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.
            

Deficiency Judgments

DEFICIENCY JUDGMENTS AND COMMERCIAL LOAN GUARANTEES: AN AREA OF RISK FOR REAL ESTATE INVESTORS

By Doug Owens

People sometimes ask me about the extent of the protection a limited liability company gives to the investor against claims that seek money from the investor's other assets. I always answer that "it depends."

One of the things that the effectiveness of the limit to the investor's individual liability can depend on is whether the creditor involved has another route to reach the investor's non-limited liability company investment besides "piercing the veil." If the investor undertakes a sizable project, such as a development of land, the lender may require the investor to give a personal guarantee of the loan in order to agree to lend on the project. Such a personal guarantee can provide the lender with a contractual way to reach the investor's individual assets.

In a recent case the investors borrowed about $11.7 million from Horizon Bank to develop two residential areas in 2005 and 2007, as the residential real estate market was booming. The development was to be done in their limited liability company. The bank required the owners of the limited liability company to give a personal guarantee of the amount of the promissory note, which they gave.

In 2008, the market for residential real estate crashed and the development work stopped on the project. The borrowers defaulted on their loan and the investors did not honor the terms of the loan guarantee. A trustee's sale of the properties involved was held. The lender bought the property for $6 million, based on appraisals showing the market value of the property at approximately $5,045,000. The original lender then went bankrupt and the loan was transferred to Washington Federal. Washington Federal sued the investors as guarantors of the loan made to their entity for the deficiency between the $6 million credit bid at the trustee's sale and the approximately $12 million that was then owing on the loan.

The reader may ask at this point, why the lender was able to pursue any deficiency judgment against the investors, regardless of the guarantee. After all, the trustee's sale was held in due course and some readers may know that for some types of loans, this prevents the lender from seeking a deficiency judgment against the defaulted borrower. Unhappily for the borrowers in this case, there is an exclusion in the law that removes the anti-deficiency shield when commercial lending is involved. And clearly this loan was for commercial purposes. This provision of the anti-deficiency law also applies to those who guarantee the commercial loans that are in default.

The investors argued in court that the price the previous lender had bid at the trustee's sale was too low which meant that the deficiency Washington Federal was trying to collect from them was too high. The investors tried to convince the court to use an old law that had been adopted in 1935, during another period of generally steep declines in the value of real estate. That law, which applied to mortgages, provided that a lender trying to foreclose a defaulted mortgage had to produce proof to the court of an "upset price" that was based on what would have been paid for the property under "normal conditions." The borrowers wanted to use this argument to say that the $6 million obtained at the 2009 trustee's sale should have been adjusted higher by the court in the deficiency judgment case because of the drastic fall in the market value of real estate that reflected itself in the comparables that were available for appraisal at that time.

The Court of Appeals rejected this argument, holding that the Deed of Trust Act defines "fair value" as the price to be paid at a trustee's sale basically by a willing buyer to a willing seller, with both knowing all material facts and not acting under compulsion. There is nothing in this definition that allows or requires a court to adjust the price paid at the trustee's sale for abnormal market conditions.

The lesson here is that investors who guarantee loans for their entities face some exposure if the entity defaults and they should not rely on abnormal market conditions to help reduce their losses.

The preceding is intended for education and is not 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