Union Bank, n.a., a National Banking Association, Plaintiff–Respondent, v. LLC (2017)

COMES NOW, Appellant North Idaho Resorts, LLC (NIR), pursuant to Idaho Appellate Rule 42, and submits this Memorandum in Support of its Petition for Rehearing of the Court's 2017 Opinion No. 8 filed January 27, 2017.

PURPOSE OF REHEARING

This Court released its opinion in the above matter on January 27, 2017, as 2017 Opinion No. 8, and affirmed the district court's judgment that Union Bank was a bona fide encumbrancer because the Partial Termination Agreement recorded in the matter terminated any rights NIR held on Trestle Creek before Union Bank recorded its mortgage.¹ The appeal decision concluded the vendor's lien was terminated by the recording of the Partial Termination Agreement, and therefore Union Bank was a good faith encumbrancer with no actual or constructive knowledge of NIR's vendor's lien. NIR requests a rehearing of the Court's decision for the reasons set forth below.

ERRORS OF FACT IN THE OPINION

In its opinion, the Court indicated NIR recorded the Partial Termination Agreement. NIR did not record the Partial Termination Agreement. Rather, Sandpoint Title contacted Richard Villelli and requested he sign the Partial Termination Agreement on behalf of NIR, which he did. Tr. Vol. III, pp. 294, L. 3—p. 299, L. 1. Charles Reeves, an officer and manager of POBD, contacted Mr. Villelli and pointed out that there were several lots described in the purchase and sale agreement that were not part of the original purchase and sale. Id. POBD requested NIR sign a partial termination agreement on the seven lots, to which NIR agreed. Id. Sandpoint Title requested Mr. Villelli execute the partial release at its office. Id. The Partial Termination Agreement signed by Mr. Villelli only had one Exhibit “A” attached at the time, which described seven lots. Id. The Partial Termination Agreement indicated on its face it was to be returned to Sandpoint Title following recording. Trial Exhibit 3. No one who testified at trial knew who added the additional Exhibit “A.”

The Court's opinion also indicated POBD sought a loan from Union Bank in 2008. This is incorrect. POBD sought a loan from Union Bank which was granted on October 29, 2007, and consisted of Facility # 1 (an unsecured loan) and Facility # 2 (the original loan converted to a secured loan). Trial Exhibit III. Facility # 1 loan was supposed to be secured by Trestle Creek in January 2008. Id. The mortgage securing Facility # 2 was not completed until March, 2008, and was recorded March 25, 2008. Trial Exhibit 1.

The opinion further discusses Union Bank's reliance on the Partial Termination Agreement at the time the mortgage was recorded. The record does not indicate that Union Bank was aware of the Partial Termination Agreement when it made the loan in 2007. In fact, the record discloses that a title report was not obtained until March, 2008, and the title report itself did not reference the Partial Termination Agreement. Trial Exhibit 8.²

The opinion also indicated that R.E. Loans was repaid by POBD on August 6, 2008. This fact is not correct. R.E. Loans was never repaid.³

ARGUMENT IN SUPPORT OF PETITION FOR REHEARING

A. The Evidence at Trial established Union Bank was not a Good Faith Encumbrancer because it had Actual Knowledge of NIR's Vendor's Lien at the Time it made its Loan to POBD

This Court in its opinion affirmed the district court's judgment that the Partial Termination Agreement terminated any vendor's right NIR held on Trestle Creek at the time it was recorded thereby making Union Bank a good faith encumbrancer at the time its mortgage was recorded. The district court arrived at this conclusion because Union Bank was entitled to rely on the record regarding existing liens at the time the mortgage was created (as opposed to the time when the loan was made). This Court in its opinion agreed with the district court that Union Bank had no actual or constructive knowledge based on the record that the release of the vendor's lien was inadvertent. The Court's opinion on appeal indicates: “[t]he district court reasoned Union Bank was entitled to rely on the record, regarding existing liens, at the time the mortgage was created and that Union Bank did not possess actual or constructive knowledge of NIR's vendor's lien, based on Union Bank's reliance on the originally filed Partial Termination Agreement NIR respectfully submits that reliance upon constructive knowledge from a recorded document does not determine what actual knowledge is possessed by an encumbrancer. No Idaho case stands for the proposition that a lender may resort to constructive knowledge to avoid its actual knowledge regarding a vendor's lien.

A vendor's lien is a statutory lien created pursuant to I.C. § 45–801. This statute provides “[o]ne who sells real property has a vendor's lien thereon, independent of possession, for so much of the price as remains unpaid and unsecured otherwise than by the personal obligation of the buyer.” The plain language of the statute indicates the duration of the lien is until such time as the price is paid in full. In fact, there is no requirement that the vendor record anything to possess the lien, although the better practice is to record a memorandum so subsequent purchasers and lenders have notice of the lien.

Idaho Code section 45–803 establishes that “[t]he liens of vendors and purchasers of real property are valid against every one claiming under the debtor, except a purchaser or encumbrancer in good faith and for value.” “Good faith means a party purchased the property without knowing of any adverse claims to the property.” Sun Valley Hot Springs Ranch, Inc. v. Kelsey, 131 Idaho 657, 661, 962 P.2d 1041, 1045 (1998). That knowledge can be either actual or constructive. Id.

Constructive notice imparted from the record is also a matter of statute. Idaho Code section 55–811 provides that “[e]very conveyance of real property acknowledged or proved, and certified, and recorded as prescribed by law, from the time it is filed with the recorder for record, is constructive notice of the contents thereof to subsequent purchasers and mortgagees.” Idaho Code section 55–813 describes documents that are conveyances, but does not include notice of a memorandum of sale or a termination of such memorandum, even though these recorded documents provide information regarding the statutory lien which automatically arises under I.C. § 45–801. Even if the memorandum of sale and partial termination were deemed to be conveyances, I.C. § 55–811 does not indicate that constructive notice displaces actual notice.

This Court in its opinion cites with approval to Kalange v. Rencher, 136 Idaho 192, 196, 30 P.3d 970, 974 (2001), for the proposition that Union Bank was a good faith encumbrancer, and that the recording of the Partial Termination Agreement terminated the vendor's lien. However, Kalange v. Rencher, supra, did not hold that constructive notice displaced actual notice in the analysis of a bona fide encumbrancer. Rather, it discussed the parameters of constructive notice and when there arises a duty of further inquiry based upon the constructive notice provided.

In 1991 Kalange sold to Farnsworth all outstanding stock in the Twin Falls Athletic Club. Farnsworth executed a note to Kalange (the “1991 Note”) which was secured by a deed of trust which was not recorded until October 15, 1993, and was subsequently re-conveyed in January of 1995.

In 1994 Farnsworth borrowed additional monies from Kalange secured by a deed of trust which was recorded on November 2, 1994 (the “1994 Deed of Trust”) which stated that it “secured a $65,000 note” (the $65,000 Note”). The $65,000 Note addressed a current debt of $65,000, but also contained provisions that added certain sums still owed under the 1991 Note as a debt and that would allow Kalange to share in the proceeds of certain sales or to receive an “alternative performance payment” equal to $50,000 if such sales did not take place.

Thereafter Farnsworth borrowed additional monies from Rencher, giving a deed of trust which was recorded on November 21, 1995. Farnsworth subsequently borrowed further additional monies from Rencher which was secured by an all-inclusive (wraparound) deed of trust, which was recorded on March 19, 1996.

Farnsworth defaulted to Kalange. Kalange brought suit to foreclose against Farnsworth and sought a determination that the 1994 Deed of Trust was prior to Rencher's both with respect to: (a) the $65,000 as recited on the face of the 1994 Deed of Trust and (b) the balance due on the 1991 Note and the $50,000 alternative performance payment. The district court held that while the 1994 Deed of Trust to Kalange would take priority over Rencher's liens to the extent of the $65,000 note described on its face, the 1994 Deed of Trust did not take priority over Rencher for the unpaid balance of the 1991 Note and the $50,000 alternative performance payment. The district court held since Rencher did not have constructive notice of the 1991 Note or the alternative performance payment, he therefore took his interest as a bona fide purchaser with respect to those items.

Kalange appealed to this Court, arguing that language in the 1994 Deed of Trust should have pm Rencher on inquiry notice of the 1991 Note and the $50,000 alternative performance payment because the 1994 Deed of Trust had not only statement of the $65,000 Note, but also the associated loan agreement. This Court noted that there is a presumption that a mortgage secures the sum expressed therein, holding “[o]ne claiming title to lands is chargeable with notice of every matter affecting the estate, which appears on the face of any recorded deed forming an essential link in his chain of title ․” Kalange, at 196, 30 P.3d at 974. An encumbrancer is also chargeable with notice “of such matters as might be learned by inquiry which the recitals in such instruments made it a duty to pursue.” Id.

While noting that a purchaser is charged with every document shown by the public record and is presumed to know every other fact which an examination suggested by the record would have disclosed, this Court found in Kalange that nothing on the face of the 1994 Deed of Trust suggested that a more complete description of the underlying debt would be found in documents outside of the record. Therefore, this Court held Kalange failed to protect himself by including information concerning the 1991 Note and $50,000 alternative performance payment in the 1994 Deed of Trust.

The parties to the present suit do not disagree that the inclusion of the second Exhibit “A” to the Partial Termination Agreement after NIR executed it was an error by an unknown person (with the inference being it was Sandpoint Title that made the mistake). This Court's determination that the trial court's analysis that the recorded Partial Termination Agreement constituted constructive notice that the vendor's lien was paid, and that the two Exhibit “A” 's did not did place Union Bank on inquiry notice to determine if the vendor's lien was paid, are not the subject of the petition for rehearing. Nor is the Court's holding that an intervening good faith encumbrancer would take free and clear of the vendor's lien because the re-recorded and corrected Partial Termination Agreement does not relate back to the original release with respect to an intervening good faith encumbrancer.

Rather, the focus of the petition for rehearing are this Court's holdings that: (1) the Partial Termination Agreement completely terminated the vendor's lien, and (2) Union Bank had no actual knowledge that the vendor's lien was not paid, thereby meeting both notice prongs (of no constructive or actual notice) required of a good faith encumbrancer.

The nature of a vendor's lien was explained in Blankenship v. Myers, 97 Idaho 356, 371, 544 P.2d 314, 329 (1975), wherein this Court held:

The vendor's lien is a lien created by statute, I.C. § 45–801, to protect the unsecured seller of real property by giving him rights in the property sold, subject to the rights of a good faith purchaser for value as provided in I.C. § 45–803, when he has no other collateral to secure payment for the property. This statutory lien codified the common law rule which established a vendor's lien under similar circumstances. At common law the vendor's lien generally could be enforced against the vendee as long as the vendor could still bring an action against the buyer for the unpaid purchase price. See 77 Am.Jur.2d, Vendor & Purchaser § 462, p. 588 (1975).

Thus, a vendor's lien exists without recording of a memorandum of sale. The recording of a memorandum of sale is done to provide constructive notice of the vendor's lien to those who might not otherwise have it.

One who sells real property has a vendor's lien thereon, independent of possession, for so much of the price as remains unpaid and unsecured otherwise than by the personal obligation of the buyer. I.C. § 45–801. See also Rogers v. Crockett, 41 Idaho 336, 343, 238 P. 894 (1925). If the seller records a mortgage for amounts due from the sale, the seller has a purchase money mortgage. See Insight v. Gunter, 154 Idaho 779, 302 P.3d 0152 (2013). Vendor's liens “are valid against every one claiming under the debtor, except a purchaser or encumbrancer in good faith and for value.” I.C. § 45–803.

As noted previously, I.C. § 45–801 provides the lien will continue until the vendor is paid in full. The Partial Termination Agreement did not terminate NIR's vendor's lien because it was not yet paid in full. Neither this Court nor the district court cite to any authority for the proposition that the vendor's lien is terminated absent such payment, and any holding to the contrary is not supported in Idaho law.

In West Wood Investments, Inc. v. Acord, 141 Idaho 75, 86, 106 P.3d 401, 412 (2005) this Court acknowledged “ ‘[o]ne who purchases or encumbrances with notice of inconsistent claims does not take in good faith, and one who fails to investigate the open and obvious inconsistent claim cannot take in good faith.’ Middlekauff II, 110 Idaho at 916, 719 P.2d at 1176 (quoting Langroise v. Becker, 96 Idaho 218, 220, 526 P.2d 178, 180 (1974)).” In the present case, even though the constructive notice of record may have indicated otherwise, Union Bank had actual knowledge at the time it made the Facility # 1 loan, which was later converted to the secured Facility # 2 loan, that the vendor, NIR, was still owed money on the purchase.

This Court cites to Benz v. D.L. Evans Bank, 152 Idaho 215, 223, 268 P.3d 1167, 1175 (2012), as controlling law in this matter. Yet, it does not apply the holding of Benz to the facts ascertained at trial.

In Benz, this Court analyzed the creation of vendee's lien pursuant to I.C. §§ 45–803 and 45–804. The dispute centered around whether the vendee's lien had priority over a bank's deed of trust. The issue on appeal was whether the vendee lien arose at the time the purchaser advanced money, or when the vendee filed a lis pendens. This Court held the vendee's lien arose upon advancement of money to the seller, and the lis pendens merely gave record notice to subsequent purchasers or encumbrancers who had no actual knowledge of the action abd claim upon which it was based of the vendee's right to foreclose the vendee's lien. Id at 223–224, 268 P.3d at 1175–1176.

This Court concluded in Benz that the bank had actual knowledge of the advancement of money from the purchaser to the seller which created the vendee's lien, and therefore the bank not a bona fide encumbrancer. In other words, the Court analyzed the presence of constructive or actual knowledge in making its ruling.

The Benz Court further examined the meaning of good faith in the context of I.C. § 45–803, and in the context of real property transactions generally, and held it meant “lack of actual or constructive knowledge” that the vendor was owed money. Benz v. D.L Evans Bank, 152 Idaho 215, 225–26, 268 P.3d 1167, 1177–78 (2012). Thus, actual knowledge that the vendor has not been paid in full negates good faith, even though previously recorded constructive notice may indicate otherwise.

Despite this Court's previous rulings of the clear effect of actual knowledge on vendor's lien priority, this Court's opinion only focused on the state of the county record (i.e. constructive knowledge) at the time Union Bank recorded its mortgage. As such, the Court's analysis was incomplete.

The trial record demonstrated Union Bank had actual knowledge the vendor, NIR, was still owed money for the sale to POBD at the time it made the loan. Concluding Union Bank was a good faith encumbrancer because the record provided constructive notice of release of the vendor's lien omits half of the good faith encumbrancer analysis by ignoring key undisputed facts and testimony at trial. It was error for the district court to ignore the evidence presented of Union Bank's actual knowledge of NIR's lien. This Court's opinion promulgates this error because the opinion failed to address the evidence at trial regarding Union Bank's actual notice. Therefore, NIR respectfully requests rehearing to allow the Court to address Union Bank's actual knowledge of the vendor's lien.

The undisputed evidence, which came from Union Bank's own loan file, and which was not contradicted at trial, was Union Bank had actual knowledge after the partial termination was recorded that NIR had not been paid the full purchase price, and therefore by statute still had a vendor's lien (i.e. a portion of the purchase price was outstanding). Based on this undisputed evidence, any conclusion that Union Bank is a good faith encumbrancer is clearly erroneous because it is not supported by substantial and competent evidence.

In the litigation and at trial, Union Bank produced no representative who had personally participated in preparation of the credit authorization. Tr Vol. II, p. 250, L. 17—p. 251, L. 5. Instead, Union Bank produced Terrilyn Baron, a vice president for Union Bank, who had been working for Union Bank for a year and a half at the time of trial. Tr Vol. II, p. 247, L1. 11–18. However, Ms. Baron was an experienced loan officer and had access to and had reviewed the bank's loan file. Tr Vol. II, p. 248, L1. 7–18.

Union Bank's loan file, and Ms. Baron's testimony at trial regarding the same, provided uncontroverted evidence that Union Bank possessed actual knowledge that NIR was still owed a portion of the purchase price for Trestle Creek at the time Union Bank made the loan, despite the constructive notice imparted by the Partial Termination Agreement.

The bank's credit authorization report (Trial Exhibit III) was prepared October 29, 2007, and showed that Union Bank had actual knowledge that NIR was still owed money on the sale of the real property. The credit authorization report was replete with references to money owed to NIR by POBD on the sale, had references to the Purchase and Sale Agreement between NIR and POBD, including its payment terms, NIR's entitlement to participation payments, and the status of the project including its completed sales. For instance, on its first page under the section “Summary Purpose” the report indicated that the seller from the 2006 sale (NIR) was still owed money from that sale:

To provide operating line that will assist borrower with working capital and marketing expense for Phase 1 of proposed development known as “The Idaho Club Lake & Golf Retreat” in Sandpoint, Idaho. Portion of the proceeds will payoff a $2,000M private seller carry back note originating from the purchase of the subject property in June 2006. (See Sources & Uses on Page 3).

Trial Exhibit III, page 1. The same amount owing NIR was also referenced in the Sources and Uses section of the credit authorization report. Trial Exhibit III, page 3. This language evidences Union Bank's actual knowledge of the unpaid purchase price to NIR when Union Bank made its loan to POBD.

The Sales History section at page 10 of Exhibit III referenced the Purchase and Sale Agreement for the sale from NIR to POBD of Trestle Creek and NIR's entitlement to participation payments as a portion of the purchase price of the sale:

The larger Idaho Club development was purchased in 2006 with a large down payment. Borrower's down payment for the subject payment totaled approximately $16,000M consisting of cash and carry back financing. Of the $16,000M, the overall equity contribution from principals was approximately $10,000M. The Purchase and Sale Agreement includes deed releases at preset prices for the different components within the larger 900 plus acre development. The seller also has the right to receive additional payments for sales in excess of preset prices on the different components when completed. The projected overall sale price when complete is expected to be in the $86,000M to $96,000M price range.

Trial Exhibit III, 10 (emphasis added).

Additional evidence of Union Bank's actual knowledge included Union Bank's review of POBD's Operating Agreement (Trial Exhibit MMM) which referenced POBD's obligation to pay NIR a down payment and participation payments. Tr Vol. II, p. 257, L. 6—p. 258, L. 18. Similarly, in the liabilities portion of the credit authorization report, it was noted that notes payable in the Pend Oreille (Trestle Creek) project were 9.100M from RE Loans Inc. and 3.070M in seller carry and assumed financing. Trial Exhibit III, page 33.

Based on the multiple references in Union Bank's loan file, Terrilyn Baron testified at trial that Union Bank had actual knowledge of the unpaid portion of the purchase price of Trestle Creek and POBD's continuing obligation to pay NIR for that conveyance in the form of participation payments:

Q. So, the bank was aware that the purchase and sale agreement had a continuing ongoing obligation and that there was such an agreement, right, at the time that it made facility one?

A. Based on this information we knew there was a purchase and sale agreement, the bank, yes.

Q. And you knew there was a continuing obligation to pay on lot sales at preset prices, right?

A. Yes, based on this.

Tr Vol. II, p. 256, L1. 5–17. Ms. Baron also testified that Union Bank knew NIR was still owed money based on Exhibit MMM, POBD's operating agreement. Tr Vol. II, p. 257, L. 6—p. 258, L. 18. In fact, when asked again whether Union Bank knew NIR was still owed portions of the purchase price Ms. Baron confirmed that based on the bank's loan file, that information was present in the loan file:

Q. Isn't it true that the documents reflect that the bank officer who was handling the credit authorization and the loan at that time was aware of the participation pricing as evidenced by what he wrote in here and what he was provided?

A. I can't speak for what he knew, but based on what we just reviewed, yes, it appears that that information is in here.

Tr Vol. II, p. 259, L1. 3–10. Ms. Baron was correct that she could not speak to what an individual loan officer personally knew, but as Union Bank's representative, she testified that the bank's own loan file evidenced Union Bank's actual knowledge that NIR was still owed portions of the purchase price for Trestle Creek when Union Bank loaned money secured by the same property.

Ms. Baron's testimony at trial was undisputed evidence of Union Bank's actual knowledge of the outstanding payments and the erroneous recorded Partial Termination Agreement. The district court ignored this uncontroverted evidence. Likewise, this Court failed to address this actual knowledge, which would preclude the Court from determining that Union Bank was a good faith encumbrancer. Union Bank had actual knowledge of the facts and circumstances creating NIR's vendor's lien. Just like in the Benz case, that actual knowledge is enough to preclude Union Bank from qualifying as a good faith encumbrancer. Accordingly, the Court should provide a rehearing of this appeal to address the issue of whether Union Bank was a good faith encumbrancer.

CONCLUSION AND REQUEST FOR RELIEF

Based on the foregoing, NIR respectfully requests rehearing on the Court's Opinion.

FOOTNOTES

1.   In its decision, this Court acknowledged Union Bank was not the name of the original lender As the Court did in ITS APPEAL OPINION, FOR THE SAKE OF SIMPLICITY, NIR WILL SIMPLY refer to Union Bank's predecessor's in interest as Union Bank” because the Court is aware of the corporate name changes.

2.   NIR acknowledges whether Union Bank was aware of the recorded Partial Termination Agreement is irrelevant to constructive notice pursuant to I.C. § 55–811.

3.   The foreclosure of the R.E. Loans mortgage is the subject of another appeal pending with this Court.