Opinion ID: 1353789
Heading Depth: 1
Heading Rank: 1

Heading: General Circumstances

Text: Joseph F. Macdonald, an employee of the Boeing Company, speculated in real estate. The record indicates that, prior to the sale of the property in this case, Macdonald had bought and sold some 12 to 18 parcels of land. Apparently with a speculative eye, Mr. Macdonald and his wife, Marilynn, purchased a parcel of real estate in 1966 for $42,500, and an adjacent parcel in 1967 for $15,000. Both parcels were purchased on real-estate contracts. Three other persons, ostensibly willing to participate in both possible risks and possible gains from the sale of the two parcels, bought into the property as cotenants under a document prepared by Macdonald. The cotenants, G.E. Stein, J.M. Lancaster and L.N. Christian, along with the Macdonalds, constituted what the record describes as the Macdonald group. Because Macdonald was the participant responsible for several legal documents executed by the group and played a leading role in making of decisions with regard to their property, the group will be referred to as the Macdonald group except where the context requires otherwise. A different group constituting a limited partnership called Equity Investors, whose general partners were M. Richard Walsh and Brama Construction Company, agreed to buy the Macdonald group property. This limited partnership accordingly entered into two earnest money agreements with the Macdonald group in 1968 to purchase the two parcels of land from them. The first agreement, dated April 22, 1968, provided for a sale price of $168,000; the second, dated June 17, 1968, and by which the property was eventually conveyed, specified a sale price of $160,000. The Macdonald group and Equity Investors signed a contract December 30, 1968, for the sale of these two parcels to the latter. Equity Investors, then with a purchaser's interest in the property and substantial hope for successful development, obtained an architect's plan and cost estimate for a 220-unit apartment complex requiring long-term financing of approximately $1.85 million. Then, having acquired a right to possession, Equity Investors began its search for an interim or construction lender. First it approached Seattle Trust and Savings Bank, but that lender declined to advance the requested funds. Another try, to the National Bank of Washington, was successful, and in April, 1969, Equity Investors' application for a $1.75 million loan for the construction of the apartment house complex was granted. At this point, a year after the original earnest money agreement between the Macdonald group and Equity Investors had been signed, in order to put Equity Investors in a better position for obtaining a loan, the parties to the real-estate contract decided that the contract of sale would be terminated, and that the land would pass to Equity Investors subject to a deed of trust designating Macdonald as beneficiary. This transaction, it was agreed, would be effected at the same time the construction loan and security interest agreement between National Bank of Washington and Equity Investors was to be closed. Transamerica Title, designated by the parties as escrow agent for the transfer and loan, was also the insurer of title for the lender, National Bank of Washington. In conversations with Equity Investors and in a rider to the deed of trust naming Macdonald as beneficiary, Macdonald and Equity Investors, in order to facilitate the loan for Equity from the National Bank of Washington, agreed that Macdonald's otherwise prior interest would be subordinate to the security interest of the bank; certain other conditions not here pertinent were additionally to be performed by the parties to that agreement. Macdonald prepared his own escrow instructions to Transamerica and insisted that all documents relative to the sale and escrow be examined by his attorney, a Mr. Best, who did examine many of the documents for him. The trial court, in one of these consolidated cases, held Transamerica liable, however, for breach of fiduciary trust and for negligence when a Mr. Stenesen, a Transamerica employee, submitted to the Macdonald group for their individual signatures a form of agreement expressly and unconditionally subordinating their interests to those of the bank. Mr. Stenesen at the time told Macdonald that the instrument was needed for closing but did not advise Macdonald of the document's legal effect nor suggest that he see his attorney about it. This document, called a subordination agreement, was later returned by Macdonald to Transamerica with his signature and that of his wife; subsequently, it was individually signed by the other members of the Macdonald group. It contained subordinating language similar to that of the rider to the earlier second deed of trust which they similarly had signed, but was phrased in language purporting to make the subordination unconditional and categorical. In this phase of the action between the Macdonald group and Transamerica, the trial court found that the Macdonald group would have refused to go through with the deal if the only alternative were an unconditional subordination agreement, and awarded the Macdonald group damages from Transamerica. The trial court found that, although Transamerica intended to make the subordination unconditional, had Macdonald understood its absolute and unconditional legal effect he would not have acquiesced in signing the document which, as noted, provided for an unconditional rather than a conditional subordination. The bank's instructions to Transamerica, as escrow agent, explicitly required that its interests be unconditionally prior and superior to all other security interests before advancing. The court, however, found the Macdonald group was unaware of the bank's requirement. Transamerica's employee, Stenesen, testified by deposition, and the court, as a basis for recovery by Macdonald against the escrow holder, found that the unconditional subordination agreement had been prepared by Transamerica for its own benefit as title insurer for the bank. The escrow and financing deal closed on May 14, 1969, and construction of the apartment house project commenced. Another phase of the deal produced a lien priority case. Brama Construction, Inc., and Equity Investors selected Columbia Wood Products, Inc., as one of the lumber suppliers. Columbia began furnishing material May 26, 1969, and some 4 months later, September 15, 1969, filed a claim of lien for materials delivered and unpaid for. It notified the bank, as disbursing agent for the project, that a part of its claim was unpaid and owing. The amount of that claim came to $119,672, plus interest and attorneys' fees of over $28,000. Then, in a phase of the case giving rise to the guaranty issue on appeal, the bank, in October, 1969, refused to make a progress advance until the percentage of moneys advanced was brought into line with the percentage of construction completed. Only 63 percent of the project had been then completed, but with the advance in question the loan would have been 65.6 percent advanced. The two figures were made to substantially coincide, however, with the infusion of an additional $75,000 advanced by one Walter Stepnitz as further capital. At this time, the bank's cost projections indicated the total cost of the project would run to about $1,988,467, more than $200,000 in excess of the original estimate. By December 16, 1969, the National Bank of Washington had advanced $1,386,659.21 of the total loan. It had obtained earlier a guaranty agreement from several persons as a condition to granting the loan whereby the guarantors agreed to hold the bank harmless in the event that the bank was not fully repaid by the long-term lender. In accepting the guaranty, the bank looked to the solvency and apparent capabilities of the guarantors of payment of the loan, Richard and Gloria Walsh, Brama Construction, Inc., and Richard L. and Eileen Brama. The Bramas had been regarded as the principal managing force in the operation of Brama Construction; they aspired, however, to be released from the guaranty agreement. Accordingly, on December 16, 1969, at a time when the bank had paid out more than 75 percent of the original loan funds, and construction was months behind schedule and cost overruns were apparent, the parties, except for the Bramas, executed a new guaranty agreement. In this second guaranty, the Walshes, Brama Construction, Inc., and Walter and Evelyn Stepnitz signed as guarantors. This new guaranty described the signatories as new guarantors; its purpose, so far as pertinent here, was to substitute the Stepnitzes for the Bramas as guarantors although the entire agreement, of which it was a part, constituted a substantial revision of the initial documentation of the project. After the execution of the new guaranty, it became apparent that the amount to be loaned would be markedly inadequate for completing the project because substantial cost overruns appeared inevitable. Advances were made on December 30, 1969, and January 7 and February 9, 1970, by the bank  but after the February advance the bank refused to pay out any more money. Of its original loan commitment of $1,750,000, it had paid out $1,742,678.63. Of the $1.85 million total loan account as subsequently enlarged, only $107,000 remained to be disbursed and the estimates of cost to complete ranged then from $135,000 to $150,000. The ultimate cost overrun found by the trial court was about $350,000. Many events then occurred in rapid succession. The National Bank of Washington commenced suits for recovery of its interests. It began a foreclosure suit and an action against Walter and Evelyn Stepnitz as guarantors. Walter Stepnitz died during the pendency of the action. Approximately 1 week before the date of trial, Stepnitz' estate in Minnesota was given service of process. Evelyn Stepnitz, Walter Stepnitz' widow, remains a party to the action. In addition, Columbia Wood Products commenced an action to foreclose upon its materialman's lien, and the Macdonald group interests, now realizing the unconditional nature of the subordination agreement they had all signed, brought action against Transamerica, the escrow agent, alleging a breach of fiduciary duty and claiming that this breach caused a loss of priority in the foreclosure action to the Macdonald group's damage. All these actions were consolidated at trial, and are here for review under consolidated cause No. 42264. In addition, following the foreclosure sale, the trial court refused to confirm the highest bid in the amount of $1.88 million submitted by the bank. Rather, the court set an upset price and indicated that it would confirm a bid of approximately $2.247 million unless the bank would waive its deficiency judgment. The bank appeals that determination under separate cause No. 42354. Because the various parties are directly affected by different segments of the case, we will consider separately the positions of the parties with reference to each other: First, Columbia Wood Products vis-a-vis National Bank of Washington; second, Macdonald group vis-a-vis Transamerica Title Company; and third, National Bank of Washington vis-a-vis the Stepnitz interests, first as to the effect and validity of the guaranty agreement, and then the confirmation of sale issue. Such additional facts as we believe essential to a resolution of the particular questions of law will be presented in connection with each question.