City Of Kent v. Bel Air & Briney , 190 Wash. App. 166 ( 2015 )

IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
BEL AIR & BRINEY, a general No. 71544-5-1
Partnership, NICK BRINEY, a single
man, ROGER C. BEL AIR AND
CANDACEBELAIR,
Appellants,
DIVISION ONE
v.
CITY OF KENT, PUBLISHED OPINION
Respondent. FILED: September 14, 2015
Spearman, C.J. — When the City of Kent (City) bought the property that is
the subject of this action, it paid off the first position lien but did not discover the
junior lien until after the proceeds had been disbursed. The City filed a complaint
for declaratory relief, seeking equitable subrogation to the prior first position
lienholder and the right to foreclose on the resulting equitable lien. On the City's
motion for summary judgment, the trial court granted the requested relief. The
junior lienholders appeal, claiming the trial court erred in so ruling because they
will be materially prejudiced by subrogating the City to the first position lien and
the City was not entitled to foreclose on the lien. We affirm in part and reverse in
part, finding that while the City is entitled to equitable subrogation, it may not
foreclose on its equitable lien.
No. 71544-5-1/2
FACTS
Appellant Bel Air & Briney (B&B) is a general partnership between Roger
B. Bel Air and Nick Briney.1 In June 2007, B&B loaned Hiep Nguyen, Hoang
Tran, and Dun Tram (Borrowers) $134,000 in return for a promissory note with
an interest rate of 12 percent (Note). This interest rate would rise to 24 percent
on default. The Note required interest-only payments of $1,345 until its maturity
on December 13, 2007, at which time the total unpaid balance would be due. On
December 7, 2007, the Note's maturity date was extended to June 13, 2008, and
the principal amount increased by $9,500. The Borrowers' monthly payments
increased to $1,435, reflecting the additional interest for increased principal. The
Note was extended again on June 27, 2008, resulting in an additional $10,000 in
principal, monthly payments of $1,535, and a maturity date of December 13,
2008.
The Note was secured by a deed of trust (B&B deed of trust) that
encumbered four parcels of land, listed as Parcels A, B, C, and D. The B&B deed
of trust was recorded on June 15, 2007, and was in either second or third
position on each parcel. The senior liens on parcels A and Dwere foreclosed in
2009, extinguishing B&B's junior interests. Parcel Bwas sold at a short sale in
2012, and B&B received $3,500 in exchange for release of its interest in Parcel
B.
1Although Nick Briney and Roger and Candace Bel Air are also named as parties, the
activity giving rise to this appeal was primarily that ofthe general partnership, Bel Air and Briney.
Forthat reason we referto the entity of the general partnership rather than the individuals during
the course of this opinion. No disrespect is intended.
No. 71544-5-1/3
The City wanted to develop an aquatic center on the block of Parcel C
(Property). The City and the Borrowers entered into negotiations to purchase the
Property in 2006. The City received a preliminary title commitment from Pacific
Northwest Title Company (PNWT) on March 14, 2007, three months before B&B
recorded its deed of trust. PNWT issued a title policy to the City on January 31,
2008, based on the preliminary title commitment. The B&B deed of trust was not
included in the title report or the policy. The sale closed in January 2008 and the
City paid $392,500 cash for the Property. Mortgagelt, the first position lender,
received $196,894.17 from proceeds and reconveyed its deed of trust. The
Borrowers received $193,499.50 from the sale and ceased making regular
payments on the B&B deed of trust. The last payment B&B received was $1,850,
which included a late-payment fee, in October of 2008. As of January 31, 2008,
the total outstanding amount on the Note was $143,305.42.
The Borrowers did not inform the City about the B&B deed of trust. As a
result, the City did not learn about the deed of trust until it was contacted by
Briney in July 2012. Briney learned about the sale of the Property in July 2012,
while in negotiations to reconvey B&B's interest in Parcel B. Until then, B&B was
unaware that the Mortgagelt deed of trust had been reconveyed.
The City gave notice of B&B's claim to its title insurer, First American Title
Insurance Company (First American), successor to PNWT. First American
accepted tender of defense. On May 1, 2013, the City filed a complaint for
declaratory relief, seeking a judgment of equitable subrogation declaring that
B&B's interest is junior to the City's interest in the amount of $196,894.17. The
City later amended its complaint to add a second claim for foreclosure of the
No. 71544-5-1/4
resulting equitable lien to extinguish all junior interests in the property. As of
October 2012, the Property's fair market value was approximately $110,000.
The parties filed cross motions for summary judgment on October 18,
2013. The trial court granted the City's motion on January 21, 2014 and denied
B&B's cross motion. The trial court entered judgment in favor of the City,
declaring B&B's deed of trust to be second to the City's lien, and ordering
foreclosure of the City's lien. At the sale, the City would be permitted to credit bid
up to $196,894.17, and would receive any proceeds from the sale after deducting
costs. B&B filed a motion for reconsideration, which the court denied on April 9,
2014.
B&B filed a second motion for reconsideration on April 21, 2014,
contending that the trial court had no basis for ordering foreclosure of the lien.
The trial court granted B&B's second motion and struck the right to foreclose on
the equitable lien. B&B immediately served a notice of default, instituting
foreclosure of its junior lien. The City then filed a motion for reconsideration on
the issue of foreclosure. B&B filed this appeal before the trial court had ruled on
the City's motion. On July 30, 2014, the trial court granted the motion and
entered an order permitting the City to foreclose on its lien. B&B assigns
additional error to that order.
DISCUSSION
We review a trial court's order granting summary judgment de novo.
Columbia Cmtv. Bank v. Newman Park. LLC, 177 Wash. 2d 566, 573, 304 P.3d 472
(2013). On review, we view all evidence in the light most favorable to the
nonmoving party. ]d. Summaryjudgment is appropriate if there is "no genuine
No. 71544-5-1/5
issue as to any material fact" and "the moving party is entitled to a judgment as a
matter of law." CR 56(c).
Equitable Subrogation
Subrogation is "'an equitable remedy,'" and is "'founded in the facts and
circumstances of each particular case.'" Newman Park, 177 Wash. 2d at 581
(quoting, Restatement (Third) of Property Mortages § 7.6 cmt. a); Credit
Bureau Corp. v. Beckstead, 63 Wash. 2d 183, 186, 385 P.2d 864 (1963)). The
doctrine allows an outside party to step into the lender's shoes and receive the
benefit of the outstanding debt, without an agreement or assignment of rights
among the outside party, the lender, or the debtor, jd. at 573. In other words, if a
third party pays the debtor's outstanding loan to the lender without any formal
agreement among the parties, then equity may permit the third party to take over
the lender's interest and receive the debtor's payments. kL at 574. The rationale
for subrogation is to prevent the unearned windfall that would otherwise accrue to
the debtor, who could deny the obligation to make further payments on the debt
because it has been satisfied by another to whom the debtor owed no obligation
by reason of assignment of rights or other agreement, jd.
In the context of mortgage refinancing, equitable subrogation takes a
somewhat different form. There, it is considered "'a tool by which real property
lenders, or lienors, may replace the prior, senior lien position of an earlier in time
lender by paying off that prior lender's loan.'" Id (quoting Scott B. Mueller, Is
Equitable Subrogation Dead for Lenders and Insurers in Missouri?, 66 J. Mo. B.
196, 196 (2010)). Thus, in the refinancing context it is generally not the debtor
No. 71544-5-1/6
who would be unjustly enriched by the payment of his or her debt by a third party,
rather it is the junior lienholder. This is so because, absent subrogation:
[T]he third party's payment would bump the number two
security interest into the number one position without the
junior lienholder having taken any action to warrant such
an advancement. We prevent this unjust enrichment by
subrogating the party paying off the priority interest to the
party who held that interest, to the extent of the former
lienholder's interest at that time.
]d at 575 (citation omitted). Stated differently, in this context, "equitable
subrogation simply seeks to maintain the proper order of priorities." Bank of
America, N.A. v. Prestance Corp., 160 Wash. 2d 560, 564, 160 P.3d 17 (2007)
(citing Buraoon v. Lavezzo, 68 Wn. App., D.C. 20, 92 F.2d 726, 729 (1937)).
Washington has explicitly adopted the "liberal approach" to equitable
subrogation as expressed in the Restatement (Third) § 7.6. See Newman Park,
177 Wash. 2d at 580 ("We now explicitly adopt Restatement (Third) § 7.6 in full.)
That section reads as follows:
(a) One who fully performs an obligation of another, secured by
a mortgage, becomes by subrogation the owner of the obligation and
the mortgage to the extent necessary to prevent unjust enrichment.
Even though the performance would otherwise discharge the
obligation and the mortgage, they are preserved and the mortgage
retains its priority in the hands of the subrogee.
(b) By way of illustration, subrogation is appropriate to prevent
unjust enrichment if the person seeking subrogation performs the
obligation:
(1) in order to protect his or her interest;
(2) under a legal duty to do so;
(3) on account of misrepresentation, mistake, duress, undue
influence, deceit, or other similar imposition; or
(4) upon a request from the obligor or the obligor's successor to
do so, if the person performing was promised repayment and
reasonably expected to receive a security interest in the real estate
with the priority of the mortgage being discharged, and if subrogation
will not materially prejudice the holders of intervening interests in the
real estate.
No. 71544-5-1/7
Under the liberal approach of § 7.6, "[e]quitable subrogation should never be
allowed if a junior interest is materially prejudiced, but if the junior interests
are unaffected, then there is no reason to deny it." Prestance, at 572. See
also Newman Park, 177 Wash. 2d at 582. ("If the circumstances are such that
subrogation to a prior mortgage will relieve the payor, and if no prejudice to
any innocent person will result, the payor may have subrogation." (Quoting
Restatement (Third) § 7.6, cmt d.))
B&B argues that equitable subrogation is not applicable to this case
because it would be materially prejudiced thereby and because its absence
would not cause B&B to be unjustly enriched.2 B&B points out that the
Borrowers, who ceased making payments shortly after the sale, pocketed the
amount in excess of that necessary to pay off the senior loan. Thus, it received
nothing from the proceeds of the sale even though the amount was more than
sufficient to pay off its lien. B&B also points out that in the interim, the property's
value has decreased to such an extent that it is worth less than the amount owed
on its lien. As a result, according to B&B, if equitable subrogation is applied, it will
be materially prejudiced because it will lose any opportunity to recoup any of its
losses. And, in the absence of its application, even if B&B's priority is advanced,
2B&B also argue that equitable subrogation is not properly applied where the senior lien
is paid off as part ofa sale and not a refinance. In the latter circumstance, B&B contends the
lender fully expects to be substituted in the prior lender's position, but a purchaser who buys the
property outright has nosuch expectation. We reject the argument for three reasons. First, other
than the fact that Prestance and Newman Park arose in the context of a refinancing, B&B cite no
case authority in supportof this argument. Second, under the liberal approach to equitable
subrogation adopted in Newman Park, we find no meaningful distinction between the two
circumstances. And, third, Illustration 21 to Restatement § 7.6, cmt. d, contemplates just such a
situation as here, where equitable subrogation is properly applied in favor of the purchaser of a
property who pays off the senior lien, but which, unbeknownst to the purchaser, is also subject to
a junior lien. See infra at 9.
No. 71544-5-1/8
it cannot be unjustly enriched, given the Borrowers' retention of the sale
proceeds and subsequent default and the substantial decrease in the property's
value.
In support of its position, B&B relies primarily on Centreville Car Care, Inc.
v. N. Am. Mortgage Co., 263 Va. 339, 559 S.E.2d 870 (2002). But the case is
unavailing because it is distinguishable both on its facts and because Virginia,
unlike Washington, has not adopted § 7.6 of the Restatement.
In Centreville, the plaintiff, Centreville Car Care (Centreville) held a
second deed of trust on a property that was overlooked when the property was
purchased. 559 S.E.2d at 871. The purchasers paid off the first deed of trust and
gave the remainder of the sale proceeds to the original owners. JcL The
purchasers had borrowed money from a third lender, North American Mortgage,
to pay for the sale, and secured that loan with a first mortgage on the property.
Id. The original owners defaulted on their loan to Centreville, and Centreville
sought to foreclose. Id. North American Mortgage sought equitable subrogation,
claiming that its deed of trust should be senior to the Centreville mortgage, id.
The Virginia court disagreed, concluding that equitable subrogation was
inapplicable because Centreville was not unjustly enriched since it had the right
to anticipate that its secured interest would be improved and/or paid based on
the satisfaction of the first deed of trust, and that subrogation, if imposed would
materially prejudice Centreville because it would get virtually nothing in return on
its lien. \± at 874.
Although no Washington cases have addressed this precise factual
scenario, the result in Centreville appears to be directly at odds with § 7.6 of the
8
No. 71544-5-1/9
Restatement. The Centreville court found that subrogation would prejudice
Centreville because satisfaction of the senior lien did not result in payment of its
lien and that the improvement in the position of its lien was warranted. But the
comment to Restatement (Third) § 7.6(d) contemplates just such a situation and
concludes otherwise. Illustration 21 presents the following circumstance:
Mortgagor holds Blackacre subject to two mortgages, held
respectively by Mortgagee-1 and Mortgagee-2. Mortgagor sells
Blackacre to Grantee, falsely stating to Grantee that Blackacre is
subject only to the first mortgage and promising that Mortgagor will
pay and satisfy that mortgage obligation with the proceeds of the
sale. Grantee, believing this statement, makes no title examination
and is unaware of the existence of the second mortgage. Grantee
completes the purchase. Mortgagor uses the proceeds of the sale
to satisfy the first mortgage but does not satisfy the second.
Grantee is entitled to be subrogated to the rights of Mortgagee-1 as
against Mortgagee-2 and may enforce the first mortgage against
Mortgagee-2.
The comment concludes that "if the cash price paid by the grantee included the
second mortgage balance, subrogation to, rather than extinction of, the first
mortgage will result in order to prevent unjust enrichment ofthe second
mortgagee." In other words, under the Restatement, the City's payment would
bump B&B into the number one position without B&B having to take any action to
warrant such an advancement. See, Newman Park, 177 Wash. 2d at 575 (". . .
absent subrogation, the third party's payment would bump the number two
security interest into the number one position without the junior lienholder having
taken any action to warrant such an advancement."). Thus, in Washington, under
the circumstances presented here, absent the application of equitable
subrogation B&B would be unjustly enriched.
No. 71544-5-1/10
B&B's contention that it will be materially prejudiced by the application of
equitable subrogation is similarly unavailing. B&B offers examples of the
difficulties it has suffered at the hands of its Borrowers, but it fails to explain how
the application of equitable subrogation affects it in any material way. It
bargained for a second position mortgage and in exchange for that risk, it
obtained more favorable terms for the loan than it could have obtained
otherwise.3 Granting the City an equitable lien leaves B&B in the same bargained
for position as it was before. The Borrowers' default on the loan and the
decrease in value of the property are not effects attributable to subrogation.
B&B argues that Kim v. Lee. 145 Wash. 2d 79, 31 P.3d 665 (2001), supports
its claim that it will be prejudiced by equitable subrogation. But the case is
distinguishable. Kim involved the parents' loan to purchase property for their
children, secured by a deed of trust, with the children making payments. 145
Wash. 2d at 82. The children later took out a new loan, secured by a new deed of
trust, to pay off their parents' loan. Id. Kim had a judgment lien against the
children that he claimed succeeded to first position when the parents' loan was
paid off. jd. at 83. The Kim court held that the judgment lien had priority under the
rule of replacement and modification. Id. at 90. Under the rule, modification will
ordinarily cause a mortgage to lose priority to junior interests to the extent that
the modification is materially prejudicial to those interests. Id. The loan to the
3"If the first-priority mortagee forecloses, then a second-priority mortagee knows he can
recover any surplus remaining only after the first-priority mortagee has been fully satisfied.
Therefore, second-priority mortages often include terms to help alleviate this risk, such as higher
interest rates. It is unfair to allow a second-priority mortagee to take a first-priority but still enforce
the previously bargained-for terms. He gains the security ofa first-priority loan, while keeping the
favorable conditions of a second-priority loan." Prestance, 160 Wash. 2d at 564, n.4.
10
No. 71544-5-1/11
children was "not merely an extension of the maturity date or stretching out the
installment payments of the existing mortgage; rather, it was a new mortgage
and the change was from a 6-year maturity date to a 30-year maturity date." Id.
The court found that these modifications materially prejudiced Kim, because they
affected the loan's payoff time and Kim's ability to move into first priority. Id.
Here, however, there was no modification or replacement of the Mortgagelt loan
and, as noted above, B&B does not explain how subrogating the City to first
position puts B&B in any worse position than before.
We affirm the trial court's ruling and find that equitable subrogation should
be applied in this case. Accordingly, the City shall have an equitable lien with
priority over the B&B's deed of trust to the extent of the City's payment of the
Mortgagelt note.
Foreclosure of the Eguitable Lien
The City argues that if it is entitled to equitable subrogation, it must
necessarily be entitled to foreclose on the resulting equitable lien because
"[wjithout the ability to foreclose, a lien is meaningless." Supp. Br. of Respondent
at 1. According to the City, Ch. 6.21 RCW and case law allow an equitably
subrogated party to foreclose its equitable lien, citing Olson v. Chapman, 4
Wash. 2d 522, 104 P.2d 344 (1940), Worden v. Smith, 178 Wash. App. 309, 332, 314
P.3d 1125 (2013), and a string of earlier cases allowing tenants in common to
11
No. 71544-5-1/12
acquire and foreclose upon equitable liens.4 The cited cases are inapposite. For
example, in Olson and Worden, the principle cases on which the City relies, the
county had a tax lien on the subject properties and the parties seeking
subrogation to the lien had paid the taxes. In each case, the court permitted
subrogation and ordered foreclosure to recover the amounts owed. In neither
case did the subrogee, as the City does here, pursue foreclosure for the sole
purpose of eliminating a subordinate lien.
Chapter 6.21 RCW, Sales Under Execution, is likewise unavailing. That
statute allows a creditor to seek a sheriff's sale to execute against property
owned by a debtor to satisfy a money judgment. But here, the City has no money
judgment to enforce, nor could it have. It is uniformly recognized that a subrogee
has no right to a personal judgment against a mortgagor as a mortgagee would.
See 107A.L.R. 785.5Thus, Ch. 6.21 RCW is inapplicable under the facts of this
case.
4 These cases include Buraet v. Carolina. 31 Wash. 62, 71 P.724 (1903) (tenant in
common paid taxes on property and court found she had stated a cause of action for declaring a
lien on the land in that amount, and to have the lien foreclosed); Stone v. Marshall, 52 Wash. 375,
100 P. 858 (1909) (co-owneracquired a lien on the interests of others that could be foreclosed by
a suit in equity, but not by a tax sale); and City of Spokane v. Sec. Savings Soc, 46 Wash. 150,
89 P.466 (1907) (court invalidated a local assessment lien to the City but awarded ita lien for
delinquent general taxes).
5"A subrogee is, generally speaking, placed in the precise position of the one to whose
rights he is subrogated, and is entitled to all the rights and securities and to the benefit of all the
remedies which were available to such person. Itfollows from the very principles of the doctrine
of subrogation that one cannot thereby succeed to or acquire any claim or right which the person
for whom he is substituted did not have, the extent of his remedies and the measure of his rights
being controlled by those possessed by the creditor, and those rights, claims, and securities to
which he succeeds are taken subject to the limitations, burdens, and disqualifications incident to
them in the hands of his predecessor. Beyond this he has no right and no valid claim for
protection."
12
No. 71544-5-1/13
Nor does the City explain how its position, that it may properly foreclose
on its equitable lien, is consistent with controlling authority. As previously
discussed our supreme court has adopted in full Restatement (Third) § 7.6,
which permits equitable subrogation under the circumstances presented here,
but only "to the extent necessary to prevent unjust enrichment."
SourceCorp, Inc. v. Norcutt, 229 Ariz. 270, 274 P.3d 1204 (2012), a case
cited by the City, is instructive. There, Sourcecorp obtained a substantial
judgment against the Shills in September 2004. Ia\ at 272. The Shills owned
property that was then subject to a first mortgage in favor of Zions National Bank
(Zions Bank) that secured a debt of nearly $689,000. JU Sourcecorp recorded its
judgment lien against this property, jd. Accordingly, the property was then subject
to both the first mortgage in favor of Zions Bank and the subordinate judgment
lien in favor of Sourcecorp.
In November 2004, the Shills sold their property to the Norcutts for
$657,000. Id Zions Bank accepted $621,000 of these proceeds in full
satisfaction of the note secured by the first mortgage. ]d\ While the opinion does
not expressly say so, it appears the Shills told neither the closing agent nor the
Norcutts about the substantial judgment lien also encumbering the property.
Although the Norcutts purchased title insurance, the title insurance company
failed to discover the judgment lien in favor of Sourcecorp in the public records.
Id,
After closing of the sale, Sourcecorp sought a sheriff's sale of the
Norcutts' property based on the judgment lien against it. Id at 276. The Norcutts
sued to enjoin the sale, and the trial court granted that relief. Id. The Norcutts
13
No. 71544-5-1/14
then argued that they were equitably subrogated to the first lien position of Zions
Bank, which was prior to the judgment lien of Sourcecorp. jd. The trial court
rejected this position. Id. at 272.
When the case reached the Supreme Court of Arizona, the Court noted
there was some ambiguity in that state's case law regarding the proper test for
equitable subrogation. But the Court resolved that ambiguity by adopting
Restatement (Third) of Property: Mortgages, § 7.6. Sourcecorp, 229 Ariz, at
273.
When the court applied § 7.6 to the facts of the case, it concluded that the
Norcutts were entitled to be equitably subrogated to the first mortgage lien
position formerly held by Zions Bank. The extent of the subrogation was for the
$621,000 they paid to that bank from the proceeds of sale at closing to fully
satisfy the debt then owed by the Shills to the bank.
In addressing the argument of Sourcecorp that foreclosure of the equitable
subrogation lien in favor of the Norcutts would be improper, the court stated:
Recognizing that equitable subrogation depends on the facts of the
particular case, see Mosher, 45 Ariz, at 468, 46 P.2d at 112, we conclude
that it is not appropriate to confer on the Norcutts a right to "foreclose" on
the interest to which they are subrogated. Instead, the purposes of
equitable subrogation are fully served by deeming the Norcutts to have a
priority to proceeds from any sale of the property in the amount they paid
to satisfy the debt, $621,000.
jd, at 276. The court remanded the case to the trial court for entry of summary
judgment in favor of the Norcutts, the subrogees of Zion Bank's first lien. But that
relief was without the power to eliminate the subordinate judgment lien of
Sourcecorp.
14
No. 71544-5-1/15
The similarities between Sourcecorp and this case are striking. There, the
Shills' failed to disclose to the purchasers of their property the subordinate
judgment lien in favor of Sourcecorp. Here, the City purchased the property from
the Borrowers, who failed to disclose the existence of the subordinate deed of
trust held by B&B. There, the title insurance company failed to discover the
judgment lien that was subordinate to the first mortgage in favor of Zions Bank.
Here, the title insurance company failed to discover the second deed of trust that
was recorded in the public records at the time of the closing of the sale. There,
the closing agent disbursed part of the purchase price funds to satisfy the first
mortgage to Zions Bank without paying the subordinate lien. Here, the closing
agent disbursed part of the purchase funds to satisfy the first mortgage without
paying the debt secured by the second deed of trust. And, notably, both
jurisdictions have adopted the same provision of Restatement (Third) of
Property: Mortgages, § 7.6.
Applying the Restatement and the reasoning from Sourcecorp, we find
that the prevention of unjust enrichment does not extend so far as to grant the
City the right to foreclose on its equitable lien. The equitable purpose of
subrogation is fully served by permitting the City to succeed to first position with
priority of right to proceeds, in the amount of its equitable lien, from any sale.
Equity is preserved by allowing B&B to retain its second position lien. To the
extent that B&B's lien adversely affects the City's equity or renders the Property
less marketable, we neither address nor foreclose any claims the City may have
against its title insurer.
15
No. 71544-5-1/16
We affirm the grant of equitable subrogation and creation of an equitable
lien to the extent of the City's payment of the Mortgagelt loan. The City's lien has
priority over B&B's deed of trust. We reverse the order permitting the City to
foreclose on its equitable lien and remand to the trial court for entry of judgment
consistent with this opinion.
Affirm in part, reverse in part, and remand for entry of judgment.
WE CONCUR: ft
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16
Bel Air & Briney. et al. v. City of Kent. No. 71544-5-1
Cox, J. (concurring) — I concur. I write separately to address additional
aspects of the City's attempt to clear title to its property by use of a sheriff's sale.
Namely, the City seeks to extinguish the subordinate deed of trust held by Bel Air
& Briney that encumbers the property.
The trial court's amended judgment ordering foreclosure states that:
"upon completion of such Sheriff's Sale, Bel Air & Briney's Lien
upon the Property shall be extinguished and Bel Air & Briney, and
any and all persons claiming by, through, or under them, shall be
forever barred and foreclosed from any right, title, interest, lien, or
estate in and to the [City's] Property . . . ."[1]
The question is whether it is proper to use the sheriff's sale statutes to
extinguish the lien of the Bel Air & Briney deed of trust against the City's
property. Specifically, may the City enforce its equitable subrogation lien arising
from the former Mortgagelt, Inc. deed of trust, which has a higher lien priority,
against the subordinate Bel Air & Briney deed of trust?
The lead opinion discusses why the City is entitled to be equitably
subrogated to the lien priority of the former Mortgagelt, Inc. deed of trust, to the
extent the City paid the obligation secured by that encumbrance. Moreover, the
opinion correctly concludes that the City is not entitled to foreclose its equitable
subrogation lien due to prejudice to Bel Air & Briney.
In seeking to obtain clear title to its property in this case, the City ignores
the fact that it holds two distinct interests in its property. First, it holds title to the
property by virtue of the deed from Ms. Hoang Tran, the former owner. Second,
Clerk's Papers at 410-11 (emphasis added).
No. 71544-5-1/2 (concurring)
it also holds a first lien by equitable subrogation because it paid off the obligation
to Mortgagelt, Inc., which was secured by a deed of trust held by that lender.
Distinct rights are associated with these distinct property interests.
These distinct interests in the property do not merge, as the City properly
concedes. As the City correctly states "the merger doctrine [does not] defeat the
equitable subrogation rights of the City of Kent."2 Specifically, because merger is
a question of intent, there is a presumption that the City did not intend its two
interests in the property to merge. This is consistent with long-standing case law:
the existence of a junior, or intervening, encumbrance or equity will,
in the absence of a showing of an intention to the contrary, prevent
a merger of a prior mortgage in the fee, where the continued
existence of the mortgage is necessary to protect the mortgagee
against the intervening, junior claims.131
Any right to clear title that the City may have arises from its interest as the
holder of title to the property. This stems from the warranties arising from the
statutory warranty deed that Ms. Tran, the former owner of the property,
presumably signed and delivered at the closing ofthe sale.4
Of course, Bel Air & Briney was not a party to the deed given by Ms. Tran.
And Bel Air &Briney never represented to the City that title to the property was
clear of encumbrances. To the contrary, Bel Air & Briney always claimed the
property was subject to its deed of trust.
2Respondent's Statement ofAdditional Authorities Pursuant to RAP 10.8 at 1.
3 Gill v. Strouf. 5 Wash. 2d 426, 431, 105 P.2d 829 (1940).
4RCW 64.04.030(2) ("that the [property is] then free from all encumbrances"); Ensberq v.
Nelson, 178 Wash. App. 879, 886, 320 P.3d 97 (2013), review denied, 180 Wash. 2d 1012 (2014).
No. 71544-5-1/3 (concurring)
Accordingly, the claim of a right to clear title by the City primarily arises
from its status as title holder to the property. This status is distinct from the grant
of an equitable subrogation lien against its property. It is the status of lien holder
that would, ordinarily, permit foreclosure under the sheriff's sale statutes. The
status of title holder does not. There simply is no authority for the City to use the
sheriff's sale statutes to extinguish the lien of Bel Air & Briney's deed of trust
against the City's property under the circumstances of this case.
For the reasons discussed in the lead opinion and here, I concur.
£&*> J.