IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE DONALD COLLINGS and BETH COLLINGS, husband and wife, Respondent,

v. CITY FIRST MORTGAGE SERVICES, LLC, a Utah limited liability company f/k/a CITY FIRST MORTGAGE SERVICES, L.C.; U.S. BANK NATIONAL ASSOCIATION AS TRUSTEE FOR THE GREENPOINT MORTGAGE FUNDING TRUST MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2007-ARI, Appellants, HOME FRONT HOLDINGS, LLC, a Utah limited liability company; ROBERT P. LOVELESS and REBECCA LOVELESS, husband and wife; ANDREW J. MULLEN AND "JANE DOE" MULLEN, husband and wife; GAVIN SPENCER and MARGARET ELIZABETH SPENCER, husband and wife; FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, Trustee; "MERS" MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., a Delaware corporation; and JOHN DOES 1-12, unnamed co-conspirators, Defendants, EXECUTIVE TRUSTEE SERVICES, LLC, a foreign company, Third-Party Defendant. No. 66527-8-I (consolidated with 66820-0-I) ORDER GRANTING MOTION FOR RECONSIDERATION IN PART, WITHDRAWING AND SUBSTITUTING OPINION, AND DENYING MOTION TO FILE SUPPLEMENTAL BRIEFINGNo. 66527-8-1/2

City First Mortgage Services LLChas filed a motion for leave to submit supplemental briefing addressing Barton v. State Department ofTransportation, No. 86924-3. The panel has determined this motion should be denied. City First has also moved for reconsideration on two issues: first, whether nondisclosure ofthe covenant not to execute warrants a new trial, and second, whether the court should set aside thejury's award ofpunitive damages underWashington's Credit Services Organizations Act, chapter 19.134 RCW. As to the first issue, reconsideration is denied. As to the second issue, City First's opening briefofappellant raised the issue insofar as itrelates to being licensed under state law, and this court failed to address it. Accordingly, the original opinion filed on July 29, 2013, will be withdrawn and a substitute opinion will be issued, in which the courtwill address the issue by inserting an additional section beginning on page 20, before "U.S. Bank," as follows:

CITY FIRST ISSUE FOUR: CreditServices Organizations Act City First contends thatthe Collings' claim that City First violated the Credit Services Organizations Act, chapter 19.134 RCW, fails as a matter of law. City First argues that itwas excluded from the Act's coverage under RCW 19.134.010(2)(b)(i) because itwas subject to regulation by Washington State, having been licensed as a
consumer loan company by the Washington State Department of Financial Institutions. City First first raised the argument below in its trial brief and in a motion forjudgment asNo. 66527-8-1/3



### a matter of lawthatwas presented to the trial court afterthe court heard exceptions to the instructions. 

### Collings' brief ofrespondent inresponse to City Firstargues that the Actdoes permit a violation to be found inthe circumstances of this case, where the City First branches from which Loveless and Mullen operated in Utah were not licensed by Washington's Department of Financial Institutions. 

### Instruction 19 sets forth the requirementthat "each branch" had to be licensed in orderto be exempt underthe Act. City First did not take exception to instruction 19. 

### Moreover, as Collings argues, the Department's regulations supportthe "each branch" interpretation ofthe statute provided by instruction 19. We conclude the trial court did not errindenying City First's motions forjudgmentas a matter of law as to the issue of coverage underthe Credit Services Organizations Act. Now, therefore, it is hereby 

### ORDERED that appellants' motion for leave to submit supplemental briefing is
denied. It is further 

### ORDERED that appellants' motion for reconsideration is granted in part. And it is
further ORDERED that the opinion filed July 29, 2013, is withdrawn and a substitute published opinion be filed in accordance with this order.No. 66527-8-1/4

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OJ ri--;; \DIN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DONALD COLLINGS and BETH COLLINGS, husband and wife, Respondent,

v. CITY FIRST MORTGAGE SERVICES, LLC, a Utah limited liability company f/k/a CITY FIRST MORTGAGE SERVICES, L.C.; U.S. BANK NATIONALASSOCIATION AS TRUSTEE FOR THE GREENPOINT MORTGAGE FUNDING TRUST MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2007-ARI, Appellants, HOME FRONT HOLDINGS, LLC, a Utah limited liabilitycompany; ROBERT P. LOVELESS and REBECCA LOVELESS, husband and wife; ANDREW J. MULLEN AND "JANE DOE" MULLEN, husband and wife; GAVIN SPENCER and MARGARET ELIZABETH SPENCER, husband and wife; FIRSTAMERICAN TITLE INSURANCE COMPANY, a California corporation, Trustee; "MERS" MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., a Delaware corporation; and JOHN DOES 1-12, unnamed co-conspirators, Defendants, No. 66527-8-I (consolidated with 66820-0-I) DIVISION ONE

PUBLISHED OPINION FILED: November 18, 2013

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EXECUTIVE TRUSTEE SERVICES, LLC, a foreign company, Third-Party Defendant.

Becker, J. — This consolidated case originated in a foreclosure rescue scheme. The trial court quieted title inthe homeowners. One appellant, ordered to pay damages and attorney fees, contends a new trial should be granted because the homeowners did not disclose a settlement they reached pretrial with anotherdefendant. Because no prejudice was shown, we reject this argument. The other appellant contends itholds a superior interest inthe home. But that appellant was not a bona fide purchaser ofthe note and deed oftrust it possesses. Thejudgments are affirmed.

FACTS Donald Collings and his wife, Beth, purchased their Redmond home in 1998. In 2005, a reduction in their income caused them to become concerned about falling behind intheir payments on the home. The appraised value ofthe home was $510,000, and Collings owed about $377,000 on itwhen, inearly 2006, a flier came inthe mail from appellant City First Mortgage Services LLC, advertising a program for people with credit problems. City First is a small mortgage company engaged in transacting the business of residential mortgage loans. Beth Collings called City First. Gavin Spencer, an employee at a City First branch in Utah, offered to help. Ms.No. 66527-8-1/3 

### Collings applied for a loan overthe phone. Soon, Spencer reported the loan was approved. Weeks later, afterthe purported closing date had been pushed back several times, Spencertold the Collingses the loan had not actually been approved butthat his manager might be able to help. Spencer introduced the Collingses to Paul Loveless, a City First branch manager, andAndrew Mullen, a branch manager and loan officer. According to Mr. Collings, Loveless said, "What we can do is buy your 

### home. Wewill putit in my name."1 Loveless proposed tobuythe Collings home for its appraised value of$510,000, take out a mortgage on it, and then lease it backfor $2,970 per month, using these funds to make payments on the 

### mortgage. Collings would pay Loveless an up-front fee of$78,540 and sign a lease-back agreementwith an option to repurchase the home afterthree years for $510,000. According to Collings, he agreed to the deal on condition that the lease would prohibit Loveless from refinancing the home and from further encumbering it with a home equity line of credit. Loveless obtained title to the home and, as planned, took out a mortgage on it with City First. The deal closed inJune 2006. InJuly 2008, a foreclosure notice appeared on the house. Collings, who had timely made all the required monthly lease payments, contacted Loveless. Loveless threatened to evict the Collingses ifthey did not send him more money. Collings discovered that Loveless, in December 2006, had refinanced the loan with City First and had taken out a home equity line ofcredit, all in violation ofthe lease prohibition. This transaction, referred to as "the Loveless Loan," is at the 

### 1Report of Proceedings (Sept. 14, 2010) at 28. 3No. 66527-8-1/4


### centerofthe ensuing controversy. Collings stopped paying Loveless and obtained legal representation. In March 2009, Collings sued City First, Loveless, Mullen, Spencerand otherparties who were laterdismissed. The complaint sought damages and injunctive relief. Meanwhile, City First had sold the Loveless Loan. The note and deed of trust passed into the hands of appellant U.S. Bank National Association as trustee for the Greenpoint Mortgage Pass-Through Certificates, Series 2007- AR1. The notice offoreclosure posted on the Collings home was part of a nonjudicial foreclosure instituted in response to Loveless' failure to make payments. Collings filed a lis pendens. Through a court order, he was able to stop the pending foreclosure. 

### InAugust 2009, U.S. Bank was granted the right to intervene. U.S. Bank sought a declaration that its security interest, as evidenced by its deed oftrust, 

### remained a viable, first priorityencumbrance ofrecord inthe officialrecords of King County and that itwas entitled to payment in full ofthe debt secured by the deed oftrust. Loveless defaulted. Itwas undisputed thatthe Loveless Loan amounted to illegal equity skimming. See RCW 61.34.020(1 )(b)(i)-(iv). In February 2010, the courtfound that Loveless, despite his name on the record title, held only an equitable mortgage. As against Loveless, title to the property was quieted in Collings, subject to any applicable valid and subsisting liens.No. 66527-8-1/5 Trial began in September 2012. Thejury was charged with two tasks. First, resolve the claims alleged inthe Collings complaint. Second, issue advisory findings inthe U.S. Bank case. Inthe City First case, thejury returned a verdict finding Loveless, Mullen, and City First liable to the Collingses. The verdict held Loveless and City First 

### liable for $40,311 incompensatory damages and also imposed $80,622 in punitive damages against the two ofthem underthe Washington Credit Services OrganizationsAct, chapter 19.134 RCW. Thejury assessed $8,000 in punitive damages against Mullen, but no compensatory damages. The court denied City First's posttrial motions and entered a judgment against it. The trial court also enteredjudgment infavor ofthe Collingses inthe U.S. Bank case. The court declared the deed oftrust held by U.S. Bank void and unenforceable, permanently enjoined U.S. Bankfrom foreclosing on the Collings home, and quieted title inthe Collingses as against U.S. Bank. City First and U.S. Bank appeal from thejudgments entered against them.

CITY FIRST ISSUE ONE: Nondisclosure ofSettlementAgreement 

### Afterthe verdict, City First moved unsuccessfully for a new trial under CR 59. One basis for the motion was City First's discovery ofa previously undisclosed pretrial settlement. The Collingses, inexchange for Mullen's promise to pay $500, had agreed they would not execute anyjudgmentthey obtained against Mullen.No. 66527-8-1/6 

### The litigation of CityFirst's motion for a new trial and the orderdenying that motion focused primarily on whetherthe covenant notto execute against Mullen had the effect of releasing City Firstfrom its vicarious liability for the acts 

### ofLoveless or Mullen. The courtconcluded that ifthe settlement did release City First from anyjudgment rendered against Mullen, it did not release anyone else. Thejudgment against City First would stand to the extent itwas based either on 

### vicarious liabilityforthe acts ofLoveless orits own independentacts.2 On appeal, City First is concerned with the significance ofthe nondisclosure ofthe Mullen settlement, not with the argument that the settlement operated as a release. Mullen remained a defendant after the settlement, and his 70-page deposition was read into evidence inthe plaintiffs' case. City First argues that the settlementwas a collusive agreement and that its nondisclosure tainted the trial. The order denying the motion for a new trial is reviewed for abuse of discretion. McCluskevv. Handorff-Sherman, 68 Wn. App. 96, 103, 841 P.2d 1300 (1992), affd, 125 Wn.2d 1, 882 P.2d 157 (1994). Atrial court abuses its discretion when its decision is manifestly unreasonable or based upon untenable grounds. Havens v. C&D Plastics. Inc.. 124 Wn.2d 158, 168, 876 P.2d 435 (1994). A court also abuses its discretion when it"uses an incorrect standard of law orthe facts do not meet the requirements ofthe standard oflaw." Sherron Assocs. Loan Fund V (Mars Hotel) LLC v. Saucier. 157 Wn. App. 357, 361, 237 P.3d 338 (2010). review denied. 171 Wn.2d 1012(2011).


### 2Clerk's Papers at 1859-63, Order Re: Mullens Release and Motion forNew Trial, Mar. 24, 2011.No. 66527-8-1/7 

### City First contends the Mullen-Collings settlementwas a "Mary Carter" agreement, one in which a defendant remains inthe trial after settling with the plaintiff inexchange for a limitation ofliability. The "Mary Carter" denomination derives from Booth v. Mary Carter Paint Co.. 202 So. 2d 8 (Fla. Dist. Ct. App. 1967). "The key elements of a Mary Carter agreement are a limitation ofthe settling defendant's liability, a requirement that that defendant remain inthe trial, and a guarantee of a certain sum of money to the plaintiff." J. Michael Philips, Looking Out for Mary Carter: Collusive SettlementAgreements in Washington Tort Litigation. 69 Wash. L. Rev. 255, 257 (1994). Here the agreement did not require Mullen to remain inthe trial, and italso did not give Mullen a financial interest inthe Collingses' potential recovery from City First—an element in some definitions of a Mary Carter agreement. We will nevertheless examine the argument in light ofthe policy concerns aboutthe potentially pernicious effect of undisclosed settlement agreements. Washington law on the topic of undisclosed settlement agreements among the parties is sparse. While our courts have not set forth a definitive rule, we have acknowledged the potential for prejudice presented by such agreements. McCluskev. 68 Wn. App. at 103-04. McCluskev was a wrongful death action arising from a two-car collision on
a state highway. The two defendants were each held 50 percent liable for a sizable award of damages: the State ofWashington for maintaining an unsafe highway, and the indigent and uninsured teenage driverfor negligently operating his vehicle. On appeal, the State invoked the policy concerns about Mary CarterNo. 66527-8-1/8 agreements in its motion for a new trial. The State argued thatthe driver and the 

### plaintiff, while outwardly appearing to be adversaries, had secretly colluded to obtain a verdict against the State as the defendantwith the deep pocket. McCluskev. 68 Wn. App. at 102. We recognized that the "existence of an undisclosed agreement between outwardly adversarial parties at trial can prejudice the proceedings by misleading the trier offact.
. .. Where appellate courts have permitted such agreements, they also have required pretrial disclosure to the trial court. The trial court can then advise thejury ofthe agreement so thatjurors can considerthe relationship inevaluating evidence and the credibility ofwitnesses." McCluskev, 68 Wn. App. at 103-04, citing Daniel v. Penrod Drilling Co.. 393 F. Supp. 1056 (E.D. La. 1975); Ward v. Ochoa. 284 So. 2d 385 (Fla. 1973) (holding Mary Carter agreements must be disclosed to jury upon proper motion), abrogated by Dosdourian v. Carsten, 624 So. 2d 241 (Fla. 1993) (holding Mary Carter agreements void and inadmissible); Maule Indus., Inc. v. Rountree. 284 So. 2d 389 (Fla. 1973); Ratterree v. Bartlett. 238 Kan. 11, 707 P.2d 1063 (1985). But we concluded that listing parallel positions taken by the plaintiff and the impecunious defendant was not enough to establish collusive conduct. Without direct evidence of some kind of agreement, there was no basis for a new trial. McCluskev. 68 Wn. App. at 103-05. Here, City First does have evidence ofan agreement. City First discovered the settlement inthe course of reviewing billing records in connection with the plaintiffs' posttrial motion for attorney fees. Based in part on the lack of disclosure ofthe settlement agreement, City First moved for a new trial. Inthe

8No. 66527-8-1/9



### course of litigatingthe motion, City First obtained a declaration from Mullen stating that he was informed Collings would settle with him only if his deposition 

### testimonywas"acceptable."3 And he saidCollings executed theagreementafter the deposition was completed inJuly 2010. City First contends a new trial must be ordered because the failure to disclose the Mullen settlement before trial violated a duty that exists in Washington either as a common law duty, a statutory duty under RCW 4.22.060(2), or as an independent ethical duty ofcounsel. Courts have adopted different approaches to Mary Carter agreements. Somejurisdictions have banned such agreements as a matter of policy. See, e.g.. Dosdourian, 624 So.2d at 246; Cox v. Kelsev-Haves Co.. 1978 OK 148, fl 32, 594 P.2d 354, 360; Elbaor v. Smith. 845 S.W.2d 240, 250 (Tex. 1992). Others have allowed Mary Carter agreements but have required that they be disclosed. Hodesh v. Korelitz. 123 Ohio St. 3d 72, 2009-Ohio-4220, 914 N.E.2d 186, 189; Monti v. Wenkert. 287 Conn. 101, 124, 947 A.2d 261, 275 (Conn. 2008). Some ofthese courts have required that such agreements must be produced for examination before trial ifthere is a discovery request. Ward, 284 So. 2d at 387;
see Grillo v. Burke's Paint Co.. 275 Or. 421, 429, 551 P.2d 449 (1976) (affirming denial of a motion for a new trial based on posttrial discovery of settlement agreement because settlement could have been discovered before trial through due diligence).

Clerk's Papers at 1773.No. 66527-8-1/10 

### Itis fair to saythat Mary Carter agreements are not favored. Butthere is little supportfor the proposition that City First is trying to establish inthis case: that an undisclosed Mary Carter agreement is automatic grounds for a new trial. Ingeneral, for a trial court to grant a party's motion for new trial, prejudice is required. SeeSprattv. Davidson. 1 Wn. App. 523, 526, 463 P.2d 179 (1969) (reversing order of new trial and stating the "existence of a mere possibility or remote possibility of prejudice is not enough"). And other courts, in rejecting arguments for a new trial premised on the existence of a Mary Carter agreement, have required prejudice. See, e.g.. Med. Staffing Network. Inc. v. Connors. 313 Ga. App. 645, 649, 722 S.E.2d 370 (2012) (concluding that even ifthe litigants had disclosed their litigation agreement during trial, "it is unlikely that thejury would have reached a different verdict"), cert, denied. U.S. (May 29, 

### 2012); Monti. 947 A.2d at 277 (concluding that "the defendantwas not prejudiced by the nondisclosure ofthe agreement so as to warrant a reversal"). We adhere to ourwell-established rule that a showing ofprejudice is required to warrant a

new trial. City First identifies three portions ofthe record that allegedly demonstrate how itwas prejudiced by not being informed ofthe settlement with Mullen. The first is a declaration from Brian Hunt, general counsel for City First, submitted to support City First's motion for a new trial. Hunt states that during closing 

### argument, counsel for Collings dramatically drew thejury's attention to the fact that Mullen and his wife did not personally attend the trial: "where are they?" and

10No. 66527-8-1/11 

### "why aren'tthey here?"4 City Firstargues thatwith evidence oftheagreementto

excuse Mullen from having to pay damages, the absence of Mullen could have been readily explained and the credibility of his testimony undermined. Adeclaration purporting to describe whatwas said during court proceedings is not a substitute for a record. The parties agreed that closing 

### argumentwould not betranscribed.5 And City Firstdid nottryto make a narrative report of proceedings of closing argumentfor review. See RAP 9.3 (rule allowing narrative report ofproceedings); see also Allstate Ins. Co. v. Huston. 123 Wn. App. 530, 544-45, 94 P.3d 358 (2004) (record insufficient to decide issue and noting that party did not attemptto have an agreed or narrative report of proceedings created), review denied. 153Wn.2d 1021 (2005). Asa result of City First's failure to preserve the pertinent record in any way otherthan its own self-serving declaration, we must disregard the allegation ofprejudice in closing argument. Second, Mullen stated in his posttrial declaration that he was told Collings would agree to execute a covenant notto enforcejudgment against him only if his deposition testimony was "acceptable." While the potential for tailored testimony certainly exists inthese circumstances, City First does not show that any specific statement Mullen made was false or misleading. Inour review of Mullen's deposition, we find nothing to suggestthat his answers were crafted to aid the Collingses against City First. His testimony was largely consistentwith the testimony of Sherri Russett, a City First employee since December 2009 who


### 4Clerk's Papers at 1776. 5See Report of Proceedings (Feb. 25, 2011) at 7. 11No. 66527-8-1/12 

### testified about how City First operated. City First simply does not explain what it would have or could have done differently with Mullen as a witness if ithad known the Collingses had agreed notto pursuejudgment against him. Third, City First contends thejury must have been misled by instructions that implied Mullen was actively defending attrial against the allegations ofthe 

### Collingses, when in reality he was notatriskofhaving to paydamages.6 But City First does not explain how the outcome ofthe trial would have been different ifthejury had instead been informed about Mullen's settlement with the Collingses. Certainly, the nondisclosure ofthe settlement deprived City First of

an opportunity to inquire into the circumstances surrounding the settlement agreement and from asking Mullen aboutwhetherthe covenant not to execute influenced his testimony. But this abstract possibility of prejudice, which will be presentwhenever a settlement agreement is kept secret, is too speculative to justify a new trial. We conclude a concrete showing of actual prejudice is necessary and City First has not made such a showing. We decline the invitation to use this case to make a definitive holding concerning Mary Carter-type agreements and the circumstances underwhich they must be disclosed. The trial court did not abuse its discretion by denying City First a new trial based on the lack of disclosure ofthe Mullen-Collings agreement.

6See, e.g.. Clerk's Papers at 856, Instruction 14, allowing the jury to find City First vicariously liable for Mullen's acts within the scope of his employmentfor City First. 12No. 66527-8-1/13

CITY FIRST ISSUE TWO: Sufficiency ofthe Evidence Use ofa general verdict City First contends there was insufficient evidence of its liability on allthe various claims asserted by the Collingses. Thejury was provided a special verdictform with 10 questions. The verdict form simply referred to the "claims" ofthe plaintiff, exceptfor question 8, which referred specificallyto the claim ofviolation ofthe Credit Services 

### OrganizationsAct, chapter 19.134 RCW.7 Theverdictform did notsingle out any ofthe other claims submitted to thejury, which included consumer protection violations and other statutory claims as well as civil conspiracy. Answering question 1, thejury found Loveless and Mullen "liable to the Collings on their 

### claims."8 Answering question 3, thejuryfound City Firstvicariously liableforthe acts of Loveless, Mullen, and Spencer. Answering question 5, thejury found City First independently liable on the plaintiffs' "claims." Answering question 8, the jury found City First, Loveless, and Mullen liable to Collings for violation ofthe Credit Services OrganizationsAct. City First maintains that we must review for sufficient evidence every theory of liability on which thejury was instructed and that ifany ofthe theories or claims fails, reversal is required because it is impossible to determine what grounds the verdict rests on.



### 7Theseparate questionregarding this allegedviolation was apparently needed because itwas the only claim that could give rise to an award of punitive damages. See RCW 19.134.080(1). 

### 8Clerk'sPapers at 898. 13No. 66527-8-1/14 

### City First relies on two earlyWashington Supreme Court cases: S. Yamamoto v. Puget Sound Lumber Co.. 84 Wash. 411, 146 P. 861 (1915), and Chase v. Knabel. 46 Wash. 484, 90 P. 642 (1907). These cases embodythe Baldwin principle, named after Maryland v. Baldwin. 112 U.S. 490, 5 S. Ct. 278, 28 L. Ed. 822 (1884). Davis v. Microsoft Corp., 149 Wn.2d 521, 539-40, 70 P3d 126 (2003). In a case in which thejury may base its verdict on one of a number oftheories of liabilityasserted by the plaintiffand one ofthe theories is later invalidated on appeal, remand for a new trial is required underthe Baldwin principle on the rationale that it is improperfor an appellate body to attemptto divine the defense or theory upon which thejury has based its decision. Davis. 149Wn.2dat539. In Davis, the Supreme Court adopted an exception to the Baldwin principle and held that remand for a new trial is required only ifthe defendant objected to the use of a general verdict and proposed a clarifying special verdict form. Davis. 149 Wn.2d at 539-40; 15A Karl B.Tegland& Douglas J. Ende, Washington Practice: Washington Handbookon Civil Procedure § 88.6, at 738-40 (2012-2013 ed.). Yamamoto and Chase have been eclipsed to the extent they are inconsistent with Davis. As Davis is the later opinion, we are obliged to follow it. See Puget Mill Co. v. Kerry. 183 Wash. 542. 559. 49 P.2d 57 (1935): State v. Martin. 149 Wn. App. 689, 695, 205 P3d 931 (2009). City First attempts to distinguish the Davis exception as a case involving multifactual theories, not different causes of action. City First cites no authority

14No. 66527-8-1/15 

### supporting this distinction and makes no policyargumentexplaining why the distinction is material. We conclude Davis applies. Because City First did not propose a special verdict formthatwould have clarified on what grounds the jury rested its verdict, City Firstcannot gain a new trial merely by showing that at least one ofCollings' claims fails for insufficient evidence. Rather, the converse 

### is true: so long as at leastone ofCollings'theories is sufficientlysupported by the evidence, the verdictwillstand. As discussed below, we conclude there was 

### sufficient evidence to support vicarious liability on the part of City First forthe wrongful conduct ofLoveless, who defaulted on every claim. Accordingly, it is unnecessary to discuss the sufficiency ofthe evidence supporting the remaining theories of liabilityagainst City First. Vicarious liability for the acts of Loveless City First contends there was insufficient evidence that City First was vicariously liable for the conduct of Loveless. Thejury was instructed that Loveless was liable as a matter of law and 

### that City First could be held liable forthe actions ofLoveless if he was acting within the scope ofemployment or agency of City First: You mustfind for the Collings with respect to each oftheir claims against defendant Robert P. Loveless. However, the Collings still have the burden to prove the amount oftheir actual damages with respectto each oftheir claims against defendant Robert P. Loveless. No other defendant is liable merely because you must find for the Collings against defendant Robert P. Loveless. However, you may find a particulardefendant liable for the acts ofdefendant Robert P. Loveless ifyou find that: (1) Defendant Robert P. Loveless was acting within the scope ofemployment or agency ofthat particular defendant;
. . .

15No. 66527-8-1/16 

### Instruction 6. On the meaning of"scope ofemployment," the jurywas instructed: An employee acts within the scope of authority ifthe employee is performing duties thatwere expressly or impliedly assigned to him or her by his or her employer or thatwere 

### expressly or impliedly required bythe contractof his employment. Likewise, the employee is acting withinthe scope ofauthority ifthe employee is engaged inthe furtherance ofthe employer's interests.
Instruction 10. The evidence showed that Loveless and Mullen owned Home Front 

### Holdings LLC, an entity designated as the landlord inthe lease-back agreement Loveless set up with Collings. They also owned Home Front Services LLC, an entity that operated two branch offices of City First. City First maintains its Home Front branch offices operated independently so that Loveless was neither an employee nor an agent of City First. There was substantial evidence to contradict City First's contention that Home Front Services was completely responsible for the day-to-day operations 

### ofthe branch office and for preparing the loan documents that originated out ofit. Loveless'sjob was to generate loans for City First. City First paid Loveless and profited from the loans he made. All ofthe loans done by the branch were through City First. Advertising and communication directed at Collings, including e-mail from Loveless, bore the City First label. City First retained the right to 

### approve the solicitations and advertising generated by Home Front Services. Collings thus had reason to believe he was dealing with City First when he entered into the sale and lease-back agreementwith Loveless. Areasonablejury could readily find that Loveless, designated as the branch manager, was an employee or agent of City First.

16No. 66527-8-1/17 

### City First did not expressly direct Loveless to enter intosale and lease back arrangements on its behalf. City First contends Loveless exceeded the scope ofany authority he had to actfor City First because he executed the 

### purchase and lease-back arrangementfor his own benefitwithout authority from City First. Butexpress authorization is not required for a finding of agency; an employer is liable ifthe actcomplained of was incidental to acts expressly or impliedly authorized. Carmin v. Port ofSeattle. 10 Wn.2d 139, 153, 116 P.2d 338 (1941). Where the servant combines his own business with that ofthe master, 

### the masterwill be held responsible unless it clearly appears thatthe servant could not have been directly or indirectly serving his master. Carmin. 10 Wn.2d at 154. There was sufficientevidence to support a finding that Loveless acted not only for his own benefit but also withinthe scope of his authorityto actfor City First in all of his transactions involving Collings, both the sale and lease-back arrangement and the Loveless Loan.

CITY FIRST ISSUE THREE: Attorney Fees Awarded at Trial 

### Collings moved for an award ofattorneyfees against City First as the prevailing party under the Consumer Protection Act, chapter 19.86 RCW, and the Credit Services OrganizationsAct, chapter 19.134 RCW. The motion allocated the time spent preparing for and trying claims against City First to the exclusion 

### of time spent against U.S. Bank. Collings asked that the award be enhanced by
a factor of 1.2. The trial court granted the request, awarding a total of 

### $628,564.20 inattorney fees and $42,307.41 incosts. City Firstcontends this

17No. 66527-8-1/18
award included time for wasteful hours, that the allocation oftime was unreasonable, that the multiplier should not have been applied, and that the award was excessive. We review an attorney fees award for abuse of discretion. Ethridge v. Hwang. 105 Wn. App. 447, 460, 20 P.3d 958 (2001). In calculating fee awards, courts should be guided by the lodestar methodology. Mahler v. Szucs. 135 Wn.2d 398, 433, 957 P.2d 632, 966 P2d 305 (1998). Underthe lodestar methodology, a court mustfirst determine that counsel expended a reasonable number ofhours in securing a successful recovery for the client. Mahler. 135 Wn.2d at 434. The trial court should exclude wasteful or duplicative hours and any hours pertaining to unsuccessful theories or claims. Mahler. 135 Wn.2d at 434. The lodestarfee, calculated by multiplying the reasonable hourly rate by the reasonable number of hours incurred in obtaining the successful result, may be adjusted upward or downward inthe trial court's discretion. Mahler. 135
Wn.2dat434. City First contends the court should have excluded, as wasteful, $81,181 infees for work related to the posttrial arguments on the issue ofthe MullenCollings settlement. City First asserts thatthe plaintiffs repeatedly shifted their 

### arguments on this issue below and that this led to fees incurred for substantial briefing that City First should not have to pay for. City First is right that the arguments shifted, butthe arguments made by Collings were mostly made in response to issues raised by City First. And the arguments made by Collings on

18No. 66527-8-1/19
the settlement issue were not unreasonable. We conclude itwas not an abuse of discretion to include this time. 

### Collings proposed an allocation separating time spent on claims with City First from time spent on claims related to U.S. Bank. City Firstasserts that many
more ofthe time entries were plainly attributable to the Collingses' defense against U.S. Bank. City First relies on Seattle-First National Bankv.Washington Insurance GuarantyAss'n. 94 Wn. App. 744, 972 P2d 1282 (1999). There, counsel presented nothing but a blanket statementthat 21 hours should be allocated to one party and 245 hours to another. Seattle-First. 94 Wn. App. at 763. Here, the trial court had more to work with. And when the award is viewed intotal, we cannot say itwas unreasonable to attribute so many hours to City First. But for City First's wrongful conduct, Collings would not have been involved inthe litigation with U.S. Bank. The trial courtfound a multiplier of 1.2 was appropriate because ofthe risk: plaintiffs' counsel carried the entirety offees and costs. Adjustments to the lodestar can be made for the contingent nature of success. See Tribble v. Allstate Prop. &Cas. Ins. Co.. 134 Wn. App. 163, 172, 139 P.3d 373 (2006). The contingent nature of success includes the degree to which the prevailing party risked receiving either no recovery at all or a monetaryjudgment insufficientto adequately compensate its counsel for all work performed. Tribble. 134 Wn. App. at 172. The argument attacking the enhancementfails to address the contingent nature of success. Here, given the risk assumed by counsel intaking the

19No. 66527-8-1/20 

### Collings case, the trial court's application of a multiplier rests on tenable grounds. Tribble. 134Wn. App. at 172. 

### Finally, City First complains the attorney fee award ofover $600,000 is excessive when compared to the plaintiffs'recovery ofabout $120,000. While the amount ofrecovery is a relevant consideration indetermining the reasonableness ofthe fee award, it is not a conclusive factor. Mahler. 135 Wn.2d at433. Alarge attorney fee award in civil litigation will not be overturned merely because the amount at stake inthe case is small. Mahler. 135 Wn.2d at 433. The court properly applied the lodestar methodology. We conclude the award was not excessive. CITY FIRST ISSUE FOUR: Credit Services OrganizationsAct City First contends thatthe Collings' claim that City First violated the Credit Services OrganizationsAct, chapter 19.134 RCW, fails as a matter of law. City First argues that itwas excluded from theAct's coverage under RCW 19.134.010(2)(b)(i) because itwas subjectto regulation byWashington State, having been licensed as a consumer loan company by the Washington State Department of Financial Institutions. City First first raised the argument below in its trial briefand in a motion forjudgment as a matter of law that was presented to the trial court afterthe court heard exceptions to the instructions. Codings' briefof respondent in response to City First argues that theAct does permit a violation to be found in the circumstances ofthis case, where the City First branches from which Loveless and Mullen operated in Utah were not licensed by Washington's Department ofFinancial Institutions.

20No. 66527-8-1/21 

### Instruction 19 sets forth the requirementthat "each branch" had to be licensed inorderto be exempt under theAct. City First did not take exception to instruction 19. Moreover, as Collings argues, the Department's regulations supportthe "each branch" interpretation ofthe statute provided by instruction 19. 

### We conclude the trial courtdid not err indenying City First's motions forjudgment
as a matter of law as to the issue ofcoverage underthe Credit Services OrganizationsAct. U.S. BANK We now address U.S. Bank's appeal ofthejudgmentquieting title inthe Collingses as against U.S. Bank. Inthe equitable proceeding instituted by U.S. Bank's claim in intervention, U.S. Bank claimed that itowned the December2006 Loveless Loan (both the promissory note and the deed oftrust securing it). U.S. Bank soughtto preserve the deed oftrust as a security interest superiorto 

### Collings' constructivetrust andtitle.9 Collings asserted several theories challenging U.S. Bank's claim that it had the right to enforce the note and deed oftrust. The trial court entered findings offact and conclusions of law rejecting U.S. Bank's claims and accepting



### 9 Findings of Fact and Conclusions ofLaw onEquitable Claims, Clerk's Papers at 2150-57, Finding of Fact 6. Adeed oftrust is a form ofthree-party mortgage involving not only a lender and a borrower, but also a neutral third party called a trustee. 18 William B. Stoebuck&John W. Weaver, Washington Practice: Real Estate: Transactions §20.1, at 403 (2d ed. 2004). "Aborrower or obligor incurs a debt or other obligation to a 'beneficiary' and, as security for that obligation, the 'grantor' conveys an estate in land to a third-party 'trustee.'" 18 Stoebuck&Weaver, § 20.1, at 403. The trustee holds an interest inthe title ofthe grantor's property on behalfofthe lender, otherwise known as the beneficiary.

21No. 66527-8-1/22 

### the plaintiffs' theories. U.S. Bankassigns error to most ofthese findings and conclusions. Findings offact are reviewed underthe substantial evidence standard, 

### defined as a quantum ofevidence sufficient to persuade a rational, fair-minded person the premise is true. Sunnyside Valley Irrigation Dist. v. Dickie. 149 Wn.2d 

### 873, 879, 73 P.3d 369 (2003). Ifthe standard is satisfied, a reviewing courtwill not substitute itsjudgmentforthat ofthe trial court even though it may have resolved a factual dispute differently. Sunnyside. 149 Wn.2d at 879-80. Questions oflaw and conclusions oflaw are reviewed de novo. Sunnyside. 149 Wn.2dat880.

U.S. BANK ISSUE ONE: Standing As a preliminary matter, U.S. Bank contends the Collingses lack standing to challenge the validity and enforceability ofthe Loveless Loan because they
were not the makers ofthe promissory note. Loveless was the maker ofthe note. U.S. Bank argues that only Loveless and those to whom he was obligated
were entitled to argue that the transfer ofthe note to U.S. Bank did not create an enforceable interest. 

### The cases cited by U.S. Bank concerning a debtor's lack ofstanding to challenge an assignment are unhelpful. This was a proceeding in equity. "Equity controls the determination ofthe claims and defenses alleged inthis lawsuit

22No. 66527-8-1/23 

### relating to U.S. Bank's Complaint for Declaratory Relief regarding foreclosure of the Loveless note and deed of trust."10 

### "Standing to assert a claim in equity resides in the party entitled to equitable relief; it is not dependent on the legal relationship ofthose parties." Smith v. Monson. 157 Wn. App. 443, 445, 236 P.3d 991 (2010). A party with an equitable interest has standing to defend that interest against a party who claims to have a superior interest. See Monson. 157 Wn. App. at448-49. Previously, the trial court had quieted title to the propertyfrom Loveless 

### back into Collings, finding the existence of a constructive trust. Because Collings had an interest inthe property stemming from the constructive trust gained through equity, they had standing inequityto assert their interest against the allegedly superior interest held by U.S. Bank.

U.S. BANK ISSUE TWO: Bona Fide Purchaser or Encumbrancer Among the reasons why the trial court rejected U.S. Bank's claim to have
a security interest superiorto Collings was the court's conclusion that U.S. Bank 

### was not a bona fidepurchaser orencumbrancerof the Loveless Loan.11 Abona fide purchaser is "one who purchases property without actual or constructive knowledge ofanother's claim of right to, or equity in, the property, and who pays valuable consideration." Albice v. Premier Mortg. Servs. ofWash.. Inc.. 174Wn.2d560, 573, 276 P.3d 1277(2012). Ifthe purchaser has knowledge or information thatwould cause an ordinarily prudent person to 

### 10 Clerk's Papers at2155, Conclusion ofLaw 21,unchallenged. 11 Clerk'sPapers at 2155, Conclusion ofLaw 24. 23No. 66527-8-1/24 

### inquirefurther, and ifsuch inquiry, reasonably diligently pursued, would lead to discovery of titledefects or ofequitable rights ofothers regarding the property, then the purchaserhas constructive knowledge of everything the inquiry would have revealed. Albice. 276 P.3d at 1284. In considering whether a person is a 

### bona fidepurchaser, we askwhetherthe surrounding events created a duty of inquiryand, ifso, whetherthe purchaser satisfied that duty. Albice. 276 P.3d at 1284. In this determination, the purchaser's knowledge and experience with real
estate is to be considered. Albice. 276 P.3d at 1284. At trial, U.S. Bankwas in possession ofthe original note, endorsed in 

### blank. U.S. Bank presented the testimony of two witnesses and introduced many documents to trace thejourney ofthe Loveless Loan after it left City First and 

### became securitized.12 The witnesses wereDavid Duclos, Vice President ofU.S. Bank and a trust manager, and Christopher DiCicco, an employee ofGMAC, the company that became the servicer ofthe Loveless Loan in February 2007. According to the testimony, the note was created in December2006 when Loveless refinanced his loan with City First. City First endorsed the note specially to Greenpoint Mortgage Funding Inc. Greenpoint endorsed the note in 

### blank. The note was acquired by Lehman Brothers Holdings. Lehman conveyed itthrough a depositor, the StructuredAssets Securities Corporation, to U.S. Bank 

### forthe benefitofcertificate holders.13 U.S. Bank was to act as trustee forthe



### 12 Securitization ofmortgages "refers to the process ofissuing mortgage-backed or mortgage-related securities based on the value ofbundled mortgage loans." Clerk's Papers at 842, Instruction 2. 13 Exhibit 155. 24No. 66527-8-1/25 

### Greenpoint Mortgage Funding Trust. U.S. Bank issued certificates to the depositor. The depositor sold the certificates. 

### Duclos signed the trust agreement on behalfofU.S. Bank.14 Hetestified thatthe Loveless Loan was part of a pool ofmortgage loans transferred to the trust on February 1, 2007, the closing date ofthe trust. He testified that U.S. 

### Bank as custodian had personnel who reviewed the loans and noted any deficiencies, such as the absence of an endorsementon a note. They produced
a certificate listing allthe loans transferred to the trust along with an exception 

### report listing the loansfound to havedeficiencies.15 The Loveless Loan is not among those listed inthe exception report. U.S. Bank claims the evidence shows without any doubt that the Loveless 

### Loan was transferred to it for value inFebruary 2007 and without notice ofany claims by the Collingses existing at that time. InFebruary 2007, Collings had not yet filed the lis pendens. The Collingses were still unaware that Loveless had 

### refinanced the home and taken out a home equity line of credit. U.S. Bank contends that when itaccepted ownership ofthe Loveless Loan, itcould not have 

### known ofany misrepresentations by Loveless since at the time, the Collingses themselves had no idea they had been defrauded. Militating against U.S. Bank's position are several key findings entered by the trial court concerning the lease by which Loveless rented the Collings home to them with a promise to sell itbackto them afterthree years. The courtfound that the lease "contained an express restriction prohibiting Loveless from further

14 Exhibit 156. 15 Exhibit 163. 25No. 66527-8-1/26 

### encumbering the homewith debt orobtaining a homeequity line ofcredit."16 The
court determined that U.S. Bank should have discovered the restriction in the 

### lease through reasonable inquiryand that the lease was a defect that should 

### have prevented U.S. Bank from accepting ownership ofthe Loveless Loan. 3. InDecember of2006, Loveless violated the prohibition 

### againstfurther encumbering the Property by borrowing $472,500 from defendant City First. This included a refinance loan inthe 

### amount of$420,00 (the "Loveless Loan") and a HELOCin the amount of$52,500 

### 13. U.S. Bankwas required by both the Custodial Agreement [Trial Exhibit 164 at Bates 647-648] and Trust Agreement § 201(b) [Trial Exhibit 156 at Bates 893-896] to maintain a mortgage origination loan file for each ofthe mortgage loans in the GreenpointTrust (Series 2007-1). GMAC maintains scanned copies ofthe loan files. U.S. Banktherefore had the opportunity to fullyreview the files before accepting ownership ofthe Loveless Loan. Such a review would have disclosed the HELOC prohibition which City First (Ms. Russett) testified would have stopped the loan as not being an "arms length transaction." 14. There is insufficient evidence in the record that U.S. Bank did infact engage in a reasonable inquiry into the Loveless Loan to determine ifthere were any defects existing regarding the underwriting. U.S. Bank had a duty to inquire as early as February 2007, which would have put U.S. Bank on inquiry notice ofthe defects in the Loveless Loan.
. . . 15. Itwas unreasonable for U.S Bankto rely exclusively on the representations and warranties about the mortgage loans given by StructuredAsset Securities Corporation ("SASC") inthe Trust Agreement [Trial Exhibit 156 at § 2.03] and the Mortgage Loan Sale and AssignmentAgreement between SASC and Lehman Brothers [Trial Exhibit 155 at § 1.04], given the absence of sufficienttime for the warrantors to evaluate the commercial paper being deposited into the Trust. The alleged transfers ofthe Note and deed oftrust from SASC and Lehman Brothers and then from Lehman Brothers 

### to theTrusteachoccurred on the sameday.t17] U.S. Bankfirst attacks the finding thatthere was an executed lease containing a prohibition against further encumbrances. 

### 16 Clerk's Papers at2151,Finding of Fact 2. 17 Clerk's Papers at 2151,2153-54. 26No. 66527-8-1/27 

### Collings produced copies of two proposed leases sentto him by Loveless 

### through e-mail.18 In one ofthee-mail messages, Loveless refers to the Collingses as having signed allthepaperwork.19 The copies retained bythe Collingses contained the prohibition testified to by the Collingses. U.S. Bank complains that Collings did not produce a copy ofthe executed lease. But Collings' inability to produce a copy ofthe executed lease does not 

### render his proof insufficient. City First did not produce the origination filewhen requested by the Collingses. Russett, the compliance officeremployed by City First, testified thatfiles might have been destroyed in December 2009 consistent with document retention policies. And in answering a requestfor production of 

### themortgage loan origination file, U.S. Bankresponded thatithad norecords.20 The evidence was sufficientto prove the copy presented by Collings accurately reflected an executed lease. U.S. Bank next contends that ifthere was an executed lease, Collings failed to prove U.S. Bank had notice of its existence. By contractual agreement, U.S. Bank was required to maintain a loan origination file for each ofthe loans inthe trust. The contents ofthe loan origination filewere not introduced into evidence by any party. Collings argued thatthe lease must have been inthe file because without proofof Loveless' anticipated investment income, City First would not have loaned money to him. Supporting this argumentwas Mullen's testimony that Loveless would have had 18 Exhibit 3 & 5. 19 Exhibit 5. 

### 20 Exhibit 81 at6, Requestfor Production No. 29; see alsoReportofProceeding (Jan. 20, 2011) at 47, where Collings argues the significance of U.S. Bank's failure to produce the loan origination file. 27No. 66527-8-1/28 

### to provide a copy ofthe rental agreementto City Firstand the underwriter, and 

### thatitwould haveto beinthe"file."21 Russettsimilarlytestifiedthatthe lease would have been provided to City First when Loveless took out the loan because 

### the propertywas an investment property as opposed to a second home.22 U.S. Bankagrees that the lease should have been in the file supporting the originalpurchase loan that Loveless took out inJune 2006, but says there
was no reason for a copy ofthe lease to be inthe loan origination file forthe Loveless Loan of December 2006 "as it was a refinance ofLoveless's own 

### loan."23 U.S. Bankdoesnotpointtoevidenceorauthority supporting the proposition thatevidence of income is a reasonable concern when financing a loan on an investment property, but not for refinancing it. We find this line of argument unpersuasive. 

### U.S. Bank also contends thatthe trial court overlooked the testimony of Duclos concerning the due diligence review by its employees to make sure the loans being acquired were enforceable. But Duclos, who testified aboutthe 

### review process, was not personally involved in itand his testimony did not establish thatthe review process was infallible. Tothe contrary, the evidence supports a finding that the lease was inthe filewhere a reasonable inquiry would have found it. Inshort, the evidence was sufficient to support a finding that U.S. Bank had constructive notice ofthe executed lease. 

### Was notice ofthe lease enough to prevent U.S. Bank from acquiring an interest in the Collings property as a bona fide purchaser or encumbrancer? U.S. 

### 21 Clerk's Papers at 768. 22 Report of Proceedings (Sept. 15,2010) at 193. 23 BriefofAppellantU.S. Bank at41. 28No. 66527-8-1/29 

### Bankdoes not directlyargue itwas not. But U.S. Bankdoes challengethe finding that the Loveless Loan was not an arm's length transaction, mentioned in finding of fact 13. Russetttestified that knowledge of the provision barring Loveless from taking out a home equity line of credit on the Collings residence 

### "would have stopped theloan" as notbeing an "arm's lengthtransaction."24 Russett's testimony explaining what she meant by "arms length transaction" was inthe context of a discussion about City First's original loan to Loveless inJune 

### 2006, not to the refinancein December 2006.25 Thus, U.S. Bank is correctin pointing out that her reference to "arms length transaction" was not strictly related to the transaction thatwe have been referring to as the Loveless Loan. 

### Nevertheless, the trial court's general point was that the lease prohibition against
a home equity line ofcredit (HELOC) should have raised red flags. Russett's testimony does support that point: 

### Q. [Collings' attorney]... Ifsomeone is coming to you to ask you to underwrite a loan on an investment property on a rental and you read a rental agreement that says no HELOCs and the guy who's making the application to you wants a HELOC, is that going to matter to you? A. Personally? Q. From your experience. A. From my experience. Yes. Q. And in what way would that matterto you? A. Iwould have to - Iwould question why they were doing something they weren't supposed to be doing.



### 24 Clerk's Papers at2153, Finding of Fact 13. 25 Report of Proceedings (Sept. 16, 2010) at 14-15. 29No. 66527-8-1/30 

### Q. It's not something thatyou would simply ignore ifyou saw it, is it? A. If I saw it? Q. Yes. A. No. 

### Q. Isthatconsistentwith your view of what a competent mortgage underwriter would do? A. Yes.[26] We conclude substantial evidence supports the findings that a reasonable 

### inquiry by U.S. Bank should have discovered the lease inthe loan origination file and that U.S. Bank should have recognized itas a red flag indicating the possibility ofpossession ofthe home by someone with a superior claim. In February 2007, the time when U.S. Bank acquired the Loveless Loan, the constructive trust generated by the equity skimming activities ofLoveless had given the Collingses an equitable interest intheir home thatwas prior in time and visible to a reasonable inquiry by U.S. Bank. Accordingly, we affirm the trial court's conclusion that U.S. Bank is not a bona fide purchaser orencumbrancer. Collings argues thatthejudgment quieting his title as against U.S. Bank
can be affirmed on alternative grounds. He contends that City First's transfer of 

### the deed oftrustto MERS (Mortgage Electronic Registration Systems Inc.) separated the deed oftrustfrom the note, rendering the deed oftrust unenforceable, and that U.S. Bankfailed to establish its right to enforce the note under various provisions ofthe law of negotiable instruments. We do not

26 Report of Proceedings (Sept. 15, 2010) at 78.

30No. 66527-8-1/31 address these arguments, as the conclusion that U.S. Bank was not a bona fide purchaser ofthe Loveless Loan is sufficientto supportthejudgmentquieting title inthe Collingses as against U.S. Bank.

ATTORNEY FEES ON APPEAL Collings asks for attorney fees on appeal against both City First and U.S. Bank. We grant the request against City First underthe same statutory 

### provisions that authorized the award inthe trial court. As to U.S. Bank, the deed oftrust provides for an award ofprevailing party attorney fees and costs "inany 

### action or proceeding to construe or enforce any term of this Security Instrument."27 Because U.S. Bank intervened to enforce the deed of trust, we conclude the provision inthe deed oftrust is applicable and Collings, as the 

### prevailing party, is entitled to an award of attorney fees on appeal against U.S.
Bank. Affirmed. 

# figfc^fel

WE CONCUR:

27 Exhibit 12. 31No. 66527-8-1/32 

### Schindler, J. (dissenting) —Irespectfullydisagree with the conclusion that the secret agreement between the plaintiffs and one ofthe codefendants to enter into a 

### covenant not to execute and release did not result inprejudice to defendant City First that warrants a new trial. The undisclosed agreement distorted the interests and 

### alignment ofthe parties and created a sham ofadversity that is contrary toWashington law, the right to a fair trial, the integrity ofthe adversary system, candorto the tribunal, and the administration ofjustice. Consistentwith the requirements ofthe Tort Reform 

### Act of 1986, chapter4.22 RCW, the Supreme Court should adopt a rule requiring the timely disclosure of an agreement between a plaintiffand a codefendant to enter into a

covenant not to sue and release. Inmulti-defendant litigation, an undisclosed settlement agreement between a plaintiffand one or more ofthe codefendants that limits liabilityyet retains the settling codefendant as a party can take various forms. However, the critical characteristic of these agreements is secrecy. Secrecy is the essence of such an arrangement, because the court orjury as trier ofthe facts, ifapprised ofthis, would likely weigh differently the testimony and conduct ofthe signing defendant as related to the nonsigning defendants.
. .. The search for the truth, in order to givejustice to the litigants, is the primary duty ofthe courts. Secret agreements between plaintiffs and one or more of several multiple defendants can tend to misleadjudges andjuries, and border on collusion. Ward v. Ochoa. 284 So. 2d 385, 387 (Fla. 1973). The integrity ofour system ofjustice is undermined by a secret settlement agreement between the plaintiffs and a codefendant. Our adversary system ofjustice is based on the fundamental assumption that each party is motivated by their obvious interest in the litigation. That assumption is no longervalid where a plaintiff and a
32No. 66527-8-1/33 

### codefendantenterinto a secretcovenant notto sue and release. Thealignmentofthe parties is not what itappears to be. The codefendant remains inthe case as a 

### defendant. The otherparties to thelitigation are misled, and thejury isdeceived by beinginformed that they are resolving an existing dispute between parties that have already resolved those claims. 

### In Washington, a pretrial settlement agreement between the plaintiffand a codefendant inlitigation involving multipledefendants is subjectto RCW4.22.060. 

### Under RCW 4.22.060 and RCW 4.22.070, a plaintiffcan keep the settling defendant in the litigation by entering into "a release, covenant not to sue, covenant not to enforce 

### judgment, or similaragreement." RCW4.22.060(1). Because of the impact ofsuch an agreement on the allocation of liabilityand the risk ofcollusion and fraud, the statute 

### requirestimely disclosure and a reasonableness hearing. RCW4.22.060(1);1 Beselv. Viking Ins. Co.. 146 Wn.2d 730, 738-39, 49 P.3d 887 (2002). 

### In recognition of the prejudicial effect of an undisclosed settlementagreement withone or more codefendants in a multi-defendant case, the overwhelming majority of jurisdictions require timely disclosure ofthe existence and terms of an agreement between the plaintiffand a codefendantto the other parties inthe case and the court. See Alaska

— Breitkreutz v. Baker. 514 P.2d 17 (Alaska 1973): Arizona — Taylor v. DiRico. 124 Ariz. 513, 606 P.2d 3 (1980): Arkansas

— Firestone Tire & Rubber Co. v.
1RCW4.22.060(1) provides, in pertinentpart: A hearing shall be held on the issue ofthe reasonableness ofthe amountto be paid with all parties afforded an opportunity to present evidence. Adetermination by the court that the amount to be paid is reasonable must be secured. Ifan agreementwas entered into prior to the filing ofthe action, a hearing on the issue ofthe reasonableness ofthe amount paid at the time itwas entered into may be held at any time prior to final judgment upon motion of a party. The burden of proofregarding the reasonableness ofthe settlement offer shall be on the party requesting the settlement. 33No. 66527-8-1/34 

### Little, 276 Ark. 511, 639 S.W.2d 726 (1982); California— Pellett v. Sonotone Corp.. 26 Cal. 2d 705, 160 P.2d 783 (1945); Colorado

— Bashorv. Northland Ins. Co.. 29 Colo. 

### App. 81,480 P.2d 864 (1970), afFd 177 Colo. 463, 494 P.2d 1292 (1972); Florida

— Ward. 284 So. 2d at 385; Idaho — Soria v. Sierra Pac. Airlines. Inc.. 111 Idaho 594, 726 P.2d 706 (1986); Illinois

— Reese v. Chicago. Burlington &Quincv R.R. Co.. 55 III. 2d 

### 356, 303 N.E.2d 382 (1973); Indiana — Fullenkamp v. Newcomer. 508 N.E.2d 37 (Ind. Ct. App. 1987); Kansas

—Ratterree v. Bartlett. 238 Kan. 11,707P.2d 1063(1985); Louisiana — Daniel v. Penrod Drilling Co.. 393 F. Supp. 1056, (D.C. La. 1975); Maryland — Gen. Motors Corp. v. Lahocki. 286 Md. 714, 410 A.2d 1039 (1980); Minnesota —Johnson v. Moberg, 334 N.W.2d411 (Minn. 1983); Nebraska

—Hegarty v.Campbell Soup Co.. 214 Neb. 716, 335 N.W.2d 758 (1983); New Hampshire

— Bedford Sch. Dist. v. Caron Const. Co.. 116 N.H. 800, 367 A.2d 1051 (1976); Ohio — Hodesh v. Korelitz. 123 Ohio St. 3d 72, 2009-Ohio-4220, 914 N.E.2d 186; Oregon

— 

### Grillov. Burke's PaintCo.. Inc.. 275 Or. 421,551 P.2d 449 (1976).2 Here, there is no dispute the Collingses and Mullen entered into the covenant not to execute and release before Mullen's deposition and did not disclose the existence and terms ofthe agreement to City First or the court until well aftertrial.



### 2Asignificantnumberofcommentators havecriticized undisclosed partial settlement agreements. See, e.g.. Robin Renee Green, Comment, Marv Carter Agreements: The Unsolved Evidentiary Problems inTexas. 40 Baylor L. Rev. 449 (1988); John E. Benedict, Note, It's a Mistake to Tolerate the Marv CarterAgreement. 87 Colum. L. Rev. 368 (1987); Richard Casner, Note, Admission into Evidence ofa Marv CarterAgreement from a Prior Trial is Harmful Error, 18 Tex. Tech. L. Rev. 997 (1987); June F. Entman, Marv Carter Agreements: An Assessment ofAttempted Solutions. 38 U. Fla. L. Rev. 521 (1986); Katherine Gay, Note, Marv Carter in Arkansas: Settlements. SecretAgreements, and Some Serious Problems. 36 Ark. L. Rev. 570 (1983); David R. Miller, Comment, Marv CarterAgreements: Unfairand Unnecessary, 32 Sw. L.J. 779 (1978); Meriwether D. Williams, Comment, Blending Marv Carter's Colors: ATainted Covenant, 12 Gonz. L. Rev. 266 (1977); John Edward Herndon, Jr., Note, "Mary Carter" Limitation on Liability Agreements Between Adversary Parties: A Painted Lady Is Exposed. 28 U. Miami L. Rev. 988 (1974); and David Jonathan Grant, Note, The Marv CarterAgreement—Solving the Problems ofCollusive Settlements inJointTort Actions. 47 S. Cal. L. Rev. 1393 (1974). 34No. 66527-8-1/35 

### The Collingses sued Robert and Rebecca Loveless, Andrew Mullenand his 

### spouse, Gavin and Margaret Spencer, Home Front HoldingsLLC, and City First Mortgage Services LLC. The Collingses alleged that Loveless and Mullen owned Home Front, and Loveless agreed to purchase their house and lease itbackto them. The 

### Collingses claimed Loveless and Mullen were either employees or authorized agents of City First, and that Loveless and Mullen violated the Equity Skimming Act, chapter 

### 61.34 RCW, andotherconsumerprotection statutes.3 TheCollingses soughtdamages and entry of a decree quieting title inthe property. The trialwas scheduled to begin on September 13, 2010. 

### On June 3, 2009, the court entered an order ofdefault against Loveless. On March 31, 2010, the court entered an amended defaultjudgmentquieting title inthe property to the Collingses. On June 9, 2010, the Collingses filed a notice to Mullen to attend thejury trial on 

### September 13 and testify. On June 20, the Collingses noted the deposition of Mullen for July 26. Inthe days leading up to the July 26 deposition, the Collingses negotiated a covenant not to execute with Mullen and his attorney. The covenant not to execute between the Collingses and Mullen provides, in pertinent part: WHEREAS, plaintiffs brought claims against defendants Mullen in a legal action commenced inthe Superior Court ofWashington for King County entitled Collings v. City First Mortgage Services, LLC, et al.. King County Cause No. 09-2-13062-1 (SEA) as a result ofan alleged rescue foreclosure scam and subsequent foreclosure proceedings perpetrated against plaintiffs; and WHEREAS, this agreement is being made for the sole benefit of the plaintiffs and defendants Mullen, under the policy ofthe law favoring the settlement of litigation, which policy would be to some extent impaired 

### 3The CreditServices Organization Act, chapter 19.134 RCW; theConsumerLoan Act, chapter 31.04 RCW; and the Consumer Protection Act, chapter 19.86 RCW. 35No. 66527-8-1/36 ifany remaining defendants in Collings v. City First Mortgage Services, 

### LLC, etal.. KingCounty Cause No. 09-2-13062-1 (SEA) or any other remaining potentially liable persons or entities, are to be in any way construed as third party beneficiaries thereof; and 

### WHEREAS, defendants Mullenexpressly deny any liability for the alleged rescue foreclosure scam and subsequentforeclosure proceedings perpetrated against plaintiffs; and WHEREAS, plaintiffs expressly reserve all rights ofactions, claims, demands, and rights ofexecution against any and all other persons or 

### entities, including but not limited to alldefendants and intervening parties named in Collings v. City First Mortgage Services. LLC, et al.. King County 

### Cause No. 09-2-13062-1 (SEA) (e.g.. City First Mortgage Services, LLC, etc.), other than defendants Mullen: 1. Inconsideration ofthe promise to pay $500.00 to plaintiffs, plaintiffs do covenant, and agree with defendants Mullen, that plaintiffs (or any successor or assignee) will not execute or otherwise seek to enforce or collect on anyjudgmententered inthe pending lawsuit against defendants Mullen. Plaintiffs will not assign any suchjudgmentto any other party and, ifsuch assignment is made, plaintiffs' assignors willbe bound by the terms ofthis Covenant Not to Execute. Shouldjudgment be entered against any defendant who is a party to this agreement, plaintiff willprovide that defendant with a Satisfaction ofJudgment promptly upon final disposition of all claims inthis matter. Neither the Collingses nor Mullen disclosed the existence or terms ofthe agreement to City First either before the deposition or during the trial. The Collingses' attorney deposed Mullen on July 26. The City First attorney was present at the deposition, but asked no questions. Loveless filed for bankruptcy before thejury trial began on September 13. Despite the notice to attend trial, Mullen did not appear at trial. The Collingses presented and read a portion ofthe transcript from Mullen's deposition testimony to the jury. City First read other portions ofthe deposition to thejury. Thejury instructions directed thejury to decide whether Loveless and Mullen engaged in acts that violated the Equity Skimming Act, the Credit Services Organization Act, the Consumer Loan Act, and the Consumer Protection Act, and whether City First

36No. 66527-8-1/37



### was vicariously liable fortheir acts. In answer to the specialverdictform, thejuryfound Loveless and Mullen were liableto the Collingses, and that City Firstwas responsible for their acts. The juryawarded the Collingses damages. The jury also awarded punitivedamages against Loveless, Mullen, and City Firstunderthe Credit Services Organization Act. 

### Two months aftertrial, City First discovered that the Collingses had entered into
a covenant not to execute with Mullen before his deposition on July 26. Included inthe 

### 33 pages ofbilling records that the Collingses submitted in support of their requestfor
an award ofattorney fees are entries showing that the Collingses were negotiating a covenant not to execute and release agreementwith Mullen beginning on July 23. City First filed a motion for a new trial. City First argued that the failure to disclose the covenant not to execute prejudiced City First by compromising Mullen's deposition testimony, depriving City First of a full opportunity to examine Mullen, and giving "the jury the false impression that the Mullens were still parties to the action." Mullen submitted a declaration stating that he received the final version ofthe covenant not to execute right before his deposition, and the Collingses would only agree to enter into the covenant not to execute if his deposition testimony was "acceptable." Mullen testified, in pertinent part: Inthe days leading up to the deposition, Plaintiffs' counsel and my counsel negotiated a covenant not to execute anyjudgment against my wife and me in anticipation ofthat deposition. Ireceived the final version ofthat document from Plaintiffs' counsel on July 26, 2010

- the morning of my deposition

- and was informed that Plaintiffs would only execute the covenant if my deposition testimony was acceptable. The covenantwas fully executed after my deposition.

37No. 66527-8-1/38 

### City First also pointed out that many of the jury instructionsflatly contradicted the covenant not to execute and were misleading. For example, Jury Instruction No. 9

states: The Collings allege that defendants Robert Paul Loveless, Andrew 

### Mullen, and Gavin Spencerwere employees ofdefendant City First Mortgage Services, LLC and that at all times defendants Loveless and 

### Mullen and Gavin Spencerwere acting withinthe scope ofemployment during the course oftheir dealings withthe Collings. Ifyou find that Robert Paul Loveless, Gavin Spencer, and Andrew Mullen, or any ofthem were acting within the scope oftheiremployment 

### with City First Mortgage Services, LLC during the course oftheir dealings with the Collings, and if you find that Loveless, Mullen or the both ofthem are liable, then you must find that the particular defendant and City First Mortgage Services, LLC are both liable. City First also cited Jury Instruction No. 23 and No. 24. Thosejury instructions state, pertinent part: The Collings claim that defendants Robert P. Loveless, Andrew Mullen, and City First engaged in violations ofthe Consumer Protection Act by violating the Equity Skimming Act, the Credit Services Organization Act, and the Consumer Loan Act. The Collings claim that defendants Robert P. Loveless, Andrew Mullen, and City First Mortgage Services, LLC have each violated the Washington Consumer Protection Act. To prove a violation ofthe Washington Consumer Protection Act as to each ofthese defendants, the Collings have the burden of proving each ofthe following propositions. The trial court denied the motion for a new trial. The order summarily states that "City First has not identified any preserved error in instructing thejury or inevidentiary

or procedural rulings that affect the substantial rights ofthe parties." In affirming the trial court's denial ofthe motion for a new trial and concluding that City First does not show prejudice, the majority also ignores the incentive of Mullen to cast City First in an unfavorable light, the inability of City First to cross-examine Mullen, and the right ofthejury to know about his alignment with the plaintiffs.

38No. 66527-8-1/39 

### The cases the majoritycites for the proposition that other courts require a "concrete" showing ofprejudice inconsidering the effect of an undisclosed settlement agreement between plaintiffs and a codefendant are distinguishable. InMedical Staffing, because the plaintiffs and the defendant "freelydisclosed [the] alignment oftheir interests to thejury during opening statements," and that alignment did not change, the court concluded itwas unlikelythejury would have reached a different verdict. Med. Staffing Network. Inc. v. Connors. 313 Ga. App. 645, 649, 722 S.E.2d 370 (2012). In Monti, the court held nondisclosure ofthe settlement was not prejudicial because "the agreement did not change the adversarial alignment ofthe parties." Monti

v. Wenkert 287 Conn. 101, 127, 947 A.2d 261 (2008). The court emphasized that "[significantly, the agreementwas executed afterthe plaintiffs rested their case," and after the codefendant "testified in her own defense, maintaining her strategy of attempting to shift liability" to the other codefendant. Monti, 287 Conn, at 127. Here, unlike in Medical Staffing and Monti, there is no question inthis case that the undisclosed covenant not to execute changed the adversarial alignment ofthe parties, depriving City First ofthe right to a fair trial. The majority also concludes that there is "nothing to suggest that [Mullen's]
answers were crafted to aid the Collingses against City First. His testimony was largely consistent with the testimony of Sherri Russett, a City First employee since December 2009 who testified about how City First operated." Ithink it is difficult, ifnot impossible, to determine whether Mullen's testimony would have been different absent the secret agreement. And even ifwe could make

39No. 66527-8-1/40 

### this determination, itdoes not change the fact thatthe undisclosed covenant not to execute distorted the true position ofthe parties and resulted inmisleading City First and thejury. Nonetheless, City First points to a number ofinstances where, consistent with 

### the secret covenant not to execute and release, Mullen gave unfavorable testimony to City First. That City First supervised Mullen's and Loveless's work
.... That all of Home Front Services' loans were placed with City First.... Based entirely on "speculation," that City First profited from Home Front Services' loans
.... Referring specifically the initial loan relating to the Collingses' residence, that there was a significant documentation error.... Based on what Mullen "would imagine," that City First should have identified the above error. City First also points to a number of instances where Mullen omitted certain critical facts. For example, That Home Front Services operated as an independent branch of City First.
. . and that City Firstwas not involved in preparing loan documents originating out ofMullen's and Loveless's Home Front Services office.
. . . That there was and is no common ownership or management or employment or agency agreement between City First and Home Front Holdings, LLC or Integrity Management Group.
. . . That there was no yield spread premium on the loans relating to the Collingses' residence
.... that all ofthe fees charged for those loans were "average" fees . . . , and that City First lost money on those loans.
. . . That City First did not underwrite any loan relating to the Collingses' residence, did not service any such loan, and was not the actual leaderfor any such loan.
. . . That the paperwork for the loans relating to the Collingses' residence was prepared in Mullen's and Loveless's Home Front Services office and, upon completion, was sent directly to the respective lender

- not to City First.

40No. 66527-8-1/41 

### Because the failure to disclose the covenant not to execute and release deprived City First ofthe right to a fair trial, Iwould reverse and remand for a new trial. 

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