Opinion
No. 26224-3-III.
November 18, 2008.
Appeal from a judgment of the Superior Court for Spokane County, No. 04-2-02479-4, Harold D. Clarke III, J., entered May 18, 2007.
Affirmed by unpublished opinion per Korsmo, J., concurred in by Kulik, A.C.J., and Brown, J.
Appellants Steve and Kay Sarich appeal an order of summary judgment dismissing their claims and the award of attorney fees to respondent Beal Bank. Beal Bank sought a deficiency judgment on two promissory notes secured by the Sarichs' stocks and property. The Sarichs argue that Beal Bank failed to act in a commercially reasonable manner when, instead of liquidating the pledged stocks, it elected to get a judgment on the notes. The Sarichs also claim there was a factual dispute regarding the amount owed on a note. Because Beal Bank bore no duty to sell the collateral, and no factual dispute existed regarding the amount on the note, we affirm. But we remand the case for entry of findings of fact and conclusions of law regarding the award of attorney fees.
Steve and Kay Sarich signed and delivered to U.S. Bank a commercial promissory note, note #61, in September 2001. Note #61 was secured by a residence in California, a second deed of trust on a Seattle condominium and pledged stocks. The condominium was already encumbered by a first deed of trust for Washington Mutual Bank. Note #61 was due and payable in full on September 30, 2003. In September 2002, Steve Sarich and Joe Cashman, a business acquaintance, executed a loan agreement for note #62 with U.S. Bank. This note was secured by a third deed of trust on the Sarichs' Seattle condominium and stocks pledged by the Sarichs. This note was also due and payable on September 30, 2003.
U.S. Bank assigned notes #61 and #62 as well as the supporting deeds of trust to Beal Bank on September 24, 2003. The Sariches defaulted on the notes.
Beal Bank and the Sarichs agreed that the Sarichs would sell their house in California, called "Rancho Mirage Property," and apply the sale proceeds against the Sarichs' obligations to Beal Bank. In April 2004, the Sarichs sold the Rancho Mirage Property and utilized the proceeds to pay off part of note #62.
In July 2005, Washington Mutual issued a notice of default on the first deed of trust on the Sarichs' Seattle condominium. Washington Mutual nonjudicially foreclosed on its deed of trust and sold the condominium at a trustee's sale in January 2006. Beal Bank did not bid at the sale.
Beal Bank sought summary judgment on the unpaid promissory notes. The Sarichs cross-moved for summary judgment arguing that Washington Mutual's foreclosure precluded Beal Bank's motion. In September 2006, the trial court granted the Sarichs' motion. Beal Bank appealed the summary judgment order to the Supreme Court, where it was reversed. Beal Bank, SSB v. Sarich, 161 Wn.2d 544, 550, 167 P.3d 555 (2007). The Court remanded the matter to the trial court for further proceedings consistent with its opinion. On remand, Beal Bank renewed its motion for summary judgment on the unpaid promissory notes. The trial court granted Beal Bank's motion as to notes #61 and #62. The court awarded to Beal Bank attorney fees and costs attributable to note #61. The Sarichs appeal.
CARE OF COLLATERAL
The Sarichs contend the trial court erred when it granted Beal Bank's motion for summary judgment because a disputed issue of fact existed regarding Beal Bank's treatment of the pledged stocks. An appellate court reviews a grant of summary judgment de novo, engaging in the same inquiry as the trial court and viewing the facts and the reasonable inferences from those facts in the light most favorable to the nonmoving party. Overton v. Consol. Ins. Co., 145 Wn.2d 417, 429, 38 P.3d 322 (2002). Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. CR 56(c).
The Sarichs claim that Beal Bank's treatment of the stocks was not "commercially reasonable" under RCW 62A.9A- 207(a) and RCW 62A.9A-610 because three years after the Sarichs' default in 2003, the bank had still not liquidated the stocks. The value of the stocks substantially deteriorated over that period of time.
Beal Bank contends that because the claim was raised for the first time on appeal this court cannot review it. See RAP 9.12. However, we regard the issue as adequately preserved. The Sarichs raised it in their answer to Beal Bank's renewed motion for summary judgment filed in November 2007.
Clerk's Papers at 522-23 (Memorandum of Steve and Kay Sarich in Opposition to Beal Bank's Renewed Motion for Summary Judgment, dated November 19, 2007).
Relying on RCW 62A.9A-207(a), the Sarichs contend Beal Bank breached the duty to use reasonable care in the custody and preservation of the pledged stocks by not selling them. RCW 62A.9A-207(a) provides that "a secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed." The official comment states that RCW 62A.9A-207(a) "imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral," and cites to §§ 17 and 18 of the Restatement of Security. RCWA 62A.9A-207(a) U.C.C. cmt. 2.
Section 17 of the Restatement is substantively identical to the first sentence of RCW 62A.9A-207(a). The explanatory comment to section 17 of the Restatement states that the "rule of reasonable care expressed in this Section is confined to the physical care of the chattel, whether an object such as a horse or piece of jewelry, or a negotiable instrument or document of title." RESTATEMENT OF SECURITY §§ 17 cmt. a (1941) (emphasis added). The Sarichs do not argue that Beal Bank failed to use reasonable physical care of stock certificates. Instead, they claim Beal Bank was required to sell the pledged stocks at a particular time.
Section 18 of the Restatement parallels the second sentence of RCW 62A.9A-207(a). The explanatory comment to section 18 states that the "pledgee is not liable for a decline in the value of pledged instruments, even if timely action could have prevented such decline." RESTATEMENT OF SECURITY §§ 18 cmt. a. This comment shows that the reasonable care requirement under RCW 62A.9A-207(a), which applies to the physical care of collateral, imposes no duty on a creditor to sell pledged stocks regardless of a change in the stock value. When addressing the provision in the Uniform Commercial Code (UCC) that mirrors RCW 62A.9A-207(a), other jurisdictions have reached the same conclusion. See UCC §§ 9-207(a); Layne v. Bank One, Ky., N.A., 395 F.3d 271, 277 (6th Cir. 2005); Marriot Employee's Fed. Credit Union v. Harris, 897 S.W.2d 723, 728 (Tenn.Ct.App. 1994); Fed. Deposit Ins. Corp. v. Air Atlantic, Inc., 389 Mass. 950, 452 N.E.2d 1143, 1147-48 (1983); Tepper v. Chase Manhattan Bank, N.A., 376 So.2d 35, 36 (Fla.Dist.Ct.App. 1979). We agree, and conclude that RCW 62A.9A-207(a) has no application in the situation presented by the Sarichs.
The Sarichs also assert that under RCW 62A.9A-610, Beal Bank had a duty to liquidate the stocks after default. RCW 62A.9A-610 provides that "after default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral." It also provides that "every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable." (Emphasis added.) Relying on the official comment, the Sarichs argue that holding collateral for a long time without disposing of it is commercially unreasonable. The comment states:
[I]f a secured party does not proceed under Section 9-620 and holds collateral for a long period of time without disposing of it, and if there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a "commercially reasonable" manner.
RCWA 62A.9A-610 U.C.C. cmt. 3.
Although Washington courts have not addressed section 9-610 in relation to the sale of pledged stocks, it has been a topic of discussion in other jurisdictions. See, e.g., Layne, 395 F.3d at 280 (6th Cir. 2005) holding that "§§ 9-610 does not address whether a lender should dispose of its collateral, but rather once that decision has been made, how the disposition should occur." A temporal delay in selling collateral is a mere factor in determining whether the disposal of the collateral was done in a commercially reasonable manner. See Prairie State Bank v. Hoefgen, 245 Kan. 236, 777 P.2d 811, 821 (1989); see also 68A Am. Jur. 2d Secured Transactions §§ 598 (2003).
Like these other courts, we conclude the statute imposes a duty on a creditor to act in a timely manner only after the creditor decides to dispose of the collateral. This conclusion distinguishes the facts of this case from Empire South, Inc. v. Repp, 51 Wn. App. 868, 756 P.2d 745 (1988), cited by the Sarichs. In Repp, it was held that the creditor failed to meet its burden of producing evidence that the timing of the sale of the collateral was commercially reasonable. Repp, 51 Wn. App. at 881. There, the creditor did elect to dispose of the collateral, while in this case Beal Bank elected only to obtain judgment on the notes. We conclude that the duty imposed by RCW 62A.9A-610 to act in a commercially reasonable manner did not arise here because Beal Bank did not liquidate the pledged stocks.
Because the Sarichs have not demonstrated the existence of a disputed issue of fact regarding Beal Bank's treatment of the pledged stocks, the trial court did not err when it dismissed their claims.
AMOUNT ON NOTE
The Sarichs also contend that the trial court improperly granted summary judgment because of a dispute about the amount owed on note #62. Beal Bank sent the Sarichs a letter of understanding dated April 9, 2004. The letter spelled out the manner in which the "net proceeds" from the sale of the Sarichs' Rancho Mirage Property were to be applied to the promissory notes including note #62. The Sarichs signed this letter, manifesting their agreement with the terms. That same day, the Sarichs sent a letter with instructions to the escrow company to give "the entire net proceeds" from the sale of the house, "but not less than $2,855,000," to Beal Bank. The sale closed, and the escrow company wired the sum of $2,858,537.81 to Beal Bank. Then the escrow company contacted Beal Bank and advised that $60,000 of the sales proceeds had been improperly paid to the Sarichs as sellers. Beal Bank returned $60,000 to the escrow company and recalculated the sum of the net proceeds from the house. That amount became $2,798,537.81, i.e., $2,858,537.81 less $60,000. Applying this amount to the balance due on note #62, Beal Bank later sent the Sarichs a statement showing that the remaining principal balance on note #62 was $188,487.88. The Sarichs objected to this balance amount, claiming that the amount should have been $60,000 less, i.e., $128,487.88.
Relying on the instruction letter they sent to the escrow company, the Sarichs assert that Beal Bank, by returning the $60,000 to the escrow company, violated the agreement that the net proceeds received by the bank would be at least $2,855,000. Beal Bank responds that this letter does not constitute a contract between the Bank and the Sarichs, but is instead a mere communication to the escrow agent. Beal Bank argues the only relevant agreement between the Bank and the Sarichs is the letter of understanding signed by both parties on April 9, 2004, in which it was agreed that the bank would receive the net proceeds from the sale of the house.
We agree with Beal Bank. The Sarichs provide no evidence that the instruction letter is part of an enforceable agreement between themselves and Beal Bank. Whatever the meaning of the phrase "but not less than $2,855,000," the instruction letter had as its purpose merely to inform the escrow company that it was to act consistently with the underlying agreement between Beal Bank and the Sarichs.
The letter of understanding signed by the Sarichs and Beal Bank stipulates that both parties intended to transfer "the net proceeds" from the sale to Beal Bank. The escrow company's mistake did not change this underlying agreement or the accounting that was based on it. Therefore, there is no disputed issue of material fact. The principal balance owed on note #62 was $188,487.88.
ATTORNEY FEES
The trial court awarded Beal Bank a total of $91,040.94 in attorney fees and costs incurred in collection of one of the two notes. Note #61 includes a provision that the lender "may hire or pay someone else to help collect this Note" and the borrower will pay the lender "that amount." The Sarichs contend the court inappropriately awarded enhanced fees that exceeded the amount actually charged by Beal Bank's counsel, and failed to segregate work done on note #61 from work done on note #62, which does not have an attorney fee provision. They also contend the trial court erred by not entering written findings of fact and conclusions of law.
The reasonableness of attorney fees is reviewed under the abuse of discretion standard. Boeing Co. v. Heidy, 147 Wn.2d 78, 90, 51 P.3d 793 (2002). The burden of proving the reasonableness of the requested fees is on the fee applicant. Scott Fetzer Co. v. Weeks, 122 Wn.2d 141, 151, 859 P.2d 1210 (1993).
In determining an award of attorney fees and costs, courts should be guided by the lodestar method for calculating the fee award. Mahler v. Szucs, 135 Wn.2d 398, 433, 957 P.2d 632 (1998). The court must first determine the reasonableness of the hourly rate of counsel at the time services were rendered, and the number of hours reasonably expended in the litigation. Mahler, 135 Wn.2d at 434. The lodestar fee is then calculated by multiplying the reasonable hourly rate of compensation by the total number of hours reasonably expended. Mayer, v. City of Seattle, 102 Wn. App. 66, 81, 10 P.3d 408 (2008); Mahler, 135 Wn.2d at 434. The court must limit the lodestar to hours reasonably expended and should discount hours spent on unsuccessful claims, duplicated effort, or otherwise unproductive time. Bowers v. Transamerica Title Ins. Co., 100 Wn.2d 581, 597, 675 P.2d 193.
In the motion for attorney fees dated on November 6, 2007, Beal Bank requested that the hourly rates of its Spokane counsel for the time spent after the summary judgment in September 2006 be set at an amount greater than the rate at which they were actually paid, so that they would be equivalent to the rates charged by the Sarichs' Seattle attorneys. The Sarichs argued that no legal basis supported Beal Bank's request for the enhanced rates. The Sarichs also showed that Beal Bank's attorneys had fewer years of legal experience than the Sarichs' attorneys.
The Sarichs further claimed that Beal Bank did not appropriately segregate the billing hours regarding note #61 from those attributable to note #62. The trial court asked Beal Bank to segregate their billing hours, and the bank made some slight reductions from the amount it initially requested. But the Sarichs objected to the new amount requested as well and complained that the redactions from the billing records rendered them opaque. When Beal Bank presented an amended request for $116,713.95, the Sarichs responded that $69,533.25 was the correct amount for attorney fees and costs.
Regarding attorney fees, trial courts must exercise their discretion on articulable grounds, making an adequate record so that the appellate court can review a fee award. Just Dirt, Inc. v. Knight Excavating, Inc., 138 Wn. App. 409, 415, 157 P.3d 431, 435 (2007). Further, the trial court must enter findings of fact and conclusions of law to support the award. Mahler, 135 Wn.2d 435. Absence of an adequate record on which to review a fee award will result in a remand of the award to the trial court to develop such a record. Mahler, 135 Wn.2d at 435.
Beal Bank and the Sarichs vigorously contested the reasonable hourly rates and the reasonable number of hours spent by Beal Bank's counsel. But the trial court produced no record to show what those two variables were ultimately determined to be and no resolution of the dispute about segregation of time between the two notes. The award of $91,040.94 by the trial court is about halfway between the two different requests made by both parties. Without findings, we can only speculate that the trial court arrived at that amount by splitting the difference rather than by calculating a lodestar amount.
Beal Bank also sought an upward adjustment of the lodestar based on the high quality of the legal work performed. But it is only after a lodestar has been correctly calculated that a court may adjust the lodestar to reflect the quality of legal work. Bowers, 100 Wn.2d at 598. And an upward adjustment of the lodestar is reserved for exceptional cases, because work quality is mostly reflected in the reasonable hourly rate. Bowers, 100 Wn.2d at 599. Not only does the record fail to show how the lodestar for the awarded attorney fees was determined by the trial court, it also fails to show whether the trial court decided that the lodestar should be adjusted upward, and if so, on what basis. Findings of fact and conclusions of law are required to establish such a record.
We affirm the summary judgment of the trial court as to the action on the promissory notes. However, because there is no adequate record on which to review the fee award, we reverse and remand to the trial court for the entry of findings of fact and conclusions of law to resolve the disputed issues, calculate a lodestar amount, and make a record that will facilitate appellate review.
As the prevailing party on appeal, Beal Bank is entitled to reasonable attorney fees for work related to Note #61. The trial court shall determine this award also.
Judgment on the notes is affirmed. The award of attorney fees is reversed and remanded.