Brian A. Worden et al., Plaintiffs,
James M. Smith et al., Defendants, Columbia Bank et al., Appellants, KAL Farms, LLC, et al., Respondents
Appeal from Walla Walla Superior Court. Docket No: 10-2-01133-2. Date filed: 10/19/2011. Judge signing: Honorable John W Lohrmann.
Kevin D. O'Rourke (of Southwell & O'Rourke PS ); Hunter B. Emerick (of Saalfeld Griggs PC ); and Carl E. Hueber, Kevin J. Curtis, and David P. Gardner (of Winston & Cashatt ), for appellants.
Corey F. Brock (of Brock Law Firm PS ); Mona J. Geidl Gonzales (of Minnick Hayner ); and Robert G. McMillen (of Telquist Ziobro & McMillen PLLC ), for respondents.
AUTHOR: Laurel H. Siddoway, A.C.J. WE CONCUR: Stephen M. Brown, J., Teresa C. Kulik, J.
[178 Wn.App. 313] Siddoway, A.C.J.
¶ 1 Brian and Anne Worden's foreclosure on property mortgaged to them by James and Jane Smith led to a predictable and error-free outcome for the Wordens and Smiths, but embroiled four other parties in disputes leading to this appeal. A bidding war for the property at the foreclosure sale resulted in a high price and surplus proceeds that were paid out to the wrong recipients as provided by an order prepared by Columbia Bank, a junior lienholder. After the bank realized it had received almost $66,000 less than the amount to which it was [178 Wn.App. 314] entitled, it first sought an amendment to the distribution order and later sought to correct the error through a request for equitable relief when the property was redeemed.
¶ 2 The circumstances presented the trial court with an unusual problem and no easy solution, but the court erred in concluding
that the law of the case doctrine or the stipulated character of the order prevented it from granting the relief requested by the bank. We reverse the trial court's decisions on both orders challenged on appeal and remand with directions to enter an order imposing an equitable lien on the property in favor of the bank's assignee.
FACTS AND PROCEDURAL BACKGROUND
¶ 3 In December 2010, Brian and Anne Worden commenced the action below against James and Jane Smith, seeking to recover over $650,000 owed by the Smiths on a promissory note and to foreclose a mortgage on property securing the note. Among relief requested by the Wordens was that the court determine that their mortgage was a valid first lien on the Smiths' property, senior to a deed of trust later granted to Columbia Bank.
¶ 4 The superior court granted the relief requested by the Wordens, entering a money judgment of $894,762.17 in their favor. It ordered that their mortgage be foreclosed and the property sold with the proceeds to be applied first to the amount owed to them.
¶ 5 At the sheriff's sale of the property in August, there were competing bidders. The property was ultimately sold to KAL Farms LLC and Alan Mehlenbacher (collectively KAL Farms) for a bid price of $1,625,000. After paying amounts owed the Wordens, surplus proceeds of $710,780.28 remained and were deposited by the sheriff with the clerk of the superior court.
¶ 6 Columbia Bank then filed a motion for an order " directing the [clerk of court] to distribute all surplus sales [178 Wn.App. 315] proceeds pursuant to RCW 61.12.150." Clerk's Papers (CP) at 190. RCW 61.12.150 dictates how the proceeds of a foreclosure sale should be applied. At the time of the motion, the parties to the foreclosure action were the Wordens (the creditors), the Smiths (the debtors), and Columbia Bank (the junior lienholder).
¶ 7 The bank's motion was unopposed. Before the time set for hearing on the motion, the bank's lawyer circulated to the parties a proposed form of order that made three references to the proposed distribution as being " pursuant to" or " required under" RCW 61.12.150. CP at 245-47. The Wordens and Smiths agreed to the proposed order, which, in its final form, was jointly presented by lawyers for the bank and the Wordens at the time set for hearing and was entered by the court.
¶ 8 Beyond describing the proposed distribution as being required by statute, the order went on to spell out who would receive the proceeds and in what amount. It stated that the proceeds would be distributed:
(1) First, towards outstanding real property taxes due and owing upon the Property, said real property taxes totaling approximately $65,625.73 ... ;
(2) Second, towards outstanding storm water taxes totaling approximately $287.64 ... ;
(3) Third, towards full satisfaction of [the Wordens'] judgment against Defendants James M. Smith and Jane A. Smith, said judgment totaling, as of September 20, 2011, the sum of $933,311.39 ... ;
(4) Fourth, all remaining proceeds, said proceeds totaling approximately $625,775.24, to be distributed to [Columbia Bank] in partial satisfaction of the sums owing to it, as required under RCW 61.12.150.
CP at 246-47. In accordance with the order, property taxes and storm water taxes in the amounts indicated were paid to the county treasurer and $625,775.24 was paid to the bank.
[178 Wn.App. 316] ¶ 9 The bank soon realized that it had made a mistake in providing that taxes should be paid from the proceeds. Within 10 days of the original order, it filed a motion to amend the order on grounds provided by CR 59(h) or, in the alternative, CR 60(b). Its motion explained that the bank's lawyer mistakenly believed that because property taxes were a higher priority lien  they must be
satisfied before other distributions, and that in providing for a priority payment of taxes the order was " a mistake in contravention of RCW 61.12.150 and should be corrected accordingly." CP at 255.
¶ 10 In response to the motion, KAL Farms, though not earlier a party to the foreclosure action, filed a notice of appearance and objected to the bank's motion. It argued that because the order directing distribution was an agreed order, the court should not entertain any motion to amend. The trial court considered KAL Farms's objection and allowed it to participate in the hearing on the bank's motion. It would later observe that although KAL Farms had not been a party at the time the order directing distribution was circulated, at least one version of the bank's proposed order directing distribution had been provided to KAL Farms's lawyer for approval.
¶ 11 During the hearing, the following exchange occurred between the court and KAL Farms's lawyer:
THE COURT: Okay, Ms. Geidl, why do you think I shouldn't amend the order? You didn't rely on the fact that taxes were going to--excuse me--your client didn't rely on the fact that [178 Wn.App. 317] these taxes were going to get paid from the sale proceeds, did he?
MS. GEIDL: No, but they, I believe the proceeds have already been distributed. ...
... [T]his was a stipulated order, and it was actually pushed by [Columbia Bank] and it was submitted on their counsel's pleading paper, and they were pretty adamant about the order and [its] verbiage. The parties all agreed, and to amend it now is, I believe, unjust, because all of the proceeds had been distributed.
Report of Proceedings (Oct. 17, 2011) (RP) at 9-10.
¶ 12 The court took the matter under advisement and thereafter issued a written opinion. Accepting arguments that had been made by KAL Farms, it explained its ...