Estate Of John W. Ball, Laureen K. Monette, Personal Representative

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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
In re the Trustee' s Sale of the Real Property of No. 43194 -7 -II
JOHN W. BALL an unmarried individual as
his separate estate,
ESTATE OF JOHN W. BALL, deceased, by
and through LAUREEN MONETTE, Personal
Representative
Appellant,
V.
JP MORGAN CHASE BANK, N.A., PUBLISHED OPINION
LEE, J. — John W. Ball' s estate ( " Estate ") appeals the trial court' s summary dismissal of
the Estate' s claim that the merger doctrine should preclude a junior lienholder from receiving
excess funds from a trustee sale when the same entity also was the senior lienholder and was the
successful bidder at the sale. Because the merger doctrine is inapplicable to this case and RCW
61. 24.080( 3) governs this situation, we affirm the trial court' s ruling.
FACTS
In April 2001, John W. Ball executed a deed of trust ( " Senior Deed ") encumbering his
property in favor of Washington Mutual Bank to secure a $ 52, 000 loan. Five years later, Ball
No. 43194 -7 -II
took out a $ 132, 000 home equity line of credit, later increased to $ 154, 700, also with
Washington Mutual Bank. This credit line was again secured by a deed of trust ( "Junior Deed ")
encumbering his property. JPMorgan Chase Bank ( "Chase ") later acquired both deeds of trust in
receivership, and Northwest Trustee Services, Inc. succeeded as trustee under both deeds of trust.
Ball died intestate on March 18, 2009, and Laureen Monette was, appointed as the personal
representative of his Estate.
The Estate later defaulted on the Senior Deed ( then securing a debt of approximately
56, 000), and Northwest Trustee sold the property by trustee' s sale in September 2011. Home
Sales, Inc., a owned subsidiary
wholly - of Chase, purchased the property for $ 92, 500. After the
amount of the Senior Deed was satisfied Northwest Trustee deposited the surplus funds
35, 286. 22) into the court registry pursuant to RCW 61. 24. 080.
In November 2011, the Estate moved the trial court to disburse the surplus funds to it
arguing that "[ a] ny and all other claims would be subordinate to that of the Estate." Clerk' s
Papers at 31. Chase opposed this motion arguing that it held a superior interest to the surplus
funds by virtue of the Junior Deed, on which the Estate still owed $ 135, 230. 65. Chase also
moved the trial court by cross motion to disburse the surplus funds to it. The superior court
denied the Estate' s motion, granted Chase' s cross motion, and directed that the surplus funds be
disbursed to Chase. The Estate appealed, and we stayed the appeal pending our decision in In re
Trustee' s Sale ofReal Property of Giannusa, 169 Wash. App. 904, 282 P.3d 122 ( 2012).
DISCUSSION
The Estate argues that the trial court " erred by determining that [ Chase] is entitled to
surplus funds, as junior lien holder [ sic], despite the fact that it was the successful bidder at the
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No. 43194 -7 -II
trustee sale" thereby merging " its deed of trust [ with] its fee title in the property." Br. of
Appellant at 5. Because RCW 61. 24. 080( 3) governs this situation and the merger doctrine is
inapplicable to this case, we disagree and affirm the trial court' s ruling.
The issues presented in this appeal are purely legal. Therefore, our review is de novo. In
re Trustee' s Sale of the Real Property of Upton, 102 Wn. App. 220, 223, 6 P.3d 1231 ( 2000). In
addition, we review questions of statutory construction de novo. Beal Bank, SSB v. Sarich, 161
Wash. 2d 544, 547, 167 P.3d 555 ( 2007).
A. DEEDS OF TRUST
Chapter 61. 24 RCW governs deeds of trust in Washington. Beal Bank, 161 Wash. 2d at
548. Under this. chapter, a deed of trust holder may nonjudicially foreclose at a trustee' s sale
when a borrower defaults under the terms of the obligation and the deed of trust contains a power
of sale. RCW 61. 24. 030. At the trustee' s sale, anyone other than the trustee may bid on the
property. RCW 61. 24. 070( 1). After covering the sale' s expense, the trustee first applies the
proceeds to the obligation foreclosed. RCW 61. 24. 080( 1), ( 2). Next, the trustee deposits any
surplus funds with the superior court clerk, who may disburse those funds only by superior court
order. RCW 61. 24. 080( 3).
Interests in the surplus funds continue in the same priority order that they attached to the
property. Specifically,
i]nterests in, or liens or claims of liens against the property eliminated by sale
under this section shall attach to the surplus in the order of priority that it had
attached to the property. A party seeking disbursement of the surplus funds shall
file a motion requesting disbursement in the superior court for the county in
which the surplus funds are deposited.
RCW 61. 24. 080( 3).
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No. 43194 -7 -II
In Beal Bank, the Washington Supreme Court held that, when a senior lienholder
nonjudicially forecloses on a deed of trust through a trustee' s sale, the foreclosure eliminates the
security of the junior lienholder ( i. e., the deed of trust), but " the debts and obligations owed to
a] nonforeclosing junior lienholder are not affected by foreclosure." Beal Bank, 161 Wash. 2d at
548. Thus, the beneficiary of a second deed of trust has a superior interest in the surplus over the
borrower. In re Upton, 102 Wash. App. at 224. More recently, in In re Giannusa, we held that
the deed of trust act plainly allows a purchasing junior lienholder to recover
surplus funds. Under RCW 61. 24. 080( 3), the junior lienholder' s - interest,
eliminated by the trustee' s sale, attaches to the surplus. The junior lienholder has
priority to the surplus over the property owner.
In re Giannusa, 169 Wash. App. at 910.
B. MERGER DOCTRINE
The Estate argues that the merger doctrine precludes Chase from receiving the surplus
funds from the trustee sale because Chase was the successful bidder at the sale. Whether the
common law doctrine of merger applies to the disbursement of surplus funds following a
trustee' s sale appears to be an issue of first impression in Washington.
Merger may occur when the fee interest and a charge, such as a deed of trust or
encumbrance,) vest in the possession of one person. Anderson v. Starr, 159 Wash. 641, 643, 294
P. 581 ( 1930). For example, if a person holds a five -
year lease on a condominium but purchases
the condominium before the end of the leasehold, the merger doctrine would dictate that the
leasehold interest merges into the superior ( fee) estate. As the Anderson court explained,
1 Unlike in the mortgage context, the merger doctrine has been accepted in the context of
extinguishing real property encumbrances, such as easements. See, e. g., Radovich v. Nuzhat, 104
Wn. App. 800, 805, 16 P.3d 687 ( 2001) ( " one cannot have an easement in one' s own property. ").
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The doctrine of merger springs from the fact that when the entire equitable and
legal estates are united in the same person, there can be no occasion to keep them
distinct ....
Equity does not favor the doctrine of merger; and though two or more
rights or estates are united in one person, equity will keep them distinct where it
appears from the intention of the person, either express or implied, that he wishes
them to be so kept.... and this person will be presumed to intend that which is
most to his advantage."
159 Wash. at 644 ( quoting 1 CHARLES HASTINGS WILTSIE, A TREATISE ON THE LAW AND
PRACTICE OF MORTGAGE FORECLOSURE § 264 ( 4th ed. 1927)); Hilmes v. Moon, 168 Wash. 222,
237, 11 P.2d 253 ( 1932). Thus, for a merger to occur, two distinct estates or property rights must
vest in the same person and that person must intend for the interests to unite.
The doctrine of merger has been highly disfavored in Washington since at least f922.
Beecher v. Thompson, 120 Wash. 520, 524, 207 P. 1056 ( 1922) ( quoting McCreary v.
Coggeshall, 74 S. C. 42, 53 S.E. 978 ( 1906)) ( "`` The view generally held is that merger is not
favored in the courts of law or equity. "'). Extensive research reveals a single appellate opinion
where a Washington court elected to apply the doctrine in the mortgage context, First State Bank
of Binford v. Arneson, 109 Wash. 346, 349 -50, 186 P. 889 ( 1920), and then only because equity
2
called for its application.
2 One scholar has persuasively argued that, in the context of mortgages, the doctrine should be
eliminated altogether as " modern title and finance practices have obviated the need for [ it]."
Ann M. Burkhart, Freeing Mortgages of Merger, 40 VAND L. REv. 283, 285 ( 1987). The
Restatement ( Third) of Property: Mortgages § 8. 5 ( 1997), takes this same view: " The doctrine
of merger does not apply to mortgages or affect the enforceability of a mortgage obligation."
Restatement, at 608.
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No. 43194 -7 -II
Here, the merger doctrine is inapplicable because Chase did not hold fee title to the
property and the junior security interest secured by the deed of trust at the same time. Once the
trustee' s sale occurred, Chase obtained fee ownership in the property upon delivery of the deed.
Simultaneously, Chase' s Junior Deed of Trust was extinguished. Because the junior security
interest ceased to exist the exact moment Chase obtained fee ownership, there was no deed of
trust to merge with the fee estate. This precludes any application of the merger doctrine.
Because the merger doctrine does not apply, RCW 61. 24. 080( 3) and Beal Bank control.
Chase Bank in its capacity as the former junior lienholder has the superior right to the excess
funds.
Accordingly, we conclude that the trial court properly awarded the surplus funds to Chase
and affirm its ruling.
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Lee, J.
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