Sterling Savings Bank v. Stanley Xu ( 2015 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
STERLING SAVINGS BANK, No. 72149-6-
Appellant, DIVISION ONE
v.
STANLEY XU and NANLING CHEN,
husband and wife and the marital
community comprised thereof; UNPUBLISHED OPINION
LONGWELL PARKRIDGE, LLC,
a Washington limited liability company;
and PARKRIDGE PROPERTY, LLC,
a Washington limited liability company,
Respondents. FILED: September 28, 2015
Schindler, J. — Following a bench trial, the court entered a judgment against
Sterling Savings Bank for approximately $2.7 million. Sterling Bank contends the court
erred in denying its request for an offset. Because the unchallenged findings establish
Sterling Bank had no right to the $2.7 million and Sterling Bank did not meet its burden
of proving it was entitled to an offset, we affirm.
FACTS
Parkridqe Property LLC
Charles Diesing owned a 249-unit apartment building in Everett. In 2008,
Diesing agreed to enter into a partnership with Stanley Xu and his spouse to finance
their purchase and make improvements to the apartment building.
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Diesing through CFD Funding I LLC (CFD LLC) and Xu through Longwell
Parkridge LLC (Longwell LLC) formed Parkridge Property LLC (Parkridge LLC).
Parkridge LLC obtained a $14.95 million loan from General Electric Capital Corporation
(GE Capital) to finance the purchase and make improvements to the apartment building.
The loan was secured by a deed of trust on the apartment building.
CFD LLC agreed to provide $6 million in supplemental financing in exchange for
a 75 percent equity interest in Parkridge LLC and a 7.5 percent preferred return on its
capital contribution. CFD LLC and Longwell LLC agreed Parkridge LLC would redeem
CFD LLC's ownership interest for $6 million within three years. Xu personally
guaranteed the obligation to repay the $6 million by August 2011.
CFD LLC attorney Robert deNormandie and Longwell LLC attorney Rebecca
Wiess drafted the operating agreement for Parkridge LLC. The agreement designates
Longwell LLC as the managing member of Parkridge LLC and CFD LLC as a
nonmanaging member.
The operating agreement requires Longwell LLC to "act in a fiduciary manner" on
behalf of Parkridge LLC and CFD LLC. The agreement requires Longwell LLC to obtain
the written consent of CFD LLC in order to borrow "any money" on behalf of Parkridge
LLC. The agreement also requires Longwell LLC to obtain CFD LLC's written consent
before granting "any lien, claim, encumbrance or security interest" against the property.
The agreement states, in pertinent part:
(a) Limitations on Authority. The written approval of the
Managing Member and the Non-Managing Member shall be required for
each of the following actions:
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(iv) Any refinance or replacement of the Bank Loan or the
borrowing of any money by the Company (other than trade payables
incurred in the ordinary course of business) or the voluntary granting of
any lien, claim, encumbrance or security interest by the Company with
respect to any asset of the Company, as security for the debts and
obligations of the Company or otherwise.
Sterling Savings Bank Loan
Without the knowledge or consent of CFD LLC or Diesing, Xu applied for an $18
million loan from Sterling Savings Bank (Sterling Bank) in January 2011. Xu
represented that Longwell LLC had the authority to execute loan documents on behalf
of Parkridge LLC in the loan application. Xu submitted a "forged fraudulent and false"
operating agreement for Parkridge LLC that identified Xu and his spouse as the only
members and the managing members.
Although it normally takes between 45 and 60 days to approve a commercial
loan, Sterling Bank gave its attorney only 9 days to do so. Sterling Bank's attorney
recommended the bank obtain a legal opinion from the attorney representing Parkridge
LLC confirming the authority of Longwell LLC to execute loan documents on behalf of
Parkridge LLC.
Attorney Rebecca Wiess drafted an opinion letter on behalf of Parkridge LLC.
The letter states, in pertinent part, "The borrower has all requisite power and authority to
carry on its business as now conducted, to own its property, and to execute and deliver
and to perform all of its obligations under the loan documents." Neither Sterling Bank's
attorney nor anyone at Sterling Bank read the opinion letter before closing the $18
million loan. The loan was secured by a deed of trust on the apartment building.
Sterling Bank paid off the GE Capital loan of approximately $15 million. Sterling
Bank deposited the remaining $2.76 million directly into Xu's personal bank account.
No. 72149-6-1/4
CFD LLC Complaint against Xu. Longwell LLC, and Sterling Bank
After Diesing learned about the Sterling Bank loan, he filed a complaint on behalf
of CFD LLC to quiet title and for damages against Xu, Longwell LLC, and Sterling Bank.
The lawsuit alleged claims of breach of contract, breach of fiduciary duty, conversion,
and unjust enrichment against Xu and Longwell LLC.1 CFD LLC acknowledged Sterling
Bank was entitled to reimbursement for the approximately $15 million paid to GE
Capital. CFD LLC requested an award of damages "in an amount to be proven at trial,
but not less than $3,000,000.00, plus penalties, interest, costs and attorneys' fees."
CFD LLC alleged the deed of trust that Longwell LLC executed to secure the
loan from Sterling Bank was void. CFD LLC alleged the bank "knew or should have
known" that Longwell LLC could not execute loan documents or grant a security interest
against the apartment building on behalf of Parkridge LLC. The court granted CFD
LLC's motion to appoint a receiver.
Summary Judgment against Xu and Longwell LLC
In December 2011, the court granted CFD LLC's motion for summary judgment
against Xu and Longwell LLC. The court ruled as a matter of law that Xu and Longwell
LLC were liable to CFD LLC for breach of contract and breach of fiduciary duty.
Sale of Property and CR 2A Agreement
In June 2012, the receiver negotiated the sale of the apartment building for
$17.85 million. CFD LLC and Sterling Bank entered into a CR 2A settlement
agreement. CFD LLC agreed Sterling Bank was entitled to approximately $15 million of
the sale proceeds under the doctrine of equitable subrogation. The parties agreed that
1 Upon learning that Sterling Bank deposited the loan proceeds directly into Xu's personal bank
account rather than Parkridge LLC's corporate account, CFD LLC withdrew its claims for conversion and
unjust enrichment.
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distribution of the remaining net proceeds of approximately $2.7 million to Sterling Bank
would be "without prejudice to either party to assert claims and defenses as to which
party has priority to the proceeds in excess of the $14,950,000 amount claimed under
the doctrine of equitable subrogation."
The court granted the receiver's motion to approve the sale. The order states, in
pertinent part:
[It is] FURTHER ORDERED that the sale of the Property shall be free and
clear of any and all liens and of all rights of redemption and that any and
all security interests and other liens encumbering the Property shall
transfer and attach to the proceeds of the sale of the Property ... in the
same order, priority, and validity as such liens had with respect to the
Property immediately before the sale.
Amended Complaint
In April 2013, the court granted CFD LLC's motion to amend the complaint to
assert a legal malpractice and negligence claim against attorney Rebecca Wiess. The
court also granted the motion to substitute Parkridge LLC as the real party in interest.
In answer to the second amended complaint, Sterling Bank asserted a
counterclaim for breach of contract. Sterling Bank alleged Parkridge LLC defaulted on
its repayment obligation under the loan agreement and requested judgment for the
outstanding amount of the loan plus interest, costs, and attorney fees.
In February 2014, Sterling Bank filed a motion for summary judgment against Xu
and his spouse for breach of the guaranty and fraud and requested an award of
$676,217.42 in damages. The court granted the motion. The court entered judgment
against Xu and his spouse in the amount of $676,217.42 plus attorney fees.
A month before the trial scheduled in April 2014, Parkridge LLC settled with
Wiess for $1 million.
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Trial
The only issue at trial was the dispute between Parkridge LLC and Sterling Bank
over the approximately $2.7 million in sale proceeds. Sterling Bank claimed it had
priority under the deed of trust that secured the loan to Parkridge LLC executed by Xu
on behalf of Longwell LLC. Sterling Bank asserted the deed of trust was valid because
Longwell LLC had actual and apparent authority to execute the loan documents.
Sterling Bank argued it reasonably relied on the representations of Xu and Wiess in
agreeing to make the $18 million loan. In the alternative, Sterling Bank argued it was
entitled to enforce the deed of trust against Parkridge LLC as a bona fide
encumbrancer. In addition to an award of the approximately $2.7 million in sale
proceeds, Sterling Bank claimed it was entitled to a deficiency judgment against
Parkridge LLC in the amount of $725,544.92.
A number of witnesses testified during the six-day bench trial including CFD LLC
attorney Robert deNormandie, Sterling Bank attorney Ren Hayhurst, and Sterling Bank
Executive Vice President Robert Williams.
When asked about the opinion letter written by Wiess, Hayhurst admitted he did
not "actually read or review the opinion letter itself before the loan closed" and did not
"even see the opinion letter until after this lawsuit started." Sterling Bank Executive Vice
President Williams testified that neither he nor any employee of Sterling Bank read the
opinion letter before the $18 million loan closed.
In closing, Sterling Bank argued it was not bound by the CR 2A agreement
regarding the distribution of sale proceeds. The attorney asserted that "Parkridge, as
far as I'm concerned, was not a party to that agreement" because "Parkridge was not
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the plaintiff at the time." Sterling Bank also argued it would be inequitable to award
Parkridge LLC the sale proceeds because of the settlements with Parkridge LLC,
Sterling Bank, Xu, Longwell LLC, and Wiess.
The court ruled that because Longwell LLC did not have the authority to borrow
money or grant a security interest without CFD LLC's consent, the deed of trust
executed by Xu on behalf of Longwell LLC to secure the $18 million loan from Sterling
Bank was void. The court found Sterling Bank should have conducted its own
investigation to verify the authority of Xu on behalf of Longwell LLC to obtain the loan
and execute the deed of trust. The court found the opinion letter written by Wiess "plays
no role because it wasn't read, it wasn't reviewed, and it wasn't relied upon." The court
awarded Parkridge LLC "$2.7 million roughly of proceeds over and above the $15
million necessary to pay off the loan."
At the conclusion of the oral ruling, the court asked, "Is there anything I failed to
address?" Sterling Bank's attorney responded, "[W]hat has not been addressed is the
$1 million payment that Rebecca Wiess' insurance carrier paid to the plaintiffs already
and whether that's an offset to that." The court found there was no evidence "to support
an offset to suggest that that is attributable to this dispute."
The court entered extensive written findings of fact and conclusions of law. The
conclusions of law state the deed of trust was void "because it was granted without
CFD's knowledge or consent in violation of the Parkridge Agreement."
The court found that Sterling Bank did not read or rely on the opinion letter
drafted by Wiess and concluded the letter did not constitute a manifestation of apparent
authority upon which Sterling Bank could reasonably rely. The court also found that
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because "a reasonable further inquiry would have revealed that Xu was not authorized
to enter into the loan on Parkridge's behalf," Sterling Bank was not a bona fide
encumbrancer.
The court concluded that under the doctrine of equitable subrogation, "Sterling
was entitled to an equitable lien on the Property" in the amount of $15,014,646.77 for
paying the GE Capital loan.2 The court concluded Sterling Bank was "bound by its [CR
2A] agreement" that the distribution of the sale proceeds to the bank "was without
prejudice of either party to assert claims and defenses as to which party has priority to
the proceeds in excess of the amount that Sterling Bank paid to GE Capital."
The court concluded Parkridge LLC was entitled to the sale proceeds that
exceeded the equitable lien. The court entered judgment against Sterling Bank for
$2,699,374.07. The court denied Sterling Bank's request for an offset, finding the bank
"did not show what part, if any, of Parkridge LLC's settlement with Wiess was
attributable to the claim it seeks to offset." The court concluded that in the absence of
any evidence about the claims resolved in the settlement between Parkridge LLC and
Wiess, Sterling Bank "did not meet its burden of proving" that it was entitled to the
equitable remedy of an offset.
ANALYSIS
Sterling Bank appeals the denial of its request for an offset of the judgment.
Sterling Bank does not challenge the determination that the deed of trust is void and
that the bank is not a bona fide encumbrancer. Sterling Bank challenges only the
2 See Columbia Cmtv. Bank v. Newman Park. LLC. 166 Wash. App. 634, 644-45, 279 P.3d 869
(2012) (holding that under the doctrine of equitable subrogation, a lender who repaid the borrower's
previous loan is entitled to assume the position of the first priority lienholder), aff'd, 177 Wash. 2d 566, 570,
304 P.3d 472 (2013).
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No. 72149-6-1/9
conclusion that the bank did not present any evidence to show what part of the Wiess
settlement was attributable to the claim it seeks to offset and did not meet its burden of
proving it was entitled to an offset.
We review a trial court's findings of fact entered after a bench trial to determine
whether they are supported by substantial evidence and whether those findings, in turn,
support the conclusions of law. Ridgeview Props, v. Starbuck, 96 Wash. 2d 716, 719, 638
P.2d 1231 (1982). Substantial evidence is the quantum of evidence sufficient to
persuade a rational fair-minded person the premise is true. Sunnvside Valley Irrigation
Dist. v. Dickie. 149 Wash. 2d 873, 879, 73 P.3d 369 (2003). Where a factual finding is
denominated as a conclusion of law, we treat it as a finding of fact. State ex rel. Lige &
Wm. B. Dickson Co. v. County of Pierce, 65 Wash. App. 614, 624 n.13, 829 P.2d 217
(1992). Where, as here, the findings of fact are not challenged, we treat the findings of
fact as verities on appeal. In re Estate of Jones, 152 Wash. 2d 1, 8, 93 P.3d 147 (2004).
Because the unchallenged findings support the conclusion that the deed of trust
is void and unenforceable, we conclude Sterling Bank had no right to the disputed sale
proceeds. In any event, substantial evidence supports the conclusion that Sterling Bank
did not meet its burden of showing it was entitled to an offset for the $1 million
settlement with Wiess.
The party requesting an offset has the burden of proving the prevailing party
recovered from two defendants for the same injury. Puget Sound Energy, Inc. v. Alba
Gen. Ins. Co., 149Wn.2d 135, 141,68P.3d 1061 (2003): Weyerhaeuser Co. v.
Commercial Union Ins. Co., 142 Wash. 2d 654, 673-75, 15 P.3d 115 (2000). To meet this
burden, the party seeking an offset must make an affirmative showing as to which
No. 72149-6-1/10
portion, if any, of the recovery "was attributable to the claim it seeks to offset." Puget
Sound Energy, 149 Wash. 2d at 141.
Settlements typically involve "far more than a simple release of liability" for a
particular claim alleged in the complaint. Weyerhaeuser, 142 Wash. 2d at 673. In many
cases, the settling party "also purchase[s] certainty by avoiding the risks of an adverse
trial outcome—not to mention forgoing the expenses associated with a lengthy trial and
appeal." Weyerhaeuser, 142 Wash. 2d at 673. As the trial court noted, the amount paid in
a settlement often represents "a release from an unquantifiable basket of risks and
considerations." Weyerhaeuser, 142 Wash. 2d at 673.3
Sterling Bank relies on the complaint CFD LLC filed against Wiess, the testimony
of CFD LLC attorney Robert deNormandie, and findings of fact 42 and 45 to argue it
met its burden of proving it was entitled to an offset for the $1 million settlement
between Parkridge LLC and Wiess.
Neither the allegations in the complaint against Wiess nor the testimony of
deNormandie show what portion of the settlement is attributed to the asserted claims.
DeNormandie testified that CFD LLC sued Wiess only "in connection with" the
fraudulent loan transaction. The amended complaint alleges Wiess breached her duty
of care by failing to confirm whether CFD LLC consented to refinancing the GE Capital
loan, failing to "carefully review" the loan documents that Longwell LLC submitted, and
3 Internal quotation marks omitted.
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No. 72149-6-1/11
issuing the opinion letter to obtain the loan from Sterling Bank.4
Finding of fact 42 and 45 do not support the argument that the bank met its
burden of proving it was entitled to an offset. Finding of fact 42 states:
Rebecca Wiess drafted an opinion letter on Parkridge's behalf
[Exhibit 52]. Xu e-mailed Wiess' opinion letter to Chicago Title on the
evening of Sunday, January 30, 2011. The Loan closed on Monday,
January 31, 2011.
Finding of fact 45 states:
On the day the loan closed, a representative from Chicago Title
informed [Sterling Bank's outside counsel] Hayhurst that Chicago Title had
received the opinion letter, that it was on Wiess' letterhead and that Wiess
had signed the letter.
Further, Sterling Bank ignores the unchallenged findings that establish neither
Sterling Bank's attorney nor anyone at the bank read or relied on the opinion letter
before closing the loan. Finding of fact 43 states:
Sterling did not read Wiess' Opinion Letter before the Loan closed.
Sterling did not rely upon Wiess' Opinion Letter in making the Loan.
Finding of fact 44 states:
Neither Hayhurst nor any other attorney at [his law firm] read
Wiess' opinion letter before the Loan closed. Hayhurst doesn't know
when [his law firm] actually received a copy of the opinion letter. Hayhurst
did not read the opinion letter until after the lawsuit was filed in July 2011.
Because substantial evidence supports the court's finding that Sterling Bank did
not meet its burden of establishing "what part, if any, of Parkridge's settlement with
4 Paragraph 9.12 of the amended complaint alleges:
Wiess breached the duty of care she owed towards Parkridge by: (1) failing to verify that
CFD approved the Sterling Loan, as required by the terms of the Parkridge Agreement;
(2) failing to carefully review the Sterling loan documents and discover that Longwell was
falsely representing itself to be Parkridge's sole member; and (3) issuing the [Opinion]
Letter, in which she falsely represented that Parkridge's "execution, delivery and
performance" of the loan documents "had been duly authorized by all necessary action"
and did not "require any consent or approval of any members" of Parkridge or "violate
any provision of the [Parkridge] articles of organization or operating agreement."
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No. 72149-6-1/12
Wiess was attributable to the claim it seeks to offset," we conclude the court did not
abuse its discretion in denying the request for an offset. See Scott's Excavating
Vancouver, LLC v. Winlock Props., LLC. 176 Wash. App. 335, 348, 308 P.3d 791 (2013)
("We review a trial court's decision to grant an offset for abuse of discretion.").
We affirm entry of the judgment against Sterling Bank. Upon compliance with
RAP 18.1, Parkridge LLC is entitled to attorney fees and costs on appeal as provided
for in the deed of trust. See Labriola v. Pollard Grp., Inc., 152 Wash. 2d 828, 839, 100
P.3d 791 (2004).
^QaJ^A,;
WE CONCUR:
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