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Collings v. City First Mortg. Services, LLC

Court of Appeals of Washington, Division 1

November 18, 2013

Donald COLLINGS and Beth Collings, husband and wife, Respondent,
CITY FIRST MORTGAGE SERVICES, LLC, a Utah limited liability company f/k/a City First Mortgage Services, L.C.; U.S. Bank National Association as Trustee for the Greenpoint Mortgage Funding Trust Mortgage Pass-Through Certificates, Series 2007-ARI, Appellants, Home Front Holdings, LLC, a Utah limited liability company; Robert P. Loveless and Rebecca Loveless, husband and wife; Andrew J. Mullen and

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David R. Goodnight, Leonard J. Feldman, Stoel Rives LLP, Seattle, WA, Aric Hamilton Jarrett, Attorney at Law, Seattle, WA, Rochelle L. Stanford, Pite Duncan LLP, San Diego, CA, Jesse A.p. Baker, Pite Duncan, LLP, Mercer Island, WA, for Appellants.

Jeffrey Alan Smyth, Attorney at Law, Shaunta M. Knibb, Smyth & Mason, Howard Mark Goodfriend, Smith Goodfriend PS, Sage Reeves, Serengeti Law, Bellevue, WA, Catherine Wright Smith, Smith Goodfriend PS, Seattle, WA, for Respondent/Cross-Appellant.

Stewart Andrew Estes Keating, Bucklin & McCormack, Inc., P.S. Seattle, WA, Amicus Curiae on behalf of Washington Defense Trial Lawyers.



¶ 1 City First Mortgage Services LLC has filed a motion for leave to submit supplemental briefing addressing Barton v. State Department of Transportation, No. 86924-3. The panel has determined this motion should be denied.

¶ 2 City First has also moved for reconsideration on two issues: first, whether nondisclosure of the covenant not to execute warrants a new trial, and second, whether the court should set aside the jury's award of punitive damages under Washington's Credit Services Organizations Act, chapter 19.134 RCW.

¶ 3 As to the first issue, reconsideration is denied.

¶ 4 As to the second issue, City First's opening brief of appellant raised the issue insofar as it relates to being licensed under state law, and this court failed to address it. Accordingly, the original opinion filed on July 29, 2013, will be withdrawn and a substitute opinion will be issued, in which the court will address the issue by inserting an additional section beginning on page 20, before " U.S. Bank," as follows:


ISSUE FOUR: Credit Services Organizations Act

¶ 5 City First contends that the Collings' claim that City First violated the Credit Services Organizations Act, chapter 19.134 RCW, fails as a matter of law. City First argues that it was excluded from the Act's coverage under RCW 19.134.010(2)(b)(i) because it was subject to regulation by Washington

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State, having been licensed as a consumer loan company by the Washington State Department of Financial Institutions. City First first raised the argument below in its trial brief and in a motion for judgment as a matter of law that was presented to the trial court after the court heard exceptions to the instructions.

¶ 6 Collings' brief of respondent in response to City First argues that the Act does permit a violation to be found in the circumstances of this case, where the City First branches from which Loveless and Mullen operated in Utah were not licensed by Washington's Department of Financial Institutions.

¶ 7 Instruction 19 sets forth the requirement that " each branch" had to be licensed in order to be exempt under the Act. City First did not take exception to instruction 19. Moreover, as Collings argues, the Department's regulations support the " each branch" interpretation of the statute provided by instruction 19. We conclude the trial court did not err in denying City First's motions for judgment as a matter of law as to the issue of coverage under the Credit Services Organizations Act.

¶ 8 Now, therefore, it is hereby

¶ 9 ORDERED that appellants' motion for leave to submit supplemental briefing is denied. It is further

¶ 10 ORDERED that appellants' motion for reconsideration is granted in part. And it is further

¶ 11 ORDERED that the opinion filed July 29, 2013, is withdrawn and a substitute published opinion be filed in accordance with this order.

¶ 12 [177 Wn.App. 914] This consolidated case originated in a foreclosure rescue scheme. The trial court quieted title in the homeowners. One appellant, ordered to pay damages and attorney fees, contends a new trial should be granted because the homeowners did not disclose a settlement they reached pretrial with another defendant. Because no prejudice was shown, we reject this argument. The other appellant contends it holds a superior interest in the home. But that appellant was not a bona fide purchaser of the note and deed of trust it possesses. The judgments are affirmed.


¶ 13 Donald Collings and his wife, Beth, purchased their Redmond home in 1998. In 2005, a reduction in their income caused them to become concerned about falling behind in their payments on the home.

¶ 14 The appraised value of the home was $510,000, and Collings owed about $377,000 on it when, in early 2006, a flier came in the mail from appellant City First Mortgage Services LLC, advertising a program for people with credit problems. City First is a small mortgage company engaged in transacting the business of residential mortgage loans. Beth Collings called City First. Gavin Spencer, an employee at a City First branch in Utah, offered to help. Ms. Collings applied for a loan over the phone. Soon, Spencer reported the loan was approved. Weeks later, after the purported closing date had been pushed back several times, Spencer told the Collingses the loan had not actually been approved but that his manager might be able to help. Spencer introduced the Collingses to Paul Loveless, a City First branch manager, and Andrew Mullen, a branch manager and loan officer.

¶ 15 [177 Wn.App. 915] According to Mr. Collings, Loveless said, " What we can do is buy your home. We will put it in my name." [1] Loveless proposed to buy the Collings home for its appraised value of $510,000, take out a mortgage on it, and then lease it back for $2,970 per month, using these funds to make payments on the mortgage. Collings would pay Loveless an up-front fee of $78,540 and sign a lease-back agreement with an option to repurchase the home after three years for $510,000.

¶ 16 According to Collings, he agreed to the deal on condition that the lease would prohibit Loveless from refinancing the home and from further encumbering it with a home equity line of credit. Loveless obtained title to the home and, as planned, took out a

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mortgage on it with City First. The deal closed in June 2006.

¶ 17 In July 2008, a foreclosure notice appeared on the house. Collings, who had timely made all the required monthly lease payments, contacted Loveless. Loveless threatened to evict the Collingses if they did not send him more money. Collings discovered that Loveless, in December 2006, had refinanced the loan with City First and had taken out a home equity line of credit, all in violation of the lease prohibition. This transaction, referred to as " the Loveless Loan," is at the center of the ensuing controversy. Collings stopped paying Loveless and obtained legal representation.

¶ 18 In March 2009, Collings sued City First, Loveless, Mullen, Spencer and other parties who were later dismissed. The complaint sought damages and injunctive relief.

¶ 19 Meanwhile, City First had sold the Loveless Loan. The note and deed of trust passed into the hands of appellant U.S. Bank National Association as trustee for the Greenpoint Mortgage Pass-Through Certificates, Series 2007-AR1. The notice of foreclosure posted on the Collings [177 Wn.App. 916] home was part of a nonjudicial foreclosure instituted in response to Loveless' failure to make payments. Collings filed a lis pendens. Through a court order, he was able to stop the pending foreclosure.

¶ 20 In August 2009, U.S. Bank was granted the right to intervene. U.S. Bank sought a declaration that its security interest, as evidenced by its deed of trust, remained a viable, first priority encumbrance of record in the official records of King County and that it was entitled to payment in full of the debt secured by the deed of trust.

¶ 21 Loveless defaulted. It was undisputed that the Loveless Loan amounted to illegal equity skimming. See RCW 61.34.020(1)(b)(i)-(iv). In February 2010, the court found that Loveless, despite his name on the record title, held only an equitable mortgage. As against Loveless, title to the property was quieted in Collings, subject to any applicable valid and subsisting liens.

¶ 22 Trial began in September 2012. The jury was charged with two tasks. First, resolve the claims alleged in the Coilings complaint. Second, issue advisory findings in the U.S. Bank case.

¶ 23 In the City First case, the jury returned a verdict finding Loveless, Mullen, and City First liable to the Collingses. The verdict held Loveless and City First liable for $40,311 in compensatory damages and also imposed $80,622 in punitive damages against the two of them under the Washington Credit Services Organizations Act, chapter 19.134 RCW. The jury assessed $8,000 in punitive damages against Mullen, but no compensatory damages. The court denied City First's posttrial motions and entered a judgment against it.

¶ 24 The trial court also entered judgment in favor of the Collingses in the U.S. Bank case. The court declared the deed of trust held by U.S. Bank void and unenforceable, permanently enjoined U.S. Bank from foreclosing on the Coilings home, and quieted title in the Collingses as against [177 Wn.App. 917] U.S. Bank. City First and U.S. Bank appeal from the judgments entered against them.


ISSUE ONE: Nondisclosure of Settlement Agreement

¶ 25 After the verdict, City First moved unsuccessfully for a new trial under CR 59. One basis for the motion was City First's discovery of a previously undisclosed pretrial settlement. The Collingses, in exchange for Mullen's promise to pay $500, had agreed they would not execute any judgment they obtained against Mullen.

¶ 26 The litigation of City First's motion for a new trial and the order denying that motion focused primarily on whether the covenant not to execute against Mullen had the effect of releasing City First from its vicarious liability for the acts of Loveless or Mullen. The court concluded that if the settlement did release City First from any judgment rendered against Mullen, it did not release anyone else. The judgment against City First would stand to the extent it was

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based either on vicarious liability for the acts of Loveless or its own independent acts.[2]

¶ 27 On appeal, City First is concerned with the significance of the nondisclosure of the Mullen settlement, not with the argument that the settlement operated as a release. Mullen remained a defendant after the settlement, and his 70-page deposition was read into evidence in the plaintiffs' case. City First argues that the settlement was a collusive agreement and that its nondisclosure tainted the trial.

¶ 28 The order denying the motion for a new trial is reviewed for abuse of discretion. McCluskey v. Handorff-Sherman, 68 Wash.App. 96, 103, 841 P.2d 1300 (1992), aff'd, [177 Wn.App. 918] 125 Wash.2d 1, 882 P.2d 157 (1994). Atrial court abuses its discretion when its decision is manifestly unreasonable or based upon untenable grounds. Havens v. C & D Plastics, Inc., 124 Wash.2d 158, 168, 876 P.2d 435 (1994). A court also abuses its discretion when it " uses an incorrect standard of law or the facts do not meet the requirements of the standard of law." Sherron Assocs. Loan Fund V (Mars Hotel) LLC v. Saucier, 157 Wash.App. 357, 361, 237 P.3d 338 (2010), review denied. 171 Wash.2d 1012, 249 P.3d 1029 (2011).

¶ 29 City First contends the Mullen-Collings settlement was a " Mary Carter" agreement, one in which a defendant remains in the trial after settling with the plaintiff in exchange for a limitation of liability. The " Mary Carter" denomination derives from Booth v. Mary Carter Paint Co., 202 So.2d 8 (Fla.Dist.Ct.App.1967). " The key elements of a Mary Carter agreement are a limitation of the settling defendant's liability, a requirement that that defendant remain in the trial, and a guarantee of a certain sum of money to the plaintiff." J. Michael Philips, Looking Out for Mary Carter: Collusive Settlement Agreements in Washington Tort Litigation, 69 WASH. L.REV.. 255, 257 (1994). Here the agreement did not require Mullen to remain in the trial, and it also did not give Mullen a financial interest in the Collingses' potential recovery from City First— an element in some definitions of a Mary Carter agreement. We will nevertheless examine the argument in light of the policy concerns about the potentially pernicious effect of undisclosed settlement agreements.

¶ 30 Washington law on the topic of undisclosed settlement agreements among the parties is sparse. While our courts have not set forth a definitive rule, we have acknowledged the potential for prejudice presented by such agreements. McCluskey, 68 Wash.App. at 103-04, 841 P.2d 1300.

¶ 31 McCluskey was a wrongful death action arising from a two-car collision on a state highway. The two defendants were each held 50 percent liable for a sizable award of damages: the State of Washington for maintaining [177 Wn.App. 919] an unsafe highway, and the indigent and uninsured teenage driver for negligently operating his vehicle. On appeal, the State invoked the policy concerns about Mary Carter agreements in its motion for a new trial. The State argued that the driver and the plaintiff, while outwardly appearing to be adversaries, had secretly colluded to obtain a verdict against the State as the defendant with the deep pocket. McCluskey, 68 Wash.App. at 102, 841 P.2d 1300. We recognized that the " existence of an undisclosed agreement between outwardly adversarial parties at trial can prejudice the proceedings by misleading the trier of fact.... Where appellate courts have permitted such agreements, they also have required pretrial disclosure to the trial court. The trial court can then advise the jury of the agreement so that jurors can consider the relationship in evaluating evidence and the credibility of witnesses." McCluskey, 68 Wash.App. at 103-04, 841 P.2d 1300, citing Daniel v. Penrod Drilling Co., 393 F.Supp. 1056 (E.D.La.1975); Ward v. Ochoa, 284 So.2d 385 (Fla.1973) (holding Mary Carter agreements must be disclosed to jury upon proper motion), abrogated by Dosdourian v. Carsten, 624 So.2d 241 (Fla.1993) (holding Mary Carter agreements void and inadmissible); Maule Indus., Inc. v. Rountree, 284 So.2d 389 (Fla.1973);

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Ratterree v. Bartlett, 238 Kan. 11, 707 P.2d 1063 (1985). But we concluded that listing parallel positions taken by the plaintiff and the impecunious defendant was not enough to establish collusive conduct. Without direct evidence of some kind of agreement, there was no basis for a new trial. McCluskey, 68 Wash.App. at 103-05, 841 P.2d 1300.

¶ 32 Here, City First does have evidence of an agreement. City First discovered the settlement in the course of reviewing billing records in connection with the plaintiffs' posttrial motion for attorney fees. Based in part on the lack of disclosure of the settlement agreement, City First moved for a new trial. In the course of litigating the motion, City First obtained a declaration from Mullen stating that he was informed Collings would settle with him only if his deposition [177 Wn.App. 920] testimony was " acceptable." [3] And he said Collings executed the agreement after the deposition was completed in July 2010.

¶ 33 City First contends a new trial must be ordered because the failure to disclose the Mullen settlement before trial violated a duty that exists in Washington either as a common law duty, a statutory duty under RCW 4.22.060(2), or as an independent ethical duty of counsel.

¶ 34 Courts have adopted different approaches to Mary Carter agreements. Some jurisdictions have banned such agreements as a matter of policy. See, e.g., Dosdourian, 624 So.2d at 246; Cox v. Kelsey-Hayes Co., 1978 OK 148, ¶ 32, 594 P.2d 354, 360; Elbaor v. Smith, 845 S.W.2d 240, 250 (Tex.1992). Others have allowed Mary Carter agreements but have required that they be disclosed. Hodesh v. Korelitz, 123 Ohio St.3d 72, 2009-Ohio-4220, 914 N.E.2d 186, 189; Monti v. Wenkert, 287 Conn. 101, 124, 947 A.2d 261, 275 (Conn.2008). Some of these courts have required that such agreements must be produced for examination before trial if there is a discovery request. Ward, 284 So.2d at 387; see Grillo v. Burke's Paint Co., 275 Or. 421, 429, 551 P.2d 449 (1976) (affirming denial of a motion for a new trial based on posttrial discovery of settlement agreement because settlement could have been discovered before trial through due diligence).

¶ 35 It is fair to say that Mary Carter agreements are not favored. But there is little support for the proposition that City First is trying to establish in this case: that an undisclosed Mary Carter agreement is automatic grounds for a new trial.

¶ 36 In general, for a trial court to grant a party's motion for new trial, prejudice is required. See Spratt v. Davidson, 1 Wash.App. 523, 526, 463 P.2d 179 (1969) (reversing order of new trial and stating the " existence of a mere possibility or remote possibility of prejudice is not enough" ). And other [177 Wn.App. 921] courts, in rejecting arguments for a new trial premised on the existence of a Mary Carter agreement, have required prejudice. See, e.g., Med. Staffing Network, Inc. v. Connors, 313 Ga.App. 645, 649, 722 S.E.2d 370 (2012) (concluding that even if the litigants had disclosed their litigation agreement during trial, " it is unlikely that the jury would have reached a different verdict" ), cert. denied (May 29, 2012); Monti, 947 A.2d at 277 (concluding that " the defendant was not prejudiced by the nondisclosure of the agreement so as to warrant a reversal" ). We adhere to our well-established rule that a showing of prejudice is required to warrant a new trial.

¶ 37 City First identifies three portions of the record that allegedly demonstrate how it was prejudiced by not being informed of the settlement with Mullen. The first is a declaration from Brian Hunt, general counsel for City First, submitted to support City First's motion for a new trial. Hunt states that during closing argument, counsel for Collings dramatically drew the jury's attention to the fact that Mullen and his wife did not personally attend the trial: " where are they?" and " why aren't they here?" [4] City First argues that with evidence of the agreement to excuse Mullen from having to pay damages, the absence of Mullen could have been readily explained and the credibility of his testimony undermined.

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¶ 38 A declaration purporting to describe what was said during court proceedings is not a substitute for a record. The parties agreed that closing argument would not be transcribed.[5] And City First did not try to make a narrative report of proceedings of closing argument for review. See RAP 9.3 (rule allowing narrative report of proceedings); see also Allstate Ins. Co. v. Huston, 123 Wash.App. 530, 544-45, 94 P.3d 358 (2004) (record insufficient to decide issue and noting that party did not attempt to have an agreed or [177 Wn.App. 922] narrative report of proceedings created), review denied, 153 Wash.2d 1021, 108 P.3d 1228 (2005). As a result of City First's failure to preserve the pertinent record in any way other than its own self-serving declaration, we must disregard the allegation of prejudice in closing argument.

¶ 39 Second, Mullen stated in his posttrial declaration that he was told Collings would agree to execute a covenant not to enforce judgment against him only if his deposition testimony was " acceptable." While the potential for tailored testimony certainly exists in these circumstances, City First does not show that any specific statement Mullen made was false or misleading. In our review of Mullen's deposition, we find nothing to suggest that his answers were crafted to aid the Collingses against City First. His testimony was largely consistent with the testimony of Sherri Russett, a City First employee since December 2009 who testified about how City First operated. City First simply does not explain what it would have or could have done differently with Mullen as a witness if it had known the Collingses had agreed not to pursue judgment against him.

¶ 40 Third, City First contends the jury must have been misled by instructions that implied Mullen was actively defending at trial against the allegations of the Collingses, when in reality he was not at risk of having to pay damages [6] But City First does not explain how the outcome of the trial would have been different if the jury had instead been informed about Mullen's settlement with the Collingses. Certainly, the nondisclosure of the settlement deprived City First of an opportunity to inquire into the circumstances surrounding the settlement agreement and from asking Mullen about whether the covenant not to execute influenced his testimony. But this abstract possibility of prejudice, which will be present whenever a settlement [177 Wn.App. 923] agreement is kept secret, is too speculative to justify a new trial. We conclude a concrete showing of actual prejudice is necessary and City First has not made such a showing. We decline the invitation to use this case to make a definitive holding concerning Mary Carter-type agreements and the circumstances under which they must be disclosed. The trial court did not abuse its discretion by denying City First a new trial based on the lack of disclosure of the Mullen-Collings agreement.


ISSUE TWO: Sufficiency of the Evidence

Use of a general verdict

¶ 41 City First contends there was insufficient evidence of its liability on all the various claims ...

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