Douglas N. Owens P.S.


Attorney At Law -  Your Legal Resource
360-299-3990
 dougowens@seattlerelawyer.com
 1610 Commercial Ave., Suite 207
Anacortes, WA 98221

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SOMETIMES, YOU CAN FIGHT CITY HALL—AND WIN
DAMAGES
            In land use matters, the conventional wisdom is that it is difficult to “fight city hall’ in the sense that the costs of the fight can overwhelm the benefits, and market conditions can change dramatically due to the passage of time during the contest.  A recent Supreme Court case showed that sometimes the fight is worth pursuing despite these obstacles.
            Normally, land use decisions can be appealed under LUPA, the Land Use Petition Act.  Appeals under LUPA are limited to determining whether the local government’s decision was based on unlawful procedure, an erroneous interpretation of the law, was outside the agency’s power, was clearly erroneous based on the evidence or violated an appellant’s constitutional rights.  This recent case involved an appeal under LUPA and also a more unusual lawsuit for damages to the property owner that resulted from the two years that had been consumed in battling opponents in the administrative process including activists and officials of government agencies, and which delay had ended the business that would have used the permitted land.
            The case began with a company called Citifor which had manufactured munitions on property in Thurston County that was located on or near a significant prairie oak-wetland habitat, and which obtained from Thurston County a twenty year permit to engage in gravel mining on the site in 2005.  The permit was issued after negotiations with environmental opponents of the mine, one of which withdrew its opposition in exchange for concessions by Citifor as to the scope of mining and restoration activities after mining.  However before mining began Citifor sold the land with the permit to the Port of Tacoma for its use in building a freight transfer location.  The freight transfer location was never built and so the Port of Tacoma negotiated with a company called Maytown to sell the property and based on the assurance to Maytown by the Thurston County Department of Natural Resources that the permit was still valid, Maytown bought the property in 2009.
            Maytown’s problems after its purchase centered on four issues: an environmental opponent (not the one that had negotiated with Citifor) challenged the validity of the permit; because of the delay between the permit’s issuance and the expected commencement of mining certain water quality deadlines had already passed; there was a discrepancy between the type of water quality testing required by the permit and the groundwater monitoring plan; and the permit was due for a five year review by a Department hearing examiner.
            Maytown had proposed some amendments to the conditions in the permit to reflect changed circumstances but once the extent of the legal campaign against the mine became apparent, Maytown withdrew all of the proposed amendments except two that dealt with the timeliness of the water quality measurements.
            During the two year administrative review period, decisions were made by the Department and appealed to a hearing examiner and then to the Department’s Board of Commissioners, all within Thurston County local government, and all during a time when according to the Supreme Court, at least two of the County Commissioners had adopted a plan to try to torpedo the mine for political reasons.
            Accordingly, after the internal county appeals had been exhausted (at which one of the environmental groups that had negotiated and agreed with Citifor participated as a mine opponent) and then the LUPA appeals to Superior Court had also been exhausted, and Maytown and the the Port of Tacoma had largely been vindicated, the victory was a Pyhrric one because the mining market had changed and the business failed.  So the Port of Tacoma and Maytown sued the county for damages resulting from the intentional misuse of government processes to interfere with a valid permit for the use of land.
            The jury agreed with Maytown and awarded $13.1 million in damages against the county, and the county appealed to the Supreme Court.  Other than on the issue of whether the trial court could award Maytown damages for its attorney’s fees in the administrative process, the Supreme Court upheld the lower court.  This case should hearten property owners who face bureaucratic opponents over land use.
            The foregoing is not intended as legal advice and should be considered as educational only.
            
SIGNPOSTS IN THE RELATIONSHIP OF BANKRUPTCY
AND DEED OF TRUST LAW WHEN YOU INVEST IN FORECLOSURES

            Some investors these days look for opportunities to obtain residential properties in foreclosure sales, including trustee’s sales under the Deed of Trust Act.  The Deed of Trust Act specifies periods that must elapse between the notice of the sale and when the sale can legally take place.
            Sometimes the borrower who is in financial distress will file a petition in bankruptcy after the notice of trustee’s sale has been recorded but before the sale takes place.   This may be an attempt by the borrower to stave off the trustee’s sale or for other reasons.  The filing of the petition invokes the automatic stay provisions of bankruptcy law, making it illegal for the trustee’s sale to be held as long as the bankruptcy case is pending in the bankruptcy court.
Unless the petition is deemed meritorious by the bankruptcy court, it will be dismissed. This type of situation can present a quandary for the investor who attends and bids at the trustee’s auction after a petition in bankruptcy by the borrower has been dismissed.  A recent case in the Court of Appeals considered such a case in which the borrower filed a petition in bankruptcy the day before the scheduled trustee’s sale and after the petition was dismissed, the trustee’s sale which had been continued by the trustee, was rescheduled and went forward, resulting in the borrower’s loss of the home.
The borrower then sued the lender and the purchaser at the trustee’s sale and the trustee, arguing that the trustee was required to send out a new notice of trustee’s sale, giving forty-five days’ notice after the dismissal of the bankruptcy petition before the sale could legally go forward.  The borrower also contended that the continuance of the trustee’s sale by the trustee violated the bankruptcy stay, and for both of these reasons asked that the sale be set aside by the court.
The Court of Appeals analyzed the borrower’s first argument based on two different statutes. The first statute says that when a bankruptcy petition is filed by the borrower and then later dismissed the trustee can choose to issue a new notice of trustee’s sale and the date of the sale cannot be fewer than forty-five days from the date the bankruptcy petition is dismissed.  The second statute says that the first statute is permissive only and does not apply when a trustee’s sale has been properly continued for a period not exceeding one hundred twenty days.  Because the trustee in this case had properly continued the sale after the filing of the bankruptcy petition for about fifty-eight days, the court held that the trustee was not required by the Deed of Trust Act to record a new notice of trustee’s sale.  
The Court of Appeals considered the borrower’s second argument under a case decided by the federal appeals court for the Ninth Circuit.  That case said that the automatic stay in bankruptcy is not violated by any action of the lender that does not change the status quo or give the lender some advantage over the borrower or harass or interfere with the borrower.  The Ninth Circuit court held that a continuance by the lender of the date of the trustee’s sale by publishing a notice of postponement of the sale did not create any advantage in the lender or otherwise prejudice the borrower while the bankruptcy was pending and therefore such a postponement did not violate the automatic stay.
The Court of Appeals therefore concluded that the borrower’s second argument was without merit and affirmed the dismissal of the lawsuit.  The court rejected the borrower’s argument that the “permissive” statute described above did not apply since according to the borrower the trustee lacked power to continue the sale due to the bankruptcy stay and must necessarily issue a new notice.  
The teaching of this case is that while it is important to keep abreast of any bankruptcy filings by the borrower that affect a trustee’s sale of property in which an investor is interested, that due diligence includes reviewing how the trustee has reacted to the bankruptcy filing.
The foregoing is intended to be educational and should not be considered legal advice.
            

HOA LIEN FORECLOSURES: A POSSIBLE OPPORTUNITY FOR INVESTORS WHEN BANKS SLEEP ON THEIR RIGHTS

I previously wrote about a case involving a bank which had lent on a condominium as collateral, and an investor who purchased the condo in a judicial foreclosure sale of the lien for the owner's unpaid homeowner's association dues assessments. In that case the bank, which had been notified of the foreclosure sale, inexplicably failed to participate and then filed a separate lawsuit after the sale seeking to overturn the sale. The Court of Appeals said in effect that the bank, having slept on its rights, did not have the right to overturn the purchase by an investor of a condo worth $130,000 for the small amount owed by the borrower in unpaid homeowners' association assessments, around $10,000.

As a result of this case it was clear that a bank that had failed to participate in a foreclosure sale and pay the homeowners' association the amount of the unpaid assessments would not have the legal right to set aside the sale of the property to an investor or other purchaser just because the price the investor paid was small in relation to the value of the property or the size of the bank's lien. However a lawsuit to set aside a foreclosure sale is not the only method that a lien holder can try to protect its collateral when another lien on the same property is foreclosed. Another approach is redemption.

Another condo foreclosure sale case on a similar point recently came to a similar result when the bank tried to exercise redemption rights and take the property back from the investor by paying the investor what the investor had bid at the homeowners' association lien foreclosure auction plus costs and interest. The bank's loan to the homeowner was about $227,000 and the unpaid homeowners' association dues were about $14,000. Redemption is a process in which the holder of a junior lien can protect its collateral in the face of a foreclosure of a lien that is prior in time to the junior lien. The junior lien holder has eight months from the foreclosure sale to exercise the redemption rights. The question before the court in this more recent case was whether the bank's first deed of trust was a "subsequent in time" lien to the homeowners' association lien. If so, the bank would have been entitled to redeem the property from the investor. The bank had, as in the first case, ignored the notice it had received concerning the foreclosure sale.

In this more recent case the court explained the apparent contradiction between the statute governing "superpriority" homeowners' association liens that establishes the priority of such liens as dating from the date the declarations of the homeowners' association are recorded, with a denial of redemption rights to a lender whose deed of trust lien was recorded after the recording of the homeowner's association declarations. The court said that the homeowner's association lien can foreclose the subsequent deed of trust security because it is a "superpriority" lien by statute, but that for purposes of the redemption statute, the homeowner's association lien does not "arise" until the homeowner's dues become delinquent. Because this date of delinquency was subsequent to the recording of the bank's deed of trust, the deed of trust was not a lien that was "subsequent in time" to the homeowner's association lien for unpaid dues. Therefore the bank was not entitled to redeem the property and the bank became an unsecured creditor of the former homeowner in this case.

The teaching of these cases is that investors can sometimes score substantial profits by bidding at foreclosure auctions of homeowners' association liens. Normally of course a lender faced with a homeowners' association lien foreclosure will pay the delinquent assessments and add the amount to its borrower's loan. If the lender involved fails to participate in the foreclosure process, then it is possible for an investor to buy a condo for a price that is a small fraction of its value. The preceding is intended for education and should not be considered as legal advice.

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Douglas Owens Attorney Seattle

Douglas N. Owens

1971 Graduate of University of Michigan Law School, twelve years service as Assistant Attorney General, thirty-four years private practice