Trapnell & Assocs. LLC v. Legacy Resorts LLC

HARRIS, Judge

Opinion 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 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 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.

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.

ISSUES AND STANDARDS OF REVIEW

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

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 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.

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 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 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,

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. ¶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 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 ¶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.

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.

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").

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 appeared at the sale and bid a higher amount in an effort to protect his interest. --------

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.