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June 21, 2013 at 6:00 AM

Washington Supreme Court: The case of the mortgage ‘volunteer’

Sheryl Gordon McCloud

Sheryl Gordon McCloud

Here is a Washington Supreme Court case that came down Thursday: Columbia Community Bank v. Newman Park LLC.  It has to do with a bank that made a loan on collateral that the borrower said he owned but only partly did, and was stuck when the borrower didn’t pay. It’s a case in which the Court threw out the standard legal principles and unanimously went with equity.

The story begins with 11 investors and a company owned by Joseph Sturtevant called Landmark Development Ventures. Together they created a company called Newman Park LLC. Landmark owned 39 percent of it and the 11 investors owned the rest.

In 2004 Newman Park bought a piece of land in Thurston County. To pay for the land it borrowed $400,000 from Longview-based Hometown National Bank, pledging the land as collateral. Quoting the ruling by Justice Sheryl Gordon McCloud:

“In 2008, without the knowledge of the other owners of Newman Park, Sturtevant went to a different bank, Columbia Community Bank, and requested a loan for his 95-percent-owned company, Trinity. CCB agreed to loan Sturtevant $1.5 million” — but only after Sturtevant pledged the Newman Park property as collateral.

He needed owners of 80 percent of Newman Park to pledge the company’s property. Instead of getting their signatures, Justice Gordon McCloud wrote, Sturtevant “forged some of the documents” so that they showed “Landmark as the only stakeholder” in Newman Park.

The bank lent him the $1.5 million on condition that he pay off the loan from Hometown National. And he did.

Columbia, based in Hillsboro, Ore., had made a bad loan. In the recession year 2009, Sturtevant’s company, Trinity, defaulted on it. The bank tried to foreclose on the Newman property, and the investors said, in effect, “Hey, we never gave you an interest in this property, so you can’t foreclose on us.” They were right about never giving an interest, and by the ordinary rules of real estate the bank was out of luck. But the investors (presumably including Sturtevant) had benefited by having their debt of $400,000 wiped out.

The question: Should Columbia Community Bank be given any lien against the Newman Park property? The Newman investors said no, that the bank had volunteered to pay off their mortgage, thank you very much, but they didn’t owe the bank anything. The bank argued that it wasn’t fair for the investors to reap a $400,000 benefit at the bank’s expense on account of one of their members’ sharp practice.

The Court found for the bank. Under a doctrine called equitable subrogation, Columbia Community Bank takes over the position Hometown National had: a $400,000 interest in the property.

It makes sense to me.

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