the redemption be effective on March 27, at which point it proposed to make payment to the sheriff of $1,747,215.47, representing the bid amount of $1,625,000 plus 12 percent interest on that amount from the date of the foreclosure sale through March 27. In calculating the redemption amount, it recognized that any taxes paid by KAL Farms (together withinterest thereon) should also be included under the applicable statute, RCW 6.23.020, but it noted that no taxes had been paid.

KAL Farms evidently perceived the redemption as an opportunity to correct the error earlier made by the bank and resolve the bank's pending appeal, in which relief might be ordered against it. On March 29, Mr. Mehlenbacher signed a "Notice of Payment of Taxes" pursuant to RCW 6.23.050, a statute that provides that a redemptioner must reimburse any taxes paid during the redemption period if it receives a proper form of notice of the payment before it redeems.² CP at 359. The notice characterized the $1,625,000 paid by KAL Farms and Mr. Mehlenbacher at the foreclosure sale as having paid "$65,625.73 . . . for outstanding real property taxes due and owing, and $287.64 . . . for outstanding storm water taxes"—amounts that should therefore be included in the redemption price for the property. Id. Granite Farms, which had not yet paid the redemption price or received a certificate of redemption immediately objected, filing a second notice of redemption directed to the county treasurer with which it enclosed andtendered its check for $1,747,215.47 and denied that any amount beyond that was due and payable.

The following week, KAL Farms filed what it called a "Motion to Pay," asking that the superior court set a redemption price for the property that would include not only the amount of KAL Farms's bid at foreclosure and interest but also the taxes paid with the foreclosure proceeds. CP at 345-46.

By this time, Saalfeld Griggs PC, the law firm that represented the bank in the foreclosure sale, had been assigned the bank's interest in any claim to recover the taxes that had been paid in error. The law firm joined in KAL Farms's motion. It argued that the court should look to principles of equity to prevent Granite Farms from receiving a windfall and apply the doctrines of unjust enrichment and equitable subrogation to add the taxes and assessments paid from the surplus proceeds, together with interest, to Granite Farms's redemption price.

Granite Farms then moved...