Erik D. Ensberg v. Jason D. Nelson ( 2013 )

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2GB DEC 16 RV:10*-58
IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
ERIK D. ENSBERG,
No. 69644-1-1
Appellant,
DIVISION ONE
JASON D. NELSON and FRANCINE
E. NELSON, husband and wife and the
marital community comprised thereof, UNPUBLISHED OPINION
Respondents. FILED: December 16. 2013
Spearman, A.C.J. — The main question on appeal is whether a seller of
property breaches the statutory warranty deed covenant against encumbrances
when, at the time of conveyance, the property is part of a homeowner's
association and there is a judgment against the homeowner's association, but
the owner of the property is not a judgment debtor, there is no lien against the
property, and there is no evidence of the association's ability to assess the
property owner to pay the judgment. We hold that the seller does not breach the
warranty against encumbrances in such circumstances. We also hold that the
seller does not convey unmarketable title. Therefore, we reverse the trial court's
judgment in favor of the buyers of the property, respondents Jason and Francine
Nelson, and remand for entry of judgment in favor of the seller, appellant Erik
Ensberg, on his claim for breach of the promissory note. We also reverse the trial
No. 69644-1-1/2
court's award of attorney's fees to the Nelsons below and award attorney's fees
to Ensberg on appeal based on a provision in the promissory note.
FACTS
In 2004, Erik Ensberg purchased a vacant lot ("the Property") in Chelan
County at the encouragement of Jason and Francine Nelson, who had already
purchased two lots adjacent to the Property. The purchase was orchestrated by
the Nelsons' friend, Jack Johnson, whose company, Key Development
Corporation, was developing and selling the lots.
Several years later, on January 25, 2009, the Nelsons bought the Property
from Ensberg for $195,000. They made a down payment of $10,000 and
financed the balance in the amount of $185,000, which was comprised of an
assumption of the underlying debt owed by Ensberg of $129,603.40. Ensberg
received a promissory note and deed of trust (in second position) for the balance
owed by the Nelsons of $55,396.60. Ensberg was not involved in selecting the
escrow or title companies or in drafting the documents, including the statutory
warranty deed. The title company performed a title search prior to closing and
found no judgment encumbering the Property.
Unbeknownst to the parties, at the time of the sale there was a judgment
of $523,474 against Jack Johnson, Key Bay Development Corporation, and Key
Bay Homeowners' Association (the HOA) of record with the Chelan County
Auditor. The HOA is the governing body for the Key Bay subdivision in which the
Property is located. The judgment was entered in Chelan County Superior Court
on March 17, 2008 and recorded with the Chelan County Auditor on April 8,
No. 69644-1-1/3
2008. The judgment did not appear on the statutory warranty deed from Ensberg
to the Nelsons.
Approximately six months after they bought the Property, the Nelsons
listed it for sale. In October 2009, the Nelsons accepted an offer to purchase for
$216,000. After the purchase and sale agreement was signed, a title commitment
was obtained. The two prior sales of the Property had involved the same escrow
agent and title company. The transaction between Ensberg and the Nelsons was
to be closed using a different escrow agent and title company, the latter being
North Meridian Title and Escrow, LLC.
North Meridian's preliminary title commitment listed various encumbrances
on the title, including the deed of trust in favor of Ensberg. Exhibit (Ex.) 26 at 4.
Paragraph 12 of Schedule B stated the following "special exception":
12. JUDGMENT:
AGAINST: KEY BAY HOMEOWNERS ASSOCIATION,
ETAL
IN FAVOR OF: DEEP WATER BREWING, LLC
AMOUNT: $523,474.00
CHELAN COUNTY JUDGMENT NO.: 08-9-00369-8
SUPERIOR COURT CAUSE NO.: 02-2-00848-2
ig\
The prospective buyers exercised their contractual right to disapprove any
matter on the title report. On October 24, 2009, they executed an addendum to
the purchase and sale agreement, requesting the Nelsons to remove the
No. 69644-1-1/4
judgment against the HOA as an exception from title1 and to agree that:
BUYER SHALL NOT BE LIABLE FOR ANY JUDGEMENT [SIC]
SETTLEMENT AMOUNT PRESENTLY OR IN THE FUTURE
OWED BY THE KEY BAY HOMEOWNERS ASSOCIATION, ET AL
IN REGARD TO EXCEPTION #12 IN SCHEDULE B INVOLVING
THE JUDGEMENT [SIC] IN FAVOR OF DEEP WATER BREWING
LLC.
SELLER WILL PAY OFF THEIR SHARE OF ANY JUDGEMENT
[SIC] SETTLEMENT AMOUNT RELATED TO THEIR LIABILITY
DUE FROM THEM AS A RESULT OF THE.. JUDGEMENT [SIC]
IN FAVOR OF DEEP WATER BREWING LLC PRIOR TO
CLOSING.
Ex. 31. The Nelsons did not agree, but urged North Meridian to revisit the
judgment issue.2 North Meridian then removed the judgment against the HOA as
an exception from Schedule B and instead referenced the judgment in the
following "Note" in the preliminary title commitment:
NOTE 10: JUDGMENT:
AGAINST: KEY BAY HOMEOWNERS
ASSOCIATION, ETAL
IN FAVOR OF: DEEP WATER BREWING, LLC
AMOUNT: $523,474.00
ENTERED: MARCH 17, 2008
CHELAN COUNTY JUDGMENT NO.: 08-9-00369-8
SUPERIOR COURT CAUSE NO.: 02-2-00848-2
THE JUDGMENT AGAINST THE KEY BAY HOMEOWNER'S
ASSOCIATION, A WASHINGTON NONPROFIT CORPORATION
(THE "ASSOCIATION"), HAS NOT ATTACHED TO THE TITLE TO
THE LAND DESCRIBED IN SCHEDULE A HEREIN. IF, AFTER
APPEAL, THE JUDGMENT ATTACHES TO THE ASSOCIATION'S
1The prospective buyers also objected to exceptions 14, 15, and 16 and requested the
Nelsons to clearthose exceptions from the title. These exceptions, as listed in the preliminary title
commitment, Schedule B, related to (1) general property taxes and service charges in the amount
of$1,335.07, (2) a lien claimed by the State ofWashington, Department ofSocial and Health,
against Jason Nelson in the amount of$4,534.38, and (3) a lien claimed by the State of
Washington, Department ofSocial and Health, against Jason Nelson in t the amount of
$14,455.43. Ex. 26.
2 It is unclear whether the Nelsons agreed to the prospective buyers' other requests.
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No. 69644-1-1/5
INTEREST, THE ASSOCIATION MAY LEVY ASSESSMENTS
AGAINST EACH LOT TO RECOVER THE FUNDS OWED TO THE
JUDGMENT CREDITORS. THIS NOTE PROVIDES NOTICE OF
THE POTENTIAL FUTURE LIABILITY FOR SUCH
ASSESSMENT(S).
Ex. 27. On November 4, 2009, the prospective buyers sent the Nelsons a
rescission of the purchase and sale agreement, which the Nelsons signed on
November 7. The Nelsons made no further effort to sell the Property.
The Nelsons defaulted on the underlying note and deed of trust and on
Ensberg's promissory note. The Property was sold at a trustee's sale in August
2010 for an unknown amount. The foreclosure had the effect of removing
Ensberg's deed of trust against the Property, but the balance on the promissory
note was still due and owing. The last payment, made on September 1, 2009,
brought the balance on that date to $50,012.34.
Ensberg filed suit against the Nelsons for breach of the promissory note.
The Nelsons counterclaimed, alleging he breached the statutory warranty deed
and failed to convey marketable title. The trial court held a bench trial, upon
which the court entered written findings of fact and conclusions of law. It
concluded that the judgment against the HOA was an encumbrance on the
Property and that Ensberg breached the covenant against encumbrances,
though it also concluded that the judgment did not render title to the Property
unmarketable. The court concluded that the Nelsons' damages consisted of the
difference between the market value of the Property without the encumbrance
and the market value of the Property with the encumbrance. For the former, the
court used the sale price of the failed sale to the prospective buyers ($216,000).
No. 69644-1-1/6
For the latter, the court used the principal amount owing to the first lien holder at
the time ofthe trustee's sale ($129,733). The difference was $86,267.00.3 The
court next concluded that Ensberg's claim for breach of the promissory note
failed because there was a failure of consideration at the time the parties entered
into their contract. The court awarded the Nelsons attorney's fees and costs
under a provision in the promissory note and entered judgment. Ensberg
appeals.
DISCUSSION
Ensberg contends the trial court erred in concluding that (1) he breached
the warranty against encumbrances and (2) his claim for breach of the
promissory note failed due to a lack of consideration.4 We review de novo a trial
court's conclusions of law following a bench trial. Edmonson v. Popchoi, 155 Wn.
App. 376, 382, 228 P.3d 780 (2010), affd, 172 Wn.2d 272, 256 P.3d 1223(2011).
Breach of Statutory Warranty Deed
A grantor conveying land by statutory warranty deed makes the following
covenants to the grantee:
(1) That at the time of the making and delivery of such deed he or
she was lawfully seized of an indefeasible estate in fee simple, in
and to the premises therein described, and had good right and full
3The trial court nonetheless recognized that the amount of any potential encumbrance
against the Property (as one of42 lots) was unknown. It stated, in Conclusion of Law 2.3, "Here
the exact amount of the encumbrance may not be known. It appears to have been anywhere from
zero to $523,474.00 at the time the plaintiff sold the property to the defendants, but itwas
nevertheless a burden upon the land." Clerk's Papers (CP) at 20.
4Ensberg also argues that the judgment below must be reversed because damages
were based on insufficient and speculative evidence. We do not reach this argument given that
we reverse based on the trial court's erroneous conclusion that he breached the warranty against
encumbrances.
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No. 69644-1-1/7
power to convey the same; (2) that the same were then free from
all encumbrances; and (3) that he or she warrants to the grantee,
his or her heirs and assigns, the quiet and peaceable possession of
such premises, and will defend the title thereto against all persons
who may lawfully claim the same, and such covenants shall be
obligatory upon any grantor, his or her heirs and personal
representatives, as fully and with like effect as if written at full
length in such deed.
RCW 64.04.030. "These covenants include both 'present' covenants, such as the
warranty of seisin, which are breached at conveyance, and 'future' covenants,
which may be breached or become effective after conveyance." Mastro v.
Kumakichi Corp.. 90 Wn. App. 157, 163, 951 P.2d 817 (1998) (citation omitted).
The covenant against encumbrances is a present covenant, "and, if breached at
all, is broken at the time it is made." Moore v. Gillinaham. 22 Wn.2d 655, 661,
157 P.2d 598 (1945) (citations omitted).
An encumbrance has been defined by the Washington Supreme Court as
any right to, or interest in, land which may subsist in third persons,
to the diminution of the value of the estate of the tenant, but
consistent with the passing of the fee; and, also, as a burden upon
land depreciative of its value, such as a lien, easement, or
servitude, which, though adverse to the interest of the landowner
does not conflict with his conveyance of the land in fee.
Hebb v. Severson. 32 Wn.2d 159, 167, 201 P.2d 156 (1948) (citations omitted).
In addition to liens, easements, and servitudes, encumbrances include
outstanding mortgages, leaseholds, restrictive covenants, and existing violations
of a restrictive covenant are encumbrances. 18 Washington Practice Real
Property § 14.3 (citing Schaad v. Robinson. 59 Wash. 346, 109 P. 1072 (1910)
(outstanding mortgages); O'Connor v. Enos. 56 Wash. 448, 105 P. 1039 (1909)
(leaseholds); Williams v. Hewitt. 57 Wash. 62, 106 P. 496 (1910) (restrictive
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covenants); Hebb. 32 Wn.2d 159 (existing violation of restrictive covenant)).
Unpaid property taxes have also been held to be encumbrances. Moore, 22
Wash, at 660-61 (warranty against encumbrance broken upon delivery of deed
because of unpaid property taxes due at the time of delivery of deed).
Ensberg contends the trial court erred in concluding that he breached the
warranty against encumbrances when he conveyed the Property to the Nelsons.
We agree. The judgment against the HOA was not an encumbrance against the
Property because the evidence did not show that the judgment constituted a
"right to, or interest in" the Property subsisting in the HOA or other judgment
debtors. There is no dispute that Ensberg, the owner of the Property, was not a
judgment debtor in the judgment against the HOA. There is no dispute that, at
the time he conveyed the Property to the Nelsons, there was no lien on the
Property as a result of the judgment against the HOA.5
The Nelsons contend that, nonetheless, the possibility of a future
assessment by the HOA from lot owners—as noted in the preliminary title
commitment—to pay the judgment meant the judgment was an encumbrance on
the Property. They cite a California decision, O'Toole v. Los Angeles Kingsbury
Court Owners Ass'n.. 126 Cal.App.4th 549 (2005), in support of their position.
5By statute, a judgment can attach as a lien against real property owned by a judgment
debtor:
The real estate of any judgment debtor, and such as the judgment debtor may
acquire, not exempt by law, shall be held and bound to satisfy any judgment of
the district court of the United States rendered in this state and any judgment of
the supreme court, court of appeals, superior court, or district court of this state,
and every such judgment shall be a lien thereupon to commence as provided in
RCW4.56.200 and to run for a period of not to exceed ten years from the day on
which such judgment was entered ....
RCW 4.56.190.
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No. 69644-1-1/9
We reject the Nelsons' contentions. There was no evidence below that the
HOA had the definite right, power, or authority to assess the owner of the
Property to pay the judgment or the authority to attach a lien on the Property for
any failure to pay an assessment. The HOA's bylaws, covenants, and governing
documents were not exhibits in the trial, and the note in the preliminary title
commitment is not evidence of the HOA's power to assess lot owners. As
Ensberg notes, by statute, a judgment against a condominium association is a
lien in favor of the judgment lienholder against all of the units in the
condominium.6 But this case does not involve a condominium association, the
statute does not apply, and the Nelsons point to no statutes that do apply. The
evidence establishes, at most, that the judgment against the HOA could, in the
future, if the HOA had the power to assess lot owners, result in a lien (of a
presently unknown amount) against lot owners. This fails to show the existence
of a present breach of the warranty against encumbrances at the time Ensberg
conveyed the Property to the Nelsons.
O'Toole, aside from being non-binding, is inapposite. There, a plaintiff
obtained a judgment against a condominium homeowner's association, but the
association refused to pay the judgment and refused to levy a special emergency
6The statute provides,
(1) Except as provided in subsection (2) of this section, a judgment for
money against the association perfected under RCW 4.64.020 is a lien in
favor of the judgment lienholder against all of the units in the condominium
and their interest in the common elements at the time the judgment was
entered. No other property of a unit owner is subject to the claims of
creditors of the association.
RCW 64.34.368.
No. 69644-1-1/10
assessment against its members. O'Toole. 126 Cal.App.4th at 551. The plaintiff
obtained an order appointing a receiver and compelling the association to levy
the assessment. ig\ On appeal, the court interpreted and applied a California
statute in holding that the association could be compelled to impose an
assessment to pay the judgment in question. See icL at 553-59. The Nelsons
point to no analogous Washington statutes that apply here so that the HOA could
be compelled to impose an assessment against lot owners to pay the judgment.
Marketability of Title
The Nelsons argue that even if Ensberg did not breach the warranty
against encumbrances, this court should affirm the judgment on the basis that he
breached his duty to convey marketable title.7 The Nelsons rely primarily on
Shinn v. Thrust IV. Inc.. 56 Wn. App. 827, 786 P.2d 285 (1990).
In Shinn, a buyer of property refused to close, advising the seller that
building restrictions constituted an unacceptable encumbrance and/or defect.
Shinn. 56 Wn. App. at 830-32. The buyer was also concerned about the potential
for litigation by third parties because the property was part of a replat that was
done without the required approval of other lot owners, jd. at 831-32. The trial
7The parties disagree as to whether this argument can be raised on appeal as a basis for
affirming the trial court's judgment. The Nelsons contend that it can, citing Barber v. Perinqer, 75
Wn. App. 248, 877 P.2d 223 (1994) for the proposition that an appellate court can decide a case
on any legal theory established by the pleadings and supported by the proof. Ensberg contends
that because the issue of marketable title was argued and rejected below and neither party
appealed on that issue, the Nelsons cannot raise it on appeal. We agree with the Nelsons and will
consider their argument regarding marketability of title. The Nelsons prevailed below and seek no
further relief from this court. As such, they were not required to file a cross-appeal of the trial
court's ruling on marketable title to argue that this court may affirm on that basis. See State v.
Bobic. 140 Wn.2d 250, 257, 996 P.2d 610 (2000) (State not required to file cross-appeal to argue
alternative ground for sustaining trial court's order where State prevailed below and did not seek
affirmative relief from court on appeal).
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No. 69644-1-1/11
court concluded that the buyer breached the purchase and sale agreement. Id. at
841. On appeal, the buyer argued that its performance was excused because the
sellers failed to deliver marketable title as required by the agreement, which
stated that "'title of seller is to be free of encumbrances or defects except those
acceptable to Purchaser.'" \_± This court held that there was a defect in title
because, due to the replat, the building restriction was a potential restriction on
the buildable area of the replatted lots, and the legal uncertainty as to whether
the "'one dwelling per lot'" restriction applied to the replatted lots raised a "real
prospect of litigation" and put the purchaser in the position of not knowing where
a dwelling could legally be built on the lot. jd. at 845-46. The court also agreed
with the buyer that the replat's violation of RCW 58.12.030 clearly exposed a
purchaser of the property to litigation. It concluded, "Here, the record
demonstrates that real doubts exist regarding the title to Lot 2, and that there is a
reasonable probability of litigation arising from the plat restriction and the
violation of RCW 58.12.030." jd, at 848. Therefore, title was not marketable.
The Nelsons cite the following statement from the court's discussion in
Shinn:
The Washington Supreme court has defined marketable title
'as one being free of reasonable doubt and such as a reasonably
informed and intelligent purchaser, exercising ordinary business
prudence, would be willing to accept. Such a title need not be
perfect in the sense that it is free from every conceivable technical
criticism or suspicion, but only from those possibilities of a defect
which would give rise to a reasonable question as to its validity.'
Shinn. 56 Wn. App. at 847 (quoting Brown v. Herman, 75 Wn.2d 816, 823, 454
P.2d 212 (1969) (internal citation omitted)).
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No. 69644-1-1/12
We conclude that Ensberg did not provide unmarketable title. For the
same reasons he did not breach the warranty against encumbrances, the title to
the Property was not unmarketable due to the judgment against the HOA. Unlike
in Shinn, where there was a known, present violation of a statute and present
uncertainty as to where a purchaser could legally build on the lot, here, a
judgment against the HOA that might at some point result in an assessment (of
an unknown amount) on lot owners did not "give rise to a reasonable question as
to" the validity of title to the Property.
Breach of Promissory Note Claim
Ensberg next contends the trial court erred in concluding that there was a
lack of consideration exchanged in the underlying contract due to the
encumbrance against the Property and that, therefore, his claim for breach of the
promissory note failed. We agree. The Nelsons contend that Ensberg's failure to
convey unencumbered and marketable title constituted a failure of consideration
for the promissory note. But because we hold that Ensberg did not breach the
warranty against encumbrances or provide unmarketable title, we necessarily
conclude that the Nelsons' argument is without merit. We reverse and remand for
entry ofjudgment on Ensberg's claim.8
8The Nelsons do not dispute that they failed to make all of the payments required under
the promissory note and that the total payments they made left a balance owing of $50,012.34
plus interest at the default rate of 18 percent per annum. The Nelsons do not dispute that
Ensberg made a demand for payment or that they failed to pay.
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No. 69644-1-1/13
Attorney's Fees
The trial court awarded attorney's fees to the Nelsons under a provision in
the promissory note that states:
10. ATTORNEYS' FEES AND COSTS: Maker shall pay all costs
incurred by Holder in collecting sums due under this Note after
a default, including reasonable attorneys' fees, whether or not
suit is brought. If Maker or Holder sues to enforce this Note or
obtain a declaration of its rights hereunder, the prevailing party
in any such proceeding shall be entitled to recover its
reasonable attorneys' fees and costs incurred in the
proceeding (including those incurred in any bankruptcy
proceeding or appeal) from the non-prevailing party.
Ex. 3. Because we reverse and remand the judgment in favor of the Nelsons, we
reverse the trial court's award of attorney's fees to the Nelsons and remand with
instructions to award attorney's fees incurred below to Ensberg. We also award
attorney's fees on appeal to Ensberg.
Reversed and remanded.
WE CONCUR: I >
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