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Flagstar Bank, FSB v. Eerkes

United States District Court, W.D. Washington, Seattle

September 4, 2014

FLAGSTAR BANK, FSB, Plaintiff,
v.
STEVE EERKES, DEBRA EERKES, and the INTERNAL REVENUE SERVICE, Defendants.

ORDER GRANTING THE UNITED STATES' MOTION FOR SUMMARY JUDGMENT AND GRANTING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

ROBERT S. LASNIK, District Judge.

This matter comes before the Court on the "United States' Motion for Summary Judgment on all Claims Against the United States" (Dkt. #47) and "Plaintiff's Motion for Summary Judgment" (Dkt. #50). Summary judgment is appropriate when, viewing the facts in the light most favorable to the nonmoving party, there is no genuine dispute as to any material fact that would preclude the entry of judgment as a matter of law. L.A. Printex Indus., Inc. v. Aeropostale, Inc. , 676 F.3d 841, 846 (9th Cir. 2012). The party seeking summary dismissal of the case "bears the initial responsibility of informing the district court of the basis for its motion" ( Celotex Corp. v. Catrett , 477 U.S. 317, 323 (1986)) and identifying those portions of the materials in the record that show the absence of a genuine issue of material fact (Fed. R. Civ. P. 56(c)(1)). Once the moving party has satisfied its burden, it is entitled to summary judgment if the non-moving party fails to identify specific factual disputes that must be resolved at trial. Hexcel Corp. v. Ineos Polymers, Inc. , 681 F.3d 1055, 1059 (9th Cir. 2012). The mere existence of a scintilla of evidence in support of the non-moving party's position will not preclude summary judgment, however, unless a reasonable jury viewing the evidence in the light most favorable to the non-moving party could return a verdict in its favor. U.S. v. Arango , 670 F.3d 988, 992 (9th Cir. 2012).

Having reviewed the memoranda, declarations, and exhibits submitted by the parties, the Court finds as follows:

The facts of this case are undisputed. In 2008, Steve and Debra Eerkes owned two adjacent pieces of property in Mount Vernon, Washington. They applied for a loan from plaintiff Flagstar Bank, FSB, to refinance the mortgage on the first parcel. The loan was approved, and Flagstar paid off the original mortgage and recorded a Deed of Trust. Unfortunately, the Deed of Trust included reference to the assessor's parcel number and legal description of the second parcel, not the first. The property records related to the first parcel showed only that the original deed had been reconveyed, with no indication of a subsequent mortgage. Mr. Eerkes agrees that the parties intended to encumber the first parcel and that the references to the second parcel were a mistake.

Mr. and Mrs. Eerkes fell behind on their federal income taxes and the United States recorded notices of federal tax liens against all of the Eerkes property, including the first parcel, in 2011. Flagstar filed this action seeking (1) reformation of the Deed of Trust to identify the first, rather than the second, parcel and (2) a declaration that the reformed Deed of Trust has priority over the United States' lien interest in the first parcel. Only the United States has opposed Flagstar's motion for summary determination of its claims. There being no genuine issues of fact that would preclude reformation of the contract, the Deed of Trust filed with the Skagit County Auditor on January 30, 2008, is hereby reformed to reflect the correct assessor's parcel number (P18037) and legal description ("The East ½ of the following described property: The Northwest 1/4 of the Northeast 1/4 of the Southwest 1/4 and all that portion of the Southwest 1/4 of the Northeast 1/4 of the Southwest 1/4, Section 8, Township 33 North, Range 5 East, W.M., lying North of County Road; EXCEPT that portion conveyed to Skagit County by Right-of-Way Deed recorded February 28, 1991 under Skagit County Auditor's File No. 9102280035"). To the extent any additional actions are necessary to make the reformation effective and/or to perfect Flagstar's interest in the first parcel, Flagstar and Mr. and Mrs. Eerkes shall cooperate to bring them about in a timely manner.

The issue then becomes whether this correction relates back to the date on which the Deed of Trust was originally filed so as to displace the federal tax lien from its priority position. It does not. Federal law, which determines the priority of competing claims once a federal tax lien has attached ( Aquilino v. U.S. , 363 U.S. 509, 513-14 (1960)), acknowledges that holders of security interests have priority over later-recorded notices of tax liens (26 U.S.C. § 6323(a)). Flagstar's loan clearly satisfies the definition of a "security interest" insofar as it is an "interest in property acquired by contract for the purpose of securing payment or performance of an obligation...." 26 U.S.C. § 6323(h)(1). With regards to the first parcel, however, the security interest did not come into existence until it was "protected under local law against subsequent judgment lien arising out of an unsecured obligation...." Id . Plaintiff's interest in the first parcel was not recorded and was therefore not protected against subsequent judgments under Washington law at any point before entry of this Order. See RCW 65.08.070 (an unrecorded conveyance "is void as against any subsequent purchaser or mortgagee..."); Zervas Group Architects, P.S. v. Bay View Tower, LLC , 161 Wn.App. 322, 325 and n.7 (2011) (Washington is a "race-notice recording state" meaning that "an unrecorded interest in real property is subordinate to a recorded interest") (internal quotation marks and citations omitted). Where an action necessary to establish priority over subsequent judgments under state law has not yet been taken, Treasury Regulation § 301.6323(h)-1(a)(2)(i) makes clear that no "rule or principle of local law which permits the relation back of any requisite action to a date earlier than the date on which the action is actually performed" is effective. Thus, regardless of whether a reformation generally relates back to the original contract date under Washington law, federal law disregards such principles when a federal tax lien is vying for priority with competing claims. See Haas v. Internal Revenue Serv. , 31 F.3d 1081 (11th Cir. 1994) (federal tax lien recorded after mortgage was erroneously discharged and before it was judicially reinstated had priority notwithstanding a lack of reliance or prejudice on the part of the government); Metro. Nat'l Bank v. U.S. , 901 F.2d 1297 (5th Cir. 1990) (because state law would not have protected bank's interest against a subsequent judgment creditor absent a showing that the creditor had actual knowledge of the defective deed of trust, the bank did not have a "security interest" for purposes of § 6323(h)(1)); Regions Bank v. U.S., 2013 WL 635615 (E.D. Tenn. Feb. 20, 2013) (mistaken release of mortgage dissolved bank's security interest for purposes of § 6323(a) and (h)(1), leaving bank with only an equitable interest in the property that could not take priority over the federal tax lien); Bank of N.Y. Mellon Trust Co. v. Phipps, 2011 WL 1322393 (D. Md. Apr. 1, 2011) (a deed of trust that was defective under state law could not, upon reformation, unseat an intervening federal tax lien from its priority position). But cf. Nat'l Assistance Bureau, Inc. v. Macon Memorial Intermediate Care Home, Inc. , 714 F.Supp.2d 1192 (M.D. Ga. 2009) (reformation of deed to indicate sale by delinquent taxpayer of entire property, rather than merely a portion thereof, deprived taxpayer of any interest in the property and relates back to the date of the sale, thereby preventing the federal tax lien from attaching in the first instance).

In the alternative, Flagstar argues that its priority interests in the property should be recognized under the doctrine of equitable subrogation. Washington has adopted Restatement (Third) of Prop.: Mortgages § 7.3, which recognizes equitable subrogation as a means of balancing the interests of lenders, borrowers, and junior lien holders when the original loan is modified or refinanced. See Restatement (Third) of Prop.: Mortgages § 7.3 cmt. a and b; Kim v. Lee , 145 Wn.2d 79, 89 (2001). The doctrine is, at base, equitable and its applicability "depends upon the equities and attending facts and circumstances of each case." Coy v. Raabe , 69 Wn.2d 346, 351 (1966). The Restatement itself rules out subrogation in certain circumstances:

If a senior mortgage is released of record and, as part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except
(1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest in the real estate, or
(2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

Restatement (Third) of Prop.: Mortgages § 7.3(a). In this case, the United States recorded its interest in the Eerkes' property three years after the senior mortgage had been reconveyed and was no longer of record. Paragraph (2) therefore applies to bar equitable subrogation. Even if the Court were inclined to view the Restatement as merely a guideline for the exercise of equitable powers rather than a statement of governing state law, it would not step in to save Flagstar from its own error at the expense of the United States in the circumstances presented here. It was Flagstar that failed to perfect its security interest in the first parcel, thereby rendering the property records inaccurate and unreliable. The United States, as an involuntary creditor, had no choice as to whether Mr. and Mrs. Eerkes would become indebted to it or the mechanisms by which it could seek recovery: it took the steps necessary to seek full recovery for the public treasury. As between the two claimants, Flagstar had every chance to protect itself and preserve its first priority position, as permitted under both federal and state law. Having failed to properly record its interest, the Court declines to exercise its equitable powers to unseat the government in Flagstar's favor.

For all of the foregoing reasons, plaintiff's motion for summary judgment (Dkt. #50) is GRANTED insofar as it seeks reformation of the Deed of Trust and DENIED insofar as it seeks a declaration that its interests in the first parcel have priority over the federal tax lien. The United States' motion for summary judgment is GRANTED. The Clerk of Court is directed to enter judgment in the above-captioned matter.


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