Court Opinion

ID: 5138570
Source: CourtListenerOpinion
Date Created: 2021-12-21 15:10:53.794671+00
Date Added: 2024-06-11T08:24:09.498676
License: Public Domain

2018 UT App 231

               THE UTAH COURT OF APPEALS

                 TRAPNELL & ASSOCIATES LLC,
                          Appellant,
                              v.
             LEGACY RESORTS LLC, JAX PETTEY, AND
                 AMERICA FIRST CREDIT UNION,
                Appellees and Cross-appellants,
                              v.
          PRAIA LLC AND TRAPNELL & ASSOCIATES LLC,
                       Cross-appellees

                            Opinion
                        No. 20160716-CA
                    Filed December 20, 2018

            Fourth District Court, Heber Department
               The Honorable Samuel D. McVey
                         No. 140500081

       Matthew G. Grimmer and Jacob R. Davis, Attorneys
              for Appellant and Cross-appellees
       Mark R. Gaylord and Zaven A. Sargsian, Attorneys
             for Appellees and Cross-appellants,
                 America First Credit Union
         David M. Wahlquist, Peter C. Schofield, Rod N.
       Andreason and Justin Starr, Attorneys for Appellees
           and Cross-appellants, Legacy Resorts, LLC

     JUDGE RYAN M. HARRIS authored this Opinion, in which
   JUDGES GREGORY K. ORME and JILL M. POHLMAN concurred.

HARRIS, Judge:

¶1     In August 2010, Legacy Resorts, LLC (Legacy), one of the
creditors of the Zermatt Resort (Zermatt) in Midway, Utah,
foreclosed on the Zermatt property, which sold at a trustee’s sale
for $14.5 million. Because the note associated with the trust deed
                     Trapnell v. Legacy Resorts

being foreclosed had an outstanding balance of $17.2 million, the
trustee credited the entire $14.5 million to the noteholder. Four
years later, another creditor (Praia, LLC (Praia), the predecessor-
in-interest of Appellant Trapnell & Associates, LLC (Trapnell))
sued, claiming that it had at least partial priority over the
foreclosing noteholder, and that it should have been paid at least
$9.8 million from the 2010 sale proceeds. In a series of rulings,
the district court rejected Praia’s claims, dismissed its lawsuit,
and entered judgment against it.

¶2     Soon after the district court entered its final judgment
against Praia, Trapnell filed a “Notice of Substitution,” notifying
the court that it was Praia’s “assignee” and was “the real party in
interest who shall prosecute this action.” That same day,
Trapnell—and not Praia—filed a notice of appeal, purporting to
appeal the district court’s final judgment and subsidiary orders.
After a remand to consider whether Praia should be given extra
time to file its own notice of appeal, the district court ruled that
there was no need for Praia to be given extra time to appeal,
because Trapnell had “already . . . substituted in as the real party
in interest” and “[i]ts rights are now Trapnell’s,” and that the
court’s intent in previously denying Praia’s request for
additional time was “that Trapnell as the real party in interest
could raise any issue on appeal Praia could have raised.”

¶3     Both sides appeal certain decisions of the district court.
Trapnell appeals the court’s rejection of Praia’s claim regarding
division of the foreclosure sale proceeds. Legacy appeals the
court’s determination that Trapnell had properly substituted in
as the real party in interest; Legacy maintains that no such
substitution was ever properly effected, and that because Praia
(as opposed to Trapnell) failed to file a timely notice of appeal,
this court lacks jurisdiction to adjudicate Trapnell’s appeal.

¶4     For the reasons set forth herein, we conclude that we have
jurisdiction to consider Trapnell’s appeal. On the merits,
however, we conclude that the district court’s decision to reject

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                     Trapnell v. Legacy Resorts

Praia’s claim regarding the division of foreclosure sale proceeds
was correct, and therefore affirm.

                         BACKGROUND

¶5     In order to get its development off the ground, Zermatt
needed funding, and it obtained that funding by taking out a
series of large loans from various creditors. First, in 2005, George
W. Perkins, Jr. (Perkins) loaned Zermatt $6 million, secured by a
trust deed on the Zermatt property. A year later, in 2006,
Zermatt obtained a second loan, this time for $16.5 million, from
America First Credit Union (AFCU). This loan was also secured
by a trust deed on the Zermatt property. At about the same time
AFCU made this second loan, AFCU and Perkins entered into a
subordination agreement in which Perkins agreed to
subordinate his interest in the property to AFCU’s interest.

¶6     By 2009, Zermatt was struggling to meet its obligations
under the first two loans, and both Perkins and AFCU had filed
notices of default. Zermatt and AFCU worked together to
address the situation. First, some of the individuals affiliated
with Zermatt formed a new entity (Legacy), and in 2010 AFCU
agreed to loan an additional $12.5 million to this new entity,
secured by a trust deed on the Zermatt property. Legacy used
the proceeds from the new $12.5 million loan to purchase
AFCU’s 2006 note and trust deed, thereby succeeding to AFCU’s
interests on that loan. Legacy then agreed to subordinate its
position to AFCU’s new position, thus subordinating its newly-
acquired $16.5 million interest to AFCU’s new $12.5 million
interest. Perkins was not a party to this second subordination
agreement. After this transaction was completed, Perkins’s $6
million interest remained subordinated to Legacy’s (formerly
AFCU’s) $16.5 million interest, while Legacy’s interest was in
turn subordinated to AFCU’s $12.5 million interest.

¶7    Legacy then foreclosed on its newly-purchased loan
(AFCU’s interest from 2006), which remained in default. By the
time of foreclosure, Legacy’s interest had grown from $16.5

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                    Trapnell v. Legacy Resorts

million to approximately $17.2 million. Legacy auctioned the
property at a trustee’s sale on August 9, 2010, having first
published notice of the sale in public newspapers and mailed
notice directly to Perkins and AFCU. The highest bidder at the
auction was Legacy itself, which made a $14.5 million credit bid.
The trustee credited Legacy’s bid amount against the amount it
was owed and, because the credit bid amount ($14.5 million)
was less than the outstanding amount on the loan Legacy was
foreclosing ($17.2 million), in Legacy’s view there were no excess
proceeds to distribute to junior creditors. The trustee then
transferred title to the property to Legacy by means of a trustee’s
deed. The foreclosure sale had the effect of extinguishing the
trust deed being foreclosed (Legacy’s), as well as all trust deeds
junior thereto, including Perkins’s. All parties agree, however,
that AFCU’s new $12.5 million lien was senior to Legacy’s
interest, and was not extinguished by Legacy’s foreclosure.
AFCU did not foreclose on that loan, and instead retained its
$12.5 million interest in the form of a lien on the foreclosed
property. That is, Legacy purchased the property at the trustee’s
sale, but took the property subject to AFCU’s $12.5 million lien.

¶8     Over the next few years, a series of transactions resulted
in Perkins’s now-extinguished interest being transferred to Praia.
On August 8, 2014, Praia 1 filed a lawsuit against Legacy and
AFCU, alleging that Perkins had been “entitled to a portion of
the foreclosure sale proceeds” that had been credited to Legacy.

¶9     Legacy/AFCU and Praia each filed cross-motions for
summary judgment, and stipulated to many of the material facts.
In their motion, Legacy and AFCU argued that Perkins had not
been entitled to any proceeds from the foreclosure sale because

1. The lawsuit was actually filed by Kenneth Patey, a
predecessor-in-interest to Praia. By order dated November 16,
2015, Praia was substituted into the lawsuit—without
opposition—in place of Patey. For simplicity’s sake, however, in
this opinion we refer to the lawsuit as having been filed by Praia.

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his interest was subordinated to approximately $17.2 million of
higher-priority interests, and the sale proceeds were only $14.5
million. In response, Praia argued that, “because a portion of
Legacy’s [interest] was subordinated” to AFCU’s new interest,
Legacy was only entitled to keep roughly $4.7 million of the sale
proceeds (the difference between Legacy’s total $17.2 million
interest and AFCU’s new $12.5 million interest), and that Perkins
was entitled to the remainder.

¶10 After full briefing and oral argument, the district court
agreed with Legacy and AFCU, and determined that Perkins had
intended for his position to be subordinated to Legacy’s $16.5
million (now $17.2 million) position, and that this subordination
was not affected by AFCU’s decision not to foreclose on its new
$12.5 million interest that was senior to Legacy’s. The court
concluded that “there were never enough funds to pay anything
to [Perkins] after satisfying the $16.5 million position [that
Perkins] was always behind,” and that “[t]he amount of the bid,
$14.5 million, cannot satisfy the $16.5 million position and still
have anything left over.” In keeping with this ruling, the district
court eventually entered a final order dismissing Praia’s claims.

¶11 At some point prior to this appeal, Praia assigned its
interest in the Perkins loan to Trapnell. After the district court
entered final judgment against Praia on Praia’s claims, Trapnell
filed a “Notice of Substitution of Real Party in Interest”
indicating that Praia had assigned its claims to Trapnell and
declaring that, “pursuant to Rule 17 of the Utah Rules of Civil
Procedure,” Trapnell was “the real party in interest who shall
prosecute this action.” On the same day as it filed its “Notice of
Substitution,” Trapnell filed a notice of appeal indicating that it,
as “assignee of the claims brought by Praia,” would be appealing
the district court’s final judgment and subsidiary decisions.

¶12 Legacy and AFCU then asked this court to summarily
dispose of Trapnell’s appeal, arguing that Trapnell had not
followed the proper procedures to become a party to the case,
and asserting that this court did not have jurisdiction to hear an

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                     Trapnell v. Legacy Resorts

appeal from an entity that had never properly been a party to the
district court case. Trapnell filed a substantive opposition to the
motion in this court. At the same time, Praia moved separately in
the district court for an extension of time to file its own notice of
appeal, which request Legacy and AFCU opposed. The district
court denied Praia’s motion for an extension of time, noting that
“the final order in this case has already been appealed and is
before the Court of Appeals.” Praia appealed this decision, and
this court summarily reversed and remanded, interpreting the
district court’s ruling as having been made on jurisdictional
grounds, and instructing the district court that it had jurisdiction
to consider Praia’s motion for an extension of time to file an
appeal. A few days later the district court entered an order, on
remand, again denying Praia’s motion for an extension of time,
this time explaining that it considered any extension
“unnecessary” due to its view that “Trapnell had already . . .
substituted in as the real party in interest as allowed by rule
17(a) of the Utah Rules of Civil Procedure.” The district court
stated that, due to Trapnell’s substitution, “there is no reason to
consider Praia as an entity required to file its own subsequent
notice of appeal” because “[i]ts rights are now Trapnell’s.” The
court further stated that its intent in denying Praia’s motion the
first time was “that Trapnell as the real party in interest could
raise any issue on appeal Praia could have raised.”

¶13 Legacy and AFCU now appeal that ruling, while Trapnell
appeals the court’s dismissal, on its merits, of Praia’s claim
regarding the division of foreclosure sale proceeds.

            ISSUES AND STANDARDS OF REVIEW

¶14 In their cross-appeals, the parties ask us to consider two
main issues. 2 First, Legacy and AFCU contend that Trapnell did

2. Legacy and AFCU also contend that Trapnell waived its
arguments on the merits and is thus estopped from making them
here, and also that Trapnell’s lawsuit was filed too late to satisfy
                                                    (continued…)

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                      Trapnell v. Legacy Resorts

not properly substitute for Praia as the real party in interest in
this case, and that the district court erred when it purported to
recognize such a substitution. Whether a district court correctly
interpreted a rule of procedure presents a question of law, which
we review for correctness. Peterson v. Jackson, 2011 UT App 113,
¶ 13, 253 P.3d 1096. If the district court erred, Legacy further
contends that we do not have appellate jurisdiction in this case.
“Whether appellate jurisdiction exists is a question of law . . . .”
Butler v. Corporation of the President of the Church of Jesus Christ of
Latter-day Saints, 2014 UT 41, ¶ 15, 337 P.3d 280.

¶15 Second, Trapnell contends that the district court erred
when it determined that Perkins (and, by extension, Praia and
Trapnell) was not entitled to any of the proceeds resulting from
Legacy’s foreclosure sale, and upon that basis dismissed Praia’s
claim. When reviewing a district court’s grant of summary
judgment, we review “the facts and all reasonable inferences
drawn therefrom” in the light most favorable to the nonmoving
party. Massey v. Griffiths, 2007 UT 10, ¶ 8, 152 P.3d 312 (quotation
simplified). We then review for correctness “the district court’s
legal conclusions and ultimate grant or denial of summary
judgment.” Id.

                             ANALYSIS

                                   I

¶16 We must first determine whether we have jurisdiction to
adjudicate Trapnell’s appeal. Legacy and AFCU assert that
Trapnell—the only entity to file a timely notice of appeal—is not

(…continued)
what they contend is the applicable statute of limitations.
Because we determine that the district court correctly dismissed
Praia’s claim on its merits, we need not address whether that
claim was also barred by the applicable statute of limitations or
by the doctrines of waiver or estoppel.

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                     Trapnell v. Legacy Resorts

and never has been a proper party to this case. We conclude that,
while the procedures set forth by rule were not perfectly
followed, under the unique circumstances of this case Trapnell is
a proper party to the underlying case, and therefore we have
jurisdiction to consider its appeal.

¶17 Legacy and AFCU are correct when they point out that—
as a general matter, and in the absence of an extraordinary
writ—nonparties are “not entitled to appeal” a lower court’s
decision. See Utah Down Syndrome Foundation, Inc. v. Utah Down
Syndrome Ass’n, 2012 UT 86, ¶ 9, 293 P.3d 241 (stating that
“persons or entities that are not parties to a proceeding are not
entitled to an appeal as of right,” and that “an extraordinary writ
is the vehicle pursuant to which nonparties can properly
challenge a court order” (quotation simplified)). An appellate
court has no jurisdiction to consider a direct appeal from a
nonparty. Id. ¶ 12 (stating that “where an appeal is not properly
taken, this court lacks jurisdiction and we must dismiss”
(quotation simplified)). Legacy and AFCU thus frame the
question properly: if Trapnell was never a proper party to the
district court lawsuit, it has no right—absent an extraordinary
writ—to challenge a decision of the district court, and we would
have no authority to take any action with regard to Trapnell’s
appeal other than to dismiss it.

¶18 In support of their argument that Trapnell was never
properly made a party, Legacy and AFCU direct our attention to
rule 25 of the Utah Rules of Civil Procedure. That rule states, in
relevant part, that when one party transfers its interest to
another “the action may be continued by or against the original
party, unless the court upon motion directs the person to whom
the interest is transferred to be substituted in the action or joined
with the original party.” Utah R. Civ. P. 25(c) (emphasis added).
The rule further provides that any such motion is to be served on
all of the parties. See id. (stating that “[s]ervice of the motion
shall be made as provided in Subdivision (a) of this rule”); id. R.
25(a)(1) (stating that the motion shall be served “on the parties as

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provided in Rule 5”). Legacy and AFCU correctly point out that
Trapnell did not strictly comply with these requirements.

¶19 Rather than file a “motion” invoking rule 25(c), Trapnell
instead filed a “notice”—which it did properly serve on all
parties in a manner that satisfied rule 5—invoking rule 17, which
simply states that “[e]very action shall be prosecuted in the
name of the real party in interest.” Utah R. Civ. P. 17(a).
Trapnell’s notice proclaimed that Trapnell had acquired Praia’s
interests, and identified itself as “the real party in interest who
shall prosecute this action.” If the matter had ended there, with
no further action taken by either Trapnell or the district court,
we would agree with Legacy and AFCU that Trapnell had not
been properly substituted into the case. Indeed, an entity not
originally part of a lawsuit cannot simply declare itself to be a
substituting or intervening party to a lawsuit. See Lundahl v.
Quinn, 2003 UT 11, ¶ 10, 67 P.3d 1000 (stating that “courts cannot
be compelled to recognize a substitution of parties at the whim
of the movant”). In Lundahl, our supreme court refused to
recognize a person as a party to the case, even though that
person had made numerous filings in the case, because the
district court refused to allow the person to intervene in the case,
and because the person had never asked to be substituted into
the case pursuant to rule 25. Id. ¶ 12 (stating that “the district
court’s justifiable refusal to address a multitude of last-ditch,
disruptive legal filings was well within its discretion and
supported by [the person’s] failure to avail herself of the
procedural rule designed to afford her the relief she claimed”).

¶20 What makes this case different from Lundahl is that, in this
case, the district court twice approved Trapnell’s participation in
the case. First, in a ruling made on September 29, 2016, the
district court denied Praia’s motion for an extension of time to
file its own notice of appeal, because the “case has already been
appealed and is before the Court of Appeals.” The district court,
in a later ruling, stated that its “intent” in denying Praia’s
original motion for additional time to appeal was that it
considered Trapnell to have been properly substituted into the

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                     Trapnell v. Legacy Resorts

case for Praia and because Trapnell therefore “could raise any
issue on appeal that Praia could have raised.” Second, in that
later ruling made after remand, the district court expressly
recognized Trapnell as a substituted party, stating repeatedly
that Trapnell had already “substituted in as the real party in
interest” and “now stands in place of Praia” because it had
“been assigned all of . . . Praia’s claims.” The district court made
these statements after receiving a filing—properly served on all
other parties—in which Trapnell clearly signaled its intent to be
substituted into the case for Praia.

¶21 Legacy and AFCU, however, identify two problems with
the procedure followed by the district court, and ask us to
reverse the district court’s recognition of Trapnell as the
substituted party on those grounds. First, they point out that
Trapnell filed a “notice” and not a “motion” as rule 25(c)
requires. We are unpersuaded by this argument. Generally
speaking, and with certain exceptions, the caption of a filing is
not necessarily dispositive of its substance. See Armstrong Rubber
Co. v. Bastian, 657 P.2d 1346, 1348 (Utah 1983) (noting that “[i]f
the nature of the motion can be ascertained from the substance
of the instrument, we have heretofore held than an improper
caption is not fatal to that motion”); DeBry v. Fidelity Nat’l Title
Ins. Co., 828 P.2d 520, 523 (Utah Ct. App. 1992) (stating that
“[t]he substance of a motion, not its caption, is controlling”). If
the district court eventually authorizes the substitution, it does
not matter that the filing that triggered that authorization is
captioned as a “notice” rather than as a “motion.”

¶22 Second, and more substantively, Legacy and AFCU assert
that they were prejudiced by the procedure that the district court
employed in recognizing Trapnell as the substituted party.
Specifically, they claim that they were never afforded an
opportunity to respond to or independently verify Trapnell’s
claim that it was in fact Praia’s assignee, and they claim they
would have had that opportunity had Trapnell filed a motion
instead of a notice. While, as noted, we certainly acknowledge it
would have been better had Trapnell filed a motion invoking

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                     Trapnell v. Legacy Resorts

rule 25(c) instead of a notice invoking rule 17, the intent of
Trapnell’s filing was clear—it wished to be recognized as the real
party in interest so that it could prosecute the appeal in Praia’s
stead. We discern no reason—and neither Legacy nor AFCU
offer one—why Legacy or AFCU could not have filed a
memorandum opposing Trapnell’s assertion that it was a
properly-substituted party, either in August 2016 right after
Trapnell made its filing, or in September 2016 during the
litigation over Praia’s motion for additional time, or in December
2016 after this court remanded the case and the district court
issued its follow-up ruling recognizing Trapnell as the real party
in interest. Moreover, neither Legacy nor AFCU (nor,
significantly, Praia, who one would think would be the party
with the most incentive to object) has come forward, either here
or in the district court, with any indication that Trapnell is not
actually Praia’s assignee.

¶23 Under the unique circumstances of this case, we see no
reason to disturb the district court’s recognition of Trapnell as
the real party in interest and Praia’s assignee. This is not a case—
like Lundahl—in which an entity never recognized by the district
court as a party was making repeated and unauthorized wild
filings. See Lundahl, 2003 UT 11, ¶¶ 10–12. And this is not a case
in which we perceive the imposition of any meaningful
limitations on any party’s right to be heard on the question of
whether Trapnell is properly a party to the case. The district
court, after receiving a written filing served on all parties,
recognized Trapnell as the real party in interest. We decline
Legacy’s and AFCU’s invitation to reverse the district court’s
determination under these circumstances. Accordingly, Trapnell
was made a party to the case below, and we have jurisdiction to
consider its appeal of the district court’s substantive decisions.

                                 II

¶24 Having determined that we have jurisdiction to hear
Trapnell’s appeal, we now turn to its merits, which present us
with an issue of circular lien priorities. We first discuss circular

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lien priorities generally, and then explain why the principles
governing circular lien priorities compel us to affirm the district
court’s conclusion that Perkins was not entitled to share in the
foreclosure sale proceeds.

¶25 An issue of circular lien priorities arises “where there are
at least three creditors who hold an interest in the same property
and fewer than all of those creditors enter into a subordination
agreement.” See VCS, Inc. v. Countrywide Home Loans, Inc., 2015
UT 46, ¶ 20, 349 P.3d 704. In the typical circular lien situation, A
has priority over B, and B has priority over C, but (due to a
separate subordination agreement between A and C) C has
priority over A.

¶26 Courts facing such situations have generally taken one of
two approaches. The first is known as “complete subordination,”
in which A is deemed—by virtue of its agreement to subordinate
itself to C—to have placed itself at the back of the line,
thereby elevating B to the first-place position, even though B
was not a party to the subordination agreement between A
and C. See id. ¶ 26 & n.15. The second is known as
“partial subordination,” which is more complex but also
more equitable than complete subordination. Under that
approach, assuming all three creditors are interested in
foreclosing, the “proper distribution of the fund” comprising
the foreclosure sale proceeds is to first “set aside from the
fund the amount of A’s claim,” and then out of that money
“pay C the amount of its claim,” and then “pay A to the extent of
any balance remaining after C’s claim is satisfied.” Id. ¶ 25
(quotation simplified). After that, B should be paid “the
amount of the fund remaining after A’s claim has been set
aside,” up to the total amount of B’s claim. Id. (quotation
simplified). Finally, “if any balance remains in the fund after A’s
claim has been set aside and B’s claim has been satisfied,” the
balance should be distributed to C and A. Id. (quotation
simplified). In summary,

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       C, by virtue of the subordination agreement, is
       paid first, but only to the amount of A’s claim, to
       which B was in any event junior. B receives what it
       had expected to receive, the fund less A’s prior
       claim. If A’s claim is smaller than C’s, C will collect
       the balance of its claim, in its own right, only after
       B has been paid in full. A, the subordinator,
       receives nothing until B and C have been paid
       except to the extent that its claim, entitled to first
       priority, exceeds the amount of C’s claim, which,
       under its agreement, is to be first paid.

Id. (quotation simplified). Partial subordination is “the approach
subscribed to by a majority of jurisdictions,” and it is the one our
supreme court adopted in VCS. Id. ¶¶ 25, 36. 3

¶27 This case presents a circular lien priority scenario: Legacy
has priority over Perkins (due to a subordination agreement
between them), Perkins has priority over AFCU’s new interest
(due to the timing of the recording of the respective trust deeds),
and AFCU’s new interest has priority over Legacy (due to a
subordination agreement between them). VCS therefore contains
clear instructions as to how the sale proceeds should have been
divided had all of the creditors—including AFCU on its new
loan—elected to foreclose. Under that scenario, Legacy would be
in the A position, Perkins in the B position, and AFCU in the C
position. The first $17.2 million—the amount of Legacy’s claim—
was to have been set aside, but since only $14.5 million was
realized at the sale, that $14.5 million would have been set aside.
And out of that $14.5 million, AFCU would have been paid $12.5

3. When Praia first filed this suit, our supreme court had not yet
decided VCS, and Praia—the party in the B position—was
hoping for the application of “complete subordination,” which
arguably would have put it at the front of the line. Unfortunately
for Praia, during the pendency of its lawsuit our supreme court
adopted the “partial subordination” approach instead.

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                       Trapnell v. Legacy Resorts

million (the full amount of its claim), and Legacy would have
been paid $2 million (the remaining amount). Perkins would
have gotten nothing.

¶28 The difference between this case and the usual “circular
lien priority” situation (e.g., VCS) is that, in this case, the creditor
in the C position (AFCU) did not foreclose its lien. Trapnell—the
successor-in-interest to Perkins’s position—argues that, in such a
situation, AFCU’s $12.5 million interest should still be subtracted
from Legacy’s share of the “set aside” amount, but not
considered “paid,” so that the sale proceeds end up being
distributed like this:

       Priority of Liens                     Proceeds Paid

       AFCU: $12.5 million                   None paid (not foreclosed)

                                             $12.5m interest remains

       Legacy (partial): $4.7 million        $4.7 million paid

       Perkins: $13.5 million                $9.8 million paid

       Legacy (remainder): $12.5m            None left over

Trapnell maintains that, without accounting for the proceeds in
this manner, Perkins will effectively be subordinated to both
Legacy’s $17.2 million interest and AFCU’s new $12.5 million
interest, and that accounting for the proceeds in the way it
advocates is the only way to prevent Perkins from ending up
subordinated “to an amount much larger than the amount to
which Perkins agreed to subordinate.” Legacy and AFCU resist
this contention, pointing out that Perkins agreed to be
subordinate to $17.2 million worth of debt, and assert that

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Perkins could never receive any recovery from the sale “unless
the winning bid was more than what Legacy was owed.” In our
view, Legacy and AFCU have the better of the argument.

¶29 Utah statutory law provides that the proceeds of a
trustee’s sale should be applied first to the costs and expenses
associated with the sale and second to “payment of the
obligation secured by the trust deed” being foreclosed. See Utah
Code Ann. § 57-1-29(1)(a)(i–ii) (LexisNexis Supp. 2018). Because
AFCU did not foreclose on its new $12.5 million interest, the
trust deed being foreclosed was Legacy’s, and that interest was
$17.2 million at the time of the foreclosure. The trustee simply
followed the statutory mandate when it credited the entire $14.5
million credit bid to Legacy’s trust deed—the one being
foreclosed—rather than to AFCU’s new interest that was not
being foreclosed.

¶30 Indeed, because the entirety of AFCU’s interest 4 was
senior to the deed being foreclosed, that interest remained
attached to the property even after Legacy’s foreclosure sale. “A
valid foreclosure of a mortgage terminates all interests in the
foreclosed real estate that are junior to the mortgage being
foreclosed,” but “[f]oreclosure does not terminate interests in the
foreclosed real estate that are senior to the mortgage being
foreclosed.” Restatement (Third) of Property (Mortgages) § 7.1

4. Presumably, a slightly different scenario would present itself if
AFCU’s new interest had been larger than Legacy’s interest.
Under partial subordination, AFCU’s new interest is in first
position only to the extent that it is equal to or smaller than
Legacy’s interest. Had AFCU’s interest been $20 million, only
$17.2 million would have been in first position, with the
remaining $2.8 million in the C position behind Perkins. See, e.g.,
Atlantic Trustee Services, L.L.C. v. Cortez, 2018 WL 1123899, *6, No.
CL-2017-8414 (Va. Cir. Ct. 2018) (stating that the creditor in the A
position “can only subordinate its . . . loan to” a loan in the C
position “to the extent of the lesser of the two loans”).

20160716-CA                     15                2018 UT App 231
                     Trapnell v. Legacy Resorts

(Am. Law Inst. 1999); see also Nature’s Sunshine Products, Inc. v.
Watson, 2007 UT App 383, ¶ 5, 174 P.3d 647 (stating that a buyer
at a foreclosure sale purchased the property “subject to the rights
of any senior lienholders of record”); Restatement (Third) of
Property (Mortgages) § 7.1 cmt. a (stating that “the title deriving
from a foreclosure sale, whether judicial or by power of sale, will
be subject to all mortgages and other interests that are senior to
the mortgage being foreclosed”); id. § 7.4 cmt. c (stating that liens
senior to the foreclosing lien “are unaffected by foreclosure and
remain on the foreclosed real estate” and that therefore senior
lienholders “remain free to foreclose on the real estate” even
after the foreclosure sale regarding the junior lien). Because
unforeclosed senior liens remain attached to the property after
the foreclosure sale, the holders of such liens have no claim to
any of the funds generated by a foreclosure sale regarding a
junior lien, even if there is a surplus. See Restatement (Third) of
Property (Mortgages) § 7.4 cmt. c (1997) (stating that “[s]enior
lienors have no lien claim to a surplus produced by the
foreclosure of a junior mortgage”).

¶31 If AFCU had foreclosed on its interest, pursuant to the
“partial subordination” principles adopted in VCS, see VCS, 2015
UT 46, ¶ 25, it would have been entitled to the first $12.5 million
of the sale proceeds pursuant to Legacy’s agreement to
subordinate its interest to AFCU’s new interest. But AFCU did
not foreclose, and chose instead to allow its senior lien to remain
on the property even after Legacy purchased it at the foreclosure
sale. In this manner, AFCU’s interest is still honored and
accounted for, even if it is not included in the calculation of how
to disburse the foreclosure sale proceeds, because AFCU even
today retains the right to foreclose on the property in the event
of default. Assuming, hypothetically, that the property was
actually worth exactly $14.5 million at the time of the trustee’s
sale, Legacy purchased only a $2 million equity interest, because
Legacy’s title is subject to AFCU’s lien.

¶32 Moreover, adopting Trapnell’s position would result in
Trapnell receiving a windfall. See id. ¶ 20 (stating that one of the

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                     Trapnell v. Legacy Resorts

virtues of the “partial subordination” approach is that it
“prevents nonparty creditors . . . from obtaining a windfall”).
Perkins’s interest was junior to Legacy’s interest, even before
Legacy agreed to subordinate its interest to AFCU’s. Thus, in the
absence of the 2010 subordination agreement between Legacy
and AFCU, Perkins would have recovered nothing in the event
Legacy foreclosed and the sale yielded only $14.5 million.
Trapnell has identified no reason that the existence of the 2010
subordination agreement—to which Perkins was not even a
party—should change the result from Perkins’s perspective.

¶33 As our supreme court noted, “the central question in
cases of circular lien priorities is what the parties intended” in
entering into their subordination agreements. See id. ¶ 27. In this
case, Perkins entered into an agreement voluntarily
subordinating his position to the interest that eventually became
Legacy’s. Indeed, Trapnell concedes, as it must, that Perkins
intended to subordinate his interest to Legacy’s, and that it was
therefore subordinate to “interests total[ing] $17.2 million.”
Regardless of how that $17.2 million interest is divvied up
between Legacy and AFCU, Trapnell “was in any event junior”
to that entire position. See id. ¶ 25 (quotation simplified). Because
only $14.5 million was realized from the foreclosure sale, there is
nothing left over to even partially satisfy Trapnell’s junior
position. Placing Trapnell behind the entire $17.2 million Legacy
interest is entirely in keeping with the intent of the parties that
entered into the 2006 subordination agreement.

¶34 And it is not unfair to Trapnell (or to any other party) to
decline to subtract AFCU’s $12.5 million interest from the
calculation of the amount Legacy is entitled to keep. AFCU
would have had the right—had it also foreclosed on its lien—to
be paid first from the proceeds of Legacy’s foreclosure sale, by
reason of its subordination agreement. It opted not to exercise
that right, and elected to take its chances that it could be paid in
the future from a different source of funds (either by Legacy
paying back the loan as agreed upon, or from funds generated in
a future foreclosure sale). Because AFCU chose not to claim any

20160716-CA                     17                2018 UT App 231
                     Trapnell v. Legacy Resorts

of the funds generated by Legacy’s foreclosure sale, there is no
reason to subtract its $12.5 million interest from the total amount
of funds available to pay Legacy and other junior creditors.

¶35 This result does not, as Trapnell argues, place Perkins’s
interest behind more than $29 million worth of interests. Perkins
was not, and has never been, behind AFCU’s new $12.5 million
interest (at least not if that interest is considered separately from
Legacy’s). Perkins had the right—ahead of AFCU—to recover
any surplus from the foreclosure sale that exceeded $17.2
million. See id. ¶ 25 (stating that “C will collect the balance of its
claim, in its own right, only after B has been paid in full”
(quotation simplified)). Indeed, even Legacy and AFCU
acknowledge that, had more than $17.2 million been recovered
at the foreclosure sale, the first $13.5 million over and above
Legacy’s $17.2 million interest would have gone to Perkins, and
not to AFCU. The Perkins interest was only ever behind $17.2
million in liens, and the fact that AFCU’s nonforeclosed lien
remains on the property does not change that fact. As Legacy
points out in its brief, “[t]he agreement between AFCU and
Legacy did not place Perkins behind both AFCU and Legacy; he
was only behind Legacy while Legacy alone had an obligation to
give AFCU priority to some of what Legacy received.” 5

5. Because it was not foreclosing on its trust deed, AFCU as
senior lienholder was not entitled to make any direct claim on
the corpus of funds generated by Legacy’s foreclosure sale.
However, pursuant to the terms of its previous subordination
agreement with AFCU, Legacy did, in a sense, share the benefit
of the foreclosure sale with AFCU by purchasing the property
subject to AFCU’s pre-existing senior lien. No matter how high
the sale price ended up being, AFCU retained a future
entitlement—by virtue of its senior lien—to foreclose on the
property in the event of a default in the obligations secured by
its lien, and recover up to $12.5 million. If Perkins felt like the
price bid at Legacy’s foreclosure sale was too low, he could have
                                                    (continued…)

20160716-CA                      18               2018 UT App 231
                    Trapnell v. Legacy Resorts

¶36 Accordingly, we conclude that, under the principles of
“partial subordination” set forth in VCS, Perkins (the party in the
B position in the VCS hypothetical) was not entitled to recover
anything from the foreclosure sale unless the sale yielded more
than $17.2 million—the amount to which Perkins voluntarily
subordinated his interest. This result holds true even where, as
here, AFCU (the party in the C position) did not foreclose on its
lien. Because the foreclosure sale yielded only $14.5 million,
Perkins was not entitled to receive any of the proceeds of the
sale. Legacy was appropriately credited with those funds,
subject to its own separate obligation to share those funds with
AFCU in a manner satisfactory to Legacy and AFCU and
consistent with those parties’ separate subordination agreement.

                         CONCLUSION

¶37 Under the unique circumstances of this case, Trapnell was
a proper party to the case and therefore may take a direct appeal
from the district court’s final order. We therefore have
jurisdiction to consider the merits of Trapnell’s appeal. On its
merits, however, Trapnell’s appeal fails, because Perkins was not
entitled to any portion of the $14.5 million proceeds from the
2010 foreclosure sale.

¶38   Affirmed.

(…continued)
appeared at the sale and bid a higher amount in an effort to
protect his interest.

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