Opinion
No. 59952-6-I.
November 10, 2008.
Appeal from a judgment of the Superior Court for King County, No. 02-2-12084-9, Michael S. Spearman, J., entered March 28, 2007.
Affirmed by unpublished opinion per Leach, J., concurred in by Schindler, C.J., and Cox, J.
UNPUBLISHED OPINION.
We review this action to quiet title for a second time. Kim Carpenter challenges the trial court's additional finding of fact and its amended conclusion of law entered on remand. Mikel and Pauline Hernandez ask this court to affirm the trial court's judgment based upon the statute of frauds, or the alternative theories of equitable mortgage, lack of consideration, and adhesion contract.
We hold that the trial court erred when it held that the parties' transaction violated the statute of frauds. However, we also hold that the record provides substantial evidence to support the trial court's finding that the parties intended a deed and option to purchase to create a loan or mortgage. In light of the foregoing, other unchallenged findings by the trial court, and the circumstances of this case, we conclude that the transaction between the Hernandezes and Carpenter constituted an equitable mortgage. Therefore, we affirm.
Because we affirm the trial court's judgment on grounds that the transaction was an equitable mortgage, we need not address the alternative theories of lack of consideration and contract of adhesion.
Background
The Hernandezes owned and managed the Dos Amigos Tavern starting in 1985. Due to their failure to pay approximately $10,000 in property taxes, the tavern was scheduled to be sold at a tax foreclosure sale on December 14, 2001.
On December 13, 2001, Carpenter approached the Hernandezes and offered them a way to avoid the sale. The parties dispute the terms of Carpenter's offer. According to Mr. Hernandez, Carpenter offered to loan him $10,000 on the condition that he would pay Carpenter approximately $20,000. Carpenter recalls that Mr. Hernandez sought a loan, but that he expressly refused to offer him one. Instead, Carpenter claims that if the Hernandezes conveyed their property to him, he promised to pay back taxes, rent the property to the Hernandezes for $200 per month, and grant the Hernandezes an option to repurchase the property within 30 days for approximately $20,000 to $25,000. Mr. Hernandez then proposed to make the payment in two installments, the first half due immediately and the second half due in 60 days.
After conducting a title search and inspecting the tavern, Carpenter drafted a statutory warranty deed and a real estate excise tax affidavit. The deed provided: "The Grantors Mike and Pauline Hernandez, husband and wife, for and in consideration of ten dollars and other valuable consideration, convey and warrant to Kim Carpenter, the following real property." The deed was signed by the Hernandezes and notarized on December 13, 2001.
Carpenter then attempted to pay the delinquent taxes at the treasurer's office. However, the treasurer refused to accept any payment from Carpenter because the deed presented by Carpenter had not been recorded. The treasurer was later advised by a prosecutor that he should have accepted payment from Carpenter. Based on this advice, the treasurer decided to remove the property from the foreclosure sale list. On the next day, December 14, Carpenter returned, and the treasurer informed Carpenter that he should have been allowed to pay the taxes. The treasurer also told Carpenter that the property had been removed from the foreclosure sale list. However, Carpenter left the office without paying any taxes.
Instead, he called Mr. Hernandez to tell him that the property had been taken off the foreclosure sale list and that Mr. Hernandez was now obligated to pay $10,925 by December 21. When Mr. Hernandez stated that he was unable to pay that amount in time, Carpenter "agreed that since he hadn't actually paid the taxes as he promised, he would give [Mr. Hernandez] a one-week extension to December 28th to make the first payment."
On December 24, 2001, the parties signed an option to purchase real estate, prepared by Carpenter. The option recited that the December 13, 2001, deed to Carpenter "was given in consideration of payment of taxes and/or otherwise delaying same property from a tax foreclosure sale scheduled on December 14, 2001." It granted the Hernandezes the right to repurchase their property for $21,850 if they paid the first half by December 28, 2001, and the second by February 13, 2002. If the option was not timely exercised, it would expire. The option also stated that the Hernandezes would pay $200 per month in rent on December 28, 2001 and January 13, 2002. As of December 24, 2001, Carpenter had not paid any taxes, and it is undisputed that he never did.
This option expired by its terms, as the parties did not have any further contact until February 14, 2002. On that day, the parties attempted to negotiate a new deal with different terms. Carpenter testified that he was willing to sell the tavern "below market value, favorable to [Mr. Hernandez]." When these negotiations stalled, Carpenter sent a letter on April 6, 2002, demanding that the Hernandezes either pay rent or vacate the premises in three days.
Although Mr. Hernandez disputed receiving the letter, the trial court noted that a receipt acknowledging that the letter had been received appeared to bear his signature.
On April 17, 2002, the Hernandezes filed a complaint for "Return of Property, Quiet Title, Lack of Consideration, and Recession [sic] of Any Contracts." The Hernandezes alleged the transaction was void on several grounds, including lack of capacity, fraud, and negligent misrepresentation. Following a bench trial, the court issued its oral ruling on December 15, 2003, stating that the Hernandezes had failed to meet their burden of proving lack of capacity, fraud, and negligent misrepresentation by clear and convincing evidence and quieting title to Carpenter. Afterwards, the Hernandezes filed a "Memorandum in Favor of Plaintiff's Version of Proposed Findings," asking that the court consider new alternative theories of equitable mortgage, lack of consideration, and adhesion contract. The court did not consider the Hernandezes' request.
On February 3, 2004, the trial court entered its written findings of fact and conclusions of law and a judgment quieting title to Carpenter and evicting the Hernandezes. The Hernandezes filed a motion for reconsideration, asking for a second time that the court consider their alternative theories. This motion was denied.
The Hernandezes appealed. On November 28, 2005, this court reversed and remanded the case with the following instructions:
We conclude that the trial court abused its discretion in refusing to consider the Hernandezes' . . . motion to amend the pleadings and the alternative theories of lack of consideration, equitable mortgage, and adhesion. . . . We vacate the judgment quieting title to Carpenter and remand to consider the Hernandezes' motion to amend and the alternative theories based on the evidence presented without objection at trial.
Hernandez v. Carpenter, noted at 130 Wn. App. 1035, 2005 WL 3150304, at *4-5.
On remand, the trial court made one additional finding of fact, stating that the intent of both parties was to treat the transaction as a loan or mortgage. The court also concluded that the statutory warranty deed, real estate excise tax affidavit, and the option to purchase failed to satisfy the statute of frauds, RCW 64.04.010, because none of these documents contained the terms and conditions of the parties' transaction. Based on this conclusion, the court quieted title in the property to the Hernandezes and denied Carpenter's request for payment of rent and eviction.
Standard of Review
We review questions of law de novo. Our review of challenges to the trial court's findings of fact and conclusions of law is "limited to determining whether substantial evidence supports the findings and, if so, whether the findings in turn support the trial court's conclusions of law and judgment." Substantial evidence exists "`when there is a sufficient quantum of proof to support the trial court's findings of fact.'" We need to "review only findings of fact to which error has been assigned and findings to which no error is assigned are verities on appeal."
Dickson v. Kates, 132 Wn. App. 724, 731, 133 P.3d 498 (2006) (citing Ed Nowogroski Ins., Inc. v. Rucker, 137 Wn.2d 427, 436-37, 971 P.2d 936 (1999)).
Dickson, 132 Wn. App. at 730 (citing Org. to Pres. Agric. Lands v. Adams County, 128 Wn.2d 869, 882, 913 P.2d 793 (1996)).
Dickson, 132 Wn. App. at 730 (quoting Org. to Pres. Agric. Lands, 128 Wn.2d at 882).
Dickson, 132 Wn. App. at 730. Carpenter has failed to assign error to Findings of Fact 1 through 16. These findings are verities on appeal.
Discussion
A. Statute of Frauds
Carpenter challenges the trial court's conclusion of law that the deed and December 24, 2001, option fail to meet the requirements of the statute of frauds. Specifically, the trial court stated:
The only contemporaneous documents reflecting the purported December 13 agreement were the statutory warranty deed . . . and the real estate tax affidavit both dated December 13, 2001. These documents are insufficient to comply with the statute of frauds because neither contains the promises alleged to have been exchanged nor the terms and conditions to which the conveyance was subject. . . . Nor does the Option to Purchase Real Estate, signed by the parties on December 24, 2001, taken together with the December 13 documents sufficiently specify the terms and conditions of the purported agreement to satisfy the statute of frauds.
While the trial court was correct as to the December 13, 2001, agreement, we agree with Carpenter that the trial court erred with respect to the December 24, 2001, agreement because the trial court's findings of fact and evidence in the record do not support its conclusion that the statute of frauds was violated.
The real estate statute of frauds provides: "Every conveyance of real estate, or any interest therein, and every contract creating or evidencing any encumbrance upon real estate, shall be by deed." To satisfy this statute, "[e]very deed shall be in writing, signed by the party bound thereby, and acknowledged by the party before some person authorized by this act to take acknowledgments of deeds." In addition, "[a]n option to purchase real estate is subject to the statute of frauds." The statute requires an option to provide all the material terms of the transaction.
Pardee v. Jolly, 163 Wn.2d 558, 567, 182 P.3d 967 (2008).
Hunt v. Great Western Sav. Bank, 54 Wn. App. 571, 574, 774 P.2d 554 (1989).
The December 24th option satisfies these writing requirements. Both the deed and option contain an adequate legal description. Moreover, these documents, when read together, supply all the material terms of the parties' agreement. The deed states that it was signed in consideration of an agreement to (1) pay taxes and/or delay the sale of the property and (2) grant an option to purchase. The option specifies other material terms, which the trial court described in the following finding of fact:
See Pardee, 163 Wn.2d at 567 ("[A] conveyance of real property must include a legal description of the property.") (citing Key Design, Inc. v. Moser, 138 Wn.2d 875, 881, 983 P.2d 653, 993 P.2d 900 (1999)).
Home Realty Lynwood, Inc. v. Walsh, ___ Wn. App. ___, 189 P.3d 253, 257 (2008) ("`[C]ompliance with the statute of frauds is not limited to a single, signed piece of paper, but may be evidenced by several documents clearly related.'") (quoting Knight v. Am. Nat'l Bank, 52 Wn. App. 1, 5, 756 P.2d 757 (1988)). Here, the option is "clearly related" as it expressly refers to the deed: "[S]aid deed was given in consideration of payment of taxes and/or otherwise delaying same property from a tax foreclosure sale scheduled on December 14, 2001 and an agreement to grant this purchase option in accordance with the terms contained herein.".
The Option to Purchase Real Estate contained the following conditions. . . . One, it described the option to purchase for $21,850, it described two payments, each in the amount of $10,925. The first payment was said to be due on December 28 of 2001. The second payment was said to be due on February 13th, 2002. The document provided that [Mr. Hernandez] was to pay rent in the amount of $200 per month on December 28th of 2001 and then again on January 13th, 2002. The document further indicated that if the option was exercised and all other conditions met, that [Carpenter] was hereby required to quitclaim the property to [the Hernandezes]. The document also provided that if the option was not exercised, as agreed, that the option would expire.
Thus, evidence in the record and the trial court's finding of fact show that the deed and option satisfy the writing requirements of the statute of frauds — a point conceded by counsel for the Hernandezes at oral argument. Accordingly, we find that the trial court erred.
B. Equitable Mortgage
The Hernandezes argue that the parties' transaction constitutes an equitable mortgage. Carpenter insists that this transaction was a sale followed by an option to purchase. He rejects the Hernandezes' equitable mortgage argument, as well as the trial court's finding of fact regarding the parties' intent to create a mortgage. Specifically, the trial court found: "While the form of this transaction was characterized as a sale followed by an option to purchase, in fact, the intent of the parties including defendant Carpenter was [sic] treat this as a loan or mortgage." Substantial evidence supports the trial court's finding of fact. Moreover, in light of this finding and the circumstances of this case, we agree with the Hernandezes that the transaction between Hernandez and Carpenter constituted an equitable mortgage.
Carpenter also argues that the trial court erred when it added a finding of fact after remand. However, the trial court is entitled to make new findings of fact on remand. See Seidler v. Hansen, 14 Wn. App. 915, 917-18, 547 P.2d 917 (1976).
Following the principle that "`the character of the transaction is fixed at its inception and . . . is what the intention of the parties makes it,'" our courts have established a framework for determining whether a real estate transaction was intended as a mortgage or sale. First, we presume that the parties intended a sale when a transaction involves a conveyance by a deed, absolute in form, and the documents associated with the transaction do not show any contrary intent. This presumption shifts the burden to the party claiming an intent to create a mortgage to prove this intent by clear and convincing evidence.
Gossett v. Farmers Ins. Co., 133 Wn.2d 954, 966, 948 P.2d 1264 (1997) (alteration in original) (quoting Johnson v. Nat'l Bank of Commerce, 65 Wash. 261, 268, 118 P. 21 (1911)).
Gossett, 133 Wn.2d at 966.
Gossett, 133 Wn.2d at 966.
Carpenter relies heavily on the presumption of a sale. The deed, he points out, only contains language "in the exact form prescribed by RCW 64.04.030" so nothing on its face indicates the parties' intent to create a mortgage. Similarly, Carpenter stresses that "[n]owhere [in the option] are words such as `debt,' `repayment,' `borrower,' or `lender.'" He also refers to letters mailed to and received by the Hernandezes demanding rent. In one letter, dated April 2002, Carpenter explained that "the only debt owed me is the rent . . . There is no other debt." In addition to these documents, Carpenter draws attention to his testimony that he explicitly refused to offer Hernandez a loan. When Mr. Hernandez "indicated that he was looking for a loan, . . . I told him on no uncertain terms that I wasn't interested in giving him a loan and that wasn't an option."
RCW 64.04.030 provides the language and form for warranty deeds for the conveyance of land.
While this evidence may support the presumption of a sale, we first note that the trial court was not bound to accept the truth of Carpenter's testimony. Moreover, in deciding whether sufficient evidence exists to overcome this presumption, we consider "all the circumstances surrounding the transaction." In particular, circumstances that involve (1) a sale with an option to repurchase, (2) a large disparity between the amount of indebtedness and the value of the property, and (3) a party motivated by severe financial pressure to seek funds, may constitute clear and convincing evidence of a loan or mortgage.
See Frank Coluccio Constr. Co. v. King County, 136 Wn. App. 751, 764 n. 6, 150 P.3d 1147 (2007) ("[T]he trial court was not bound to accept as true the testimony of . . . witnesses.") (citing Brewer v. Copeland, 86 Wn.2d 58, 74, 542 P.2d 445 (1975)). See also Du Pont v. Dep't of Labor Industries, 46 Wn. App.471, 479, 730 P.2d 1345 (1986) ("[T]he trial court's determination on conflicting evidence is decisive.").
Gossett, 133 Wn.2d at 966.
See also 18 William B. Stoebuck and John W. Weaver, Washington Practice: Real Estate: Transactions § 17.10, at 285 (2d ed. 2004) (listing six elements that lead Washington courts to declare an equitable mortgage). The conduct of the parties may also be considered. Significantly, the trial court found that the property remained in Hernandez's possession at all times. The Hernandezes' daughter also paid back taxes on the property for one year.
For example, in Phillips v. Blaser, our Supreme Court pointed to these factual circumstances as clear and convincing evidence of a loan. In Phillips, the plaintiff faced a tax foreclosure and turned to the defendant for $298.60. When the defendant advanced him this amount, the plaintiff executed a quitclaim deed to his land and entered into a contemporaneous written agreement in which the defendant promised to reconvey the land to the plaintiff if he paid her $598.50 by November 1, 1937. If the plaintiff failed to pay by this date, the defendant retained title. Later, the defendant sold the land to a third party, receiving $4,000 in cash. Our Supreme Court affirmed the superior court's finding that the transaction was a mortgage, declaring that "a deed with a mere option to repurchase will be construed as a mortgage" where the transaction involves "`such lack of consideration as would shock the conscience, or . . . [is] so wanting in equity.'"
13 Wn.2d 439, 125 P.2d 291 (1942).
Phillips, 13 Wn.2d at 445.
Phillips, 13 Wn.2d at 441.
Phillips, 13 Wn.2d at 441.
Phillips, 13 Wn.2d at 441.
Phillips, 13 Wn.2d at 443.
Phillips, 13 Wn.2d at 448.
Phillips, 13 Wn.2d at 447-48 (quoting Hoover v. Bouffleur, 74 Wash. 382, 387, 133 P. 602 (1913)).
The Phillips decision relied heavily on Hoover v. Bouffleur, another Supreme Court case that involved the same three factual circumstances. In Hoover, the plaintiff owned property worth $4,000, but subject to a $2000 mortgage. Needing $250 to meet overdue payments on the mortgage, the plaintiff borrowed this amount from the defendant, who expressly refused to make a loan. Instead, the defendant demanded the deed and gave the plaintiff an option to repurchase the property within three months for $325. When the defendant attempted to rely on the presumption of a sale by presenting the deed and option, our Supreme Court stated that "to hold that the intent of the parties must necessarily appear upon the face of the collateral paper. . . . would kill that true spirit of equity with which a court should approach cases of this kind." Accordingly, the Court found that the circumstances of the case — the same three present in Phillips — required "a court of equity to declare the deed . . . to be a mortgage."
74 Wash. 382, 133 P. 602 (1913).
Hoover, 74 Wash. at 383.
Hoover, 74 Wash. at 383.
Hoover, 74 Wash. at 383.
Hoover, 74 Wash. at 386.
Hoover, 74 Wash. at 385. See also Pittwood v. Spokane Sav. Loan Soc'y, 141 Wash. 229, 236, 251 P. 283 (1926) (citing Hoover as teaching that "the disparity was so great as to overcome all presumptions that the deed was what it purported on its face to be.").
The following unchallenged findings by the trial court establish that the same three factual circumstances in Phillips and Hoover are present in this case:
(2) In December, 2001 the [Hernandezes] owned . . . and operated a tavern known as Dos Amigos Tavern. . . . The assessed value of the property was $152,600. The market value of the property had been estimated between $100,000 and $250,000.
(3) [The Hernandezes] were delinquent in payment of property taxes and costs in an amount in excess of $10,000. The Property was scheduled to be sold December 14, 2001 at a tax foreclosure sale auction.
(5) [Mr. Hernandez] claims that [Carpenter] offered to loan him the money to pay the taxes, approximately $10,000, and that [Mr. Hernandez] would then repay [Carpenter] in an amount of two times the amount of the taxes, approximately $20,000. . . . [Carpenter] claims that he told [Mr. Hernandez] that if [Mr. Hernandez] would convey the property to him he would, one, pay the taxes, two, he would rent the property to [Mr. Hernandez] for $200 per month; and three, he would grant [Mr. Hernandez] an option to repurchase the property within 30 days for approximately $20 to 25,000, no more than $25,000. [Mr. Hernandez] then countered . . . that he would prefer to make that payment in two payments, one-half [sic] due immediately, the second half due within 60 days.
(6) [Carpenter] went to prepare a statutory warranty deed and a real estate tax affidavit in order to effect the conveyance of the property. [Carpenter] returned . . . with the documents. [Carpenter and the Hernandezes] went to a Notary Public. . . . [B]oth [Hernandezes] signed the statutory warranty deed.
(7) [Carpenter] then went to the Treasurer's Office to pay the taxes on the property. . . . [T]he taxes were not paid. The next day, December 14th of 2001, [Carpenter] returned to the Treasurer's Office and learned that the Treasurer had determined that he should have allowed the taxes to be paid. . . . [Carpenter] did not pay the taxes on that date, however.
(8) On December 24th [Carpenter] returned . . . with a document entitled Option to Purchase Real Estate. . . . This document was ultimately signed by [Carpenter and the Hernandezes].
(15) [Mrs. Hernandez] was aware at the time that the [deed] involved a transaction regarding the tavern, but believed that it was a loan.
(16) [Mr. Hernandez] was aware [Carpenter] proposed . . . a way to avoid the tax foreclosure sale. At best, it can be said that Mr. Hernandez . . . understood the subject matter of the discussion but thought the transaction involved a loan as opposed to a conveyance with an option to repurchase.
These findings show that, first, the transaction between the Hernandezes and Carpenter involved a sale with an option to repurchase. Second, Carpenter offered to pay $10,000 for property with a market value estimated between $100,000 and $250,000. Considering that the option to repurchase was twice the amount owed in taxes by the Hernandezes, they paid $10,000 for a mere two-month extension in the payment due date. This disparity becomes even greater in light of the fact that Carpenter never paid the back taxes or any monies to the Hernandezes. Third, the Hernandezes turned to Carpenter to avoid the December 14, 2001, tax foreclosure sale. These three circumstances constitute clear and convincing evidence that the transaction between the Hernandezes and Carpenter was a mortgage.
Carpenter tries to distinguish these cases on superficial grounds. He suggests that Phillips is inapposite because the plaintiff "intended an equitable mortgage at the outset" whereas Hernandez only "c[a]me up with the theory until after trial." Carpenter then argues that Hoover is distinguishable because usury does not apply in this case.
Accordingly, we hold that substantial evidence in the record supports the trial court's finding that Hernandez and Carpenter intended a loan or mortgage. Moreover, following Phillips and Hoover, the circumstances of this case lead us to conclude that the transaction between the Hernandezes and Carpenter was an equitable mortgage.
Conclusion
Although the trial court erred in finding a violation of the statute of frauds, we hold that the record contains substantial evidence that supports the trial court's finding of fact that the Hernandezes and Carpenter intended a mortgage. This finding, along with the unchallenged findings of the trial court and other evidence in the record, support our conclusion that the transaction between the Hernandezes and Carpenter constituted an equitable mortgage. We affirm the trial court on the alternative grounds set forth above.