Insight Assets, Inc. v. Farias

This opinion is subject to revision before final
publication in the Pacific Reporter
2013 UT 47IN THE
SUPREME COURT OF THE STATE OF UTAH
INSIGHT ASSETS, INC.,
Appellant, Cross-Appellee and
Plaintiff, Counterclaim-Defendant,
v.
HOMERO FARIAS,
Appellee, Cross-Appellant and
Defendant, Counterclaim-Plaintiff.
No. 20110020
Filed August 6, 2013
Second District, Ogden Dep’t
The Honorable W. Brent West
No. 090908263
Attorneys:
Kelly Ann Booth, Salt Lake City, for appellant
Ronald G. Russell, Rodger M. Burge, Jeffery A. Balls,
Salt Lake City, for appellee
ASSOCIATE CHIEF JUSTICE NEHRING, authored the opinion of
the Court, in which CHIEF JUSTICE DURRANT, JUSTICE DURHAM,
JUSTICE PARRISH, and JUSTICE LEE joined.
ASSOCIATE CHIEF JUSTICE NEHRING, opinion of the Court:
INTRODUCTION
¶1 This case concerns the relative priorities of a vendor
purchase money mortgage and a third-party purchase money
mortgage, and the application of the doctrine of laches to purchase
money mortgagees who fail to assert their claims in a timely manner.
We conclude that, although Insight Assets, as vendor purchase
money mortgagee, may have a superior claim of right, its claim is
barred by the doctrine of laches, and accordingly affirm.
INSIGHT ASSETS v. FARIAS
Opinion of the Court
BACKGROUND
¶2 In 2004, Joseph and Denise Phalen (Sellers) owned property
located in Ogden, Utah. Sellers entered into a Real Estate Purchase
Contract (REPC) with William and Roberta Boeck (Buyers). The
parties agreed on a purchase price of $88,000. Of this, $70,300 was
to be financed through a third-party purchase money mortgage by
First Franklin Financial Corporation (Bank), $100 was paid as an
earnest money deposit, and $17,600 would be provided through
seller financing, otherwise known as a vendor purchase money
mortgage. Sellers were aware of the financing arrangement but
never communicated with Bank.
¶3 Sellers executed a Warranty Deed conveying the property to
Buyers. Buyers executed a Deed of Trust naming Bank as
beneficiary (Bank Trust Deed), securing repayment of Bank’s loan.
Buyers also executed a Trust Deed evidencing the seller financing
(Sellers Trust Deed). After closing, the instruments were recorded
together in this order: (1) Warranty Deed from Sellers to Buyers,
(2) Bank Trust Deed, and (3) Sellers Trust Deed. Bank’s Trust Deed
was subsequently assigned to Wells Fargo Bank.
¶4 Shortly after closing, Buyers defaulted on their obligations
to both Bank and to Sellers. In June 2005, Wells Fargo foreclosed on
the property and properly recorded its deed. Sellers never
attempted to foreclose on the property, nor did they assert any rights
to it. Wells Fargo conveyed the property to another buyer, who
conveyed the property to yet another buyer, who ultimately
conveyed the property to Homero Farias, the defendant in this case.
¶5 In 2009, Sellers assigned their interest in the outstanding
Sellers Trust Deed to Insight Assets, the plaintiff in this case. Insight
Assets, through its substitute trustee, recorded a notice of default,
stating that a default in Sellers Trust Deed had occurred and that
Insight Assets had elected to sell the property to satisfy the amounts
owing.
¶6 The district court determined, on summary judgment, that
Mr. Farias took the property as a bona fide purchaser and therefore
Insight Assets had no claim against him or the property. Insight
Assets appealed. Mr. Farias cross-appealed the issue of attorney
fees.
2
Cite as: 2013 UT 47Opinion of the Court
ISSUES AND STANDARDS OF REVIEW
¶7 Insight Assets contests the district court’s grant of summary
judgment to Mr. Farias. The court concluded that Mr. Farias was a
bona fide purchaser for value. A district court’s grant of summary
judgment is a question of law that we review for correctness.1
Furthermore, an appellate court may affirm a district court’s ruling
on “any legal ground or theory apparent on the record.”2
1. Insight Assets also argues that as a matter of law Sellers Trust
Deed had a higher priority than the Bank Trust Deed, despite the
order of recording. The district court did not reach this issue, but
it also presents a question of law.
¶8 On cross-appeal, Mr. Farias contends that the district court
erred in refusing to award him attorney fees under Utah Code section
78B-5-826. We review a district court’s interpretation of a statute for
correctness.3
ANALYSIS
I. THE PURCHASE MONEY RULE
¶9 Insight Assets correctly asserts the general Purchase Money
Rule: a vendor purchase money mortgage, more simply called seller
financing, ordinarily takes priority over any other third-party
purchase money mortgage, typically bank financing. “Where the
contest is between a purchase money mortgage to a third person who
advances part of the purchase price . . . and a purchase money
mortgage to the vendor . . . for the balance, the latter is given
preference even if he had notice of the former.”4 This is because, as
the Restatement explains, “the equities favor the vendor.”5 The
vendor not only parts with money but with specific real estate, which
the vendor would not relinquish except for the understanding that
the vendor will be able to use the relinquished real estate to satisfy
1
Harvey v. Cedar Hills City, 2010 UT 12, ¶ 10, 227 P.3d 256.
2
Bailey v. Bayles, 2002 UT 58, ¶ 10, 52 P.3d 1158 (internal quotation
marks omitted).
3
See Turner v. Staker & Parsons Cos., 2012 UT 30, ¶ 7, 284 P.3d 600.
4
Kemp v. Zions First Nat’l Bank, 470 P.2d 390, 393 (Utah 1970)
(internal quotation marks omitted).
5
RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 7.2 cmt. d (1997).
3
INSIGHT ASSETS v. FARIAS
Opinion of the Court
the mortgage owed the vendor.6 “[T]he law is more sympathetic to
the vendor’s hazard of losing real estate previously owned than to
the third party lender’s risk of being unable to collect from an interest
in real estate that never previously belonged to it.”7
¶10 This rule, however, is not absolute. As we stated in Kemp v.
Zions First National Bank, “an examination of the authorities and the
principles involved will show that the result actually depends upon
the circumstances of the given case, the equities, and the effect of the
recording act.”8 The Restatement also specifies that “where only one
of the parties has notice of the other, the recording acts, rather than
[the Purchase Money Rule], should govern and should award
priority to the party lacking notice.”9
¶11 In Kemp, even though there was both a vendor purchase
money mortgage and a third-party mortgage, this court turned its
focus to the facts that the sellers “had given an unrestricted warranty
deed, knowing that the financing bank was going to rely on it,” “the
bank had neither actual nor constructive knowledge that the vendor
retained an interest in the property,” and sellers, “who had failed to
record their own mortgage . . . went to the bank and in effect
approved the transaction by accepting their share of the proceeds
therefrom, but without disclosing that they retained an interest.”10 In
light of these facts, this court concluded that the third-party purchase
money mortgage had priority.11
¶12 The Supreme Court of Colorado considered a fact pattern
nearly identical to the facts at issue now in ALH Holding Co. v. Bank
of Telluride.12 In that case, as in this one, the buyer purchased the
home with both a loan from the bank and a loan from the sellers.13
6
Id.
7
Id.
8
470 P.2d at 393.
9
RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 7.2 cmt. d.
10
470 P.2d at 393.
11
Id.
12
18 P.3d 742 (Colo. 2000).
13
Id. at 743.
4
Cite as: 2013 UT 47Opinion of the Court
The bank loan was recorded moments before the sellers’ loan.14 The
buyer defaulted on both notes, and the bank foreclosed.15
Significantly, however, the bank and the seller knew about the other’s
loan.16 The Supreme Court of Colorado determined that the bank’s
note—the third-party mortgage—would have had priority over the
vendor purchase money mortgage, except for the critical fact that it
“was not entitled to the benefits of the recording statute because it
had notice of [the seller’s] unrecorded instrument prior to acquiring
rights of its own in the property.”17
¶13 Insight Assets does not dispute that in order for the Purchase
Money Rule to apply, the parties must have had notice of each other’s
purchase money mortgage. On appeal, Insight Assets argues both
that Bank had actual knowledge of the vendor purchase money
mortgage (a question of fact), and that the title company’s knowledge
of the vendor purchase money mortgage was imputed to Bank (a
question of law).
¶14 Mr. Farias advances three lines of defense. First, he argues
that Bank did not know of the vendor purchase money mortgage,
and therefore the Purchase Money Rule does not apply. Second, he
argues that even if Bank did know of the vendor purchase money
mortgage, the matter is irrelevant because Mr. Farias was a bona fide
purchaser and therefore took the property free and clear. And third,
he argues Insight Assets’ claims are barred by the doctrine of laches.
We disagree with Mr. Farias and the district court that he was a bona
fide purchaser, because the fact that Sellers Trust Deed was recorded
before the conveyance to Mr. Farias removes this case from the ambit
of the Recording Act and the availability of relief to a bona fide
purchaser. However, because we hold that the doctrine of laches
bars Insight Assets’ claim, we need not determine, as a question of
fact or of law, whether Bank knew of the vendor purchase money
mortgage.
14
Id.15
Id. at 744.
16
Id. at 743.
17
Id. at 747.
5
INSIGHT ASSETS v. FARIAS
Opinion of the Court
II. THE RECORDING ACT DOES NOT APPLY
TO MR. FARIAS’ CLAIM BECAUSE THE
PRIOR INTEREST WAS RECORDED
¶15 Mr. Farias argues that even if the vendor purchase money
mortgage were in the first position, he had no notice of this and took
the property free and clear as a bona fide purchaser for value. The
district court agreed with Mr. Farias on this point and based its ruling
on this conclusion. We disagree.
¶16 Utah’s Recording Act provides:
Each document not recorded as provided in this title is
void as against any subsequent purchaser of the same
real property, or any portion of it, if:
(1) the subsequent purchaser purchased the property
in good faith and for a valuable consideration; and
(2) the subsequent purchaser’s document is first duly
recorded.18
On its face, the Recording Act applies only to prior unrecorded
interests. Here, Sellers Trust Deed was recorded in 2004—three years
before the conveyance to Mr. Farias. There are no allegations that the
recording was defective or improper in any way. Therefore, the
appropriate analysis of the competing interests lies outside of the
Recording Act.
III. INSIGHT ASSETS’ CLAIMS ARE BARRED
BY THE DOCTRINE OF LACHES
¶17 “The equitable doctrine of laches is founded upon
considerations of time and injury. Laches in legal significance is not
mere delay, but delay that works a disadvantage to another.”19
Laches is “based upon [the] maxim that equity aids the vigilant and
not those who slumber on their rights.”20
¶18 Insight Assets argues that laches is inapplicable because it
filed its notice of default within the six year statute of limitations for
18
UTAH CODE § 57-3-103.
19
Mawhinney v. Jensen, 232 P.2d 769, 773 (Utah 1951) (internal
quotations marks omitted).
20
CIG Exploration, Inc. v. State, 2001 UT 37 ¶ 14, 24 P.3d 966(alteration in original) (internal quotation marks omitted).
6
Cite as: 2013 UT 47Opinion of the Court
obligations in writing.21 Insight Assets is correct that six years is the
applicable statute of limitations for relief under the Trust Deed and
we have stated that “it is the practically invariable rule that laches
cannot be a defense before the statutory limitation has expired.”22
However, that rule is not absolute. It is also true that “[t]he doctrine
of laches may apply in equity, whether or not a statute of limitation
also applies and whether or not an applicable statute of limitation has
been satisfied.”23 Both the Purchase Money Rule and mortgage
foreclosure actions are equitable in nature and therefore subject to the
equitable defense of laches, irrespective of whether the statute of
limitations period has run.24
21
UTAH CODE § 78B-2-309; see id. § 57-1-34 (“The trustee’s sale of
property under a trust deed shall be made, or an action to foreclose
a trust deed as provided by law for the foreclosure of mortgages on
real property shall be commenced, within the period prescribed by
law for the commencement of an action on the obligation secured by
the trust deed.”).
22
F.M.A. Fin. Corp. v. Build Inc., 404 P.2d 670, 672 (1965). While
F.M.A. Financial is similar to the case at hand in some respects,
namely, that both cases involve a party seeking repayment of an
obligation secured by real estate and in both cases the party initiated
such action over halfway through the six year statute of limitations,
the facts of F.M.A. Financial are notably different. In F.M.A.
Financial, the defendant seeking relief under the doctrine of laches
was the original obligor on the promissory note and another court
had previously denied its defense to the underlying obligation. Id.Furthermore, had laches applied in that case, it would have
“result[ed] in giving [the defendant the benefit of the real estate
transaction while] reliev[ing] him of his obligation to pay the agreed
commission.” Id. But most importantly, the defendant presented
no disputed material facts relevant to the elements of laches. Id. As
such, there was no reason to depart from the “practically invariable
rule” in that case because the laches defense failed as a matter of
law. Id.23
Am. Tierra Corp. v. City of W. Jordan, 840 P.2d 757, 763 (Utah
1992).
24
See DOIT, Inc. v. Touche, Ross & Co., 926 P.2d 835, 845 (Utah
1996) (“The doctrine of laches is an equitable defense which arises in
(continued...)
7
INSIGHT ASSETS v. FARIAS
Opinion of the Court
¶19 “[L]aches has two elements: (1) a party’s lack of diligence
and (2) an injury resulting from that lack of diligence.”25 Both
elements are present here.
¶20 First, Insight Assets, as assignee of Sellers’ interest, lacked
diligence in asserting its rights to the property.26 “The length of time
that constitutes a lack of diligence depend[s] on the circumstances of
each case.”27 Here, during the five years between Buyers’ default and
Sellers’ assignment to Insight Assets, Sellers took no action to clarify
or assert their rights to the property. Indeed, the priority of Sellers
Trust Deed over the earlier-recorded Bank Trust Deed was
dependent on the Purchase Money Rule, a multi-factor balancing test
under which priority is determined by “the circumstances of the
given case, the equities, and the effect of the recording act.”28 Thus,
Sellers could not have rationally assumed that their interest had
priority over Bank’s interest without having brought an action to
determine priority. Because the foreclosure by a senior interest-
holder extinguishes a junior interest-holder’s security interest in the
property, by failing to bring a claim during Bank’s foreclosure
proceedings, Sellers risked forfeiting their security interest entirely.
We can conceive of no explanation for Sellers’ inaction other than
lack of diligence.
¶21 Second, if we allowed Insight Assets’ untimely claim to
proceed, Mr. Farias would be injured. Mr. Farias negotiated the price
24
(...continued)
cases where the plaintiff seeks equitable relief.”).
25
Fundamentalist Church of Jesus Christ of Latter-Day Saints v.
Lindberg, 2010 UT 51, ¶ 27, 238 P.3d 1054; see Fundamentalist Church
of Jesus Christ of Latter-Day Saints v. Horne, 2012 UT 66, ¶ 29, 289 P.3d
502.
26
“[A]n assignee stands in the shoes of its assignor,” and an
“assignee is subject to any defenses that would have been good
against the [assignor].” Sunridge Dev. Corp. v. RB & G Eng’g, Inc.,
2010 UT 6, ¶¶ 13, 15, 230 P.3d 1000 (second alteration in original)
(internal quotation marks omitted). Therefore, any delay by Sellers
is attributable to Insight Assets for purposes of our laches inquiry.
27
Lindberg, 2010 UT 51, ¶ 28 (alteration in original) (internal
quotation marks omitted).
28
Kemp v. Zions First Nat’l Bank, 470 P.2d 390, 393 (Utah 1970).
8
Cite as: 2013 UT 47Opinion of the Court
for his home without considering the $17,600 debt that Insight Assets
claims is secured by the property. When Mr. Farias purchased the
property three years after Buyers’ default, it was reasonable for him
to infer from Sellers’ inaction that their security interest had been
extinguished by Bank’s foreclosure. In addition, the passage of time
has made it difficult for Mr. Farias to gather evidence in his defense.
The linchpin of Insight Assets’ theory that its claim is entitled to
priority under the Purchase Money Rule is the original third-party
lender’s knowledge of the seller financing. However, the original
third-party lender has gone out of business, and Mr. Farias has been
unable to locate its records or its former employees who may have
information relevant to this case. Mr. Farias has also been unable to
locate Buyers. In sum, the passage of time due to Insight Assets’ lack
of diligence has injured Mr. Farias in his ability to defend this action.
¶22 Because Insight Assets and its predecessors in interest have
slumbered on their rights, equity should not come to their aid.29 As
such, the doctrine of laches bars Insight Assets’ claimed interest in
the real property at issue in this case.
IV. MR. FARIAS IS ENTITLED
TO ATTORNEY FEES
¶23 Finally, we consider Mr. Farias’ cross-appeal for attorney
fees. The district court determined that Mr. Farias was not entitled
to attorney fees under Utah Code section 78B-5-826. Section 826
provides:
A court may award costs and attorney fees to either
party that prevails in a civil action based upon any
promissory note, written contract, or other writing
executed after April 28, 1986, when the provisions of
the promissory note, written contract, or other writing
allow at least one party to recover attorney fees.
¶24 In Hooban v. Unicity International, Inc., we recently established
that “[a] party is entitled to reciprocal fee-shifting by statute ‘when
the provisions’ of a contract would have entitled at least one party to
recover its fees had that party prevailed ‘in a civil action based upon’
the contract.”30 The statute “consists of a conditional if/then
statement: (a) If the provisions of a written contract allow at least one
29
See CIG Exploration, Inc. v. State, 2001 UT 37, ¶ 14, 24 P.3d 966.
30
2012 UT 40, ¶ 32, 285 P.3d 766.
9
INSIGHT ASSETS v. FARIAS
Opinion of the Court
party to recover attorney fees in a civil action based upon the
contract, (b) then a court may award attorney fees to either party that
prevails.”31 “[A]n action is ‘based upon’ a contract under the statute
if a ‘party to the litigation assert[s] the writing’s enforceability as
basis for recovery.’”32 In Hooban, we determined that these
conditions were met because if Mr. Hooban had “prevailed in [the]
suit, he would have been a party to the contract upon which the suit
is based and would have been contractually entitled to attorney
fees.”33
¶25 In this case, Insight Assets requested attorney fees based on
the contract in the district court and argues it is entitled to them on
appeal, as well. Sellers Trust Deed provided:
Upon the occurrence of any default hereunder,
Beneficiary shall have the option to declare all sums
secured hereby immediately due and payable and
foreclose this Trust Deed in the manner provided by
law for the foreclosure of mortgages on real property
and Beneficiary shall be entitled to recover in such
proceeding all costs and expenses incident thereto,
including a reasonable attorney’s fee in such amount as
shall be fixed by the court.
We determined above that Mr. Farias is the prevailing party in this
action. If Insight Assets’ suit had been successful, it would have
resulted in foreclosure on the original mortgage from the seller
financing, and Insight Assets, as beneficiary, would have been
entitled to reasonable attorney fees under the parties’ contract. Thus,
the statutory trigger for fee shifting is met: the contract allows at
least one party, Insight Assets, to recover attorney fees, and
consequently the court may award attorney fees to the party that
prevails in the action. Therefore, section 826 affords a basis for an
award of attorney fees to Mr. Farias as the prevailing party. We
reverse the district court’s denial of attorney fees to Mr. Farias and
remand this matter for a determination of the amount of fees owed
to Mr. Farias.
31
Id. ¶ 12.
32
Id. ¶ 22 (second alteration in original) (quoting Bilanzich v.
Lonetti, 2007 UT 26, ¶ 15, 160 P.3d 1041).
33
Id. ¶ 32.
10
Cite as: 2013 UT 47Opinion of the Court
CONCLUSION
¶26 We conclude that Insight Assets’ claim as vendor purchase
money mortgagee is barred by the doctrine of laches. We also
conclude Mr. Farias is entitled to reasonable attorney fees as the
prevailing party.
11