No. 58101-5-I.The Court of Appeals of Washington, Division One.
July 30, 2007.
Appeal from a judgment of the Superior Court for King County, No. 04-2-04998-9, Jim Rogers, J., entered April 13, 2006.
Affirmed by unpublished opinion per Agid, J., concurred in by Coleman and Ellington, JJ.
AGID, J.
Chang and Hea Ho, a married couple, sued their escrow agent, Young S. Oh, for failing to file a deed of trust to secure a promissory note they received in connection with the sale of a Ramada Inn. The trial court dismissed the Hos’ breach of contract and breach of fiduciary duty claims because they failed to prove damages. The Hos argue that the purchase price of the Ramada motel real property and business assets in 2000 was sufficient evidence of damages.
The trial court correctly focused on the value of the assets at the time of foreclosure because damages could only be determined based on the value of the Hos’ deed of trust after three senior liens were paid. Without evidence of value at that time, any damage award would be purely speculative, given the change in management and the lowered value that foreclosure sales typically bring. We affirm.
FACTS
Chang and Hea Ho, a married couple, owned and operated a Ramada motel in Des Moines, Washington. They sold the business, including all land, buildings, and business assets, in December 2000 for $2.81 million to CKMS, Inc., a corporation wholly owned and operated by Chung and Michelle Choe. The Purchase and Sale Agreement (PSA) provided that CKMS would make a down payment equal to 25 percent of the purchase price and finance the remainder with a loan from a local bank. The parties designated Young S. Oh, an attorney and accountant, as the escrow and closing agent. On April 15, 2001, they amended the PSA to extend the closing date and change the names of entities purchasing the property from CKMS to the Choes and CKMS II.
The Choes and CKMS II borrowed $2,248,000 from three sources: Citibank, First Mutual Bank, and Evergreen Community Development Association (Evergreen). Oh prepared a Bill of Sale conveying the Ramada business assets to CKMS II, a Statutory Warranty Deed conveying the Ramada land and buildings to the Choes, an Allocation Addendum, and a Real Estate Excise Tax Affidavit certifying the taxable value of the real property as $2,200,000. Oh prepared deeds of trust and UCC-1 filings securing the banks’ interests in the real estate and business assets of the Ramada as follows: First Mutual Bank held a security interest in the amount of $2,248,000; City Bank held a security interest of $204,700.56; and Evergreen held a security interest of $869,000, which reduced the balance owed to First Mutual by that amount. From May 10 through May 14, 2001, Oh disbursed all funds in escrow in the amount of $2,825,101.11.[1]
Before the transaction closed, the Choes and Hos substituted a $100,000 promissory note for part of the down payment and instructed Oh to prepare a $100,000 promissory note, UCC-1 filing, and deed of trust against the Ramada business assets and land for the note. Oh prepared a promissory note and filed a UCC-1 but did not prepare the deed of trust. At trial, Oh agreed that he was verbally instructed to prepare the deed of trust but did not do so. After the transaction closed, Oh sent the parties a binder of closing documents that did not include a deed of trust securing the $100,000 note. The Hos received and reviewed this binder upon receipt. On June 7, 2001, Oh filed a UCC-3 statement, signed by the Hos, subordinating the Hos’ UCC-1 secured interest in the business assets of the motel to the secured interests of First Mutual Bank, Evergreen, and City Bank. In its Findings of Fact, the trial court found that the Hos understood that their secured interests were subordinate to those held by the three banks.
The Hos and Choes continued to do business with one another after the closing. In March 2002, Choe entered into a PSA to sell the Ramada motel to a third party. In order to facilitate the sale, the Hos agreed to release their deed of trust lien for $100,000 and assume another of the Choes’ corporate obligations if the sale closed. In return, the Choes agreed to repay the Hos all amounts owed them when the transaction closed. The transaction did not close, and because sale of the motel was a condition precedent, the trial court ruled that the settlement agreement was never executed.
In August 2002, the Choes and CKMS II sued the Hos and the real estate brokers and agents involved in the sale of the Ramada motel when the business revenue was lower than expected. The Hos counterclaimed for more than $400,000, including $130,000 in attorney fees. In January 2005, the Hos and Choes entered a Settlement Agreement and Release of Claims that settled all claims between them for $100,000. The Hos testified that they accepted this amount because the Choes had no more money or assets with which to pay them.
After this settlement, the Hos sued Oh for breach of the escrow contract and his fiduciary duty as an escrow agent for failing to create and record a deed of trust securing the original $100,000 promissory note. In their complaint, the Hos acknowledged that Oh prepared and recorded a UCC-1 for the $100,000 promissory note. The Hos asserted as damages the unpaid balance of the purchase price of the motel. Oh counterclaimed for attorney fees under RCW 4.84.185, asserting that the Hos’ claim was frivolous.
At trial, the Hos argued that Oh’s failure to file a deed of trust caused them to lose their right to foreclose on the property and recover the amount of the promissory note. They testified that they agreed to enter into a settlement agreement with the Choes because the Choes had threatened bankruptcy. The trial court allowed this hearsay testimony only as evidence of the Hos’ motivation to accept the Settlement, not as proof of the Choes’ financial condition. The trial court found that the Hos offered no competent evidence that the promissory note was uncollectible or what the fair market value of the motel’s land and building was at the time they would have foreclosed on it.
[The Hos’] theory, without supporting evidence, calls for this Court to speculate as to events, consequences and damages, and the Court will not engage in such speculation. For example, once the Hos began foreclosure under their deed of trust, the senior lien holders, First Mutual and the SBA, could have credit bid in the amount of their debt at the Hos[‘] foreclosure sale, been credited the amount of their debt, and wiped out any junior lien holders, including the Hos, and thus, the Hos would have recovered nothing from their foreclosure sale. Or, if there was a third party bidder at the Hos’ foreclosure sale, that bid amount may not have exceeded the amount of the Hos’ debt and the Hos would have recovered nothing from their foreclosure sale. [2]Although the trial court ruled that the Hos had proven liability, it ultimately dismissed their claim under Bennett v. Maloney[3] because they presented no competent evidence showing the fair market value of the Ramada’s land and buildings had they completed the foreclosure. In its Conclusions of Law, the trial court explained:
13. . . . Having a right to bid at a foreclosure sale by itself does not provide the measure of damages for the Hos. They needed to show that they would have been successful at their foreclosure sale, or at least had the prospect of success, in taking back the business at their foreclosure sale?, and that they would have received some measurable value in the process. However, there was a complete absence of evidence as to what would have happened had the Hos sought to retake the business at their foreclosure sale. Without such evidence, the Court is left to speculate as to a variety of circumstances and events that could have occurred at the Hos’ foreclosure sale.
14. While the Court recognizes that once breach and proximate cause are proven, damages need not be shown with mathematical certainty, Topline Equip. Inc. v. Stan Witty Land, Inc., 31 Wn. App. 86, 94, 639 P.2d 825 (1982), the Hos had to demonstrate enough certainty to provide a reasonable basis for establishing the amount of damages. ESCA Corp. v. KPMB Peat Marwick, 86 Wn. App. 628, 639, 939 P.2d 1228
(1997). See also Mason v. [M]ortgage America, Inc., 114 Wn.2d 842, 792 P.2d 142 (1990) (there must be some competent evidence in the record to establish the amount by reasonable basis). Since they have provided no basis at all for establishing the amount of damages, the Court is unable to award any damages.
15. Because the Hos have failed to meet their burden of proving the amount of damages by any proper measure, their causes of action must be dismissed with prejudice.[4]
The Hos moved twice for reconsideration and once to adopt additional findings, but the trial court denied the motions. On May 5, 2006, it entered judgment in favor of Oh and awarded him $200 in statutory costs.
DISCUSSION
Findings of fact must be supported by substantial evidence.[5]
Substantial evidence is “`evidence of sufficient quantity to persuade a fair-minded, rational person of the truth of the declared premise.'”[6]
An appellate court will not substitute its judgment for that of the trial court, even if it would have resolved the factual dispute differently.[7]
We review conclusions of law de novo.[8]
Proof of Damages
The trial court ruled that the correct measure of damages was the value of the lost security interest and required the Hos to prove either the amount a third party bidder would have paid or the amount they would have paid to take back the Ramada real estate and business assets at a foreclosure sale. The Hos argue that they were not required to prove their exact amount of damages, and they provided sufficient proof because the trial court could have measured damages by either (1) the amount of the promissory note plus interest or (2) the amount that would have remained after foreclosure based on the original purchase price.
Oh asserts that all of the trial court’s findings concerning damages are supported by substantial evidence and that the trial court properly dismissed the Hos’ claim because they did not present any evidence of the value at the time of foreclosure, as required by the Bennett decision.[9]
Further, he asserts that the Hos did not prove that any proceeds from a foreclosure sale would have remained after the three primary creditors had exhausted the proceeds.
In Bennett, an attorney acting as an escrow agent in a real estate transaction breached his duty to his clients by failing to obtain a bond for a deed of trust. We held that the trial court incorrectly calculated damages as the amount of the promissory note plus interest rather than the amount the plaintiff would have collected had the transaction been done properly.[10] In Bowers v. Transamerica Title Ins. Co., the Washington Supreme Court explained that damages for a lost hypothetical security interest are measured by the value the plaintiffs would have received had they sold the property subject to a deed of trust.[11] I Tilly v. Doe we defined the value of a security interest lost through another’s negligence as its value at the time the property would have been sold in a foreclosure action.
The Hos argue that the purchase price in 2000 affords a reasonable basis for valuing the Ramada real property and business assets because it is a recent sale. The authority they cite is not persuasive. In re
Application of Busse is an Illinois case in which the court held the recent sale of property is the best evidence of the security interest’s value.[12] But, here, the intervening events of September 11, 2001, drastically altered the value and saleability of motel properties. This case and Busse present different facts. In National Bank of Washington v. Myers, the Supreme Court rejected the Bank’s argument that there was no evidence of the security’s value because there was evidence about the purchase price, the bank’s appraisal, and the testimony of others about the future sale of the property.[13] Here, there was no evidence of either a recent appraisal or future sale. In State v. Reano, the Supreme Court sanctioned the use of a purchase price to determine the value of land in a condemnation case.[14] Reano is also distinguishable because the evidence of value was not contested.[15]
And there are several other reasons why the price the Choes paid in 2000 is an insufficient basis for a damage award. While the Hos argue that they would have recovered all of the original purchase had they sold the property in a foreclosure sale, they offered no proof of that assertion. At the time of the purchase, the value of the real property exceeded the amount the Choes and CKMS II borrowed from three primary lien holders. But that value included $360,000 for goodwill and a noncompete agreement, factors that likely have no value at a foreclosure sale. A new valuation was necessary to determine whether the Hos’ security interest would have had any value at the time of foreclosure. They were subordinate to all the primary lienholders, and if the value of the goodwill and noncompete agreements diminished significantly, there would be no excess value to cover their $100,000 interest. Nor was there any evidence about whether value of the land and business assets changed based on depreciation, change in management, the decline in travel after 9/11, or the lower price typically obtained in a foreclosure. Because there was no proof of what the Hos would have collected had they foreclosed on the property, the trial court correctly dismissed their claim.
Because Oh failed to draft and file a deed of trust in the Ramada motel land and business assets, the Hos lost their right to foreclose. But Oh’s breach of duty alone is not sufficient to establish damages. Nor does it result in a windfall to Oh, as asserted by the Hos, because without proof that the deed of trust would have resulted in the recovery of some or all of the amount due under the promissory note, there is no basis upon which to measure damages. The trial court had no way to calculate the value of the right to foreclose on the land and business assets absent speculation.[16] There was no error.
Attorney Fees The Hos request attorney fees under RAP 18.1, but do not cite to any contractual or statutory basis upon which they should be awarded fees. We decline to do so.
We affirm.
CONCLUSION
TBTABLE Leasehold Improvement $ 200,000 Furniture, Fixture Equipment 50,000 Non-Compete Agreement 50,000 Goodwill 310,000 Land Building 2,200,000 TOTAL $2,810,000
TB/TABLE
(1992).
(1992)).
(2006), review granted, 159 Wn.2d 1019 (2007).
(1987), review denied, 110 Wn.2d 1022 (1988)).