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Washington Federal v. Hulsey

Supreme Court of Idaho

October 31, 2017

WASHINGTON FEDERAL, successor by merger to South Valley Bank & Trust, Plaintiff-Appellant-Cross Respondent,
v.
MICHAEL R. HULSEY, individually; SM COMMERCIAL PROPERTIES, LLC, an Idaho limited liability company; JOHN and JANE DOES I-X, WHITE CORPORATIONS I-X, Defendants-Respondents-Cross Appellants.

         2017 Opinion No. 107

         Appeal from the District Court of the First Judicial District of the State of Idaho, Shoshone County. Hon. Benjamin R. Simpson, District Judge.

         The Court affirms the judgment entered on December 23, 2015, in which Washington Federal's claim for deficiency was dismissed. The Court vacates the judgment entered on April 21, 2016 to the extent it denies Washington Federal's claim for attorney's fees and costs.

          Davison, Copple, Copple & Copple, LLP, Boise, for appellant. Terry C. Copple argued.

          John F. Magnuson, Coeur d'Alene, argued for respondents.

          BRODY, Justice.

         This case arises from the foreclosure of nine commercial condominium units owned by Michael R. Hulsey and SM Commercial Properties, LLC. Just prior to a sheriff's sale, SM Commercial Properties filed bankruptcy. Eventually the bankruptcy stay was lifted and the sale took place. Washington Federal bought the property with a credit bid and then asserted a deficiency against Hulsey. The district court found that Washington Federal failed to prove both the existence of a deficiency as well as the fair market value of the property. Washington Federal raises the following issues on appeal: (1) whether Hulsey is precluded (collaterally estopped) from litigating the fair market value of the property based on the bankruptcy court proceedings; and (2) whether the district court erred when it determined that Washington Federal failed to prove the existence of the deficiency and the fair market value of the property. Both parties appealed the district court's denial of attorney's fees, but Hulsey dismissed his cross-appeal at the time of oral argument. We affirm the district court's judgment dismissing Washington Federal's claim for a deficiency, but vacate the district court's judgment denying Washington Federal's costs and attorney's fees incurred to enforce the judgment and decree of foreclosure.

         I.

         FACTUAL AND PROCEDURAL BACKGROUND

         Michael Hulsey purchased nine commercial condominium units, which were located on the base floor of the Morning Star Lodge located in the Silver Mountain Resort Complex in Kellogg, Idaho. Several of the units are used by the resort for its operations. Hulsey purchased the units from Jeld-Wen, the developer, for the total purchase price of $2, 378, 000. He financed $1, 350, 000 of the purchase price through Washington Federal's predecessor-in-interest bank. The commercial loan was made to Hulsey individually and was secured by a deed of trust on the units and an assignment of rents. After the units were completed, Hulsey attempted to sell the nine units as a single package, but he was unsuccessful. In 2008, the real estate market's downturn made it difficult for Hulsey to maintain tenants in some of the units. Hulsey transferred title to the nine units to his wholly owned limited liability company, SM Commercial Properties. Although he transferred title to the units, Hulsey remained liable on the loan because he was the original borrower. During this time, the original lender merged with Washington Federal.

         Under the terms of the promissory note, the entire amount due and owing matured on September 5, 2012. After the loan matured, Washington Federal granted Hulsey time to continue to attempt to sell the units to satisfy the loan. Hulsey continued to make voluntary interest payments, and at the end of 2013, the balance owed under the loan was $1, 213, 751. In August of 2013, Hulsey received an offer ("2013 Offer") to purchase the nine units, together with an additional commercial condominium not at issue, for a total of $2 million. The offer was subject to the buyer's ability to simultaneously close on his purchase of the Silver Mountain Resort.

         On October 29, 2013, Washington Federal told Hulsey to direct all future communications regarding the loan to Washington Federal's counsel. Hulsey proposed to continue making interest payments, as he had done with Washington Federal's predecessor-in-interest and with Washington Federal, but the bank declined Hulsey's proposal.

         In January 2014, Hulsey's attorney sent Washington Federal a written, prelitigation settlement offer. The settlement offer included a short valuation letter from Jim Koon, an experienced commercial broker and property manager in North Idaho. In the offer, Hulsey suggested to Washington Federal that the property might be worth $578, 000 depending on certain assumptions. Washington Federal did not accept the settlement offer.

         Washington Federal subsequently filed suit against Hulsey and SM Commercial Properties. The parties stipulated to the entry of an order appointing a receiver and to the entry of a Judgment and Decree of Foreclosure in the amount of $1, 487, 517.62. The parties requested that the district court retain jurisdiction to handle any deficiency that might result from the sale of the property.

         On October 29, 2014, SM Properties filed Chapter 11 Bankruptcy. The Sheriff's sale that had been scheduled to take place the next day was cancelled. Shortly thereafter, Hulsey received another unsolicited offer for the property ("2014 Offer") for $1.5 million. Like the 2013 Offer, the 2014 Offer was subject to the buyer simultaneously purchasing the Silver Mountain Resort.

         Washington Federal moved the bankruptcy court for relief from the automatic stay to allow the foreclosure to proceed under the district court's order. Hulsey objected to Washington Federal's motion, and the matter was heard by the bankruptcy court. The bankruptcy court granted the motion from the bench. Subsequently, the property was sold by the Shoshone County Sheriff pursuant to the district court's Judgment and Decree of Foreclosure. Washington Federal purchased the property based upon a credit bid of $765, 000. Washington Federal sought a deficiency against Hulsey for over $700, 000 ($1, 487, 517.62 - $780, 000 (the appraised value advanced by Washington Federal's expert).

         The sole remaining issue-whether a deficiency judgment should enter-was tried by the district court. One week before trial, Washington Federal filed a motion in limine challenging some of the exhibits proposed by Hulsey, including a 2005 appraisal of the property. Washington Federal argued the 2005 appraisal was irrelevant and requested that the district court apply the bankruptcy court's ruling on the motion for relief from stay (specifically, a finding that there was no equity in the property) to preclude Hulsey from contesting the fair market value of the property as of the sale date. In its memorandum decision following the trial, the district court rejected Washington Federal's issue preclusion argument, finding that the bankruptcy court did not determine the fair market value of the property. The district court subsequently found that Washington Federal had failed to meet its burden of proof as to the existence of a deficiency and the fair market value of the property as of the sale date. Both parties then moved for attorney's fees incurred after the entry of the stipulated Judgment and Decree of Foreclosure, which the district court denied. Washington Federal timely appealed to this Court. Hulsey filed a cross-appeal on the denial of the attorney's fees, but dismissed the appeal at the time of oral argument.

         II.

         ISSUES PRESENTED ON APPEAL

         1. Whether the district court erred in ruling that the bankruptcy proceedings did not preclude Hulsey from contesting the existence of a deficiency.

         2. Whether the district court erred by finding that Washington Federal failed to satisfy its burden of proving the existence of a deficiency and the amount of the deficiency.

         3. Whether the district court erred in denying attorney's fees and costs incurred by Washington Federal after entry of the stipulated Judgment and Decree of Foreclosure and before the deficiency trial.

         4. Whether the district court erred in striking portions of the affidavit of Roy Cuzner submitted by Washington Federal in support of its request for attorney's fees.

         5. Whether either party is entitled to an award of attorney's fees and costs on appeal.

         III.

         STANDARD OF REVIEW

         The Court's review is limited "to a determination of whether the evidence supports the trial court's findings of fact, and whether those findings support the conclusions of law." Sims v. Daker, 154 Idaho 975, 977, 303 P.3d 1231, 1233 (2013). "[T]his Court is not bound by the legal conclusions of the trial court, but may draw its own conclusions from the facts presented." Steuerer v. Richards, 155 Idaho 280, 283, 311 P.3d 292, 295 (2013). "Findings of fact will not be set aside on appeal unless they are clearly erroneous." Kennedy v. Schneider, 151 Idaho 440, 442, 259 P.3d 586, 588 (2010). But "[w]here findings of fact are supported by substantial and competent, though conflicting, evidence, they are not clearly erroneous and thus will not be disturbed by this Court." Id.

         IV.

         ANALYSIS

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