Opinion
No. 36611-8-II.
July 8, 2008.
Appeal from a judgment of the Superior Court for Thurston County, No. 07-2-00161-9, Richard D. Hicks, J., entered June 8, 2007.
Affirmed by unpublished opinion per Bridgewater, J., concurred in by Houghton and Quinn-Brintnall, JJ.
Ross D. Greer appeals the trial court's vacation of its order distributing $35,015.40 to him after a mortgage foreclosure sale. We hold that Citibank was a junior lienholder and entitled to those funds. We affirm.
FACTS
Greer owned real property in Thurston County, located at 8645 Johnson Point Road NE, Olympia, Washington. In 1999, Greer granted a deed of trust to Source One Mortgage Company to secure a loan in the principal amount of $72,000. Source One properly recorded the deed on December 27, 1999.
In 2002, Greer obtained a line of credit from Citibank Federal Savings Bank in the amount of $25,000. He secured the loan with a second position deed of trust, which Citibank properly recorded on August 23, 2002. The original loan specified that Citibank had the option to increase the loan amount.
Thereafter, in 2003, CitiMortgage, Inc., refinanced Greer's existing Source One mortgage and provided him a loan in the amount of $70,031.00. Greer granted a third deed of trust on his property to secure the loan. CitiMortgage properly recorded its deed in Thurston County on October 2, 2003. CitiMortgage intended the 2003 loan to take priority over the 2002 line of credit.
In 2004, Citibank agreed to advance Greer additional funds on his 2002 loan. Greer signed a mortgage modification agreement, increasing the line from $25,000 to $75,000. At the time of the hearing to disburse the surplus funds in the superior court, Greer owed Citibank $81,531.48. Citibank advanced all of the funds after July 29, 2004, the date that Greer signed the modification agreement.
Eventually, Greer failed to make payments on his CitiMortgage mortgage, and the trustee in the matter instigated nonjudicial foreclosure proceedings. On October 2, 2006, the trustee properly recorded a notice of trustee's nonjudicial foreclosure sale in Thurston County. The sale did not purport to foreclose Citibank nor was notice served on Citibank.
But on December 27, 2006, Citibank executed a subordination agreement, subordinating its deed of trust to CitiMortgage's deed of trust. The language in the subordination agreement memorialized Citibank's agreement in regard to the relative priorities between Citibank and CitiMortgage. It stated that CitiMortgage's deed of trust was in first position and Citibank's deed of trust was in second position. CitiMortgage did not sign the subordination agreement. Nevertheless, Citibank properly recorded it in Thurston County on January 2, 2007.
Then, on January 5, 2007, the trustee held the nonjudicial foreclosure sale on CitiMortgage's deed of trust. After costs and expenses, the sale yielded a surplus of $65,015.40, which the trustee deposited in the Thurston County Superior Court registry.
On January 24, 2007, Greer executed a power of attorney and "Acquisition Agreement" with Foreclosure Advocates LLC, whereby Greer agreed to pay Foreclosure Advocates 33 percent of any funds to which he may be entitled from the foreclosure on his property. Greer subsequently filed a motion to disburse funds. He did not provide notice to Citibank. At a hearing on May 4, 2007, the Thurston County Superior Court disbursed $35,015.40 of the surplus funds to Greer. It also ordered $30,000 of the surplus to remain in the registry until further notice from the court.
Citibank became aware of the trial court's order to disburse funds in May 2007, at which time it filed a motion for reconsideration. In its motion, Citibank argued that Greer owed Citibank $81,531.48 and that it was entitled to the surplus funds to settle this debt because its deed of trust interest attached to the surplus after the sale. After considering briefs and oral argument, the trial court determined that Citibank was, in fact, entitled to the surplus funds. It granted Citibank's motion, vacated its May 4 order to disburse the funds to Greer, and ordered Greer to return the $35,015.40 to the registry. The trial court also ordered the registry to disburse the entirety of the surplus funds, $65,015.40, to Citibank to satisfy a majority of Greer's outstanding debt.
ANALYSIS I. Standard of Review
Greer contests the trial court's distribution of surplus funds to Citibank under Washington's Deeds of Trust Act (Act). A trial court's interpretation of a statute is a question of law, reviewed de novo. W. Telepage, Inc. v. City of Tacoma Dep't of Fin., 140 Wn.2d 599, 607, 998 P.2d 884 (2000); In re Upton, 102 Wn. App. 220, 223, 6 P.3d 1231 (2000).
Deeds of Trust, chapter 61.24 RCW.
When interpreting a statute, our goal "is to ascertain and give effect to the intent of the legislature which is done by first look[ing] to the plain meaning of words used in a statute." Amresco Independence Funding, Inc. v. SPS Props., LLC, 129 Wn. App. 532, 536, 119 P.3d 884 (2005) (internal quotations omitted). When the statute's words are unambiguous and plain, we apply the statute as written. Amresco, 129 Wn. App. at 536. When possible, we construe a statute so that no words are rendered superfluous. Amresco, 129 Wn. App. at 536.
II. Attachment of Priorities to Surplus Funds
Greer argues that under the Act, lien priorities attach to surplus proceeds from a nonjudicial foreclosure sale on the date the trustee's notice of sale is recorded. Thus, he asserts that because Citibank was not a junior lienholder on October 2, 2006, it is not entitled to the surplus funds. But Greer misconstrues the controlling language in the Act.
The Act permits a trustee to sell property through a nonjudicial foreclosure process. Amresco, 129 Wn. App. at 536. Courts should construe it to further three basic objectives, that the nonjudicial foreclosure process (1) remains efficient and inexpensive; (2) provides adequate opportunity for interested parties to prevent wrongful foreclosure; and (3) promotes stability of land titles. Cox v. Helenius, 103 Wn.2d 383, 387, 693 P.2d 683 (1985). But since the Act dispenses with many protections commonly enjoyed by borrowers, "lenders must strictly comply with the statutes, and courts must strictly construe the statutes in the borrower's favor." Amresco, 129 Wn. App. at 537.
Under the Act, a trustee initiates foreclosure proceedings by serving and recording a notice of trustee's sale and a notice of foreclosure at least 90 days before the foreclosure sale date. RCW 61.24.040. The Act directs the trustee to send notice to various parties, including:
The beneficiary of any deed of trust or mortgagee of any mortgage, or any person who has a lien or claim of lien against the property, that was recorded subsequent to the recordation of the deed of trust being foreclosed and before the recordation of the notice of sale.
RCW 61.24.040(1)(b)(ii) (emphasis added).
It is this language on which Greer bases his argument. He concludes that because the Act does not direct the trustee to provide notice of the foreclosure to parties who have a lien against the property that was recorded before the recordation of the deed of trust being foreclosed, such parties' interests in the property do not attach to the surplus. In other words, Greer argues that priority interests attach to the surplus when the trustee sends notice of the foreclosure sale. But this argument lacks merit because it ignores the plain language of the statutory provision governing the distribution of surplus funds derived from a nonjudicial foreclosure sale of property.
RCW 61.24.080 sets forth the trustee's duties in regard to distributing any surplus funds after the nonjudicial foreclosure sale. The trustee first applies the funds to satisfy the expenses of the foreclosure. RCW 61.24.080(1). The trustee then satisfies the obligation secured by the foreclosing deed of trust — in this case CitiMortgage's deed of trust — with the remaining funds. RCW 61.24.080(2). After that, the trustee must deposit any surplus in the clerk's registry of the superior court in the county where the foreclosure sale occurred. RCW 61.24.080(3). The trustee is required to provide notice of the remaining surplus to "each party to whom the notice of trustee's sale was sent pursuant to RCW 61.24.040(1)." RCW 61.24.080(3). The trustee is additionally required to record the notice and provide a copy to the court clerk. RCW 61.24.080(3). Once the trustee completes this process, the trustee is relieved of further duties. RCW 61.24.080(3).
After the trustee deposits the surplus, the court clerk indexes it under the grantor's name and may not disburse any funds absent a superior court order. RCW 61.24.080(3). Although the Act does not outline the procedure to obtain such an order, it does specify that, "[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." RCW 61.24.080(3).
This plain language states that the priority liens on the property attach to the surplus in the same priority order they attached to the property. See Upton, 102 Wn. App. 220 (noting that interests in real property continue in the proceeds from a trustee's nonjudicial foreclosure sale according to a deed of trust, in the same order of priority that they were attached to the property.) The surplus does not exist until the foreclosure sale occurs, thus it is reasonable to conclude that the lien priorities at the time the surplus comes into existence determine distribution of such funds.
The procedural requirements for distributing of the surplus after the foreclosure sale further support this logical conclusion. The Act indicates that the court clerk may not disburse any surplus funds, absent an order from the superior court. RCW 61.24.080(3). Presumably, then, the holder of an "interest, lien or claim of lien" against the property must petition the court to obtain such an order. 27 Marjorie D. Rombauer, Washington Practice: Creditors' Remedies — Debtors' Relief § 3.69, at 212 (1998) (discussing RCW 61.24.080(3)); . The moving party is required to provide notice of the motion to disburse funds to "all parties to whom the trustee mailed notice of the surplus, and any other party who has entered an appearance in the proceeding, not less than twenty days prior to the hearing of the motion." RCW 61.24.080(3).
We reject Greer's contention that the surplus is distributed according to creditors' lien priorities at the time the trustee recorded notice of the foreclosure sale. This interpretation renders superfluous the statutory requirement that the moving party notify "any other party who has entered an appearance in the proceeding." See RCW 61.24.080(3). Parties other than those receiving notice of the foreclosure sale would not need notification of disbursement of funds under Greer's interpretation and argument. It is a well-established principle that a court will not interpret a statute so as to render other language within the statute superfluous. Amresco, 129 Wn. App. at 536.
Accordingly, Greer's argument — that the priorities of the interests attach when the trustee sends notice of the foreclosure sale 90 days before the sale — conflicts with the plain language of the Act. Therefore, if Citibank can show that it was a junior lienholder at the time the surplus funds came into existence and its priority is higher than Greer's interest in the property, then it is entitled to the surplus funds.
III. Citibank is a Junior Lienholder Entitled to the Surplus Funds
Greer suggests that Citibank's subordination agreement did not effectively establish Citibank was a junior lienholder entitled to the surplus funds. But he is mistaken. Citibank is a junior lienholder, entitled to the surplus funds, for three alternative reasons: (1) it made optional advances to Greer under its loan, subsequent to CitiMortgage's deed of trust; (2) it executed a valid subordination agreement with CitiMortgage before the nonjudicial foreclosure sale; and (3) it had second priority under the doctrine of equitable subrogation.
A. Optional Advance
Citibank contends that its lien was junior to CitiMortgage's lien at the time of foreclosure because it made optional advances under the terms of its loan to Greer after CitiMortgage recorded its deed.
A future-advances clause included in a mortgage is a security for the present loan and also for sums that the mortgagee may advance to the mortgagor in the future. 18 William B. Stoebuck John W. Weaver Washington Practice: Methods of Title Assurance, § 14.8, at 146 (2004). It is well-settled in Washington that when advances under a contract are optional and not obligatory, the lien priority of the advances is determined as of the time the advances are actually made. Nat'l Bank of Wash. v. Equity Investors, 81 Wn.2d 886, 899-900, 927, 506 P.2d 20 (1973). An advance is obligatory when a lender is legally obligated to make it; whereas an advance is optional when a lender has discretion to make it or not. Nat'l Bank, 81 Wn.2d at 899-900.
Here, Citibank agreed to increase Greer's line of credit from $25,000 to $75,000 on July 29, 2004, when Greer signed the mortgage modification agreement. The original deed of trust included the following language regarding modifications: "We at Our option may make Future Loan Advances to You or Borrower." CP at 58 (emphasis added). Therefore, Citibank's advance to Greer was optional and Citibank's lien priority is determined as of July 29, 2004, the date it increased Greer's line of credit under the mortgage modification agreement. See Nat'l Bank, 81 Wn.2d at 899-900. Accordingly, Citibank's lien priority is junior to CitiMortgage's lien priority in the deed of trust, which was recorded on October 2, 2003. Citibank is thus entitled to the surplus because it was a junior lienholder at the time of the sale generating the funds.
Citibank recorded the mortgage modification agreement on July 13, 2005.
B. Subordination Agreement
In addition to the optional advance, Citibank also entered into a subordination agreement with CitiMortgage before the foreclosure sale. Greer contends that the subordination agreement is not valid.
A valid subordination agreement establishes priorities between different parties' interests in the same property. See Ban-Co Inv. Co. v. Loveless, 22 Wn. App. 122, 134, 587 P.2d 567 (1978). It is a contract entered into by the parties. As a general rule, a person must be a party to a contract to challenge its validity. See Lonsdale v. Chesterfield, 19 Wn. App. 27, 31, 573 P.2d 822 (1978), aff'd and remanded, 91 Wn.2d 189, 588 P.2d 217 (1978). But a third-party may challenge a contract if the third party establishes that the contract was for its benefit. Lonsdale, 19 Wn. App. at 31. An incidental, indirect, or inconsequential beneficiary does not have standing to challenge a contract. Lonsdale, 19 Wn. App. at 31.
The record does not indicate that either CitiMortgage or Citibank challenged the validity of the agreement. In fact, Citibank argues that the agreement is valid and properly recorded on January 2, 2007, before the foreclosure sale. Significantly, Greer fails to address his standing to challenge the validity of the subordination agreement between Citibank and CitiMortgage. And he failed to address his standing before the trial court. Under RAP 2.5, we will generally not consider arguments or theories raised for the first time on appeal. Washburn v. Beatt Equip. Co., 120 Wn.2d 246, 290, 840 P.2d 860 (1992). Accordingly, we need not address the merits of this argument.
Ignoring the standing issue, Greer contends that the subordination agreement is invalid because the parties entered into it after the trustee sent notice of the foreclosure sale. He cites no case law to support this proposition; he merely reasons that "[t]here is no good reason why Citibank could, would or should have signed a subordination agreement." Br. of Appellant at 8.
There is no authority to support Greer's position concerning invalidity because of timing. Furthermore, by entering and recording the subordination agreement before the trustee's foreclosure sale, Citibank effectively provided notice to prospective buyers of the lien priorities on the property. In that regard, the subordination agreement may have even yielded more bidders, by providing an opportunity to purchase clear title, thereby working to Greer's advantage.
We hold that Greer has failed to establish he has standing to challenge the validity of the subordination agreement. Therefore, based in the record before the court, the subordination agreement effectively established that Citibank was junior lienholder to CitiMortgage at the time the trustee conducted the foreclosure sale on Greer's property.
C. Equitable Subrogation
Finally, Greer contends that Citibank is not the junior lienholder under the doctrine of equitable subrogation because Citibank asserted it rather than CitiMortgage. This argument is unfounded.
Subrogation is an equitable remedy, used to provide for a proper allocation of payment responsibility and maintain the proper order of priorities. Bank of Am. N.A. v. Prestance Corp., 160 Wn.2d 560, 564, 160 P.3d 17 (2007). It is "designed to avoid a person's receiving an unearned windfall at the expense of another," i.e., the intervening lienholder through an advancement in priority, at the expense of another, i.e., the new mortgagee who paid the prior debt. Bank of Am., 160 Wn.2d at 567 (quoting Restatement (Third) of Property: Mortgages § 7.6(a) cmt. a, at 509 (1997)).
In the refinancing context, "[e]quitable subrogation is a broad doctrine and should be followed whenever justice demands it and where there is no material prejudice to junior interest." Bank of Am., 160 Wn.2d at 581. It is irrelevant whether the party asserting equitable subrogation had actual or constructive knowledge of intervening liens. Bank of Am., 160 Wn.2d at 582. Two important policy considerations support a liberal application of equitable subrogation in the refinancing context. First, it facilitates more refinancing and thus helps stem the threat of foreclosure. Bank of Am., 160 Wn.2d at 580. Second, it affords "enormous financial benefits" to many homeowners by reducing title insurance premiums. Bank of Am., 160 Wn.2d at 580-81 (acknowledging that "[t]itle insurance primarily ensures there are no intervening liens, and when a jurisdiction adopts the liberal view of equitable subrogation, the insurance premium is greatly reduced.")
The Washington Supreme Court recently addressed the application of equitable subrogation in Bank of Am. There, Washington Mutual held a first priority lien on the debtor's personal property through a deed of trust it recorded in 1994. Bank of Am., 160 Wn.2d at 561. Bank of America held a second priority lien on the debtor's personal property through a deed of trust it recorded in 1999. Bank of Am., 160 Wn.2d at 561. Then, in 2001, the debtor secured a loan through Wells Fargo through a deed of trust on the same property. Bank of Am., 160 Wn.2d at 561. The debtor obtained the final loan to pay off the Washington Mutual loan. Bank of Am., 160 Wn.2d at 562. The Supreme Court noted that Wells Fargo expected to have priority over all other interests for the amount used to pay Washington Mutual. Bank of Am., 160 Wn.2d at 562.
After a comprehensive discussion of the doctrine of equitable subrogation, the Supreme Court held that it applied to the facts and circumstances of the case. Bank of Am., 160 Wn.2d at 582. Specifically, it found that Wells Fargo established that it expected to receive first priority resulting from the debtor's loan and no junior lender, i.e., Bank of America, was materially prejudiced by Wells Fargo obtaining the first lien position. Bank of Am., 160 Wn.2d at 582.
The Supreme Court adopted the doctrine of equitable subrogation as outlined in Restatement (Third) of Property: Mortgages § 7.6(a) (1997). Bank of Am., 160 Wn.2d at 562.
The facts and circumstances presented in this case are nearly identical to those in Bank of Am. And in fact, Greer does not dispute that equitable subrogation may apply. Instead, Greer seems to argue that Citibank cannot assert equitable subrogation as a junior lienholder to CitiMortgage. He contends that CitiMortgage is the only party who may assert equitable subrogation. But Greer's proposition is inconsistent with the purpose and policy considerations of equitable subrogation in the mortgage context. See Bank of Am., 160 Wn.2d at 580. Here, justice supports the application of equitable subrogation because the junior lienholder (Citibank) was not prejudiced when CitiMortgage took the first lien position from Source One by lending Greer the funds to pay off the Source One loan. We hold that Citibank was the junior lienholder under the doctrine of equitable subrogation and thus entitled to the surplus funds from the trustee's foreclosure sale. See Bank of Am., 160 Wn.2d at 582.
Affirmed.
A majority of the panel having determined that this opinion will not be printed in the Washington Appellate Reports, but will be filed for public record pursuant to RCW 2.06.040, it is so ordered.
HOUGHTON, P.J. and QUINN-BRINTNALL, J., concur.