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.
            

INVESTING IN JUNIOR NOTES? THIS CASE MAY INTEREST YOU

There are many types of investors. There are several varieties of investments that are presented by some as ways to make profits. One of these investments is the purchasing of promissory notes secured by deeds of trust on real estate. Usually the note purchaser acquires the note at a discount from the face amount of the note, thereby "locking in" a profit should the note be held to maturity or later resold. The benefits of such notes as investments are stated to be that they provide regular income over an extended period and are secured by real estate, making them a relatively secure investment. At least that is what the people who recommend note purchasing as an investment suggest. It is interesting that the promissory note and the deed of trust are actually separate claims on the property of the borrower, and this can become important. We are all also aware that in today's economy, sometimes borrowers default on their notes that are secured by real estate, and it is then up to the holders of the notes to seek to recover their investments.

Of the types of notes available for purchase, there are senior notes and junior notes. Senior notes are those that are secured by deeds of trust that are in first position on the title. In the event of a default by the borrowers, holders of senior notes have the best chance of recovering the full amount owing on the note. Junior notes are every other kind than senior notes. Because their holders have a relatively higher risk of not recovering the full amount due in the event of a default, usually junior notes carry a higher interest rate and when purchased in the secondary market, a higher discount to the face amount of the loan, than do senior notes.

Normally, in the event of a default on a note secured by a deed of trust in Washington, the holder of the note begins a foreclosure of the deed of trust. This can be judicial, by filing a lawsuit, or nonjudicial, by giving notice of a trustee's sale and then conducting such a trustee's sale. Ordinarily if a borrower defaults on a junior note, there is no reason why the holder of that note should not use the nonjudicial foreclosure procedure available under Washington laws. However in the recent economic climate even a home that is not "underwater" may not be attractive to buyers in a trustee's sale foreclosing a junior note because such buyers must take subject to the senior deed of trust. A recent case in Washington shows the importance of the separate nature of the note and deed of trust.

In this case, a home worth some $310,000 was secured by a first deed of trust for a loan of $200,000 and a second deed of trust to a different lender for a loan of $80,000. The homeowners defaulted on the junior note and the holder of that note began foreclosure and then discontinued foreclosure. The holder of the junior note filed a lawsuit against the borrowers on the promissory note and obtained a default judgment against them for the amount owing on the note. The holder of the second note then tried garnishment but was unable to recover any funds through that method.

The homeowners then defaulted on the senior note and the holder of that note foreclosed by holding a trustee's sale which produced surplus proceeds of some $110,000 which were deposited in the court. The homeowners and the holder of the junior note both claimed the surplus proceeds. The court decided that the holder of the junior note had a first priority claim on the surplus proceeds of the trustee's sale of the senior note and that the homeowner's homestead exemption did not apply to those proceeds. The court ruled that even though the foreclosure of the senior note holder's deed of trust wiped out the junior deed of trust's lien on the property, that lien attached with first priority to the surplus proceeds of the trustee's sale and the fact that the junior note holder had obtained a judgment against the borrower based on the borrower's default on the note did not preclude the junior note holder from asserting that first priority. Sometimes it is helpful to have both a belt and suspenders when seeking payment on a loan secured by real estate.

The foregoing is not intended as legal advice and is instead only for education.

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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