EAGLE EQUITY FUND LLC v. TITLEONE CORPORATION COREY BARTON HOMES (2016)

MEMORANDUM IN SUPPORT OF APPELLANT'S PETITION FOR REHEARING

COMES NOW the Appellant, by and through its counsel of record, and hereby provides the Court with its Memorandum in Support of Appellant's Petition for Rehearing in accordance with Idaho Appellate Rule 42(b).

INTRODUCTION

Eagle Equity Fund (“EEF”) was stripped of its security interest in a residential development by the wrongful reconveyance of its deed of trust by TitleOne. That fact has always been clear and undisputed both at the trial court level and at the appellate level. What damages flowed from that wrongful act, however, was a highly contested issue. The trial court was required to rule upon an issue of first impression in the State of Idaho in addressing the defendants' summary judgment motions: what is the measure of damages for the improper reconveyance of a piece of property? (Opinion, p. 8)

The trial court had to look to other states for guidance. EEF believed in good faith that the trial court erred in its handling of this issue of first impression. To complicate matters, the trial court's ruling had a prophylactic effect on all of EEF's claims and it operated to deny EEF any relief from the loss of its security interest by what was clearly wrongful or improper conduct by the defendants.

For this Court to conclude that EEF's appeal of the trial court's handling of this issue of first impression was frivolous appears to ignore the fact that there had never been a ruling on this particular issue and that appellate review in this case, of necessity, could not be frivolous or unreasonable. For this reason, EEF respectfully requests this Court to review and reverse its award of attorney's fees to Respondents on the ground that the appeal was brought frivolously.

ARGUMENT

A. APPEALING A RULING BY THE TRIAL COURT ON AN ISSUE OF FIRST IMPRESSION IN THE STATE OF IDAHO SHOULD NOT BE DEEMED FRIVOLOUS.

This Court has previously held that appealing an issue of first impression provides a reasonable basis in fact or law to support the appeal such that attorney's fees should not be awarded on the ground that the appeal was taken frivolously or unreasonably. See Kootenai Medical Center v. Bonner County Commissioners, 141 Idaho 7 (2004); Arnold v. City of Stanley, 158 Idaho 218, 224, 345 P.3d 1008, 1014 (2015).

In this case, the issue that had not been previously addressed by an Idaho court was how to determine the value of a security interest that had been wrongfully reconveyed. EEF offered evidence at trial that it did not receive notice of the short sale because of the reconveyance and thus was prevented from participating in the short sale. As this Court noted in its Opinion at footnote 2,

A short sale occurs when a property is sold for less than the outstanding amount of debt that it secures. Short sales are permitted only where the seller has obtained the consent of all creditors secured by the property. (emphasis added)

EEF was deprived of its contractual right to object or not consent to the short sale. EEF provided evidence to the trial court that in the absence of the wrongful reconveyance, it would have objected to the short sale; that it would have paid RBC as much or more than DAS paid in the short sale; that it had the financial capacity to do so and that it had the motivation to protect its second position by buying out the first position. In its Opinion at page 10, this Court stated:

With respect to TitleOne, EEF appealed from a district court finding that it failed to present evidence of damages beyond mere speculation. On appeal, EEF still provides nothing but speculation.

It was this conclusion that led to the award of attorney's fees under Idaho Code section 12-121. EEF respectfully disagrees with this conclusion. The evidence before the court was that EEF would have negotiated with RBC and paid what DAS paid or more to protect its security interest. EEF was not willing to just let the property go. From a practical standpoint, EEF had already invested $725,500 into the property. Galiano had likewise invested $4.7 million to acquire the land and install utilities and roads in the development. There was significant value in the project. There were 43 bare lots ready for sale. Moreover, EEF had the ability to ride out the downturn in the market and it was prepared to do so. This was not “speculative evidence”. These were facts offered to prove that the stripping of the security interest caused harm to EEF.

Had EEF been able to acquire RBC's first position Deed of Trust, then the EEF second position Deed of Trust would have taken first position. This is significant because the proceeds from each lot sale would have been applied to reduce the principal amount of EEF's note with Galiano. The 43 remaining lots in the development would have had to have a value of at least $725,500 to render the EEF Deed of Trust and security interest fully protected. As we know, DAS quickly sold all of the lots to Corey Barton Homes for approximately $1.13 million. EEF's security interest, after moving to first position, would have a value of $725,500 since the property was clearly worth more than $725,500 so EEF's security interest was fully protected. The loss of that security interest, therefore, resulted in damages to EEF in that amount.

The trial court's rejection of this evidence and calculation of damage offered by EEF in connection with its handling of an issue of first impression was believed to be erroneous by EEF. The trial court adopted authorities from California in reaching its holding. In one of those cases, however, the California court engaged in an analysis of what would have happened in the absence of the wrongful recording. In effect, the court “speculated” in its assessment of damages. The trial court and this Court appear to have omitted this case from their analysis so it bears repeating here.

TitleOne cited the case of Rooz v. Kimmel, 55 Cal. App.4th 573 (Cal. D. Ct. App. 1997) in support of its contention that EEF's security interest had no value and hence no damage could have been sustained by its wrongful stripping. The Rooz case is particularly relevant here since the Rooz court did, in fact, engage in an analysis of what would have happened if the Deed of Trust in question had been properly recorded in a timely manner by the defendant Title Company (North American).

To briefly summarize the pertinent facts of Rooz, Rooz received a Deed of Trust from Kimmel in the original amount of $445,000 which was later increased to $515,000 to be secured by the Redstone Building upon its acquisition. The $445,000 Deed of Trust was initially secured by a building in Berkeley that Rooz had sold to Kimmel as part of an exchange agreement. Kimmel closed escrow on the Redstone Building with a purchase price of $ 1.5 million. A first Deed of Trust was recorded in the amount of $975,000. North American delayed the recording of the Rooz Deed of Trust that was supposed to be in second position. During the delay, Kimmel encumbered the building with two additional Deeds of Trust totaling $1,050,000. Rooz's Deed of Trust was then recorded in fourth position instead of second position.

The commercial real estate market declined and the second deed of trust holder foreclosed on the Redstone Building thereby extinguishing Rooz's fourth position Deed of Trust. Because Rooz believed Kimmel and North American had wrongly impaired his security on the $515,000 note, he sued them for breach of oral agreement, negligence, breach of fiduciary duty, fraud and civil conspiracy.

The trial court found in favor of Rooz and calculated damages based upon the original amount of the $445,000 Deed of Trust and then discounted the damages to present value. The trial court also used a value of $ 1.9 million for the Berkeley building in its calculations. Rooz argued that the $515,000 Deed of Trust should have been used in the calculation and that the reduction to present value was erroneous. The Court of Appeal agreed with Rooz stating the following:

We conclude Rooz is correct on this point. Rooz agreed Kimmel could remove the $445,000 deed of trust against the Berkeley property before Kimmel acquired title to the Redstone Building. Thus, neither Kimmel nor North American breached a contract or tort duty to Rooz when they recorded the reconveyance of the $445,000 deed of trust against the Berkeley property. The breach came later, when Kimmel refused to permit North American to record the new $515,000 deed of trust in second position on the Redstone Building. It was that breach that led to the impairment of Rooz's security by moving it from second to fourth position. Presumably, had Rooz been in second position, his $515,000 note would have been fully secured (or at least better secured) when the Redstone Building was sold in foreclosure. Rooz at 595, emphasis added.

The Court of Appeal concluded that it was appropriate to consider what would have happened if Rooz's Deed of Trust had been recorded in second position rather than fourth position. This was not speculation. It was an analysis of what would have happened absent the improper recording of the Deed of Trust. Here, the trial court and this Court on appeal, should have considered what would have happened if EEF was notified of the short sale. If California law is going to be relied upon to decide an issue of first impression in Idaho, then all relevant California law ought to be considered. To ignore what the Court did in the Rooz case was error. Had the reasoning applied by the court in Rooz been followed, then the trial court should have focused on what would happened in the absence of TitleOne's wrongful reconveyance. In that situation, EEF would have had notice of the short sale, it would have paid the price necessary to assume first position and its deed of trust in the amount of $725,500 would have been fully secured. EEF's damage would then have been the full amount of the deed of trust. The Rooz case unquestionably calls for a different outcome in this case but it was ignored.

At a minimum, it was not unreasonable or frivolous for EEF to argue the application of this California case since California law was being relied upon in the granting of summary judgment as to all of EEF's claims. As such, attorney's fees should not be awarded to Respondents pursuant to Idaho Code section 12-121.

CONCLUSION

For the reasons set forth above, EEF respectfully requests that the Court review and reverse its award of attorney's fees to Respondents.

EAGLE LAW CENTER

Paul R. Mangiantini Attorney for Appellant

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on the 15th day of December 2016, I caused to be served in the manner indicated a true and correct copy of the foregoing to the following:

Thomas Dvorak ( ) U.S. Mail, Postage Prepaid GIVENS PURSLEY, LLP ( ) Hand Delivered 601 W Bannock Street ( ) Overnight Mail PO Box 2720 ( x ) Facsimile (388-1300) Boise, ID 83701 ( ) Email

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Paul R. Mangiantini