Opinion
Nos. 53880-2-I; 53681-8-I [Consolidated]
Filed: April 25, 2005 UNPUBLISHED OPINION
Appeal from Superior Court of King County. Docket No. 03-2-26853-4. Judgment or order under review. Date filed: 01/12/2004. Judge signing: Hon. Patricia H Aitken.
Counsel for Appellant(s), Kim Krummeck, Attorney at Law, 6211 26th Ave NE, Seattle, WA 98115-7109.
Counsel for Respondent(s), Masako Kanazawa, Attorney at Law, 900 4th Ave Ste 2000, Seattle, WA 98164-1076.
Gina McNaughton purchased property at a trustee's sale following a nonjudicial deed of trust foreclosure against property that had been owned by Richard Brock. After the trustee's sale, Brock, who had made no effort to restrain the trustee's sale under Ch. 61.24 RCW, purported to transfer title to the property to Brande Tanner by statutory warranty deed, but Brock remained in possession of the real property. McNaughton brought this unlawful detainer action against Brock. Tanner filed a separate quiet title action against McNaughton. Brock raised an affirmative defense to the unlawful detainer action, claiming that the trustee's sale had been invalid because the original promissory note that had been secured by the deed of trust had been paid in full. But the trial court determined that McNaughton was a bona fide purchaser of the property and was entitled to possession of the property.
The trial court permitted Tanner to intervene in the unlawful detainer action, but Tanner's separate quiet title action was not consolidated and remained a viable separate action that was still pending. Tanner is not a party to this appeal and Tanner's rights against McNaughton, if any, are not at issue here.
Brock argues on appeal that the trial court lacked jurisdiction to address his affirmative defense and ought to have dismissed the unlawful detainer action. But Brock raised a defense that went to the issue of right to possession, and the trial court had jurisdiction. Moreover, by failing to timely seek to restrain the trustee's sale before-the-fact, Brock waived his right to contest the trustee's sale after-the-fact. The court did not err in ruling that McNaughton, was a bona fide purchaser and entitled to immediate possession of the property. Accordingly, we affirm.
FACTS
This is an unlawful detainer action regarding property located at 23516 27th Avenue Northeast, Arlington, Washington (Tax Parcel No. 31050500202900). Appellant Richard Brock purchased the property in 1992 for $100,000 and financed his purchase through a Deed of Trust with Chase Manhattan Personal Financial Services, Inc., on September 24, 1992. The Deed of Trust was recorded on September 25, 1992.
Sometime in 2001 or 2002, Chase Manhattan initiated foreclosure on several properties owned by Brock, including the subject property. Brock filed for bankruptcy, but Chase Manhattan obtained relief from stay in bankruptcy court and was allowed to continue with the foreclosures. Brock was thereafter sent notice of a trustee's sale stating that Brock's property would be sold at public auction on July 26, 2002.
The notice provided that if the default was based on default of any senior lien on the property, the action necessary to cure the lien was delivery of written proof to the trustee that all senior liens were paid current and that no other defaults existed. The notice further provided:
Anyone having any objection to the sale on any grounds whatsoever will be afforded an opportunity to be heard as to those objections if they bring a lawsuit to restrain the sale pursuant to RCW 61.24.130. Failure to bring such a lawsuit may result in a waiver of any proper grounds for invalidating the Trustee's sale.
Exhibit 8 at 9-11.
The trustee's sale on the subject property was held on June 13, 2003. Brock's agent was at the sale and handed out a written document titled "NOTICE OF DEFECT," which had been recorded at the Snohomish County Auditor's Office the previous day. The notice stated:
Be advised that the person attempting to pass title to the property identified above is in breach of the terms and conditions of the original Deed of Trust. There is a defect in the title that prohibits the auctioneer's client from legally passing title through a public action.
Buyers at the public auction will receive constructive notice of these facts and will have knowledge of an interest contrary to the interest assumed by the person that may have ordered a public action. Transferee cannot prevail under these conditions.
If an adverse claim regarding the subject property is recorded, this Notice will be re-recorded, invalidating such claim.
Clerk's Papers at 65.
Gina McNaughton purchased the property at the sale, paying $223,028.95 in cash. McNaughton recorded a trustee's deed on June 20, 2003. McNaughton testified that prior to the trustee's sale, she did a preliminary title search and did not find any irregularity with the trustee's sale or any indication that the deed of trust had been paid off and the property re-conveyed to Brock. McNaughton stated that neither Brock nor any of his associates offered her a notice of any kind at the sale. She stated that after the sale was completed one of her consultants, Alvin Rainbolt, sought out Brock, spoke with him, and obtained a copy of the notice he was handing out. She stated the notice was very vague.
Rainbolt was also present at the trustee's sale and asserted that he saw Brock and an associate passing out notices just minutes prior to the trustee's sale, and that the notices indicated that there was some kind of defect with the title. Rainbolt said he approached Brock to determine the nature of the alleged defect, but that Brock did not describe its nature, stated that he was not allowed to discuss it with Rainbolt, and told Rainbolt that it was a matter of public record.
On July 17, 2003, Brock executed a warranty deed transferring title to the property to Brande Tanner. Brock continued to reside on the property, however, and McNaughton filed an unlawful detainer action against him on July 22, 2003. Thereafter, Brock filed a motion to dismiss the unlawful detainer action, asserting that the foreclosure and trustee's sale were invalid because the property had not been in default. He stated that his original promissory note on the property had been paid in full. Brock attached the original note with Chase Manhattan marked "PAID IN FULL," but with no indication of when the obligation had been paid and whether by way of a refinance or by some other means.
At trial, Brock asserted that the obligation on the subject property had been paid five years prior to the foreclosure and trustee's sale. Brock asserted that during bankruptcy proceedings that he filed in an effort to stop foreclosure by Chase Manhattan on several of his properties, he realized that his debt on the subject property had been paid some five years earlier. He stated that he notified counsel for Chase Manhattan to correct the defect, but that Chase failed to do so. He argued that because the bank had no interest in the property upon which to initiate foreclosure proceedings, the trustee's sale was invalid.
On cross-examination, Brock admitted that he had received the written notice of the trustee's sale, and even conceded that the trustee's sale was done properly. He admitted that he did not avail himself of the remedy provided in the notice of the trustee's sale to initiate a lawsuit to contest the foreclosure. Brock admitted that he did not tell Rainbolt of the nature of the defect of title prior to the sale, even when asked. Upon questioning by the court, Brock admitted that he had additional mortgages on the subject property. He asserted that although these mortgages were in arrears at the time he was given the notice of default, they had been paid in full by the time of the trustee's sale. To support this claim, Brock referred to a Notice of Redemption prepared by him, which stated simply that the debt for a September 14, 1995 note with Chase Manhattan had been discharged. No other evidence was provided to the court.
In the Notice of Redemption dated May 2, 2003, Brock declared that he had provided a Settlor's Note to Chase Manhattan on September 14, 1995, and that the company had accepted the note in return for legal title of the subject property until the debt was discharged. Brock further declared that he was now offering the Note for registration and that it was evidence that the debt with Chase Manhattan had been satisfied. This note is not contained in the record.
The court issued an oral ruling in favor of McNaughton on December 11, 2002, finding that McNaughton was a bona fide purchaser, that she had inadequate notice of the claimed defect prior to the sale, and that Brock had received prior notice of the sale and his remedies, but nonetheless failed to avail himself the remedies or to provide notice of the nature of the alleged defect prior to the sale.
Brock thereafter filed a motion to dismiss, arguing for the first time that because the title of the property was in dispute, the unlawful detainer court had no jurisdiction over the matter. Brock citied a Nebraska case with similar facts in which an unlawful detainer action was dismissed where the court found that the deed of trust on property sold at a trustee's sale was not in default. See Cummins Management, L.P. v. Gilroy, 266 Neb. 635, 667 N.W.2d 538 (2003).
The trial court, after hearing argument about the applicability of the Nebraska case, noted that in both Washington and Nebraska quiet title actions generally are not to be heard in unlawful detainer actions. However, the court stated that an exception exists in Washington where a defense is raised that goes to the issue of possession. The court opined that since the defenses raised in the present case went to the issue of possession, the court had jurisdiction to hear those issues, citing Kelly v. Powell, 55 Wn. App. 143, 776 P.2d 996 (1989). Thus, the court denied Brock's second motion to dismiss.
The court issued its Findings and Conclusions on January 9, 2003. The court found that Brock "failed to provide notice of any fact that would suffice to put a reasonable person on notice of any irregularity regarding the right of the Trustee to conduct the trustee's sale [or] . . . of any fact that would cause a reasonable person to inquire further." Clerk's Papers at 6, Finding of Fact 2. The court further found specifically that McNaughton did not have adequate notice of any defect regarding the trustee's sale or the process leading to the trustee's sale. The court noted that although Brock had received notice prior to the sale of his right to seek to enjoin the sale, and knew that he intended to raise the same defense to the sale prior to the sale, he nonetheless "failed to utilize the pre-sale remedies allowed for by the Deed of Trust Foreclosure Statute[.]" Clerk's Papers at 6, Finding of Fact 3. The court concluded that Brock had thereby waived his right to assert his defense in the unlawful detainer action. The court also concluded that McNaughton was a bona fide purchaser of the subject property. The court awarded McNaughton rental damages and attorney fees, and ordered issuance of a Writ of Restitution returning possession of the property to McNaughton. The court denied Brock's motion to dismiss because McNaughton held title and had the right of possession.
Brock appeals, asserting that the trial court neither had personal nor subject matter jurisdiction over the action in unlawful detainer because the property was not in default and not subject to a foreclosure sale.
DISCUSSION
Washington's Deeds of Trust Statute, RCW 64.24 et seq., provides the process by which a deed of trust may be foreclosed and property sold at auction following default by the borrower. "Three goals of the Washington deed of trust act are: (1) that the nonjudicial foreclosure process should be efficient and inexpensive; (2) that the process should result in interested parties having an adequate opportunity to prevent wrongful foreclosure; and (3) that the process should promote stability of land titles." Plein v. Lackey, 149 Wn.2d 214, 225, 67 P.3d 1061 (2003). RCW 64.24 et seq. provides that a deed of trust must provide a power of sale, that the borrower must be in default before the sale, and that the borrower must receive notice of the sale. RCW 61.24.030-.040. The statute provides certain remedies permitting the borrower to correct the default prior to the sale, as well as the option of restraining the trustee's sale by filing an action contesting the sale. RCW 61.24.090; RCW 64.21.130. Where the deed recites the facts showing that the sale was conducted in compliance with all of the requirements of the statute and the deed of trust, the recital is prima facie evidence of such compliance, and conclusive evidence in favor of bona fide purchasers for value. RCW 61.24.040(7). The statute also provides for an orderly transfer of possession to the purchaser of a deed of trust after a trustee's sale, and recourse to the unlawful detainer statute, RCW 59.12 et seq., where possession is not transferred within 20 days following the sale. RCW 61.24.050-.060.
Brock does not contest that he received notice of the trustee's sale, or that it contained information about how he could restrain the sale. He also does not contest that the trustee's sale was handled in accord with the procedures set forth in RCW 61.24. Rather, he asserts that a court does not have jurisdiction in an unlawful detainer case to determine who holds title to the property. Brock relies heavily on a Nebraska case, Cummins Management. In Cummins, the Nebraska Supreme Court held that a trial court's jurisdiction over forcible entry and detainer actions did not include jurisdiction to hear title disputes. Thus, where purchasers at a trustee's sale filed a petition for forcible entry and detainer, the trial court was required to dismiss the action because it involved questions of title. Cummins, 266 Neb. at 640-42. Brock fails to recognize that, unlike Nebraska, Washington recognizes an exception to the limited scope of unlawful detainer actions where the defendant raises a defense that affects the right of possession.
An unlawful detainer action brought pursuant to RCW 59.12.030 is a narrow one, limited to possession and related issues such as rent and restitution. Munden v. Hazelrigg, 105 Wn.2d 39, 45, 711 P.2d 295 (1985); Kelly v. Powell, 55 Wn. App. 143, 150, 776 P.2d 996 (1989). In order to protect the summary nature of unlawful detainer actions, other claims are generally not allowed. Munden, 105 Wn.2d at 45; Kelly, 55 Wn. App. at 150. "An exception to the general rule is made when the counterclaim, affirmative equitable defense, or set-off is `based on facts which excuse a tenant's breach.'" Munden, 105 Wn.2d at 45 (quoting First Union Management, Inc. v. Slack, 36 Wn. App. 849, 854, 679 P.2d 936 (1984)). The exception properly applies when resolution of the counterclaim is "`necessary to determine the right of possession.'" Kelly, 55 Wn. App. at 150 (quoting First Union Management, 36 Wn. App. at 854).
In Kelly, the case relied upon by the trial court in the present case, the tenants were being evicted for non-payment of rent; they counterclaimed for specific performance on the theory that they had exercised their option to purchase the premises. Kelly, 55 Wn. App. at 150. This court concluded on appeal that that the trial court properly considered the counterclaim because its resolution was necessary to determine the right of possession. We then reasoned that if the tenants had properly exercised the option, they would have been entitled to continued possession. Thus, we concluded that the trial court had to reach the merits of the counterclaim to decide the issue of possession, and that such reach was proper. Kelly, 55 Wn. App. at 150.
Other Washington courts have also recognized that unlawful detainer courts may consider defenses that raise defects of title. See, e.g., Peoples Nat'l Bank of Wash. v. Ostrander, 6 Wn. App. 28, 30, 491 P.2d 1058 (1971) (defendants in an unlawful detainer action claimed that the deed of trust foreclosed upon was obtained by fraud, and the appellate court recognized that fraud was an equitable defense that could be heard in an unlawful detainer action).
Because title necessarily affects right to possession, affirmative defenses of wrongful title can be heard to establish, for purposes of the unlawful detainer action, where possession should lie. Thus, we hold that the trial court had jurisdiction to consider Brock's claim that the unlawful detainer action should be dismissed because Chase Manhattan had no right to transfer title to McNaughton.
We also hold that the trial court did not err in concluding that McNaughton was a bona fide purchaser and by awarding possession to her, after it found that Brock had not availed himself of the remedies provided in RCW 61.24 et seq. prior to the trustee's sale. "`A bona fide purchaser for value is one who without notice of another's claim of right to, or equity in, the property prior to his acquisition of title, has paid the vendor a valuable consideration.'" Steward v. Good, 51 Wn. App. 509, 512-13, 754 P.2d 150 (1988) (quoting Glaser v. Holdorf, 56 Wn.2d 204, 209, 352 P.2d 212 (1960)). Only where a purchaser has knowledge of facts which are sufficient to put an ordinarily prudent man upon inquiry and the inquiry, if followed with reasonable diligence, would lead to the discovery of defects of title, will the purchaser be held chargeable with knowledge thereof and will not be heard to say that he did not actually know of them. Steward, 51 Wn. App. at 513.
McNaughton conducted a title search, but found no defect or any evidence that the debt had been paid and the property reconveyed. Brock admits that he knew of a specific alleged defect in title prior to the trustee's sale, that is, that the debt had been paid. Nevertheless, Brock failed to bring a lawsuit to restrain the sale, and only filed notice of a general defect in title the day before the sale, not a notice of the specific alleged defect. Brock also failed to give notice to McNaughton about the nature of the alleged defect, even when specifically asked by McNaughton's representative, both prior to and after the sale. Therefore, the trial court properly concluded that Brock "failed to provide notice of any fact that would suffice to put a reasonable person on notice of any irregularity regarding the right of the Trustee to conduct the trustee's sale [or] . . . of any fact that would cause a reasonable person to inquire further."
Clerk's Papers at 6, Finding of Fact 2. Thus, McNaughton was a bona fide purchaser.
Finally, the trial court properly concluded that Brock waived his right to contest the trustee's sale by failing to timely raise his defense. Brock concedes that he received notice of the sale. Brock also concedes that the sale complied with the provisions of RCW 61.24 et seq., and that McNaughton paid the bid price. Although Brock claimed that he cured the default prior to the sale, he failed to adequately document any such cure, and he did not attempt to restrain the trustee's sale, as allowed by RCW 61.24.030, on the basis that the deed of trust of the subject property was not in default. By failing to timely seek the remedies provided in RCW 61.24 et seq., Brock waived his affirmative defense. See Plein, 149 Wn.2d at 227-29 (citing Country Express Stores, Inc., v. Sims, 87 Wn. App. 741, 749-52, 943 P.2d 374 (1997) (waiver doctrine applied in these circumstances serves all three goals of the deed of trust act, and to allow one to delay asserting a defense until after a trustee's sale would defeat the spirit and intent of the deed of trust act; any objection to trustee's sale is waived where presale remedies are not pursued) (citing RCW 61.24.040(1)(f)(IX)). Accord Peoples Nat'l Bank of Wash. v. Ostrander, 6 Wn. App. at 32-33 (defendants knew prior to the sale that the deed documents they signed were not for a mortgage, but for a deed of trust; despite notice of the sale they failed to attempt restraint of the sale as allowed by RCW 61.24 et seq. and instead waited until afterward to assert their defense; appellate court held that the trial court had properly granted summary judgment to the plaintiff on the unlawful detainer action, despite the alleged defects in title).
RCW 61.24.040(7) provides that a sale in compliance with all the requirements of RCW 61.24 et seq. is conclusive evidence in favor of the bona fide purchaser who pays the bid price. A bona fide purchaser is entitled to possession within 20 days after the sale, as long as all occupants and tenants are given all notices required by the statute. RCW 61.24.060. Ch. 61.24 RCW allows the grantor of a deed of trust the right to restrain a trustee's sale upon any proper grounds, but also gives reciprocal rights to a bona fide purchaser by granting the right to prompt possession after a trustee's sale. Peoples Nat'l Bank, 6 Wn. App. at 31-32.
In sum, the trial court did not err in ruling that McNaughton was entitled to possession and we affirm its orders in the unlawful detainer action.
COLEMAN and APPELWICK, JJ., Concur.